Google’s interest is enough to propel Link’s prices to new highs. Consequently, ChainLink may end up dominating the Oracle market. Thanks to yesterday’s announcement, Link is up 38.4 percent. However, this appears to be the early stages of a possible mega rally.
The Crypto that Google & Libra will be utilizing Chainlink too ! Afterall the main crypto guy at Facebook is on the board of chainlink. Evan ChengTechnical Advisor "Evan is one of the creators of LLVM which generates the low level machine code running every Apple device, as well as much of Google, Nvidia, and Intel.
What is a smart contract?
In essence, a smart contract is a program that runs based on a set of parameters that are defined by the creator and has the ability to control the movement of value based on interactions with those parameters. First discussed in 1996 by Nick Szabo, many claim that smart contracts are the real use case for blockchain technology in the same way programs extended the power of the computer beyond basic calculator math.
The simplest example is a digital vending machine. If represented as a program, the input of money equal to the price for a soda will enable the release of said soda to the user. The soda will not be accessible without providing the appropriate amount of value, and if that value is provided the program will ensure that the soda is delivered. These ‘programs’ predicated on value exchange are what Ethereum is specifically built to run in a secure environment. Creators and users of smart contracts do not need to know each other or have any predetermined level of trust.
Smart contracts have the capability to be digital representations of any financial contracts that currently exists in the analog world. A few examples of everyday financial contracts:
Municipal bonds that pays a quarterly interest payments to investors
Insurance contracts that provides coverage for a flight being on time
Uber rides where the rider pays a dynamic price to the driver
It is the unlimited flexibility of what can be created as a smart contract that makes them intriguing and potentially revolutionary.
Why are smart contracts powerful?
The most fundamental building block in economics is a general-purpose financial agreement. These agreements specify inputs, logic and outputs for anything ranging from credit card purchases to employment contracts.
Intermediaries are present in many of the transactions that take place within digital markets today. From a ride on the Uber platform to a bank executing on the covenants of a bond agreement, these financial contracts are everywhere. In each instance there is one (or more) intermediary introducing a high level of overhead cost, unnecessary counterparty risk, and potential for fraud. Many businesses that enable financial platforms have a fee-based business model, in excess of their platform cost, for every transaction occurring on their platform. Ronald Coase contended in his 1960 article, The Problem with Social Cost, “is that if we lived in a world without transaction costs, individuals would bargain with one another to produce the most efficient allocation of resources.” In economic theory, additional fees have a cost on the overall economic system and increase friction for buyers and sellers, limiting the total output.
What comes 1st the Chicken or the Egg Problem?
Smart Contracts’ missing LINK
The problem at a high level
Mass adoption of interesting smart contracts will require data feeds that are secure, external to the blockchain (i.e. interest rate data from a bank), and maintain privacy when incorporated into a smart contract. Data feeds that meet these conditions are not currently available for a number of reasons. Broken down, the problem lies with the following:
Blockchains (and smart contracts running on the blockchain) cannot directly fetch and incorporate external data; they lack the networking capabilities necessary.
Current solutions are powered by a community of centralized oracles, software that connects external data feeds to blockchains for smart contract functionality.
Relying on single sources of data for a smart contract is inherently insecure; the single entity is left vulnerable to tampering or data corruption. The self-executing nature of smart contracts makes data integrity paramount.
Lastly, data requests transmitted through the blockchain are publicly available; observers can see any data fed into a contract which possibly leaks sensitive information.
These conditions result in extremely limited smart contract functionality and low adoption rates. If you are a large enterprise, the tamperproof value of smart contracts is effectively nullified if contracts are public and the underlying data feeds are insecure.
Diving deeper, let’s examine a specific example of the problem:
Smart contracts are often highlighted as being able to create the next generation of financial contracts; i.e bonds that issue coupon payments automatically instead a human intermediary facilitating the quantity and cadence of payments. The current lack of off-chain data availability for smart contracts (centralized oracles) is flawed:
Assume that a bank went through the trouble to set up self-executing smart contracts that would process trillions of dollars a year in bond payments, and elected to use a centralized oracle (i.e. Oraclize) as its data input for interest rates.
Now imagine either the source of data (Standard and Poors) that feeds the centralized oracle, or the centralized oracle itself (Oraclize), gets hacked and the interest rate data is changed . Billions or trillions of dollars are erroneously paid out as a result of a hack on the data provider and the self-executing nature of smart contracts.
This is what is typically called a “security at the edges” problem and underlines our investment thesis for ChainLink. Large institutions will not adopt smart contracts until both the smart contract and the data feeds that power them are verifiably secure end-to-end and private where possible.
So, how do we ensure that the data feeds that trigger smart contracts maintain their integrity? The high-level solution is that ChainLink employs decentralization & reputation scoring to set up and maintain data feeds. Layered on top of this system, is low-level hardware integration with leading trusted hardware processing enclaves (Intel SGX) to ensure smart contracts have high-integrity/private data feeds.
An example of the solution, provided by ChainLink:
Applying decentralization to data feeds will ensure there are multiple sources providing data inputs for any given smart contract product. It also means that the multiple inputs are scored in a way that rewards the most accurate data feeds and punishes the inaccurate ones — maintaining a reputation system/marketplace for data providers. Below we walk through our bond example from above, exploring how a decentralized oracle and trusted hardware approach solves this problem:
Instead of the bond smart contract calling a single API for interest rate data when the coupon payment is due, the contract puts the data-request “up for bid” on an on-chain marketplace. The smart contract owner stipulates parameters like the number of data providers they want to aggregate, the reputation score required to be able to participate, and a general Service Level Agreement (SLA) for data delivery.
Several data providers respond to this service agreement with a bid in the form of a data reply — when enough data providers have responded, the majority response is taken (or average depending on the request), outliers are removed, and data is fed into the contract. Even if a single data provider has been hacked/tampered with, there is no effect on the data powering the smart contract.
Once the payment is executed by the contract, the confirmation of the receipt is confirmed by a transaction that is executed within a trusted hardware enclave and therefore verifiable to the Bond smart contract, but does not leak sensitive PII to the entire Ethereum network.
In this case, the resulting outcome is a profound step for both smart contracts and the bond issuance market: a high-quality, broadly-sourced change in a bond yield rate is securely and privately acted upon without a centralized intermediary structure.
Why does this need to be tokenized?
The LINK token serves a few specific use cases within the ChainLink ecosystem:
Compensating data feed providers (smart contract data inputs)
Example: Bond coupon smart contract compensates interest rate data providers with the LINK token for responding to their data request.
Compensating payment oracles (smart contract payment outputs)
Example: Bond coupon smart contract compensates a banking network (i.e. SWIFT) for processing the coupon payment after the smart contract is triggered by interest rate data.
Maintaining a reputation system for payment oracles/data providers
Example: LINK tokens are held by data or payment oracles and contribute to the overall reputation of those oracles.
Example: LINK tokens are taken from network participants on a per-request basis, as for each request they “stake” LINK tokens on their response being accurate. If their data is inaccurate or incomplete, the network takes these LINK tokens away and distributes the staked tokens to accurate participants.
Specific use cases aside, the value of a token in this model is much broader than just utilizing it within the ecosystem. The power of a tokenized business model isn’t specific to ChainLink and is commonly referred to as cryptoeconomics. The two benefits of tokenized business models are 1) for solving the “chicken-or-the-egg” problem of initializing a two sided network, and 2) for removing network transaction fees to realize greater platform utilization.
For context, the ICO allocation for ChainLink was 35% sold in the Token Sale, 35% dedicated to a network incentive program, and 30% retained by the team for platform development.
Solving the chicken-or-the-egg problem for networks
Allocating 35% of the tokens to node incentives allows the team to create programs that will incentivize data and payment providers to develop services on the ChainLink network. For larger providers, the cost of setting up a new system (even if there is an ROI from eventual cost savings) can be prohibitive. Allocating these tokens can be used to offset that cost, but also serve to aligning partners with investors and the team in realizing the success of the network. Everyone now has a financial interest in the growth of the network and then the appreciation of the token. Enacting this strategy breaks down the chicken-or-the-egg problem that has hindered so many previous networks from reaching scale.
- Removing additional transaction fees
Many businesses have a business model where the success of their company depends on the volume of transactions that occur on their platform and they take a fee for facilitating those transactions. Token businesses don’t have revenue or profit in the same way that traditional businesses do. Instead, their success is directly tied to the growth of the network and therefore the appreciation of the token value. “C” corporations in the United States provide similar incentive models by allowing employees to earn shares of stock. This works to ensure that employees have a shared investment in the success of the business. By retaining 30% of the tokens, there is no need for an additional fee for each transaction. This decreases the friction in the market and increases the potential output overall.
ChainLink Overview and Analysis
ChainLink is a decentralized oracle solution. At a high level, the project aims to provide secure inputs (data) for smart contracts, and secure outputs (payment functionality) for those smart contracts to settle once triggered. An example would be ChainLink providing interest rate inputs for banks for a bond coupon payment contract, and facilitating smart contract outputs — in this case paying USD out to the corresponding bank account stipulated in the contract. The two goals of the project broken down:
Smart Contract Inputs: Build a network of data providers (Inputs) for smart contracts, where data providers provide service for a fee paid in the network’s native token, LINK. The decentralization of data feeds means that, for a given smart contract request, multiple data providers will answer the request for data, leaving the self-executing contracts significantly less susceptible to manipulation from the underlying data feed.
Smart Contract Outputs: Build a network of payment oracles to take the result of the smart contract and pay out a corresponding amount (Ether, Bitcoin, Fiat), compensated for their service with LINK tokens. The project specifically takes the position that the majority of smart contract payments in the near future will be desired (by the user) to be done in fiat currency. We agree with this. Accordingly, they have have a partnership with SWIFT, the largest network of banks in the world. This gives them a rare scale bridge from crypto to fiat currency.
Market Size and Strategy
There are essentially two markets that ChainLink is pursuing in the near term for the use of their secure inputs and outputs — Large Financial Firms and FinTech Startups. We will address each in-depth below.
Large Financial Firms
These firms are adopting smart contracts to streamline their operations and generate new revenue streams. As an example, securities settlement (i.e. a Bond coupon payment) is a time and resource intensive process that requires access to external data feeds and human interaction. CapGemini estimates that $7.5Bn in annual cost savings could be achieved if in-house settlement systems were automated and that overall loans could grow $149Bn if settlement times were reduced.
In recognition of this opportunity, ChainLink has partnered with SWIFT, the largest interbank network in the world. At its core, SWIFT is essentially a messaging service that banks use to communicate with each other. Each message carries a type of payment command which can range from the simple (send $X from Bank X to Bank Y) to complex (have Bank Z settle security A balloon payment). SWIFT has been under pressure from consortiums of other banks that have adopted blockchain technology (ex. Bank of America adopting the Ripple messaging platform), and are now seeking the same performance efficiencies that their competitors have by adopting blockchain technology.
In October, ChainLink completed a year-long proof of concept for smart-contract based Bond payments over the SWIFT network, and are currently working on building a larger implementation for smart-contract based securities. The opportunity for this specific implementation is large. In terms of volume, SWIFT does about 25–30M payment messages per day, of which 11–13M are related to securities processing — this equates to a total of about 3bn per year. We assume (conservatively) that around 10% (300M) of these securities messages are related to bond processing.
If the LINK token is addressing smart contract data input/payment output functionality for over 300M messages per year — it will be involved in processing around 820K transactions a day. This is more than Ethereum (600K transactions per day, valued at $44bn at time of writing) or Ripple (200K network payments per day, valued at $11bn at time of writing). ChainLink is currently valued at $100m.
The final piece of the SWIFT partnership that is important to understand is that, if it is implemented, ChainLink will have access to one of the very few gateways to fiat that exists for smart contracts. If the partnership is successful, ChainLink will not only enable SWIFT to process smart contracts, but it is possible SWIFT will enable other external smart-contracts to settle through fiat on its network by means of a ChainLink/SWIFT oracle. This is a massive opportunity for both companies: SWIFT could potentially become the fiat clearinghouse for cryptocurrency-based smart contract transactions by way of ChainLink.
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