Since it came on the cryptocurrency scene, Chainlink has made waves in crypto markets attracting the attention of DeFi companies, crypto investors, blockchains, and big tech and financial players such as Google and SWIFT. Chainlink’s technology claims to solve one of the biggest challenges for the practical implementation of smart contracts – connecting blockchains to real world data – such as price feeds or delivery confirmations – through so-called oracles blockchain connectivity. If Chainlink is able to do so, it can potentially boost the market for decentralized apps (dApps).
The story of Chainlink began with its white paper published in 2017 by Steve Ellis, Ari Juels and Sergey Nazarov. In it, the authors outlined their vision for a decentralized oracle network. This oracle network was supposed to solve one of the biggest challenges for the practical implementation of smart contracts – the blockchain’s inability to fetch reliable information from the real world.
To illustrate the importance of this blockchain connectivity, think of a digital asset tied to the price of a real-world asset such as gold. Blockchain technology can ensure the reliability and security of the digital contract, but to be truly valuable to a consumer it needs a reliable input from the “outside” – in this case, the price of the underlying asset, for instance, the price of gold.
Similarly, a smart contract in borrowing or lending needs the input of relevant prices to determine the value of collateral. If someone borrows 100 DAI (ca. $100) with 1 ETH of collateral (currently ca. $400), the protocol needs to be able to continually monitor the value of the collateral. In most lending/borrowing platforms, the collateral would be liquidated to repay the DAI debt once the price of ETH falls below $150. Thus, a reliable oracle for this price is of utmost importance for the stability of the system.
Architecturally, Chainlink is designed with on-chain and off-chain modules which are interconnected and upgradable, to flexibly adapt to evolvement of technology. Decentralization is achieved by both retrieving data from multiple sources and processing it with multiple nodes. The oracles are managed by a network of nodes whose performance and reputation are monitored continuously. Chainlink oracles are designed to connect a blockchain with any external data feed or API, such as financial market data, or weather reports.
The Chainlink technology is managed by a fintech company SmartContract Chainlink Ltd., with Sergey Nazarov as a CEO. The research team is united under Chainlink Labs. Since the publishing of the white paper, the project has passed a number of important milestones. In 2017, the Chainlink’s ICO raised $32M. In 2019, the Chainlink mainnet was launched on Ethereum. Since then, the technology was developed to work with different blockchains – as “Chainlink is blockchain agnostic” according to the company’s website. A number of successful partnerships, including ones with Google, Tezos and Oasis Networks, have also been established.
Chainlink oracles can be used by smart contracts with various purposes: from digital securities to supply chain to asset management. Their primary use is supplying reliable data from on-chain and off-chain sources to the fast growing dApps market. Such data can include market price feeds, financial data, data from the IoT devices, etc. Chainlink also hopes to facilitate the connection between blockchains and payment systems, such as SWIFT or PayPal.
As of today, the most developed Chainlink functionality includes aggregate price feeds for crypto and fiat currencies. To establish price feeds, Chainlink is attracting external data providers, such as centralized and decentralized exchanges. Next, Chainlink nodes aggregate the data from external providers to create a price update resistant to manipulations. Finally, this price data can be used by any smart contract with established access. This way, Chainlink can offer services to both data providers (who can sell their data) and data consumers such as DeFi companies (who can use the data for smart contracts). For instance, Synthetix is using Chainlink to establish prices on their derivatives platform, and AAVE (lending and borrowing platform) – to ensure the total value of the collateral.
Along with supplying data to the rapidly growing DeFi market, Chainlink is also cooperating with some big tech and financial players looking to expand their services into crypto markets. For instance, Chainlink is working with SWIFT on a large project to establish infrastructure for connecting existing banking systems and smart contracts. In 2019, Google announced that it would use Chainlink nodes in the cloud/blockchain applications built with Ethereum and Google Cloud.
Chainlink’s native token – LINK – has been trading since 2017 and has demonstrated significant growth in Q2-Q3 2020. At the time of writing, it is the number 5 cryptocurrency by market capitalization (with more than $5B market cap).
With its rapid growth, DeFi is definitely one of the top priorities for Chainlink at the moment, as confirmed by Sergey Nazarov. Many DeFi companies already use Chainlink, and more seem poised to adopt it. Chainlink has used its first mover advantage well, but now new projects are appearing to challenge its position. To handle potential competition, Chainlink is looking for industries with an even broader impact than DeFi, which is still relatively small compared to traditional financial markets. Two markets with potential are gaming and insurance, and big enterprises venturing into blockchain.
Chainlink is not only looking to differentiate its functionalities, but also to expand on the geographical markets. In 2019, the company has been growing its presence in Asia – one of the biggest crypto hot spots – by partnering with data providers such as Binance, Tokenview and CoinGecko, and incorporating several Asian-based node operators.
Recently, a number of events have taken place, which would seem to bode well for Chainlink’s future. In February 2020, Polkadot integrated Chainlink on its Substrate network, and in April 2020, Tezos incorporated Chainlink in its protocols to provide price feeds to Tezos developers. In August 2020, Chainlink was integrated into one of the Bitcoin sidechains – RSK.
Furthermore, the recent Chainlink acquisition of DECO from Cornell University is seen by Sergey Nazarov as a big step towards mainstream adoption of the blockchain technology. DECO is a decentralized oracle for TLS (Transport Layer Security) that is used to provide security for digital transactions. Integration of a well-known and tested technology to ensure security and privacy has the potential to convince many companies outside of DeFi as well as crypto enthusiasts to start implementing decentralized technologies.