What is ChainLink (LINK)?

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The LINK token has performed well on the market since July 2018 when its price was only around 20 cents. It overperforms a lot of tokens this year. Traded around $4 at the beginning of July 2019 with a capitalisation of $1.5 billion, one may wonder if LINK is reasonably valued. Here we analyse ChainLink’s promises, its utility in the ecosystem, as well as what you need to know before deciding whether or not to invest in this token.

Chainlink, what is it for?


Chainlink is a decentralised oracle system. Since the creation of Ethereum and the increasing use of decentralised applications in 2017, smart contracts have gradually proved their utility. The applications are diverse, affecting finance, insurance, governance methods, and much more.

New types of applications are emerging, hosted on public blockchain networks, mostly on Ethereum. They are open to all, auditable, censorship-resistant, flawlessly running 24 hours a day, and can hold and transfer value in the form of cryptocurrencies or digital assets (tokens).

While the execution of these autonomous contracts is predictable and unavoidable, there are weaknesses for functions that require data external to the blockchain.

An oracle system to feed smart-contracts


Let’s take an example of a contract to manage bets on the outcome of a France-Argentina soccer game. To do this, each participant sends an ether and picks what he thinks will be the winning team to the contract address, which will keep the tokens until the match is over.

France wins, and one of the participants must receive his two ethers, minus the commission of the company that managed the system. Unfortunately, a smart contract is unable to open a web page to consult and verify the winning team.

He needs a data source that can be consulted from outside the blockchain, that he can query at any time, and that is reliable. These entities are called oracles, in reference to the divinatory nature of oracles in ancient Greece.

Chainlink’s idea is to create a decentralised oracle system, always available, resistant to possible manipulation, and providing accurate information even if some oracles were wrong or misbehaving.

Usecases are multiple. It may involve information about the price of a share on the stock exchange, the weather over a city, or the winner of the last Voice of America season. Any decentralised application requiring a high degree of reliability on external data imported into its contracts will be able to benefit from the services provided by Chainlink’s oracles.  

Even better, a contract can combine several requests to make complex decisions, particularly in the fields of insurance or financial products. Our Coinhouse Premium Services teams review cryptoassets projects on a daily basis and will be able to provide more details on the potential value of projects like Chainlink. Our expertise will help you taking the right decisions. 

Chainlink, how does it work?


First it is required to install the software called ChainLink Core, which is used to communicate with the Ethereum blockchain and to distribute and schedule tasks between oracles.

Companies that need it offer payments in LINK, the Chainlink token, so that oracles provide the data necessary for the proper work of their smart contracts.

For a single request, several oracles will be requested. Each of these oracles will use different data sources to produce a result that will be written on the blockchain.

In order to avoid problems of collusion or cheat, users of the ChainLink oracle system can ask their request to be processed only by oracles that have staked LINK tokens. These oracles choose the price of the data they provide and will earn more LINKs as they process a large number of requests.

However, if the data they propose does not correspond to the majority of other oracles, not only are they not paid, but they lose the LINKs they have staked.

Moreover, a reputational system exists, through which customer smart contracts managers can rate the quality of the data provided by oracles. These different systems should result in reliable data sources that are very difficult to falsify.

As a result, the LINK token provides the necessary economic incentive for each party to perform its tasks correctly.

The LINK token in question


The token is useful because it is actively used in the decentralised oracle economy created by ChainLink teams. However, it is now difficult to anticipate the success that ChainLink will have in the ecosystem in the medium or long term. If this architecture will prove effective, the demand will follow. Also, like many other projects currently on the market, the token seems quite easily substituted by ether or DAI. 

The team behind the project is serious, supported by a very active community on social networks, and the development on Github is active. These are positive signs when studying a crypto project. The list of partners can be consulted here.

In early July, a mention from Google saying they could use the ChainLink technology to bridge the gap between their BigQuery cloud service and Ethereum contracts, as well as a listing on Coinbase fed the hype and inflated the token price to over $4. 

If you are interested in this asset, the circulating supply of LINK is now 350 million, representing only one third of the 1 billion tokens total supply, bringing ChainLink’s theoretical market capitalisation to $3.5 billion. These 350 million LINKs will be used as an economic incentive for ChainLink nodes to do their oracle work. The remaining 300 million is held by the team of developers, who can use it at any time freely. Following our analysis on the project, we think ChainLink is overvalued at the moment and the run up was mostly led by hype.