Chainlink- Behemoth of the Decentralized Oracles Pt 1
This report is not meant as financial advice and please do your own research and take responsibility for your own trades. This report is meant to update you regarding the markets so that you can make informed decisions.
What is Chainlink?
Chainlink is the leading decentralized oracle network and allows smart-contracts to have access to real-world data. An oracle in computer science is an access point or network that you can retrieve information from that you can run/build your programs with.
As blockchains before LINK were silo networks from the outside world, this limited its potential on the innovations it can create and there was no secured or decentralized way to pass information from S&P’s stock price data to Ethereum’s blockchain. Doing this via a centralized service or a single oracle source opens up a single point of failure, allowing a variety of attack vectors (such as the man in the middle attack or providers being untrustworthy) and thus extremely risky especially when we are talking about millions of dollars on these decentralized blockchains.
Why are decentralized oracles so important?
The value proposition of Chainlink is that it is designed to foster high-quality and secured data feeds:
- It has a reputation system so that you can choose which service provider(in Chainlink network, they are known as node operators)to use as a developer. This forces the node operators to compete for business as it is an incentive to maintain their standards to have high rankings, attracting more users and thus earning as many fees as they can.
- Node operators also get penalized when they supply bad data or uptime is not to par, which incentivizes node operators to be diligent thus ensuring a high level of quality in data and service uptime for the entire network.
Last but not least, the most important point is to prevent price manipulation attacks on smart contracts.
Let me give you a simple example, me and Carl have a bet on who is going to win the presidential election. We sent 1 ETH each to a smart contract and this smart contract will trigger automatically depending on the API feed of the results and deposit 2 ETH into the winner’s ETH address.
Previously, without Chainlink, if I’m IT savvy enough to know that the smart contract is using the Coingecko’s API. I can hack that API feed and force the smart contract to trigger even before the election results are out to secure my winnings.
This is an extremely layman example of one use of a decentralized oracle but many hacks in the crypto space could have been prevented if they were using Chainlink’s oracle. Namely, Value Defi and bZx’s 2nd hack.
Further information on how to prevent oracle price hacks can be found in this article.
Why DeFi Needs Real Oracles beyond DEX
In light of the recent 2nd bZx incident, it’s important to reflect on the situation in hindsight and implement…
How does it work? (Technical)
There is an automatic matching system for works and requests.
- A Service-Level Agreement Contract(SLAs) is created when developers create the Service Request Contract. This contract contains the parameters needed, such as the minimum reputation of provider needed and which particular set of nodes the users want to use.
- The Order-matching Contract will send this Service Request to the network to look for bids from the selected nodes and then select the right number & type of nodes to fulfil the request.
- The Chainlink nodes who accepts this request will then fetch and translate the off-chain data and convert it into a format where blockchains can use.
- The last Aggregating Contract will then validate this data from the chosen oracles to ensure its authenticity and accuracy. Faulty or bad nodes will be penalized by taxing their staked LINKs here.
- The Aggregating Contract not only can validate data from a single provider but multiple providers as well. Which users can opt to use for higher security but higher cost.
Tokenomics of Chainlink
To evaluate the price of LINK, we first need to understand its tokenomics.
Request Contract holders need to use LINK to pay nodes operators whenever a request is fulfilled. The price for each data feed is different and is set based on supply and demand by the node operators.
There is also a collateral system where node operators need to stake LINK in the network to show their commitment as an operator’s LINKs will be taxed whenever they provide bad data or fail to fulfil a request. Node operators with larger amounts of LINK staked will have a higher reputation (among other criteria). Therefore making them likelier to get chosen for requests to earn LINKs.
Many people also do not know that the max supply of LINK is capped, similar to Bitcoin at 1 billion tokens, which means its value will not be diluted by endless farming or minting which is the case for DOT, ETH or SUSHI token.
In the future, node operators will also be allowed to take deposits of LINK from users and pay them a percentage of the fees earned, which means a large supply of LINKs will be locked(note only 40% of the current supply is circulating). This removes circulating supply which no doubt will increase the price of LINK in the long run.
Currently, 300 million tokens are held by the team with 350 million circulating in the public and the last 350 million being kept for node operators and ecosystem fund. The Chainlink team is also selling their tokens at an estimated rate of 1–2% per year base on their ETH address transactions.
This presents a very unique value proposition for the price of LINKs due to the finite supply as well as its utility, a perfect marriage between Bitcoin’s store of value together with ETH’s utility.
In a normal economy, to balance supply and demand, price and quantity demanded will consequentially rise, vice versa. For example, if the price goes up due to high demand for a normal good such as rice, people are going to buy less and substitute it with something cheaper like potatoes. The difference with LINK is that you must buy LINKs to use the Chainlink network, this causes its price to appreciate due to the limited supply and stickiness of the asset. This is further escalated by Chainlink’s lead and monopoly in the decentralized oracle space.
Its price appreciation together with the network’s growth will mean the average investor and node operator will not be inclined to sell as the more valuable LINK and the larger the Chainlink network becomes, the more reason people want to hold/use it (Veblen Goods). Large node operators such as corporations who staked LINK to utilize the network will also have no reason to sell an asset that they need for business, especially when it is appreciating in value.
But what if we run of Chainlink’s to use the network?
This is a non-existent problem as a single LINK can be broken down into 18 decimal places. The supply will never rise to a point where there is low demand due to the ability for it to be broken down into such small numbers. By then, each LINK will be worth $1000 (hypothetical)and users can just pay 0.1 LINK that is worth $100 for a request as compared to now where users pay 10 LINKs($100 current value) for the same request. This means that not only the price will keep moving up, the network will also continue to function as per normal similar to how Bitcoin is working now.
Is there a demand for decentralized Oracles?
Yes, there is. Currently, the Chainlink protocol is the 7th highest consumer of gas in the Ethereum network and the 3rd highest consumer of Ethereum block space. Chainlink having this high level of gas consumption shows real network usage. However, it is also one of the major factors that contribute to the current costs of maintaining and using the Chainlink network. The ultimate goal is to increase usage while decreasing the amount of gas consumed.
Currently, LINK reduces this gas usage by increasing the latency of the data feeds. Future updates include optimisation of data requests and responses through the use of threshold responses which batches data transactions together, reaching data consensus off-chain before porting it into the Chainlink network(more nerdy information here) and prepaid aggregator contracts which reduce the number of times node operators need to interact with their nodes for maintenance. Other optimizations in gas fees will have to wait for 2nd layer scaling technologies like Optimism, Celer and Matic to mature before Chainlink implement them(Chainlink team is keeping up and updating as the tech grows).
“Since launch, the Chainlink ecosystem has grown substantially from just three nodes to over 27 security reviewed nodes that are live today feeding off-chain data to the 29 various Chainlink Price Reference Data contracts currently being consumed by several Ethereum mainnet DeFi protocols such as Synthetix, Loopring, Ampleforth, and Aave.”
To get an updated list on Defi protocols using Chainlink, visit feeds.chain.link
It has also one of the strongest team in the entire crypto space.
Credits to Smart Content
- Professor of Computer Science at the Jacobs Institute at Cornell Tech
- Former chief scientist of RSA
- Formalized Proof of Work consensus in 1999 (powers Bitcoin and Ethereum)
- Invented Proof of Retrievability in 2014 (powers FileCoin and Sia)
- Co-author of the Chainlink whitepaper in 2017 and only works with Chainlink
- Co-author of the Mixicles whitepaper in 2019
- Co-founder of The Initiative For CryptoCurrencies & Contracts (IC3)
- 36,000 total scholarly citations
- Founder of DocuSign, the industry-leading e-signature provider in the world
- Joined as a business advisor to Chainlink in early 2019
- Decentralized consensus researcher
- Associate Professor at the University of Illinois
- Associate Director of the Initiative for Cryptocurrencies and Contracts (IC3)
- Board member of the Zcash Foundation and Ethereum Enterprise Alliance
- Advisor to both Zcash and Tezos
- Former Senior Manager at Apple
- Director of Engineering Blockchain at Facebook
- Co-creator of the LLVM, which generates the low-level machine code running every Apple device, as well as much of Google, Nvidia, and Intel
- Ethereum Core Dev and developer liaison at the Ethereum Foundation (the glue between Eth core devs and the community)
- Former Partner and CTO at Triton Research
- Founder of CoinFund, one of the leading research groups focused on web 3.0 and blockchain-based infrastructure.
- CEO of Smith+Crown, a widely accepted leader in blockchain research
I think that’s enough for today. Stay tuned for part 2 that in the works! I’ll delve deeper into Chainlink’s current ecosystem as well as its competitors and evaluate the technology of each protocol before concluding on my price predictions.
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References and Resources
What Is Chainlink in 5 Minutes | Gemini
ChainLink is a decentralized oracle network that provides real-world data to smart contracts on the blockchain. LINK is…