Is LINK a good investment asset?
Updated: Apr 15, 2021
The short answer is "Yes".
Rising institutional interest in cryptos is now a well-known fact. Institutional money is currently focussed on bitcoin and ether, but in time will look for more opportunities. There could be attractive upside in those cryptos that institutions are not looking at yet, but will soon.
Most altcoins though don’t inspire much confidence. Many reek of “pump and dump”. A deep investigation is therefore required to differentiate between the good and the ugly.
LINK is one crypto that does inspire confidence. It is the native token of Chainlink- It (1) solves a real problem, (2) is likely to see years of demand growth, (3) has clients in both the crypto world and traditional finance, and (4) has a committed team of Link Marines behind it.
(Please note that this is not financial advice. These are my personal thoughts that led me to buy LINK)
Investment Thesis Summary - The launch of Ethereum 2.0 is likely to make the network more efficient, more scalable, and more secure => This will mean more dApps => More dApps will mean more smart contracts => More smart contracts will mean more demand for off-chain data => More demand for off-chain data will mean more demand for quality oracles.
=> And Chainlink is the most credible decentralized oracle network out there.
Basics first - To understand the above thesis one needs first understand smart contracts.
What is a Smart Contract?
A smart contract is a contract that executes automatically when certain conditions are met. Nick Szabo in his piece The Idea of Smart Contracts uses vending machines as an example. He calls a vending machine a “primitive ancestor of smart contracts”. If a certain sum of money is deposited in a contraption, then the vending machine will automatically release the preferred item and balance change (if any). There is no salesperson/shopkeeper/cashier in between.
What is the most common smart contract in the blockchain world work?
In the blockchain world, the most common use of smart contracts has been in Initial Coin Offerings (ICOs). An ICO is managed through a smart contract with if/else conditions like -If the minimum amount of funds are raised, then funds are transferred to the fundraiser wallet, else the funds revert to the investor's wallet.
Smart contracts need data. Sometimes from outside the blockchain.
In the above examples, the data like money inputted in a vending machine or funds raised in an ICO is in the blockchain itself. Many smart contracts however require external data not native to the blockchain.
DeFi (Decentralized Finance)- In a DeFi lending platform like say Compound where you deposit 1 token as collateral and borrow another, the exchange rate between the 2 tokens is required. Relying on the exchange rate of only one exchange is dangerous. If a malicious party gets to know that Compound is using a particular low volume exchange for its pricing feed, then that malicious party can manipulate prices in that exchange (i.e. push up the price of the collateral crypto and reduce the price of the borrowed crypto) and borrow more than she deposits in the lending platform.
Insurance - Insurance smart contracts are not a reality yet but are often cited as an example to show how useful smart contracts can be. A crop insurance smart contract will automatically release the money to insured farmers when say rainfall is below a certain level. If the weather data is incorrect then the farmers won’t get paid even when there’s a drought or they may get paid although rainfall was adequate, in which case, the insurance companies get screwed in the process.
Sports Betting- In betting platforms you bet on the outcome of say a cricket match and get paid based on the match outcome and betting odds. Incorrect information about sporting events results will lead to the wrong parties getting paid.
The danger with smart contracts is that since they are run on code with no centralized authority, there is no recourse if there is a bug in the code or the data is incorrect. The smart contract executes automatically and cannot be reversed.
How does outside information reach the smart contract?
Outside information (like pricing feeds, weather data, sporting event outcomes) is delivered by oracles. An oracle is an intermediary between a blockchain and the outside world. It delivers outside information to the blockchain and blockchain information to the outside world.
Why do we need Chainlink if oracles can deliver the required data?
The whole philosophy behind blockchain is decentralization- Not having to rely on any central authority. And here we have blockchain-based smart contracts that rely on a single oracle? Oracles represent a single point of failure. They might be controlled by malicious parties. They might be controlled by incompetent parties. They could face a power outage bringing to a halt all activity in smart contracts using them. Their data could be plain wrong.
The flash loan attacks in the DeFi space recently have been possible because of bad oracle data. Without a reliable data service like Chainlink, any liquidity pool is open to attack.
This is where Chainlink comes in. Chainlink is a decentralized oracle network that incentivizes a group of oracles to deliver reliable data to smart contracts.
How does Chainlink work?
Chainlink uses a probabilistic incentive philosophy similar to Bitcoin i.e. the players can technically game the system, but will only hurt themselves if they do, while the network will survive.
Let’s say a smart contract operator is looking for weather data and wants to use 2 known weather APIs OpenWeatherMap and Weatherbit. They send a data request with their requirements. Oracles in the Chainlink network have a reputation score based on their past track record like how many requests they’ve completed, how much time they took to provide data etc. Data requests are sent to oracles shortlisted based on their reputation scores. The higher the reputation score, the higher the chances of getting selected. Shortlisted candidates then submit bids i.e. their charges for providing the required data. The final oracles for the project are selected based on these bids. The final selected oracles then submit the requested weather data.
Taking a very simplistic example - Let us assume that 7 oracles were selected. 5 of them submit the same data and 2 submit different data. Chainlink assumes that the 2 outliers have submitted faulty data. It discards their data and penalizes them by slashing their stake. It then averages the weather data from the 2 APIs and sends it to the smart contract operator. The node operators are paid in LINK for their services.
To be eligible to provide data services, oracles must stake LINK. This stake serves as collateral incentivizing the oracles to provide correct data. Providing faulty data leads to the staked LINK being slashed and a record of the nodes' malicious behavior being stored immutably on-chain. Remember that providing oracle services is a lucrative activity. This means that by providing faulty data, you not only lose your stake but only a profitable revenue stream forever.
One of the things that makes this a technically challenging task is that requests are in the blockchain programming language and have to be translated to a language understood in the outside world and the data collected has to be translated back into the blockchain programming language. This translation is done using the Chainlink Core and Chainlink Adapter.
Who is using Chainlink?
Chainlink boasts of several high profile customers from both the crypto world (Synthetix, Aave, Yearn Finance) and the traditional world (Swift, Google). Chainlink began its journey on Ethereum but is now available on other blockchains like Bitcoin and Polkadot.
The Chainlink token called LINK was launched through an ICO in 2017 which raised $32million. It is currently ranked among the Top 5 cryptocurrencies, based on market cap. LINK has 2 demand sources
1. Oracles are paid in LINK for providing correct data.
2. Oracles have to stake LINK when bidding for contracts.
In the future, smart contracts could power billion-dollar industries. As more smart contract operators use oracle data, there will be greater demand for LINK from both smart contract users (who need LINK to pay for data) and oracles (who need LINK to stake in contracts). Further, staking reduces the supply of LINK by tying it to contracts and hence removing it from circulation.
LINK vs bitcoin
Both bitcoin and LINK have excellent development teams which makes them both good assets.
BTC > LINK - Bitcoin scores over LINK because of the following reasons:
* Bitcoin benefits from greater network effects
* Almost 90% of total bitcoin supply has already been mined while only 35% of total LINK tokens are in circulation. The release of more tokens could be an overhang.
* Since LINK is a utility token, its value is somewhat limited by its usefulness. Bitcoin on the other hand is a monetary asset (like gold) and has value beyond its use cases.
LINK > BTC - LINK scores over bitcoin because of 1 main reason:
* Value of any asset goes up as new potential investors discover it. LINK is currently being used mainly for oracle jobs. Retail and Institutional investors who are already invested in bitcoin are yet to discover LINK.
Net net- LINK is a credible token for institutional and retail portfolios