Understanding Chainlink: A Cryptocurrency Analysis

Summary:

Chainlink (LINK-USD) is a decentralized network that operates on the Ethereum blockchain. Chainlink provides off-chain data/information to the blockchain, making it on-chain data that can be used for smart contracts via their Decentralized Oracle Networks (DON’s).

Chainlink has been able to revolutionize smart contracts through the integration of off-chain data. This is because the off-chain data allows for exponentially more use cases for these smart contracts, which may help us adopt crypto faster than previously thought.

In the future, Chainlink plans to improve upon their anonymity (where they can and where it makes sense) and implementing what they call “meta contracts”.

Note: There will be a list of definitions at the end of this article to help clarify some general and technical terms used throughout this analysis.

The History of Chainlink:

The Chainlink protocol was created in 2017, they were able to do this through a $32M round of funding. Chainlink’s main goal is to solve the Oracle problem so that the power of the blockchain can be unlocked and adapted quicker. Chainlink aims to do this through their DON’s.

Through their network, Chainlink is able to provide Price feeds (useful for DeFi), verifiable randomness, proof of reserve, the Keeper network, and more.

Recently, they have released Chainlink 2.0 whitepaper, which broadens the capabilities of their Decentralized Oracle Networks, provides tamper-proof data delivery, and secure off-chain computation. This update was made to make Chainlink even more scalable by providing more security, privacy, and authenticity.

Lastly, this update lowers Chainlink’s gas (transaction) price of Oracle updates by 90%.

General Information:

Chainlink is a fixed supply coin and has a supply cap of 1B coins (currently there is only 435.51M coins in supply).

Currently, Chainlink has a price of $19.05 (USD), and is actively traded, with their volume being approximately $1B traded in the last 24 hours.

Chainlink has a market cap of $8.38B, making it the current 15^th largest cryptocurrency. Furthermore, their fully diluted market cap is $19.25B.

Chainlink’s (1B) token supply is distributed as follows:

Company: 300M of their tokens are reserved/allocated to their parent company (Smartcontract.com). This number fairly standard and it is good that this is not higher, because the higher this number, the more likely a rug pull, and less of a potential upside.
Community Holders: 350M of their tokens are reserved for their holders, investors, and community. This number being so high is good for Chainlink because it gives them the potential to have big returns.
Node Operators: The other 350M tokens are reserved for Chainlink’s node operators. This is also good to see such a large allocation of tokens to them.

Chainlink’s Decentralized Oracle Network (DON):

Chainlink is able to bring real world data to the Chainlink network and blockchain, through their DON’s. This is especially important when looking at the application of Chainlink’s smart contracts because DON’s were made specifically to enhance and extend the capabilities of these contracts. By utilizing a DON, Chainlink is able to improve upon existing smart contracts because they can now be connected to the real world.

DON’s offer networking, storage, and computation systems, while providing confidentiality, integrity, and accountability. These are offered through 2 functions of DON’s, executables, and adopters.

Executables: Programs that run continuously, and in a decentralized manner to improve performance and allows for confidential computation, which will be discussed in-depth later. Executables run and perform their operations on Chainlink’s DON, working hand-in-hand with adapters to link external data.
Adapters: Adapters (when working in DON’s) can send and retrieve data from off-DON systems, operate bidirectionally, and leverage joint computation to achieve more features (ie. Encryption for privacy)

Adapters communicate information from web servers to executables, then communicate the information from the executable to the blockchain. This is how Chainlink is able to fetch their off-chain data for their DON’s (which consist of the executable and storage).

(An example of how this works is found in the first image slot at the bottom of this article)

An example of how this works is given through Chainlink’s founder (Seregey Nazarov) in a podcast with Lex Fridman, found here.

Nazarov described their DON and smart contract capabilities through an example of crop insurance. Where he went on to say they could use their smart contracts that run on Ethereum to make crop insurance contracts between a farmer in Bolivia and an insurance company in America, in which the farmer gets paid if it does not rain for let’s say 14 days straight. Chainlink’s smart contracts can collect external data from 5-7 different and trusted API’s (could be weather stations, radars, local news channels etc.) to determine how long it has not rained for, and if the period of time that it has not rained is verified and 14 days (as stated in the hypothetical contract), the contract will be executed, and the farmer will be compensated. This is a game changer and allows people (like farmers in Bolivia) to hedge their risk, which would never have been available to them otherwise. And all of this runs on DON’s, adapters, and executables on Chainlink’s system.

(An example of how this works is found in the second image slot at the bottom of this article)

This technology, combined with smart contracts, has never been seen before, and has enormous potential in terms of future use cases.

Hybrid Smart Contracts:

Chainlink refers to their “hybrid smart contracts” as combining on-chain and off-chain components securely. These hybrid contracts are what differentiates Chainlink from the thousands of other cryptocurrencies out there.

Chainlink saw a problem in the way smart contracts were previously operated as they were very limited in their uses, slow to execute, and overall expensive. So Chainlink decided to go all in on improving on the use cases for these contracts through the adoption of off-chain components to the blockchain. One of the use cases that Chainlink solved can be seen in the Crop Insurance example above.

Chainlink has been able to adopt this off-chain information through their DON’s, which enable them to offer these hybrid smart contracts. Chainlink still recognize that there is a long way to go to further improve on their technology and add new features like anonymity which they plan to address in the future.

Hybrid contracts are the first step involved in eventually reaching “meta contracts” which Chainlink believes will revolutionize the way in which we use crypto. Bringing us closer being able to transform the current monetary system into a digital one.

Example:

This kind of technology has various uses that can improve the efficiency for all parties involved. Once again, I will use an example from the Lex Fridman podcast with Sergey Nazarov, found here

In this podcast Sergey pointed out that this confidentiality technology could be used in the data marketplace very effectively. This is because there is one party who is buying the data (person A); however this party does not know the quality of the data they are purchasing from the other party (person B). Based on this fact, person A does not want to pay for person B’s data because they do not yet know the quality, and Person B does not want to send the data over to person A for a quality check because then they would be giving it away for free. However, Chainlink’s smart contracts provide a solution to this problem because their smart contracts can work as an impartial agent, because of the fact that they can process off-chain data. This ensures that Person B gets paid and knows nothing about person A’s data algorithm, Person A gets their data automatically placed in their algorithm to keep person A’s data private.

This process would work like this:

Person A provides their funds and states what data they are looking for
Person B provides their data
- Chainlink assesses this data by taking random cross-sections of this data and internally assesses the quality and potential match based on Person A’s criteria.
- Chainlink determines the fair price of the data for both parties.
If both parties agree upon the price, then the contract is executed and the transaction is approved.

Confidentiality:

Blockchains by their nature are very transparent. However, many people value confidentiality and would like to see some sort of confidentiality on the blockchain where it makes sense. This inherent transparency clashes with peoples desires for confidentiality and needs to be addressed in a way that makes sense for the users and for the blockchains.

Chainlink has proposed some ways in which they can implement confidentiality in their system to accommodate the need for confidentiality. These proposals include a combination of the following:

Confidentiality-Preserving Adapters: Two technologies (DECO and Town Crier) enable oracle nodes to retrieve data from off-chain systems in ways that protect user privacy and data confidentiality.
Confidential Computation: DON’s can conceal their computations from blockchains to a certain extent.
Supported Confidential Layer-2 Systems: Many layer-2 systems use zero-knowledge proofs to provide various forms of transaction confidentiality.

This kind of confidentiality is very important to people and has many cases where it can be used effectively. Once again, I will use an example from the Lex Fridman podcast with Sergey Nazarov, found here

The example that he gave was with health insurance companies in which he explained the following. Through Chainlink, you can have a smart contract that hold a person’s data and evaluates the data of the user (ie. Age, sex, medical history, medical conditions etc.) without sharing it to the insurance company. However, the insurance company will know that the smart contract will be able to effectively evaluate the patient properly and give them a policy with a price that fits their information. This solves the confidentiality worry about providing this data over the internet/blockchain and is only one example of a potential use case in which having confidentiality does not have an impact on the outcome of a result.

(An example of how this works is found in the third image slot at the bottom of this article)

Trust Minimization:

Chainlink’s goal is to create a trustworthy layer of support for smart contracts through decentralization and crypto economic guarantees. This is because users favour a trust model for smart contracts made possible through Chainlink’s DON’s. Chainlink is always working on ways to improve their trustworthiness and security, and already have the following measures in place to ensure this right now.

Data-Source Authentication: Data provides sign their data to ensure it is correct which helps to strengthen the relationship between the contracts and the data.
DON Minority Reports: Flags can be issued and examined when there is malfeasance in the DON.
Guard Rails: Detects anomalous conditions and halts the execution of the contract if it is suspicious.
Trust-Minimized Governance: Gradual-release updates facilitate inspection and intervention in the case of a system failure.

Furthermore, there is incentives for people when they help to identify and solve cryptoeconomic security concerns.

Chainlink Staking:

Staking in Chainlink is very different from staking in other cryptocurrencies. Staking in Chainlink is aimed to ensure the timely delivery of correct oracle reports. Chainlink’s approach to staking is as follows:

Adversarial Model: Covers attacks that are overlooked, such as prospective bribery (bribing nodes)
Super-Linear Staking Impact: An adversary must have a budget greater than the combined deposits in all of the oracle nodes (which is large due to staking in these nodes)
Implicit-Incentive Framework (IIF): Chainlink’s incentive model that stretches beyond explicit, deposited, staking funds.

Transaction Execution Framework (TEF):

A TEF is an approach to the efficient execution of a Smart Contract across a mainchain and a DON. A TEF can support any layer-2 execution techniques, allowing it to process smart contract transactions. The TEF allows Chainlink to do so confidentially, with lower fees, and with higher performance. The TEF can do this because of the following functions:

Transaction Ingestion: Executes, receives, or fetches user transactions through DON’s or the mainchain.
Fast Execution: Processes transactions locally (on the DON)
Low-cost Oracle & Adapter Access: Reduced cost through off-chain oracle access (on-chain storage is expensive).
Syncing: Periodically updates their smart contracts.

Node Reputation and Performance History:

Chainlink documents the performance histories of their nodes on the chain. Users can reference the past operations/performances of these nodes to make informed decisions. This decentralized compilation of accurate performing histories allows both users and operators to build their reputations to distinguish themselves on Chainlink’s network. Something like this can be very important in the future for insurance companies or any other companies adopt Chainlink’s technology, this is because users will be able to see the satisfaction scores and previous performances of these companies before they decide to do business.

An example may be an insurance company. By having performance histories, users can see if other users have been satisfied with their services, how many claims that they have settled, how many claims have been neglected, and how many customers this company serves. This gives very important information to the user, as they decide which company, they want to do business with. Furthermore, this history makes companies to compete for the best satisfaction and successful claims rate, in order to beat out their competition.

Exciting News:

Augur is launching a new platform to capture the quickly growing sports betting market. This new platform is called “Augur Turbo”. Augur has decided to use a combination of Polygon Matic $MATIC and Chainlink $LINK in order to decentralize their sports betting, reduce their fees, and improve their services.

Augur will use $MATIC to keep their fees low (due to their very low gas fees.

Augur will use $LINK for their Oracles, allowing them to transfer up-to-the-second, real-world data to the blockchain to help their increase their speed of adjusting the odds, updating the stats/scores, and paying their bettors out after the conclusion of their match(es).

Source:

Augur Adds Sports Betting With Launch of Polygon-Based 'Augur Turbo' - CoinDesk

Key Definitions:

Oracle: An oracle sends data from off-chain sources (ie. Temperature information) to a blockchain, namely Ethereum, which then transforms it to on-chain data. This data is then used in applications like smart contracts.
Decentralized Oracle Networks (DON’s): DON’s are formed by committees of oracle nodes that cooperate in order to fulfill a specific task to provide persistent services to clients. DON’s are a powerful tool that helps developers create off-chain support for smart contracts.
Verifiable Randomness: Several types of developer applications require a verifiably correct source of randomness to enable verification. An example of this is a PoolTogether, where a promotion promises to give 5 lucky winners $50 in $LINK. This randomness will select these winners and automatically pay them out (via smart contracts) ensuring that their contest is legitimate and truly random.
Off-Chain: Transactions, and/or data that takes place in the real world and can be put into a blockchain via Chainlink.
On-Chain: This consists of transaction and/or data that is registered/recorded on some blockchain technology.
Smart Contract: A Smart contract is a self-executing contract with terms that must be met by both sides for the contract to be executed. These contracts are traceable but irreversible. An example of this would be the sending me an automatic release of $50 in $LINK on my birthday. This smart contract would have to know my birth date, however once it does, a smart contract will execute every year on my birthday sending me this money.
Fixed Supply: This means that there is a limit to the amount of supply, and that more supply of a coin cannot be created.
Fully Diluted Market Cap: This refers to the market cap of a coin, given their maximum supply at current prices.
Node: A node is a computer that connects and supports a given cryptocurrency network. The computer works on validating and relaying transactions onto the blockchain.
Oracle Node: A committee of nodes with the goal of supporting/working alongside existing blockchains, rather than providing its own separate functionality.
Proof of Reserve: Chainlinks Proof of Reserve (PoR) is the solution for maintaining end-to-end transparency for any platform utilizing backed/wrapped assets.
Keeper Network: The Keeper Network is a decentralized network for projects that need software development and IT operations (DevOps) and eternal teams to find keeper networks (jobs).
Node Operators: Chainlinks node operators are the backbone of their network. These operators participate in DON’s, allowing engineers to fetch external data securely/reliably via API’s. These operators are crucial for smart contracts and the real world data they need to use to run properly.
API’s (Application Programming Interface): API’s provide real time data, by letting one software application to interact with another. Chainlink uses API’s to take real-time, and real-world data and transfer the into the blockchain through their DON’s.
Staking: Actively participating in validating transactions, anyone who meets the minimum staking (balance) requirements can participate and earn rewards. Staking locks up your holdings and earns interest.