In this post, I will walk you through how Chainlink gets its value. We’ll talk about Chainlink’s utility and why its services are in demand. I will walk you through what problem Chainlink solves and what kind of products it provides. We’ll take a close look at the three factors driving its value: the scarcity of its supply, the fact the LINK token is used as payment, and how LINK gets locked up via staking.
Chainlink Utility and Use Case
Chainlink is a decentralized oracle network that connects smart contracts to real-world data. An Oracle in crypto-speak is just a complicated word for data provider.
Here’s how it works in a nutshell.
Chainlink node operators provide data from the real world and make it available to anyone who wants to automate an application through the use of smart contracts. Remember blockchain networks can’t talk to the outside world.
For example, the Ethereum blockchain doesn’t know the price of ETH. ETH’s price is determined by market forces so it’s impossible for the Ethereum network to be privy to that information.
Instead, Oracle networks fetch the price of ETH from qualified data providers such as Coinmarketcap, Coingecko, cryptcompare, and others. Each oracle takes the median price and supplies it to the chainlink network.
Chainlink is a decentralized network which means that all nodes come to a consensus and the agreed upon input is what is supplied to smart contracts.
By using Chainlink DeFi applications can ensure that they have access to accurate data.
What problem does Chainlink solve?
Chainlink solves what is known as the Oracle problem which is the fact that blockchains cannot process external data. However not having access to external data sources is akin to having a computer but not being able to connect it online. Chainlink is the link between external systems and blockchains.
What kind of data do chainlink oracles provide?
Here are a few examples of data that application developers can connect their smart contracts to
- chainlink price feeds
- sports events outcomes
- weather conditions
- any application programming interface (API)
- data points from IoT sensors
- off-chain computation
- The state of a stablecoin’s reserve assets
Where does Chainlink (LINK) get its value?
Chainlink gets its value in 3 ways
The first thing to note is that Chainlink’s LINK token has a fixed total supply of 1 billion tokens. According to Coingecko about 1/3 is allocated to the company, 1/3 to the node operators and 1/3 was made publicly available during the initial coin offering in 2017. Digital assets with fixed supply are thought to be more desirable due to their scarcity.
2. LINK is used as currency
Secondly, LINK tokens are used to pay for data. Every time a smart contract requests data from an oracle it needs to pay the data provider in LINK. See How to Get Chainlink (LINK) here.
LINK is a type of ERC-20 token called ERC677. ERC-677 introduces additional functionality compared to ERC-20. Its key feature is the ability to send tokens with a callback function to a contract, enabling more complex and dynamic interactions between tokens and smart contracts.
So now you have a scarce digital asset that people need in order to make payments in exchange for useful information that makes their product work. A massive chunk of DeFi apps rely on Chainlink to function. If DeFi is the future of finance then Chainlink is a central cog for the whole system to function. Currently, there are more than 500 decentralized apps using Chainlink to function plus an additional 200 NFT apps and another 200 gaming apps.
In addition, Chainlink has partnered with big names on the data provision side including, AWS, Google, Accuweather, Associated Press, Oracle, and Intel.
The key thing driving factor driving value here is not the price itself but the number of partnerships. The more the Chainlink oracle network is used the more that LINK will be in demand.
Chainlink introduced its first iteration of staking in December 2022 and has just launched its second iteration in December 2023. Data providers who want to prove that their data is reliable in terms of uptime and accuracy can stake LINK. This means that they are locking up their LINK to put their money where their mouth is. If they are shown to be not performing on par with expectations they could have their stake slashed. This would not only hurt them economically but would also feed into a reputation score that anyone could review to decide whether they wanted to use their service.
Users can also delegate their LINK tokens to be staked with a node. You can find out more about Chainlink staking here.
What you want to be aware of is that Chainlink is not a blockchain itself. It’s not like Ethereum or Bitcoin which rewards miners and validators with newly issued coins. Instead, Chainlink rewards stakers with fees generated from payments from smart contracts that use the Chainlink ecosystem. You should think of Chainlink as a platform that enables crypto projects across blockchains to do their job. Like Gam on Medium says Chainlink is middelware. Just like how Apple offers the app store as a service to developers to promote their apps Chainlink offers a secure and decentralized way for others to offer their data.
So now you have a third thing going. Not only is the supply fixed and not only is the LINK token in demand as a medium of exchange but more LINK is getting locked up and taken off the market. The first staking pool was 25 million and this year has expanded to 45 million.
Market dynamics and demand
Chainlink has a market capitalization of just under $9 Billion at the time of writing. At its all-time high price of $50, its market cap was $20Bn. Chainlink’s price is rising off the back of their new staking iteration and the broader uptick in the crypto market.
At the time of writing Chainlink secures more than $16Bn in value across networks. This means that $16Bn worth of assets rely on Chainlink oracle services. Without Chainlink we wouldn’t have the multitude of defi applications we have today.
Chainlink’s off-chain data feeds power some of the most popular DeFi apps such as Aave, Compound, dYdX, Frax, Liquity, Sushi, Synthetix, and more.
In addition Chainlink has deployed the CCIP a better performing and more secure bridge protocol that allows blockchains to send messages and tokens to eachother. See How Does Chainlink CCIP Work for more.
Chainlink’s most popular service after its data feeds are its verifiable random functions (VRF). Random number generation is an important aspect that many smart contracts need and is not as easy as it sounds. VRF is used by gaming and NFT projects to prove to their users that their games are fair or that their NFTs are scarce. This way anyone technical person can cross verify that a number or game is truly random and not manipulated in any manner.
In this post, I will walk you through where Chainlink gets its data from. I will describe how Chainlink connects to external data sources and give examples of how their decentralized Oracle service works. Read more.
In this post, I will walk you through how chainlink is used. I will show you which apps and companies are using Chainlink and the extent of its usage. Read more.