It’s hard to believe that come January 9, 2019, it will have been 10 years since Bitcoin was first introduced to the world by an unknown entity called Satoshi Nakamoto. Almost nobody knew at the time that Bitcoin, and the blockchain technology that underpins it, would go on to become one of the most lucrative and speculative investments the world has ever seen. Unlike most life changing technologies where investment is limited by law to sophisticated investors or to those of a specific geographic location, Bitcoin and blockchain ventures were uniquely available to anyone around the world, both rich and poor.
In 2017, the blockchain space saw an unprecedented wave of mass euphoria, as many projects saw their valuation go up thousands of percent, forever changing the lives of those investors with the fortitude and vision to buy in early. Everyone was getting rich, MSNBC was doing cryptocurrency analysis daily, and any project with the buzzword “blockchain” got an automatic pump from investors flocking from project to project based on hype.
However, like all parabolic investments, reality crept in and the party came to a grinding halt. In 2018 alone, most projects saw their valuations fall over 90+%, with many even going below ICO price. Unsurprisingly, the shattering of portfolios has killed morale and caused trading volume to drop off a cliff. Most investors left the market completely, and the ones remaining consist of either diehard holders or traders still playing crypto hot potato.
This extreme volatility has left the blockchain space in a very weird spot, as most people became so emotionally tied up in price movement that they completely lost track of fundamentals. In fact, one has to wonder whether or not most people ever understood why the whole movement started in the first place. It’s human nature to want to pounce on a perceived opportunity to get rich quick, but speculation eventually dries up, and it’s at this point in time when those possessing true knowledge and vision separate from those who don’t.
Was it all just a fad or worse a scam, or is there really something deeply revolutionary behind blockchain? To answer that question, one must first rewind history and remember why the blockchain space started in the first place.
Infrastructure In Decay
Most people don’t really understand the systemic issues present in the architectural design of current systems of exchange, whether that be the infrastructure of financial exchange, data exchange, or ownership exchange. The problem is that most backend systems, specifically the computing and storage layers, are isolated from one another and sit on central servers run by centralized institutions.
The first issue with this model is that it places great power and responsibility on the centralized institutions that process and store data. They’re extremely vulnerable from a security standpoint because all their information is housed in a central location, making it ripe for a hacker to penetrate, since they know exactly where to attack.
Additionally, with great centralization of power, usually comes lack of transparency and lack of accountability, as the entity becomes so big that its power becomes monopolistic, meaning it can makes its own rules, even at the expense of its users. Just look at companies like Facebook and Google, which sell people’s data with little to no repercussions. There’s a strong case to be made that this data doesn’t even belong to them, since it’s the users that create the data, which means the decision over what’s done with that data should be up to the user. Lack of data ownership is a major privacy concern as the world moves increasingly into a digital age.
Another major issue is the lack of efficient, trustful connection between isolated systems. This results in companies spending countless amounts of money on overhead to both make systems compatible with each other, and establish trust in the connection. Most of this money is used on paying technological middlemen to facilitate connection and trusted third parties to establish trust. What ultimately results is middleman syphoning off value from what should be a direct exchange between the parties involved. Value is lost on the business side through the expenditure of overhead, which often results in value lost on the consumer side as those costs of business are passed onto them.
Luckily, a new wave of digital ledger technology has emerged, proclaiming it can solve the current infrastructure problems facing outdated systems of value exchange.
The God Protocol
In 1997, Nick Szabo, a technological pioneer who coined the term “smart contracts,” wrote an article in which he describes, what he refers to as, the “God Protocol.” He states:
“Imagine the ideal protocol. It would have the most trustworthy third party imaginable — a deity who is on everybody’s side. All the parties would send their inputs to God. God would reliably determine the results and return the outputs. God being the ultimate in confessional discretion, no party would learn anything more about the other parties’ inputs than they could learn from their own inputs and the output.”
The whole idea centered around replacing middleman intermediaries, such as trusted third parties, with a trustless third party protocol that was able to receive inputs, processes them, and deliver outputs, all in a completely secure and unbiased manner. This trustless third party would be automated and under the control of no one, yet still deliver perfect results.
When Bitcoin came on the scene twelve years later, it presented the first edition of the God Protocol, the blockchain. Blockchain technology introduced a trustless computation and storage layer for the proposed protocol. It accomplished this through the development of a decentralized network, powered by distributed computing, that’s still able to reach network consensus. Many people now know this process as mining.
Miners provide the hardware hashing power that fuels computation on the distributed network, as well as store the transactional data in a shared digital ledger. The open source software run by miners consists of an algorithm (SHA-256) that ensures the validity of their computation. The beautiful thing about trusteless blockchains is that no one entity controls mining operations, anyone can become a miner, and the entire process is fully open source.
Bitcoin also brought about the first form of trustless functionality, which was a peer-to-peer (P2P) payment system with its own native digital currency. No central third party could syphon off value from the transaction, minus a small transaction fee for processing, which was substantially cheaper than conventional methods. A new level of transparency, accountability, and objectivity was brought to money for the first time in a long time. No longer did people have to rely on central banks for currency, on commercial banks to store their currency, or on payment systems like PayPal or Western Union when sending money around the world. It’s no accident that Bitcoin spawned right after The Financial Crisis of 2008.
While Bitcoin paved the way for blockchain, six years later Ethereum would introduce the next layer to the God protocol, smart contracts. Whereas Bitcoin limited blockchain’s functionality to P2P payments, Ethereum’s introduction of smart contracts brought a whole new level of functionality to the computing layer.
Smart contracts are virtually the same as current legal agreements except they are digitized into code and arbitrated by a trustless third party, i.e. the blockchain. They allow anything of value to be transacted and for transactions to have instructional parameters. This meant that blockchains with smart contract capabilities could now digitize hard assets, transfer ownership of those digital assets, set conditions for the transfer of those assets, and record all of the transactions in an immutable shared ledger.
For example, Entity A only wants to make a transaction with Entity B if Entity B does something specific, such as complete a task. Another way to frame it is that Entity A only receives money from Entity B if a specific outcome happens — — such as a sports bet where a certain team wins or a derivative contract that hits a certain price. If Entity A picks the wrong team or the derivatives instrument hits the liquidation price, the blockchain initiates a payment from Entity A to Entity B. There is nothing either party can do to stop the contract from executing once it has been sent to the blockchain to arbitrate. This brings trust to P2P interactions and eliminates counterparty risk.
The amount of possible use cases that this technology opens up is vast and not even known at the current moment in time considering the novelty of it all.However, some clear use cases that exist are digital identity, record keeping, securities, derivatives, trade finance, mortgages, supply chain, land title ownership, auto insurance, and clinical trials.
Despite the massive developments of blockchain and smart contracts, which added trustless storage, computing, and functionality to the God protocol, there still remains some unpatched holes that make it inadequate as a trustless third party. These shortcomings are clearly hindering the progress of the entire blockchain space.
Vulnerabilities In The God Protocol
There are really three main issues that need to be addressed for digital ledger technology to complete the goal of perfecting a trustless third party.
Due to the mechanics of the consensus mechanisms underpinning blockchain technology, blockchains lack the ability to trustlessly connect with off-chain resources, meaning they cannot interact with the outside world without sacrificing their features of decentralization.
Basically, the moment a smart contract receives data from a single website, the advantages of smart contracts and blockchain, such as trustlessness, decentralization, and having no middleman, are completely lost. The reason being is that, intentionally or unintentionally, this single point of connection can influence the contract.
Remember, a smart contract cannot have a single point of failure, just as a blockchain cannot have a single node running it and still be secure; otherwise it would just be a typical centralized database. This results in smart contracts that are unable to connect with data, already established backend systems, or other digital ledger technology, while still remaining completely trustless.
Currently, on platforms like Ethereum, there are trusted ways of accessing data, such as using a centralized third party oracle service like Oraclize or by one of the parties in the contract having an in-house oracle, such as in a B2C relationship where the business has their own oracle. However, this defeats the whole idea of blockchain and smart contracts, which is to have trustless end-to-end execution.
If someone enters into a smart contract with an insurance company, but the insurance company owns the communication line between the smart contract and the data it needs because they built the oracle, the customer still has to trust that the insurance company won’t tamper with the communication line and cheat them. It will be hard to achieve full realization of a trustless third party without tamperproof lines of communications between smart contracts and off-chain resources.
Because trustless blockchains (public chains) are decentralized, a bottleneck problem exists in the processing layer, meaning they can only handle so many transactions per second, while still keeping the network decentralized. Some projects like EOS and Ripple attempt to solve the problem by having fewer validating nodes, while other projects like HyperLedger and Corda use a permissioned blockchain structure instead of an open blockchain structure.
It remains to be seen whether the business world will accept the security flaws and lack of network effects associated with sacrificing decentralization and trust for speed and power. However, it’s no secret that blockchains have to scale in computational power if they are to see any kind of mass adoption. This will be a great hurdle that public blockchains must overcome.
Since trustless blockchains are inherently open source and public, they lack a privacy layer in the computation and storage layers. This is of grave concern when it comes to businesses using public blockchains, as most businesses possess sensitive data that they do not want compromised or seen by their competitors. For this reason, permissioned chains have emerged to fill the void, but again it remains to be seen whether they will last as public blockchains develop more functionality. This is very similar to the argument of intranets vs. the Internet, which ultimately saw the Internet win out as the main highway of exchange.
Taking into account the above problems, it’s clear that the God protocol still has a couple of kinks that need to be ironed out before its a part of our everyday lives. Realistically though, what do people expect when a revolutionary technology emerges on the scene in less than ten years? Do people really expect there to be no major hurdles to overcome, especially for a technology that uproots deeply ingrained infrastructure?
Growth and adoption of new technology is never a smooth, linear ride. Fortunately, unbeknownst to most of the blockchain ecosystem, there does exist a solution that has the potential to fix the three core problems in the God protocol; that project is Chainlink (LINK).
Completing the God Protocol
“The single biggest crypto innovation of 2018 will be working oracles. Oracles (the ability to bring info from outside a blockchain into a blockchain) are critical to a great many projects. Oracles exponentially increase the scope of what crypto can do.”
-Ari Paul, Managing Partner at Blockchain Capital
In simple terms, Chainlink is middleware that acts as a decentralized oracle network, with the core functional objective being, bridging two environments, on-chain and off-chain, through the use of APIs. It does this by taking on-chain resources, such as blockchains like Ethereum, Bitcoin, and Hyperledger, and connecting them via APIs to off-chain resources, such as market data, bank payments, retail payments, backend systems, events data, other blockchains, and any web API that exists.
It provides connectivity between the two by performing two functions: connecting smart contracts to off-chain inputs (data), which are then fed into the smart contract and used to produce off-chain outputs (payments, transfer of ownership, transfer of data). Essentially, the off-chain data is used to trigger smart contract actions based on the parameters set forth when the contract was made.
Example: Company A manufactures goods that are then shipped to Company B, a retail store. The two companies create a smart contract where the retailer agrees to pay the manufacturer once the goods are delivered. When the goods arrive, the retailer signs for them using an e-signature, which has an API that can be used as an input for the smart contract. This input is used to trigger an output in the form of a payment from the retailer’s bank account to the manufacturer’s bank account.
This enhanced level of connectivity brings a whole new level of functionality to smart contracts. Just like a computer with no Internet connection has limited capabilities, so too do smart contract platforms that cannot connect to outside functions. Chainlink acts as the Internet for smart contracts, allowing connectivity between almost everything.
Chainlink was specifically designed with modularity in mind, meaning every piece was built separately and is able to be upgraded. It also makes use of external adaptors, which can be built by anyone and allows Chainlink to connect to any smart contract platform that exists, effectively rendering it blockchain agnostic. Any smart contract platform can utilize Chainlink’s oracle services and it can make payments on any blockchain or backend system with an API. These payments can be made using any fiat currency and any cryptocurrency.
While this new enhancement in connectivity is vital to smart contract usability, it’s only really valuable and unique if the connectivity is trustless.
APIs are used all the time in today’s world, but the problem is that these APIs are centralized, meaning the medium in which off-chain and on-chain resources communicate is a single line with a central point of attack. With the goal being trustless connectivity, this possesses a massive security risk and is particularly dangerous in a world of self-executing contracts.
Imagine creating a smart contract worth a billion dollars, only for it to execute to the wrong person or for the wrong amount because it received bad data, was hacked, or was tampered with by the authority controlling the API feed. This is why there is a pressing need for decentralized oracles, especially for high value/high importance contracts. What’s the point of having decentralized smart contracts when they have centralized API connections?
To solve this, Chainlink has developed a decentralized network of oracle nodes that retrieve data from off-chain API data feeds so it can be used to trigger smart contracts. Nodes also format the data into blockchain readable formats to trigger API outputs. Smart contract creators wanting to utilize the Chainlink network can use a variety of tools to make their connectivity trustless, such as distributing sources, distributing oracles, and use of trusted hardware. It also has features to secure decentralization, such as aggregation, reputation systems, staking/penalty payments, and certification services.
Levels of Decentralization:
When a smart contract creator uses the Chainlink network for its services, it must first select the amount of nodes it wants to use. For example, having one node fetch data for the contract will likely be cheaper, but comes with more security risk, whereas having 1000 nodes service the same contract will give the contract far greater trust and security.
One of the ways a smart contract creator can increase trustless connectivity of the smart contract is by having nodes fetch data from several sources. For example, a node could get market-pricing data from Bloomberg, Yahoo Finance, and Reuters.
Another way it can increase trustlessness in the connectivity layer of the smart contract is by having multiple nodes work on the contract. One way this could work is for all the nodes to get data from the same source, which is important when there is only one source of data. This would insure against the one and only node being a bad actor or getting hacked, since there are other nodes to back the contract up. Another way is to have multiple nodes get data from multiple sources.
The smart contract creator can also choose an aggregation method for the data fetched by the nodes, such as using an average from all the sources, tossing out the outliers, or weighting different sources more than others. In reality, there can be all kinds of aggregation methods. It’s ultimately up to the smart contract creator to choose what they want.
The smart contract creator can also choose how much collateral they want the node to stake in order to get the privilege to solve the contract. This collateral acts as both a penalty payment and insurance on the contract in the event that the node acts in a malicious or unprofessional way, specifically if their data feed is inconsistent with the data given by other oracle nodes working on the smart contract. The malicious node will have to pay the smart contract creator the amount of collateral that was agreed upon in the beginning of the contract if their data feed is a clear outlier. Low value contracts might not request as much collateral, but high value/high importance contracts will likely want larger amounts of collateral staked to insure the node performs its job to the highest standards.
Another security check on nodes is having a reputation system that rates nodes based on certain criteria such as the total number of assigned requests, total number of completed requests, total number of accepted requests, average time to respond, and amount of penalty payments. What this does is keep nodes acting in an honest manner because if they do not, they are subject to receiving bad ratings by other users, which are then seen by future customers. A bad rating would cause the node to lose out on potential revenue earned by servicing upcoming contracts. This is likely to be done by third parties, at least initially.
Finally, another proposed security check is for the Chainlink team or some outside third party to give endorsements of high quality oracle providers. They could do this by monitoring network statistics in order to locate nodes they found most reliable. This is not something that is mandatory, but more of an optional feature to increase security on the system.
While trustless connectivity takes digital ledger technology to a whole other level of functionality, Chainlink’s long-term vision aims to perfect the God Protocol by adding off-chain computing. Effectively, this would act as both a scaling solution for smart contract platforms, such as Ethereum, as well as act as a privacy layer for smart contracts, by moving most of the processing work to private off-chain environments. To achieve this, they would look to take the on-chain smart contract and move it off-chain into what they refer to as a trusted execution environment (TEE). A TEE is a private enclave where the integrity of the application, such as the data, the code, and the control flow, are protected from any outside entity tampering with them. This even protects against malicious operating systems and malicious administrative hosts running the application. The secure enclave ensures confidentiality, so that others cannot see the data or what kinds of processes are being done with it. An easy way to think about this is imagining the data and computation happening in a secure lock box, where no one from the outside world can see it or even access it.
TEEs are possible through the use of trusted hardware, such as Intel SGX, the current leader in this new space. Chainlink has recently purchased Town Crier, an oracle built on the Ethereum network using SGX trusted hardware, which already has a working product that’s retrieving sensitive flight information for smart contracts to see if they have been delayed and issuing flight insurance based off that information. All of this is done withoutrevealing any personal data of the passenger to anyone.
With processing being done off-chain in secure enclaves, it takes a major load off smart contract platforms, which means they can focus on becoming settlement layers with a lot less computation, while most of the heavy processing is done off-chain using Chainlink. This is very similar to how the Lightning Network aims to take a lot of computational weight off the Bitcoin main chain, leaving Bitcoin as a settlement layer and the Lightning Network as the high computational chain for most of the day-to-day transactions.
This can substantially reduce costs since less work needs to be done on-chain, which requires gas payments that are far too high for recurrent computational tasks, especially at the current moment. Moving computation into TEEs will likely increase the use of blockchains, since high on-chain fees are absorbed less frequently, meaning fees are only paid when finalizing settlements. This is especially beneficial for those DAPPs, which require frequent computation before the final settlement.
TEEs will likely intrigue those businesses worried about sensitive data being stolen on public blockchains, which would bring about a whole new subset of players into the space. It also supremely enhances the usability of smart contract platforms by allowing them to scale to new levels, while still maintaining decentralization. Another exciting possibility is having web assembly (WASM) code sent to nodes, which could allow them to perform all types of processes that go far beyond smart contracts. This means that Chainlink nodes wouldn’t just be fetching data, but could theoretically perform any function with any level of processing, even if they were not initially programmed to do so.
While this technology is still in its early stages and isn’t even a sure thing, the potential for it can’t go understated, which is likely why Chainlink has seen many additions to its team, along with a plethora of exciting partnership announcements in the last few months.
Team & Partnerships
The Chainlink team consists of a two-man core of Sergey Nazarov and Steve Ellis, but have made eight new additions to the team since they launched their ICO. Sergey in particular is one of the premier smart contract pioneers in the space; building decentralized applications since 2014, initially launching Cryptamail as the first blockchain-based messaging service, then going on to build Secure Asset Exchange, which became the first widely used decentralized exchange interface. He has been seen talking on blockchain panels with Vitalik Buterin since before Ethereum came out, as well as owning the website SmartContract.com years before most people knew what they were.
Sergey, through both his company SmartContract and Chainlink, are known for building oracles for large financial enterprises like SWIFT, as well as leading smart contract development teams like ZeppelinOS, OpenLaw and Market Protocol. He also worked for early stage venture capital funds FirstMark Capital and QED Capital. Given his previous work experience, the people he associates with, and the conferences he speaks at, it’s pretty clear that he has well-established connections in the world of blockchain, computing, academia, business, and finance. It’s also clear that Chainlink isn’t a new project that started during the ICO, but has been in development for years, as stated by Sergey when interviewed by the newspaper American Banker
The team also has six advisors, two of whom are Ari Juels and Evan Cheng who were the only two advisors before the ICO. Ari Juels, who co-wrote the whitepaper, is a PhD professor at Cornell, former Chief Scientist of RSA, and co-director of the IC3 initiative, the leading blockchain and research development consortium. Interestingly enough, Ari Juels shared the same stage with Nick Szabo at the Synchronize conference where they spoke on a panel discussing “The Power and Promise of Smart Contracts.” The other advisor, Evan Cheng, one of Facebook’s most senior engineers, is now the Director of Blockchain at Facebook.
The biggest takeaway from the team is their non-hype mentality and impressive Pivotal Tracker activity, showing they don’t care about creating artificial excitement about their project, but instead are a team that lets its actions do the talking. Their partners always publicize their partnership collaborations first, which is rare in a space where projects broadcast announcements of announcements just to create hype.
Another interesting aspect of Chainlink is their community. Despite the fact that they hardly market or communicate, the level of excitement in the community continues to grow. The community is almost cult-like with its overabundance of memes, which might sound like a bad thing, but even famous entrepreneur Peter Thiel said that most successful start-ups should be run like cults. To him, this means that the company has a strong culture, which the Chainlink community certainly does.
“The Accord Project is an open source, non-profit, initiative working to transform contract management and contract automation by digitizing contracts.”
Accord is setting the developmental standards for the construction of legal smart contracts and Chainlink is providing oracle services to them. Accord has some of the biggest law firms in the world working with them, such as Baker McKenzie, K&L Gates, and Allen & Overy, along with major technological and financial firms, such as IBM, Hyperledger, and APPG (UK government).
“OpenLaw is building a technology stack to help power next generation “smart” legal agreements.”
OpenLaw is aiming to do something very similar to Accord in building the developmental standards for the construction of legal smart contracts, and Chainlink is providing oracle services to them. Their aim seems to be more focused on developing legal standards on open blockchains, whereas Accord seems to be more focused on permissioned blockchains. One important piece to note is that OpenLaw is owned by Consensys. OpenLaw also recently partnered with Rocket Lawyer, an online consumer law company with tens of thousands of customers, to exploit the benefits of smart contracts.
“The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.”
While there has been no official announcement from SWIFT on their partnership with Chainlink, it is known, such as being displayed on the Chainlink website and being confirmed by the Chainlink team, that Chainlink is working on a Smart Oracle for SWIFT. This coincides with the fact that Chainlink did two successful proof-of-concepts for SWIFT at their annual SIBOS conference, where they created and executed a smart bond. This smart bond was a smart contract that took the interest rates of 5 banks, aggregated them into a single rate, and used that rate to make a payment that translated into a SWIFT payment message. SWIFT handles the interbank payments for over 11,000 banks in its network.
On a speculative note, there is speculation that the smart oracle they are creating for SWIFT might be designed similar to the recent white papersreleased by SWIFT describing a global platform for the financial services API economy, which is basically an exact description of Chainlink’s functionality.
“Web3 Foundation was founded with one mission: to support a fully decentralized web. Web3 Foundation is building an internet where users are in control of their own data, identity and destiny.”
Web3 is trying to build the decentralized Internet, with the Polkadot blockchain as the backbone. They also want to use Chainlink as their decentralized oracle service provider. Interestingly, Gavin Wood, the co-founder of Ethereum and the guy that wrote a lot of the code for it, is the head of both, Web3 and Polkadot.
“ZeppelinOS is an operating system designed specifically for smart contracts. It provides an on-chain set of upgradeable standard libraries, and an incentive structure to continually upgrade and patch itself.”
ZeppelinOS will be the development standard toolkit for smart contracts and DAPPs on Ethereum and Chainlink will be their oracle. Essentially, they are one of the base layers of Ethereum and developers who want to build applications on Ethereum will use the features in their toolkit, such as Chainlink. In fact, 95% of Ethereum smart contracts are built upon ZeppelinOS libraries.
Taking in all these partnerships, the same pattern keeps emerging, showing that Chainlink is partnering with the organizations that set the baseline protocol infrastructure that everything for smart contracts is built off. This includes organization building the infrastructure for decentralized law (Accord, OpenLaw), decentralized finance (SWIFT), the decentralized web (Web3), and Ethereum (ZeppelinOS). In most of these partnerships, it ‘s likely they build Chainlink right into the protocol itself, which gives Chainlink access to the millions of customers using their platforms. Being on so many high frequency platforms would bring an enormous amount of activity to the Chainlink network.
“Town Crier system is an authenticated data feed for smart contracts, a.k.a. an “oracle.” It was created by students and faculty at The Initiative for CryptoCurrencies and Contracts (IC3).”
On November 1, 2018, Chainlink accounced at Devcon 4 that it had acquired Town Crier. By absorbing Town Crier, Chainlink inherits the clients already exploring the use of the SGX oracle, as well as close access to the big name clients in the IC3, of which Chainlink is also a member. As stated, in the long-term vision, the use of trusted hardware is essential to big business adoption of smart contracts, so by Chainlink acquiring the industry software standard in SGX oracles, they become the market leader in off-chain computation through trusted hardware. This is not to be understated because most businesses will not adopt smart contracts unless they are private, scale to handle heavy processing, and require little overhead, all features that Town Crier provides by housing smart contracts in secure enclaves.
“In partnership with ConsenSys, Amazon Web Services and the Enterprise Ethereum Alliance, Kaleido brings the dramatic simplicity of SaaS combined with the performance, security, global reach and cloud scale in a platform that goes way beyond today’s quick start scripts and templates.”
Kaleido is essentialy a marketplace for the entire stack of blockchain products and services that any developer or company wishing to engage in the blockchain space would need to develop their own tailor-made solutions. It enhances the user experience of building smart contracts and allows this all to be done with relative ease. Chainlink is one of the “industry products” offered on the marketplace, which shows just how valued it is already, given that companies like Amazon Web Services and ConsenSys are backing Kaleido. It is quickly establishing itself as the Industry Starndard.
Blockchain Project Partnerships:
Chainlink has many partnerships with blockchain startups and data providers, such as Wanchain, Factom, Morpheus Network, Brave New Coin, Market Protocol, ClinTex, bZx, Hydrogen, Kaiko, RTrade Technologies, GameDex, Synthetix, Mobilum, Data Sports Group, NAKA chain, Bodhi, Katallassos, Provable (formerly known as Oraclize), Celer, Olympus Labs, and ETHA, with other speculated ones on the way such as Request Network, Ambrosus, Icon, Universa, and Cardano. These partnerships give Chainlink access to most of the clients that utilize these platforms, which could be significant if they turn out to be big players in the space.
In reality, there will be tons of blockchain projects that will need to interact with off-chain resources; therefore Chainlink becomes a necessity, given they’re clearly the market leader in decentralized oracles. In fact, there are hardly any serious competitors to them at the current moment, although some do exist such as Witnet, Shintaku, and Mobius, which could take some part of the market share. There are also centralized oracles aiming to compete, such as Oraclize and ZAP. No market is without competition, but it’s clear that in terms of development, business connections, and already established partnerships, Chainlink stands out.
White Label Partnerships:
There is a lot of speculation that Chainlink has many white label partnerships with the who’s who of large technology firms and permissioned blockchains, such as with Microsoft, through their Cryplets application. Basically, what this means is that these platforms have Chainlink oracle services built into their protocol stack, but the public doesn’t know that and the credit for these services go to the companies and blockchains who run them. It’s very similar to how Wal-Mart has their own brand of in-house food, in which they take the credit for, but don’t actually make the food. Instead, they contract out some other company to do it for them, but Wal-Mart puts their name on it.
Lastly, something that everyone should be aware of is the new PSD2 law going into effect in Europe. In 2019, every European Financial Institution must provide API support for payment initiation and account enquiry made by all the upcoming Fintech companies. Chainlink is uniquely positioned to facilitate communication between Fintech companies and legacy payment systems since it can plugin to Fintechs using an API and plugin to the SWIFT system, as it demonstrated with its POC where it made a payment in the specific ISO 20022 XML format.
Since SWIFT handles most of the infrastructure for interbank payments around the world, it’s possible to trigger a fiat banking system payment via Chainlink based on the outcome of the contract. This will likely require the use of TEEs in order to maintain strong privacy standards for customers. European banking is going to radically shift and Chainlink is positioned to be a direct financial bridge between legacy banking systems and new Fintech startups.
Let’s start with the basics first; the Chainlink network currently has a total supply of 1,000,000,000 tokens, with 350,000,000 in circulating supply. Their ICO was held on September 19th, raising $32,000,000, of which $29,000,000 was sold to private VC’s with a 100 ETH minimum investment, while the remaining 3,000,000 were sold to the public with a 7 ETH maximum investment. The public ICO sold out in about 15 minutes.
LINK is an ERC20 token with additional ERC223 “transfer and call” functionality, allowing tokens to be received and processed by contracts within a single transaction.
The token has two purposes: paying node operators and incentivizing uptime guarantees. In terms of paying node operators, this includes retrieval of data from off-chain data feeds, formatting of data into blockchain readable formats, and off-chain computation. These prices would be set by node operators and subject to the market.
In terms of incentivizing uptime guarantees, this is done through the payment penalty/collateral system described above, in which nodes must put up whatever collateral is requested by the smart contract creator in order to be able to service the contract. Failing to service the contract with good data will result in the node losing the collateral. To ensure more trust and security, especially for high value/high importance contracts, the smart contract creator will likely demand higher collateral on the contract. Things that come to mind here are large bond payments, large derivatives contracts, transfer of sensitive data, and transfer of expensive assets like a house.
Since LINK acts as a kind of collateral insurance on smart contracts, the total market cap of the LINK token must equal the total amount of insurance demanded on all the contracts at a given time. This means that both high value contracts, like bonds or real estate transfers, and liquid markets with high amounts of activity, such as derivatives and supply chain, will need enough collateral to back up all the insurance needed on them. This could get rather large if there is a sizeable amount of activity on the network.
The Chainlink network actually provides more security the higher the value of the token because it means contracts are backed by a healthy amount of insurance, bringing increased trust to the network. It also puts the burden of trust on the node, instead of the smart contract creator, which should expedite adoption, as people feel comfortable running smart contracts knowing they are adequately insured against mistakes.
Another rewarding aspect about the token is the fact that those who choose to run nodes stand to make a considerable amount of profit if the network is active, similar to how Bitcoin mining can be profitable. While holding LINK isn’t required for running a node, not having any will prohibit the node from putting up any collateral to service contracts. Since most contracts will want insurance, especially high value/high importance contracts, the more LINK a node holds the more likely they are to service lucrative contracts. This means that most tokens will be locked up in nodes, leaving a very small percentage actually being traded on the open market.
Most smart contract creators using Chainlink oracles will likely never even interact with the token, as fiat relays are currently being built that allow the customer to pay in whatever currency they want, while the payment in LINK to node operators will happen in the background through the use of decentralized exchanges and simple protocols. Chainlink actually formed a partnership with OpenLaw to show how real world fiat currencies can be used easily with self-executing payment clauses in a legal contract. This should accelerate adoption, as the customer experience will be very seamless and simple and not require the user to hold cryptocurrency.
“If anyone solves oracles, it’s probably worth more than crypto”
-Richard Heart, early Bitcoin investor
Taking everything into account, it’s hard not to get too excited about what a successful Chainlink network could do to revolutionize the smart contract space. If Ethereum can exceed a 100 billion marketcap based on tokenization, crowdfunding, and simple smart contract functionality, then the possibilities brought about by Chainlink are profound, given they provide a working bridge from legacy systems to all blockchains and provide the most secure medium of exchange between data and smart contracts. This doesn’t even take into account their medium-to-long term goals of providing scaling and privacy solutions for smart contracts using TEEs.
There is a real possibility that Chainlink could ignite the next crypto bullrun, given it opens up a whole new level of possible functionality for DAPPs using smart contracts. From a business perspective, companies will save tons of money by not having to make expenditures on overhead, such as manual entry of data, human arbitration of contracts, and middlemen services used to establish trust. From a customer perspective, people won’t have to rely on the good faith of companies when entering into agreements with them, since the blockchain is the ultimate arbitrator of how the contract is executed.
The companies who opt towards giving up control in favor of decentralization will likely gain massive marketing advantages over companies that don’t because it showcases to customers their willingness to allow trustless third parties to arbitrate, bringing much needed trust back into B2C relationships. It could become a game of who will blink first and give in.
Obviously though, this is not financial advice and there are always obvious risks associated with speculative investments like Chainlink, such as competitors coming into the space, smart contract platforms trying to implement their own native oracles, and businesses choosing to build everything in house on private chains with private oracles. This is a project that will not be done overnight and will likely take years to reach its full potential, although that is true of all blockchain projects today.
Despite the obvious risks, what project has this wide of a use case, this important of a use case, this professional of a team, this level of Pivotal Tracker activity, this high level of partnerships/clients, and this lucrative of tokenomics? In a space of hype projects that add little value to the world, Chainlink solves real world problems, works with already established companies, and offers a solution that the digital ledger technology space desperately needs.
Flipping low fundamental hype coins will not last forever and so people better start to think about which projects have strong fundamentals and will actually be around in the future. The amazing part about Chainlink is that it doesn’t matter what smart contract platform succeeds, whether that be public or permissioned chains, because Chainlink can service any type of platform, being it’s blockchain agnostic. They are like a premier shovel manufacturer in the smart contract gold rush, in that everyone needs oracle services in order for their own projects to succeed. Most mining companies went bankrupt in the Gold Rush, but the shovel manufacturer always made money.
If Chainlink reaches its full potential, it could complete the God Protocol, perfecting the first trustless third party in world history. This is likely to obsolete many current blockchain projects and the ramifications are bigger than most people understand. Klaus Schwab, founder and head of the World Economic Forum, described this phenomenon of decentralized trust in a book called The Fourth Industrial Revolution, in which he even mentioned SmartContract.com by name. So with all that’s been said, the choice is yours: watch from the sidelines or take a risk on what could be one of the most valuable pieces of digital real estate heading into the future. Do your own research, understand the risks, but know that life-changing investments don’t come around all that often.
Thanks to all the anons that made this possible, especially @timo_harings for helping me through the editing process and adding some details I missed.
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