Why Connecting Smart Contracts to Real-World Data Will Drive the Next Bull Market.
During the long hard crypto winter of late 2018, many projects faded away or folded, however Chainlink managed to keep growing and even defy the bearish market.
This run has continued since and has grown to now undoubtedly be one of the titans of the space, currently ranked as the #12th largest project by market cap in the space.
Despite being one of the most technically sound projects in the environ, and moving towards solving a critical problem — the project fundamentals have not been as widely discussed or understood as they should have been.
Let’s look to change that.
What are Oracles & Why are They Important?
Historically, blockchains which run smart-contracts have not been able to natively connect to off-chain data, events and payment gateways — this has essentially rendered the technology (smart-contracts) clunky, and reliant on manual input. This, of course, is not scalable — which has left the executional capabilities largely conceptual.
Or to put it more bluntly, they (smart-contracts) have been in no-man’s land — a nascent, unused technology existing almost exclusively in the wet dreams of computer science.
A decentralised oracle network solves this bottleneck.
An oracle is a decentralised source of truth, which will most obviously come in the form of a price authority mechanism. If sufficiently trusted, this will allow a seamless transition between off-chain and on-chain platforms to extract the data (namely price) and execute trades with autonomy and surety.
Put simply, it will be a major achievement for the functionality of decentralized finance, transfer of data, and blockchains in general.
So How Do Oracle’s work, and Why Can They Can Trusted?
Put simply, there is no one true source of truth. So in Chainlink’s solution, the user requests the data they are looking for (the question) to the relevant nodes (currently 21, and soon to be many more) which then provide the data (the answer). The user then chooses the answer which is most favourable to them, which in a price feed scenario would be the lowest cost.
Requested data is delivered by multiple parties (all competing to be the oracle) that are incentivized to be reliable and honest (for fear of losing staked $Link as a consequence).
You can see what this would look like below, where we are looking at the price of ETH in USD. Each of those dots represents a node, which is titled (reputation is important) and then aggregates the cost of all the nodes in the middle.
The user would then opt for the node they wished to choose as the “source” which would then be fed to the smart-contract to execute (ie the contract is directed to use node x as the source of truth).
Considerations for which node to choose is both the price, and also the cost of data retrieval (from the node paid in the $Link token). For example, one node might be broadcasting a lower price on $ETH but the cost of retrieving & transmitting that data in $Link might be much higher, and it could make the most sense to choose the node with the second-lowest $ETH price (so long as the retrieval cost was low enough for this to be sensible).
DeFi & The Importance of Oracle Data
The increasing use of Chainlink price oracles driven by the explosion of DeFi, has meant that $Link has decoupled from $BTC, the crypto market leader. That is, Chainlink had been having its own bull-run for well over a year.
Decentralized Finance (DeFi) is a system of financial tools where the idea is to allow anyone with internet access to be able to lend, borrow and bank without the need for middlemen.
DeFi is the first crypto innovation that has an immediate use-case that is superior in both ease of use, and availability of returns (%) to equivalent products in legacy markets. Put more simply, DeFi is the first innovation of blockchain technologies that is immediately disruptive to financial services.
In the previous crypto bull run during 2017, the talk of disruption was fever pitch but the operative word was always potential. In context, countless sentences and conversations started with ‘blockchain could revolutionise x’ but the delivery of that promised disruption was always future-gazing.
Front and centre of this integration is the working relationship between Chainlink and Australian project, Synthetix — who are currently co-sponsoring price data across all fiat pairs. What this means in practice is, Synthetix need a consistent feed of fiat prices and Chainlink is able to facilitate that, so by co-sponsoring the feeds they share the cost of data retrieval.
The picture becomes even more illuminating when you look at the demand for price reference data for ETH pairs. Leading DeFi platforms such as Kyber, Bancor, 1inch, and Aave are all actively using Chainlink as a source of truth for asset swaps.
This is a very positive show of faith by some of the leaders of DeFi who rely on the smart-contract data being reliable and accurate. It is worth noting however that leading DeFi platform by volume Uniswap, uses its own price discovery mechanism.
For the sake of transparency, it should also be noted that Compound which raised $25 million in it’s Series A run by Andreessen Horowitz at a $90m initial valuation — has also claimed to have come up with a similar solutionto Chainlink’s for its platform.
However the opportunity Chainlink has is much larger than merely DeFi, or even limited to cryptocurrencies at all. The solution proposed is designed in a way so that it could become the trusted bridge between not only all blockchains, but also become the vital link between the crypto and legacy markets. That is, $Link will not only feed data into smart contracts, but could also become the conduit to feed crypto information back into legacy markets.
In this sense, it could become a source of truth and by extension vital bridge between the emerging and legacy financial worlds.
Besides being partnered with almost every crypto organisation in the space, Chainlink is also partnered with many leading traditional organisations in varying capacities. Due to the nature of “breadcrumb” announcements it can be hard to clamp down on details, but these partnerships include but are not limited to;
- Thomson Reuters
And many more with some very interesting public commentary from places such as DocuSign also floating around the internet.
These names needs little elaboration, but a certain takeaway is that companies on both sides of blockchain technology can see the obvious benefit of having a price discovery mechanism that crosses the chasm between offchain/onchain businesses.
Thriving Community / Meme Culture
There can be no doubting the colossal power of organised communities, and Chainlink has built arguably one of the most powerful organised digital communities anywhere on the web.
The origin of most of the humour and content creation style is from the atypical corner of the internet known as 4chan, and more specifically the /biz/ page of the bulletin board. If you are unfamiliar with 4chan, and are interested in checking it out, be forewarned that it is not for everyone.
However from this corner of the internet, solid information and a collective identity has formed around Chainlink more than any other crypto project, and the mania has been apparent for years. An example of this community in effect is that affiliates of the project ChainLinkGod and @cryptodavid_ on Twitter who were very helpful in assisting me to write this very article.
To be honest it is refreshing to have such a serious tech project be supported and information proliferated in such a light-hearted and often openly disconnected way.
For example, it is 100% certified that Sergey, the CEO of Chainlink’s parent company is eating a Big Mac as you read this.
Cryptographic encryption is incredibly powerful stuff, and most of it’s magic is actually above my comprehension — but it doesn’t make very good content, and let’s be honest the internet is now just one giant multi-tentacled meme. If cryptocurrency is the currency of the internet, then memes are certainly the universal language.
The long and short of it is this, Chainlink is an absolute juggernaut. Its recent bullrun could easily be compared to Tesla’s historic run on the NASDAQ.
It is worth noting that other sophisticated projects are building their own price discovery solutions, but ultimately it doesn’t really matter, as the need for decentralised price feeds will become so omnipresent that the space will have many reliable and bad-actor resistant sources of truth.
As it stands today though, one project is well ahead of the rest in terms of delivering on this.
Mine Digital is proud to announce that we will soon be integrating Chainlink onto the exchange. Stay stinky!