According to DefiLlama, the multi-chain Decentralized Finance (DeFi) ecosystem has experienced a 12x growth over the course of 2021, starting the year at approximately $21B to now surpassing $250B. This common economic metric widely used to measure DeFi’s growth and adoption is known as Total Value Locked (TVL) — the aggregate financial value of all blockchain-based tokens stored within a protocol or platform at a given moment in time.

Underpinning much of the DeFi ecosystem are hybrid smart contracts — decentralized applications that combine on-chain infrastructure with off-chain infrastructure to create enhanced utility for blockchain networks. Within the hybrid smart contract framework, TVL is currently regarded as one of the best ways to measure the total economic impact of the on-chain portion of the DeFi ecosystem, as it tracks the funds directly locked on-chain in a blockchain’s DeFi ecosystem.

For the off-chain portion of hybrid smart contracts, oracles have become the dominant layer of infrastructure. Oracles are used to fetch external data and perform off-chain computations on the behalf of decentralized applications in DeFi and beyond. However, because oracle networks for data and computation do not hold user funds, the “locked” portion of the “Total Value Locked” metric does not apply. This begs the question then, how do you track the value of oracle networks within the decentralized economy?

One answer is to use TVL as an input to generate a new metric referred to as Total Value Secured (TVS) — the aggregate amount of TVL within all protocols and platforms that depend on the proper operation of an oracle network to protect user funds. Although still a relatively new metric in the mindshare of the crypto community, TVS serves as a useful measuring stick of the economic impact and adoption of oracles.

When applying this metric to Chainlink, the most widely adopted decentralized oracle network across the blockchain ecosystem, the TVS totals over $82B+. Chainlink’s TVS covers hundreds of decentralized applications across the multi-chain ecosystem including Aave, Compound, Liquidity, Venus, Synthetix, Flexa, Benqi, Fei Protocol, Alchemix, dYdX, and many more. Ultimately, this makes Chainlink one of the fastest growing and highest potential value securing forms of decentralized consensus in the blockchain ecosystem.

In this article, we explore in more depth how decentralized oracle networks like Chainlink secure value, how TVL is commonly calculated today, and how TVL serves as an input to determine the TVS of oracle protocols.

How Oracles Secure Value Within Hybrid Smart Contracts

Total Value Secured as a metric of the economic impact of oracle networks is derived from the fact that the real-world data provided to smart contracts via oracles directly determines the outputs of such applications. The dynamic between oracles and smart contracts goes back to the infamous “garbage in, garbage out” problem of logic-based systems. If a smart application receives manipulated data, then any operations that depend on such data will not execute as expected. The end result is putting user funds at risk.

For example, in a decentralized money market protocol, users interact with on-chain logic that allows them to lend their assets and generate yield or deposit collateral and borrow assets as working capital. These activities are commonly facilitated through overcollateralized loans, where a borrower’s collateral is worth more than the assets being borrowed (e.g. $100 of ETH collateral to borrow $70 of USDT). To ensure the solvency of money markets, positions that fall below an acceptable collateralization ratio (e.g. 110%) are liquidated by automatically selling the user’s collateral to pay back their debt.

As part of money market operations, price oracles are required to determine the max loan issuance size when a new loan is created and to mark positions for liquidation when they become under-collateralized. Price oracles enable such operations to be performed by smart contracts by continuously publishing real-time price updates on the blockchain for every supported asset, which are then used on-chain to determine the collateralization ratio of loans.

If the integrated price oracles are operating as designed and the market risk parameters are adequately set, then the decentralized money market will operate smoothly. However, if the price oracles deliver manipulated or stale market data, then the protocol can become insolvent and lose user funds. For instance, if the price of a collateral asset is reported to be higher than it is in reality, then malicious actors can create toxic loans where the debt is worth more than their underlying collateral. Therefore, a significant portion of an on-chain money market’s TVL can be drained since the borrower has no incentive to pay back their loan positions. This ultimately leads to lenders on the market taking a loss.

Conversely, manipulated pricing data can also lead to borrowers being falsely liquidated and incurring a liquidation fee. Furthermore, if the price oracles delivering market data on-chain fail to deliver data on-chain in a timely manner, user funds can be at risk during market volatility as undercollateralized positions cannot be liquidated without a freshly updated source of data.

In order to protect the capital of both lenders and borrowers, money market protocols must use a highly reliable and tamper-resistant price oracle solution such as Chainlink Price Feeds. Aave and Compound are just two examples of widely used money market protocols with billions of dollars in TVL that use Chainlink Price Feeds to protect against data manipulation and downtime. Through Chainlink, such protocols are provided access to market data even during blockchain network congestion and market volatility.

Money markets are just one example of how oracles directly secure the applications that consume its data. However, this logic applies to a wide range of hybrid smart contract use cases within the DeFi ecosystem such as decentralized stablecoins, synthetic assets, futures contracts, prediction markets, and more. A simple generalization of this dynamic is:

If a faulty oracle network can cause an application to lose user deposited funds, then a properly operated oracle network is securing that application’s TVL by protecting it against data manipulation and downtime.

Before diving deeper into TVS, let’s first look at how TVL is calculated and its utility, given that TVL is used as an input to determine an oracle protocol’s TVS.

Diving Into Total Value Locked (TVL)

TVL is a useful metric because it’s a hard-to-fake measure of the total economic activity taking place within a protocol or platform. A growth in TVL is generally perceived as a sign of success for a smart contract application because it not only shows the magnitude of economic activity occurring but also the willingness and trust of users to deposit their money into the application. While not the only way to measure economic activity, TVL is one of the more useful measuring sticks as TVL can only increase if there is real capital being deposited.

The “locked” portion of TVL can be considered a bit of a misnomer as the assets aren’t usually locked in the sense that the assets cannot be withdrawn. Rather, they are “held” by the smart contract for any user-defined period of time. While it may seem counterintuitive that a “non-custodial” smart contract “holds” user deposits, it is framed as such because there is typically no centralized custodian or intermediary involved compared to the traditional financial economy. When held, the tokens are “managed” by on-chain programmatic code that defines the conditions under which deposited assets can be used and when assets can be withdrawn.

Though TVL isn’t a fully standardized metric and has many nuances to consider in its usage, there are some common approaches taken when determining the TVL of many use cases within DeFi.

• Decentralized money markets: the total value of all tokens held in the protocol’s smart contracts. Effectively tracks total value of deposits minus the total value of borrows. Some trackers show just the total value of deposits, which arguably is a different metric than TVL.
• Decentralized exchanges: the total value of all deposited tokens across all liquidity pools in an automated market maker (AMM) or on-chain order book based exchanges.
• Decentralized stablecoins: the total value of tokens deposited as collateral to back minted stablecoins, but not the market value of the minted stablecoins. The minted tokens are counted as TVL within the other applications they are deposited into.
• Synthetic asset platforms: the total value of tokens deposited as collateral to back synthetic tokens, but not the market value of minted tokens. The synthetic tokens are counted as TVL within the other applications they are deposited into.
• Rebase tokens: the total value of tokens deposited as collateral to back rebase tokens, but not the market value of the rebase tokens. The rebase tokens are counted as TVL within the other applications they are deposited into.
• Privacy Mixers: the total value of tokens deposited into the mixer’s smart contract.
• Futures/Perpetuals: the total value of tokens deposited as collateral to back existing futures positions or available as liquidity, but not the value of leveraged positions themselves.
• Options: the total value of tokens deposited as collateral or available as liquidity to back calls and puts, and not the value of the options positions themselves.
• Payment channels/networks: the total value of tokens deposited in the payment network’s smart contracts as liquidity.
• Yield aggregators: the total value of deposited tokens into the protocol plus yield generated. Effectively tracking the value of tokens users are able to withdraw from the protocol.
• Insurance: the total value of tokens deposited as collateral into the protocol or available as liquidity to back insurance agreements, but not the value of all outstanding coverage policies.
• Cross-chain token bridges: the total value of tokens locked in custody on all host blockchains, which back the wrapped token representations minted on other receiving chains. Wrapped tokens created by a bridge can be counted as TVL within the other applications they are deposited into.
• Staking Pools: the total value of all tokens/coins deposited in the protocol plus earned yield from Proof of Stake blockchains. Any minted derivative claim token can be counted as TVL within other applications it’s deposited into.

Given the composability of the smart contract ecosystem, many protocols route user deposits into other on-chain protocols. When determining the aggregate TVL of the DeFi ecosystem or DeFi ecosystems on specific blockchains, many TVL dashboards take this into account by filtering double counting. However, this needs to be managed on a protocol by protocol basis and standardization across the ecosystem has not been fully achieved. Accurately tracking aggregate TVL will likely become more complex as the DeFi ecosystem evolves in a layered manner and different interpretations emerge.

Additionally, it’s important to note that certain types of capital are often excluded from TVL metrics including:

• Staking of an application’s native governance token. Such staking is typically used for governance and exposure to revenue cash flows, but not commonly used within the actual on-chain financial product offered to users. However, there is not a strong consensus on this and TVL trackers often include toggles to include/exclude this portion.
• Assets within a protocol’s “pool2,” an automated market maker liquidity pool where one of the tokens is the protocol’s native token. Pool2’s are designed to increase native token liquidity but are most often separate from a protocol’s financial product and are commonly built on existing AMMs. The TVL in a pool2 is taken into account in the AMM protocol in which liquidity is deployed. TVL trackers often include toggles to include/exclude pool2 in the native token protocol’s TVL.
• Native tokens held idly by a protocol’s DAO treasury. Such capital is usually not used directly within the protocol and often consists of minted but not yet issued tokens.
• Off-chain collateral that backs on-chain tokens. For example, the fiat currency backing centralized stablecoins is collateral that inherently exists off-chain. Growth in centralized stablecoins is a different metric usually tracked by market capitalization (which should be 1:1 to off-chain collateral).

Taken as a whole, TVL is an increasingly popular metric used to measure the economic success of specific DeFi applications and blockchain networks as a whole. While there are many nuances to calculating TVL, many of which are outside of the scope of this article, it provides users a powerful tool to gauge the growth of the decentralized economy and sets up the framework to determine the TVS of oracles.

Diving Into Total Value Secured (TVS)

TVS is a powerful metric in measuring the adoption of oracle networks because it shows exactly how much value is being directly secured by the inputs provided by oracles. Similar to the TVL metric, TVS is a hard-to-fake metric that highlights both an oracle network’s market adoption by applications with economic activity and the level of trust users have for a specific oracle protocol. While there are other important metrics to track in the realm of oracles — e.g., number of integrations, user fees, data points put on-chain, number of oracle feeds, number of nodes/data sources, data accuracy, uptime percentage, etc. — TVS is a single unifying metric that helps sum up the total economic impact and adoption of an oracle network.

The “secured” portion of “Total Value Secured” specifically refers to the protection an oracle solution provides against data manipulation and delivery corruption that could lead to the loss of user funds. It’s important to consider that a hybrid smart contract needs to be secured end-to-end, which goes beyond just using a secure oracle solution. This means leveraging heavily audited on-chain code, as well as providing protection against economic attack vectors and other forms of risk management such as proper loan-to-value ratios and enough distributed liquidity for supported assets. Simply put, both the on-chain logic and data inputs from oracles are responsible for securing user funds, so both need to be correct and tamper-proof.

In most situations, the entire TVL of a protocol or platform relies upon the proper operation of its integrated oracles to secure user funds, so the entire TVL is included in an oracle’s aggregate TVS. However, there are edge cases that need to be taken into consideration when calculating TVS. For example, some DeFi protocols offer a range of different financial services where some use oracles and others do not. Only the services within a DeFi application that depend on oracles for the security of user funds should be counted under that oracle network’s TVS.

Additionally, there are situations where only a portion of a smart contract’s TVL is secured by a particular oracle protocol. For example, isolated money markets that allow end-users to define which oracle is used by specific markets may result in one oracle protocol being used in some markets and other oracles in another. Similar situations may arise on multi-chain applications where they may use different oracles on different chains. In these situations, only the TVL that is directly being secured by a specific oracle network should be included within its TVL.

Furthermore, there are also cases where a hybrid smart contract uses multiple oracle solutions in tandem, such as by mixing data from across different oracle protocols. While mixing data from multiple different oracle protocols is dangerous for data quality, since the lower quality oracle solution simply dilutes the quality of the higher quality oracle solution, some protocols do use this approach and require consideration. The most realistic approach is that there would be an overlap, with the different oracle protocols sharing the same TVL under their respective TVS metric.

For situations where a DeFi protocol itself doesn’t use oracles, but applications built on top do, only the TVL of the higher-level application would be included under TVS. There are also instances where oracles are not only used by DeFi applications but also CeFi applications as well. In any case where oracles are directly securing value by preventing data manipulation that results in a loss of user funds, then the TVL of such a platform or protocol would be included under TVS.

Beyond Data Delivery

While the TVS metric of oracle networks today mostly applies to protocols using oracles to access real-world data, oracle protocols such as Chainlink go far beyond data delivery and also provide services based on off-chain computation and cross-chain interoperability. In these cases, the previously explored definition of TVS can apply to these categories of services as well.

In particular, the Cross-Chain Interoperability Protocol (CCIP) is an inter-chain messaging solution being built on the Chainlink Network that will enable the creation of programmable token bridges. As a result, funds within these bridges will be directly secured by a collection of Chainlink nodes that is kept in check by another independent oracle-powered anti-fraud network. This means the TVS metric of Chainlink can be expanded to include both the TVL of DeFi applications powered by Chainlink services and the tokens used within CCIP.

Conclusion

While TVS is a relatively new metric, we believe it is one of the most robust metrics for determining how much value an oracle protocol generates within the multi-chain hybrid smart contract economy. We hope to foster more discussion around TVS moving forward given the deeper role oracles like Chainlink continue to play in blockchain applications built using hybrid smart contracts, going beyond data delivery and into various off-chain computations.

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Decentralized applications (dApps) are a new type of digital application built on blockchains. Unlike most Apps today, which consist of closed-source code running on centralized servers, dApps are open-source software running on decentralized networks. Decentralization is desirable because it removes any single point of control or failure in the dApp’s execution, generating strong determinism — the dApp will run exactly as originally coded without counterparty tampering, network downtime, or administrative censorship. Determinism is critical to multi-party process automation, especially when billions to trillions of dollars exchange hands without human intervention.

dApps are built using smart contracts — programs with coded logic that run deterministically on blockchains (if x event happens, execute y action). Most dApps combine several smart contracts to form an application with a specific use case. Some examples of dApps include:

• Bancor — a decentralized exchange (DEX) that uses an automated market maker (AMM) to provision on-chain liquidity for asset swaps. Users stake their assets in liquidity pools, which traders and other dApps leverage to swap between assets instantaneously, paying small fees to the liquidity providers (LPs).
• Aave — a decentralized money market where anyone can permissionlessly take out an overcollateralized loan in seconds. Lenders supply assets into liquidity pools to earn interest, while borrowers obtain loans from liquidity pools by depositing collateral and paying interest.
• PoolTogether — a no-loss savings game where users deposit their interest-bearing tokens into a lottery pool, which accrues interest over the lottery’s duration and distributes it all to a random winner. Afterward, users can withdraw their deposits in full.
• Fei Protocol — an algorithmic stablecoin that aims to maintain a value of $1 USD in a decentralized manner. It has an adjustable supply, which mints and burns stablecoins to financially incentivize arbitrageurs to return FEI to its $1 peg when it’s over/under $1.

These are just a few examples of the many dApps currently running live across various blockchains. However, dApps are still in their infancy, meaning they are likely to undergo continual upgrades, and new advanced dApps will emerge that are still yet to be imagined.

Instead of focusing on the benefits to dApp users (demand-side) or why cryptocurrency tokens exist, this article examines how value capture from dApps will be distributed across decentralized infrastructure (supply-side). In a simple sense, what functionalities do dApps require that come with costs, and what layers of infrastructure are best equipped to service those functionalities and capture dApp fees as a result?

This article goes about answering those questions by first identifying all the potential functionalities needed by dApps. It then outlines several macrotrends that will affect dApp value capture. Finally, it lays out a generalized framework of four layers where dApp value is likely to consolidate.

Notes:

First, these are merely approximations from our research using incomplete and continually expanding datasets. The dApp ecosystem evolves rapidly, so our analysis may change over time. Second, we often denote that users will incur costs, yet realize that most dApps are currently subsidizing many of these costs with initial token supplies to bootstrap their network effects. However, with a 5–10 year outlook, we assume that users will incur most of these costs over the long term. Thus, we may interchangeably state dApps and/or users incur underlying infrastructure costs.

Potential Value Capture Functionalities for dApps

Before looking at how value capture will be distributed, let’s outline all the possible functionalities that dApps may require to run competitively end-to-end. Every functionality provides a pivotal service to the dApp that has a cost to generate. People don’t work for free, so each service is performed for a profit that is captured by the dApp, underlying blockchain, off-chain oracles, external service providers, or some combination of the four.

dApps will vary in what services they require and how critical each service is to their success. Additionally, the cost of each service will depend on how frequently it’s used, how much value it secures, how it’s architected, and the overall quality of the dApp itself. With that in mind, listed below are the six most basic functionalities required by all dApps.

Settlement

dApps are essentially sub-ledgers within the overall blockchain ledger. They are made up of smart contracts that assign asset ownership and define how deposited assets can interact within the dApp. Settlement represents a permanent state change to the dApp, meaning the dApp’s sub-ledger undergoes an irreversible update. State changes happen through on-chain transactions that are processed by the dApp’s underlying blockchain, such as to transfer ownership of assets, augment the code of upgradable smart contracts, verify off-chain proofs, post hashes of external state, or simply store raw calldata. Each state change requires satisfaction of the dApp’s smart contract conditions, which can be as simple as a signature verification or involve more complex computation checks.

Users have to pay blockchain miners/validators for any settlement functions performed on-chain since they are the entities that produce blocks and secure the blockchain network. While many blockchains have block rewards to subsidize the work done by miners/validators, users still have to pay a base fee to prevent Denial of Service (DoS) spam from halting the network. Additionally, users may have to pay tips to miners/validators to get their transactions processed quicker when the demand for blockspace exceeds the supply. Settlement costs for dApps will depend on the settlement frequency, settlement complexity, on-chain data storage requirement, underlying blockchain network congestion, finality needs, and more.

Generally, high-throughput blockchains with greater hardware requirements (100 to 1,000 nodes) are likely to settle each user’s transaction on the underlying blockchain directly and individually, while more decentralized (10,000 to 100,000+ nodes), lower-throughput blockchains will bundle multiple user transactions off-chain and settle them on the blockchain as a single aggregated settlement transaction to improve overall throughput (upwards of 100x to 10,000x).

Computation

Each dApp has smart contracts with logic that need to be processed before the final state change is generated. While settlement involves transferring assets or storing finalized state directly on the ledger, computation consists of running the dApp’s code to check if various conditions were met for settlement. Simply put, computation determines what the final update to the sub-ledger will be (state change), while settlement performs a simple verification of the state change and executes it on the blockchain.

Example: An undercollateralized loan in a decentralized money market.

• Computation — checks the collateralization of the loan by referring to a price feed to calculate the outstanding loan value compared to the collateral value. If the loan’s collateralization is found to be under the predefined threshold (e.g., 150%), it will signal a liquidation is possible.
• Settlement — checks the liquidator’s transaction signature and the results of their computation. If valid, the blockchain will liquidate the user’s collateral by paying down the debt and transferring ownership of liquidated collateral to an external entity(s).

dApps on high-throughput blockchains may simply run computation and settlement together on-chain. However, decentralized blockchains are beginning to separate the computation and settlement processes. Separation is achieved by computing transactions off-chain in layer-2 networks, then batching those transactions together (e.g., rollup) and settling them on-chain via a single aggregated transaction. This reduces on-chain costs since the blockchain only has to store a small amount of data and process a single compressed proof to verify all the state changes for settlement instead of performing computation work for each individual transaction.

Users will need to pay blockchain miners/validators for any computation done on-chain (similar to settlement) and pay layer-2 validators for any computation done off-chain.

Storage

dApps require storage solutions to host user interfaces (UI) so users can interact with dApps in their web browser. Website hosting can be done through traditional cloud services like AWS or decentralized alternatives like Ethereum Name Service (ENS) and the InterPlanetary File System (IPFS). Although anyone can run a full blockchain node to interact with dApps without any UI, most users will not, necessitating the need for such interfaces. Since ENS and IPFS are unmonetized networks, they offer little value capture potential unless an incentivization layer is built on top (e.g., Filecoin offers financial incentives to store files persistently).

dApps also need to store data associated with the application, such as raw transaction data. The location of this data will depend on where the dApp’s computation takes place. If computation occurs exclusively on-chain, then the data is stored on-chain, and fees go to miners/validators (sometimes with state rent to minimize bloat). If computation is performed off-chain in a layer-2 network, then dApps can store transaction data either on-chain or off-chain, depending on the trust assumptions desired by the dApp.

Some dApps will store all transaction data on-chain so anyone can reconstruct any state changes, but with the trade-off of paying higher fees to miners/validators to store the data. Other dApps will store only the final state root on-chain, and store the raw transaction data off-chain at a lower cost, such as through a committee of layer-2 validators or decentralized storage networks. Users will need to pay storage providers to both keep the data (persistence) and allow for on-demand queries of specific pieces of data (availability).

Additionally, some dApps may pay for off-chain storage solutions to store other forms of data required for their use case. For example, user profile data and analytics may be stored off-chain and used to generate reputation scores that are made available back on-chain through an oracle. Ultimately, dApps have many options regarding where they store their data.

Capital

dApps often have a native digital asset and/or leverage other user-deposited digital assets as part of their services. The capital is used across many functions, such as liquidity provisioning within decentralized exchanges and money markets, built-in insurance backstops for synthetic asset platforms and decentralized stablecoins, external insurance to hedge unforeseen smart contract failures, and/or staking incentives to encourage usage of the platform. With Decentralized Finance (DeFi) being the most significant product-market fit for dApps thus far, liquidity plays a prominent role in lowering slippage for users and allowing for greater amounts of economic activity to occur.

Users often need to pay fees directly to capital/liquidity providers when utilizing a dApp that benefits from this deposited capital. Oftentimes, this fee is a static percentage of the transaction’s value (e.g., 0.3% of trade size). dApps may also use a portion of their fixed token supply or implement an ongoing inflationary token supply to subsidize key service providers, including end-users directly, specific LPs, and/or governance token holders. For example, yield farming is a popular way of bootstrapping the supply side of a DeFi dApp by directly rewarding users and/or LPs with the dApp’s newly minted tokens (i.e., governance tokens).

Services

Most dApps need several supplementary off-chain services to support their on-chain functions and continual maintenance, such as access to external data, transaction ordering, privacy generation, retail bank payments, enterprise backend systems, other blockchains, keeper bots, arbitrageurs, data indexing, traditional APIs, verifiable randomness, proof of reserves, blockchain abstraction layers, or any type of off-chain data or service not available or practical to run on the native blockchain itself.

dApps have to pay for services, pay to initiate them from on-chain, and/or pay to make the results of the services available on-chain for use in the dApp. dApps may use a single off-chain service or combine multiple services to expand their utility and/or lower costs for users. Generally, these services are run by the dApp’s development team, outsourced to anyone in a permissionless manner using financial incentives, or outsourced to specific knowledgeable/capable entities through on-chain or off-chain agreements. Decentralized Oracle Networks (DONs) have absorbed many services, acting as a universal on-chain gateway to any off-chain service.

DONs often abstract services away for dApps, such as handling payments to both miners (posting information on-chain) and off-chain APIs (subscriptions to off-chain resources) as part of the fees DONs take in from dApps to provision services for them.

Governance

dApps have some form of governance that controls important development and maintenance decisions. Some dApps are run by a foundation or development company that’s supported via an initial allocation of the dApp’s native token supply. Other dApps elect for on-chain governance via direct voting from governance tokens holders, delegating representatives via on-chain voting, performing non-binding off-chain votes to gauge rough consensus of its community, or forking a token and issuing an airdrop in a worst-case disagreement.

dApps that issue governance tokens allow users to shape the future direction of the protocol and capture part of its revenue. Sometimes, a portion of the dApp’s transaction fees is distributed to governance token holders, akin to receiving a dividend based on the amount of equity you own in the dApp or a stock buyback when transaction fees are burned instead of distributed. In token-weighted voting processes, owning more governance tokens allows users to become more powerful board members that can influence the protocol’s future.

As protocols scale, governance decisions may become more lucrative to control, although it’s difficult to calculate the true value, especially if no revenue stream is attached. It’s also unclear how much decentralization and participation make for good governance, likely varying from one dApp to another and producing different results. Interestingly, decentralized governance experiments could strongly influence the future of political science as many new governance models are tested in production.

Macro Trends That Will Impact Value Capture

With a comprehensive list of all the key functions that may capture value from dApps, let’s examine some general macro trends that will impact long-term value accrual across decentralized infrastructure

Trend 1: Network Effects

If there is value to be captured, it will attract competition. However, consolidation of dApps, blockchains, and various other decentralized networks will happen over time, and it’s likely that only a few winners will remain for each, akin to power law distributions. Some market verticals could even be a winner-take-all dynamic when the underlying networks are sufficiently generalized, decentralized, and self-sustaining. The main driver of consolidation will be network effects — a phenomenon where every additional user to a network leads to more value being generated for users of that network.

One of the main advantages of network effects is economies of scale, where every additional user lowers the costs for each existing and future user. It occurs when users and service providers concentrate on a single standardized protocol, leading to service providers earning the most revenue and users obtaining the highest quality services at the lowest cost. Direct benefits to dApp users include access to deeper liquidity and more robust security, while service providers can get more user fees and less extraction from their profits.

In comparison, when resources spread out across multiple protocols, costs go up, quality gets diluted, and/or revenue decreases. dApps wanting to remain competitive are likely to leverage external infrastructure with economies of scale instead of paying full costs and taking on additional risks to build their own. Economies of scale are particularly critical for open-source technology that’s easily replicated, forcing dApps to drive down margins, remove unnecessary fees, and remain minimally extractive.

The other benefit of network effects is development standards — a situation where a large ecosystem of diverse users come together to build, use, and improve upon the same technology. Standards bring many benefits to developers like more secure tech, faster integrations, sophisticated tooling, better documentation, and general comfort around relying on widely tested, adopted, and battle-hardened infrastructure. Standards feed into the lindy effect, which asserts that the longer something exists, the more likely it will continue to exist in the future. Whether it’s because standard implementations are time-tested or popular with one’s peers, new users are more likely to commit time and resources to networks that they believe are and will continue to be industry standards.

Trend 2: Tokenization Advantage

Most decentralized infrastructure requires subsidies to bootstrap the services provided by the network, or at the very least, to remain competitive. Blockchains have block rewards, oracle networks utilize dynamic subsidies, and dApps offer liquidity mining incentives. Each of these financial incentives comes from a network’s initial or inflationary supply of native tokens and is used to grow the network to the point of self-sustainability and/or build a network effect too large to overcome. Each decentralized network with a token will perform better than those without tokens, simply because they can bootstrap adoption without taking on debt. They can also cultivate excitement and notoriety by having communities that want to benefit from the project’s potential success financially.

However, these subsidy allocations will not last forever for fixed supply tokens, and their effectiveness reduces with scale. Reduction in initial subsidy allocations will force decentralized infrastructure to implement inflationary token supplies or effectively capture the full operating cost of services over the long term through user fees. The rate at which fees are passed on to users depends on how much capital the network/dApp starts with and how that capital is managed.

It’s advantageous to prolong the subsidization period, so proper capital management by foundations, development companies, or DAOs can make networks more competitive over extended periods of time. Even with great capital deployment, large network effects that take in more user fees will outpace those with higher subsidies. Additionally, non-reliance on a subsidy can signal strong network effects, further increasing its attractiveness to users and service providers with long-term outlooks.

Trend 3: Inter-Layer Creep

Network effects can lead to dApps and decentralized infrastructure gaining particular advantages, empowering them to expand into more functions within their specific layer. Inter-layer expansion is most likely to occur across three dimensions: blockchains, liquidity, and hybrid service providers.

Blockchains that successfully evolve in a timely and targeted manner can eat into the value proposition of slow-evolving blockchains optimized for specific purposes. For example, highly decentralized blockchains could generate large network effects with well-designed and widely adopted scaling and privacy solutions. This would make it challenging for specialized blockchains that are optimized for scalability or privacy to compete. However, it could also be that optimization is too great to overcome and blockchains are relegated into well-defined niches — similar to the thesis of numerous specialized blockchains coexisting and connected through a standard generalized interoperability solution.

Liquidity can give dApps advantages over other dApps, resulting in opportunities for those dApps to broaden the range of services they provide. For example, dApps with a lot of liquidity could decide to add a DEX to their money market or vice versa, bringing dual utility to their platform and more value capture to their native token. Similarly, liquidity may affect blockchain adoption, although cross-chain DEXes and wrapped tokens can mitigate this to a degree.

The last consolidation layer is hybrid services, defined as off-chain computations performed on behalf of smart contracts yet securely anchored to blockchains for heightened determinism. Hybrid services represent a broad range of functions, but generally, involve any service outsourced by dApps because it’s not possible or practical to do on-chain due to the blockchain’s financial or technical limitations.

Hybrid services consolidate particularly well in generalized oracle networks because they have a large pool of general-purpose, compute enabled, and highly reliable nodes that developers can combine into custom networks to perform specific jobs like fetching external data, performing secure off-chain computations, automating contract functions, operating cross-chain bridges, and more. A hybrid service layer for doing any supportive off-chain function can generate strong economies of scale, ease of use, and resource accessibility advantages for dApps.

Trend 4: Geographic Adoption

While network effects are important, technology adoption sometimes falls upon geographic lines, mainly due to political or cultural barriers. It’s easily observable in the U.S. and China tech giants, with each country having its own version of the same technology: Google/Baidu, Amazon/Alibaba, and Twitter/Weibo. However, it’s not just a U.S./China phenomenon; it’s found all over the world.

As a parallel, it’s not hard to imagine a scenario where certain blockchains become popular simply because they are focused on specific countries or regions of the world or because their founders have close political connections. Similarly, dApps may specialize in geographic markets, such as providing better liquidity in locally used currencies, having native language options within their dApp’s UI, or implementing regulation checks compliant with specific political regions.

Value Capture to Consolidate Within Four Layers

Considering the various dApp functions required and the macro trends that will affect value capture, let’s look at how value capture may consolidate over a long time horizon across four primary layers.

Blockchains (On-Chain Function Layer)

The first and most obvious piece of infrastructure that will capture dApp value is the underlying blockchain. Blockchains are likely to consolidate around providing the following on-chain functions for dApps:

• Checking private key signatures for asset transfers between users, within a dApp, and between dApps.
• Verifying validity proofs, fraud proofs, threshold signatures, and TEE attestations derived from off-chain computations and layer-2 networks.
• Computing smart contract logic; more or less depending on the throughput of the blockchain.
• Updating the state of smart contracts and storing calldata or real-world data on-chain.

Blockchains capture dApp value by earning block rewards and user fees for performing on-chain functions, both of which are denominated in the blockchain’s native asset. Block rewards are distributed to miners for expending energy to produce valid blocks (Proof of Work) or become accessible to validators that produce valid blocks while staking a certain amount of the blockchain’s native token (Proof of Stake). Base user fees go directly to miners/validators or get burnt as indirect payments to token holders via supply deflation. Miners/Validators can also receive extra user fees as incentives by dApp users to process their transactions quicker (i.e., fast gas prices to get into the next block) and, in some blockchains, capture Miner/Maximum Extractable Value (MEV) by reordering transactions within blocks.

In effect, blockchains can capture a portion of value from every dApp running on their network. This value capture is likely to come from very low-cost, high-frequency individual transactions on high-throughput chains and higher-cost, lower-frequency batched transactions on decentralized blockchains. Overall, the key for blockchains to capture dApp value is to support many successful dApps with active users.

Blockchains do have some limitations though. First, they only capture value from the dApps running on their blockchain. In an increasingly multi-chain world, dApps may fractionalize their usage by deploying across many chains, reducing the possible value capture for any one blockchain. Second, blockchains are optimized to provide certain features, such as generating on-chain scalability at the expense of decentralization or transparency at the expense of privacy. As such, dApps may only deploy on blockchains with certain optimizations or simply route specific functions off-chain, reducing a single blockchain’s total value capture. Finally, blockchains have purposely limited computational capabilities, so more advanced dApp computations will likely never run on-chain directly. However, the blockchain’s native token may accrue value from some off-chain compute systems like layer-2 fraud proofs or validity proofs.

Oracles (Hybrid Service Layer)

The second and more misunderstood piece of infrastructure to capture value from dApps are the oracles performing trust minimized off-chain functions, referred to as hybrid services. Since blockchains create determinism through isolation (i.e., blockchains only keep track of internal state using internal data), they have no built-in capability to connect off-chain. Blockchains require oracles to interact with off-chain resources in a manner that preserves their determinism.

While oracles are typically thought of in a limited sense as only relaying external data on-chain (e.g., price feeds), generalized oracle networks like Chainlink can be leveraged to provide dApps with any type of hybrid service — off-chain computation that uses decentralization, cryptography, financial incentives, and/or trusted hardware to provide highly secure and reliable services for smart contracts in a manner that’s verifiable and enforceable on-chain.

If the blockchain layer is akin to decentralized computers, then the oracle layer is like a web of decentralized Internet protocols. However, oracles go beyond securely connecting disparate systems of value; they also supplement on-chain computations and off-chain resources by refining them. For example, oracles can provide scalability and privacy to dApp computations and bootstrap on-chain connectivity and reliability to traditional API services through data aggregation and staking. Notably, both of these refinement services require no changes to underlying blockchains or APIs.

dApps will require a wide range of hybrid services from decentralized oracle networks (DONs), including to:

• Fetch data from external APIs and deliver it on-chain.
• Relay smart contract outputs to external APIs like fiat payment systems.
• Aggregate data to harden it against single points of failure.
• Automate DevOps and smart contract maintenance functions (Keepers) like triggering liquidations, rebases, limit orders, yield harvesting, balance top-ups, etc.
• Generate verifiable random numbers for provably fair on-chain randomness.
• Perform scalable smart contract and data computation using layer-2 technology.
• Generate privacy for smart contract computation and data.
• Order user transactions according to a pre-defined notion of fairness to prevent frontrunning and harmful forms of MEV.
• Operate cross-chain and proof of reserve bridges for wrapped tokens and tokenized real-world assets.
• Serve as a blockchain abstraction layer to read/write data to any blockchain.

DONs capture value from dApps by getting paid for each hybrid service performed. Payments are predominately denominated in the DON’s native token, no different than miners/validators getting paid in the blockchain’s native token. The cost will vary greatly depending on the frequency, complexity, and quality of the hybrid service, along with the amount of value the service secures and the crypto-economic security backing it. DONs can provide crypto-economic security by requiring oracle nodes to stake the oracle network’s native tokens in on-chain service agreements, which can be slashed for malicious activity or simply failing to meet the predefined on-chain obligations (e.g., downtime, outlier data, faulty proofs, etc.).

An overwhelming majority of dApps need hybrid services, with most dApps requiring multiple hybrid services like scalable contract computation, external data, DevOps automation, and more. It makes the scope of a blockchain-agnostic oracle layer arguably more extensive than any single blockchain since it can capture value from most dApps on most blockchains across many independent services and monetize the entire existing API economy.

We believe the hybrid service layer will consolidate most around Chainlink. Not only does Chainlink already have a significant network effect as the market-leading oracle solution, but it’s a fully generalized, blockchain-agnostic, and permissionless protocol with a heterogeneous network architecture. In this sense, Chainlink is an infinitely scalable network of independent DONs, where each DON can consist of any custom combination of nodes tasked with providing any type of hybrid service to dApps on any blockchain/layer-2. As outlined in the Chainlink 2.0 whitepaper, Chainlink DONs can have their own consensus mechanisms, data structures, external connections, governance frameworks, and trust assumptions. However, they are not permanent, generalized ledgers like blockchains. Instead, DONs are standalone, application-specific services for smart contracts on existing blockchains and layer-2 networks.

A generalized, heterogeneous oracle network like Chainlink is well-positioned to achieve network effects because it can service any use case; there are no enforced design patterns, network scalability bottlenecks, or co-dependencies between DONs. Such network architecture makes it possible to create a common hybrid services marketplace where developers can leverage existing DONs or combine reliable node operators, external APIs, and computational adapters together to quickly bootstrap hybrid services for their dApp. With a diverse marketplace also comes reputation frameworks for filtering the quality of DONs and their individual components and a common reservoir for documentation on how any on-chain and off-chain system can interact through DONs.

Only a network effect in the hybrid service layer can open up all the world’s existing data and systems to blockchain developers, as well as cultivate a large pool of highly reliable general-purpose nodes for computing upon those off-chain resources. Universal resource accessibility would vastly accelerate the time it takes to build and launch dApps in production since developers can focus on their core business logic and manage one token to do anything off-chain. There are also major economies of scale effects because many types of DONs can be collectively used and funded by multiple dApps, resulting in the most secure DONs for the lowest costs thanks to user fee aggregation.

However, the vastness of the hybrid service layer will see competition and niches carved out by other projects and variance in the hybrid services that dApps require. For example, some blockchains already have built-in cross-chain bridges like Polkadot’s XCMP or Cosmos’ IBC. Some dApps also use on-chain incentives to encourage hybrid functions like keeper bots and other dApps have less scalable computation needs because they run on high-throughput blockchains. While there will be a lot of competition, there is no doubt that a network effect in the oracle layer will bring the greatest benefit to developers wanting to build advanced dApps. Why? Because it gives developers on any blockchain access to a reliable node network to perform any custom computation in a secure, scalable, and confidential manner using any input and output.

External APIs (Off-Chain Resource Layer)

The third piece of infrastructure to capture dApp value is the external APIs utilized by dApps. External APIs are defined as any system or network existing outside the dApp’s underlying blockchain that natively generates a unique form of value, whether that be valuable data or services. External APIs encompass centralized systems, blockchains separate from the dApp’s own, and on-chain dApps that are leveraged off-chain. So while generalized oracle networks provide gateways to external resources and refine on-chain/off-chain services, external APIs generate many underlying datasets and computational services that dApps want to access.

Some examples of popular external API resources include:

• Data providers specializing in generating particular datasets, such as high-quality weather data or financial market information. The dApp can use this data through an oracle as an input to trigger the execution of its computation.
• Cloud infrastructure offering advanced computational capacities like high-performance machine learning algorithms and integrated IoT networks. The dApp can leverage cloud systems to process raw data, which is then relayed on-chain by an oracle as an input to trigger smart contract functions.
• Global payments infrastructure providing fiat payment rails and access to large customer bases. dApps can use traditional payment gateways to settle transactions off-chain in local fiat currencies.
• Storage solutions consisting of decentralized networks like Filecoin and Siacoin or centralized networks like DropBox and cloud systems. dApps can off-load large storage requirements to external networks to avoid more expensive on-chain costs and/or retrieve external data needed for computation.
• dApps creating in-demand services like The Graph’s on-chain data indexing to support UIs or other blockchains for external payments. dApps can utilize other on-chain systems to get new features or reach new users.
• Web hosting and domain registration solutions powering UIs and websites, allowing people to find and utilize dApps.

External resources capture value by dApps paying directly or indirectly for their data/services. Payments are made either off-chain using fiat currencies and traditional API subscription models or on-chain using the external dApp/network’s native token. Most dApps across all blockchains require some form of external data or computation, which almost always necessitates the use of oracles as a bridge between environments. These external resources can be quite crucial to the dApp’s success, particularly data and computation used in the dApp’s execution. As a whole, the value capture for external resources is relatively high. However, most external APIs are niche, so there are clear limitations to how much value any single external resource can capture from dApps.

As noted previously, oracles often abstract away external resource fees from dApps by baking them into the oracle fees paid by dApps. This makes it easier for dApps since they only need to manage a single payment stream for any off-chain resources. It also lowers costs since oracles can aggregate fees towards shared external services. Over time, external resource providers are likely to become oracle nodes themselves, something already seen on Chainlink today (e.g., Tiingo, dxFeed, and more).

Ultimately, it’s important for oracle networks to support external resources in two ways: 1) enable external resource providers to sell API connections to existing oracles in a backward-compatible manner and 2) allow external resource providers to launch their own oracle nodes to sell their APIs directly on-chain.

This dual approach model is essential for getting the broadest range of data on-chain while maintaining the strong reliability guarantees needed by time-sensitive dApps that secure billions of dollars in an automated fashion. It’s why Chainlink has both models running in production today, along with provisioning data aggregation and data privacy solutions to refine data for dApps. The reality is many API providers don’t want to run additional infrastructure or lack the capability to do so in a highly reliable manner. Thus, if nodes were required to run their own nodes, it would severely limit on-chain access to data and introduce potentially serious vulnerabilities to smart contracts (i.e. if API providers are not professional DevOps).

dApp Tokens (On-Chain Capital Layer)

The final layer to capture dApp value is the native token of the dApp and the various external dApp tokens that may be used in a dApp. Most dApps issue their own native tokens, which are linked to some value stream or governance power within the dApp to give the tokens value and used to bootstrap a two-sided marketplace. Alternatively, dApps offering support for non-native dApp tokens generally do so to attract capital, especially DeFi apps that require liquidity for a wide variety of assets. The most common ways dApp tokens are used today include:

• Providing liquidity for essential dApp services like token swaps and overcollateralized loans.
• Funding insurance pools to protect user funds in case of faulty services.
• Giving equity to holders by tacking on small transaction fees for specific user interactions within dApps.
• Allowing users token-weighted voting power in on-chain governance decisions.
• Functioning as a bridge currency between trades.
• Serving as the medium for payment and/or discounts for dApp services or purchases.

dApp tokens capture value in various ways, sometimes with more than one value stream. Some dApp tokens simply give holders the right to vote on protocol modifications through the dApp’s native governance DAO. Other dApps distribute a portion of all transaction fees to governance token holders (dividend or burn) as a form of revenue for holding equity in the dApp. There are also dApps that issue inflationary rewards to holders that stake dApp tokens, whether exclusively for their own governance token holders or for some external dApp token holders to attract liquidity. Finally, some dApps get more creative by offering special privileges and discounts within their dApp that only their token holders can access.

dApp tokens can be considered somewhat limited in network effects since they can only capture value from the usage of their dApp, and must be careful when charging high fees given the ease of dApp replicability. However, certain dApps are built more like infrastructure than pure standalone applications, such as dApps using other dApps for token swaps or immediate on-chain liquidity. There’s also evidence that dApps with respected reputations and communities are very hard to displace. For example, many copycat forks of dApps exist today, yet most don’t amount to much because users don’t trust inexperienced teams and/or remain loyal to their favorite dApp due to social consensus or financial exposure.

The most successful dApps are likely those with original ideas built by strong teams. They are also likely to employ a multi-chain strategy, attract large long-term liquidity providers, support a passionate and active community, outsource hybrid services to solutions with the best network effects, tie revenue streams to their token, and become a popular token in other dApps.

Advanced dApps Require Infrastructure Consolidation to Tap Into Network Effects

dApps are primed to become the backbone of how people interact globally in a diverse set of social and economic processes. However, achieving a large ecosystem of successful dApps requires tapping into the benefits of network effects, which necessitates a consolidation in the decentralized infrastructure that supports dApps. Network effects are critical to provisioning an advanced development environment for dApp creation, maintenance, and evolution, both to expand the number of resources available to developers and to give dApps the highest quality services at the lowest costs.

Network effects are truly beneficial for dApps and all the layers that support them.

• Blockchains hosting successful dApps will generate more user fees, leading to increased security budgets capable of supporting more decentralized and tamper-resistant networks. dApps running on blockchains with a greater security budget are more secure and trusted by users.
• Oracle networks enabling a vast array of new dApps through hybrid services will attract larger pools of user fees, increasing the network’s security budget and extending the number of jobs available for node operators. Increased demand for oracle networks leads to competition between oracle nodes, resulting in more secure nodes, a wider range of services, and additional API data and computational services being made available on-chain through oracles.
• External resource providers benefit greatly from successful dApps and oracle networks because it opens up new markets for them to earn revenue. The more external resources and oracle computations available to developers, the faster dApps are developed, the more value they can secure, and the more advanced functionalities they can support.
• dApps backed by secure blockchains, augmented by advanced oracle computations, and connected to high-quality external inputs/outputs lead to more performant, cost-efficient, and cutting-edge dApps. The continual improvement of dApps leads to more demand from users, generating more income for dApp token holders.

So while different infrastructure layers may vie for value capture, successful dApps — regardless of where value capture aligns — will result in more value available for all infrastructure layers because the total pie is extensively larger. Ultimately, all four layers all interdependent and require the success of one another to not only maximize their own value capture but achieve the ultimate meta goal beyond material desires:

A society where people have the ability to control their own data and financial assets and participate in fair, open, transparent, and reliable contractual relationships with others.

—

Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

The announcement of Uniswap V3 has given rise to various questions regarding how Uniswap’s Time Weighted Average Price (TWAP) oracles compare to Chainlink Price Feeds. While both of these price oracle solutions provide exchange rates between various Ethereum-based tokens, there are many significant differences that are not immediately obvious but have serious consequences for users.

We present our analysis on why we believe TWAP oracles to be unsuitable for the vast majority of DeFi use cases, as well as how Chainlink Price Feeds overcome such limitations to provide a superior price oracle solution for the DeFi ecosystem. The main focuses of the comparison are as follows:

Price Precision

• TWAP is a lagging indicator that becomes out of sync with the market-wide price during times of moderate to high volatility, leading to inaccurate data being consumed by smart contracts that put protocols at risk of under-collateralization.
• Chainlink Price Feeds use a Volume Weighted Average Price (VWAP) to deliver accurate, real-time financial market data regardless of market volatility.

Security/Accuracy Optimization

• TWAP oracles have an inverse relationship between tamper-resistance (security) and freshness (accuracy), meaning users need to optimize for one or the other, but cannot achieve both simultaneously.
• Chainlink Price Feeds can maximize tamper-resistance (security) and freshness (accuracy) at the same time without an inverse correlation.

Market Coverage

• TWAP oracles only consist of prices from a single exchange, resulting in a significant lack of market coverage that doesn’t account for liquidity fragmentation across trading pairs, CEXs, competing DEXs, differing DEX versions, or DEXs ported to other blockchain networks.
• Chainlink Price Feeds provide full market coverage by tracking prices on all exchanges (CEXs & DEXs) and weighting them by real volume, serving as a future-proof, set-and-forget oracle mechanism that automatically tracks new liquidity fragmentation.

Scaling Security

• TWAP oracles do not have scalable security, as the only methods of increasing security are either incredibly capital intensive or result in stale/inaccurate data during volatility.
• Chainlink Price Feeds provide numerous ways for an oracle network to increase its security as it rises in value secured, such as adding more nodes, data sources, and crypto-economic security like higher node payments and implicit/explicit staking.

Feed Diversity

• TWAP oracles only provide the exchange rate between two on-chain tokens, meaning it cannot provide financial market data on real-world assets like commodities, forex, stocks, indexes, or tokens priced in fiat currencies.
• Chainlink oracle networks can connect smart contracts to any external data resource including any type of financial market data, real-world events, off-chain computation, data privacy solutions, and much more.

NOTES: The information presented applies to all TWAP oracles derived from AMM DEXs, not just Uniswap. The limitations of AMM DEXs as price oracles do not diminish their immense value proposition, particularly the ability to provide decentralized, permissionless, and non-custodial token swaps. Finally, for simplicity, we use “TWAP oracle” to mean any TWAP generated by an on-chain AMM DEX, even though technically a TWAP could be generated from any data source.

What is an AMM DEX?

Before examining the limitations of a TWAP, it’s important to understand what an AMM DEX is and how it generates exchange rates for users. If you are already familiar with this concept, feel free to skip this section.

A decentralized exchange (DEX) is an application powered by smart contracts that allow users to trade assets on a blockchain network in a decentralized, non-custodial, and peer-to-peer manner. However, instead of using traditional bid/ask order books to make liquidity available, most common in centralized exchanges (CEXs), an Automated Market Maker (AMM) uses pre-funded liquidity pools for all asset swaps on the DEX.

In simple AMM models, the liquidity pool is a smart contract that allows Liquidity Providers (LPs) to deposit equal amounts of two tokens (e.g., $100 of ETH and $100 of USDT for the ETH/USDT liquidity pool), which traders can use to swap between those two tokens. The LPs earn trading fees (e.g. 0.3% of each trade) in compensation for their liquidity provisioning and still hold the same cumulative value of assets post-swap (ignoring impermanent loss). As a result, users and other smart contracts are provided access to immediately available liquidity for just a small fee.

The exchange rate in an AMM liquidity pool is determined by a bonding curve, which depends on the relative amount of liquidity on each side of the pool. While there are different types of bonding curves with various design considerations, as explored in this Chainlink article, the concepts within this article apply to all types of AMMs. Uniswap in particular uses an X*Y=K bonding curve where K is a constant value 1, X is the amount of token0, and Y is the amount of token1. If the amount of token0 increases, then the amount of token1 must decrease (and therefore the exchange rate changes proportionally) and vice versa.

The exchange rate offered by an AMM is managed through arbitrage, where automated bots have a self-interested economic incentive (aka profit) to rebalance the pool’s exchange rates to match other exchanges. For example, this can take the form of buying a token on an AMM with a lower price and selling it on a different exchange with a higher price, both earning a profit and creating equilibrium across the two exchanges. Arbitrage is the reason why AMMs usually provide users with fair market value on swaps (ignoring slippage).

Because AMMs manage an exchange rate (which is already on-chain) for each trading pair, some have assumed that this data could be used as a censorship-resistant price oracle within DeFi protocols. However, it’s not so straightforward and comes with numerous hidden limitations that put users’ funds at serious risk.

Why TWAP?

The naive way to use an AMM liquidity pool as a price oracle is by simply dividing the number of tokens currently residing within each side of the pool to get an exchange rate.

Example: a pool with 2 WBTC and 120,000 USDT would generate a price of 60,000 USDT per WBTC and 1/60,000 WBTC per USDT.

While this does provide the current spot price of the liquidity pool, it’s extremely vulnerable to manipulation. Smart contracts using AMM spot prices as oracles can be easily exploited through sandwich attacks — an attack vector where a malicious entity makes a large trade within an AMM liquidity pool to shift the price in their favor, then uses that distorted pricing to unfairly siphon value from smart contracts using that AMM liquidity pool as a spot price oracle.

Normally, such an attack would only be possible by well-capitalized entities like whales, but flash loans — temporary uncollateralized loans which are only valid if paid back in full before the end of the transaction — allow anyone in the world to become a temporary whale and perform such a sandwich attack.

This is not a theoretical issue either; millions of dollars in user funds have already been lost due to protocols relying on an AMM spot price as an oracle (e.g., warp.finance and bZx, who both upgraded to Chainlink to resolve this issue). It is therefore highly recommended, even by Uniswap, to avoid using AMM spot prices as oracles because they can (and will) be manipulated, resulting in user losses.

To mitigate sandwich attacks, AMM DEXs began offering Time Weighted Average Price (TWAP) oracles. TWAP is a pricing methodology that calculates the mean price of an asset during a specified period of time. For example, a “one-hour TWAP” means taking the average price over a defined hour of time. Since flash loans only exist within a single block, taking a TWAP value over multiple blocks is immune to such attacks.

The most widely known TWAP oracle is from Uniswap, both in its current V2 and upcoming V3 release. A common TWAP implementation used in both Uniswap versions involves taking two snapshots at different points in time, tracking both the timestamp and historical sum of prices for each, and using this information to calculate a final TWAP data point (shown in the image below). In V2, snapshotting is a manual process (or outsourced to Keep3r), while V3 outsources the process to Uniswap traders. By default, Uniswap V3 supports a ~13-second TWAP, but can be extended up to ~nine days by paying a one-time gas fee per trading pool.

While using on-chain data as your price oracle sounds idealistic, in practice, there are a number of trade-offs that exist. These limitations put user funds at risk, ultimately preventing the usage of TWAP oracles at scale for the vast majority of DeFi applications. These issues are simply inherent limitations of TWAPs calculated from AMM DEXs, meaning they can only be solved by using a non-TWAP and non-AMM oracle solution like Chainlink Price Feeds. We explore such limitations below and how Chainlink Price Feeds mitigate them.

The Limitations of TWAP Oracles

Freshness/Accuracy

By design, a TWAP is a lagging indicator and does not provide the current spot price, but instead an average value taken over a previous time period. This is largely fine during periods of low volatility (as the price value doesn’t change much), but it can become a significant issue during times of moderate-to-high volatility because the TWAP becomes out-of-sync with the global market-wide price.

If the price of an asset rapidly shifts in one direction, the TWAP will deliver stale pricing data since it’s derived from the past and not enough time has gone by for it to catch up. This dynamic results in tamper-resistance (security) being inversely correlated with freshness (accuracy), meaning developers are forced to prioritize one property or the other, but cannot realistically achieve both simultaneously.

Adjusting the length of time that a TWAP covers (e.g. 10-minute TWAP vs. 10-hour TWAP) has the following implications:

• Longer TWAP: higher tamper-resistance (more expensive to manipulate) but less accurate data (becomes stale during volatility).
• Shorter TWAP: more accurate data (stays fresh during volatility) but reduced tamper-resistance (lowering the cost of manipulation).

The inverse correlation between security and accuracy is inevitable in a TWAP, making it highly undesirable since DeFi applications require price oracles that are simultaneously maximally tamper-resistant and accurate. Because a low level of tamper-resistance is a non-starter for high-value applications, the majority of TWAP oracles tend towards tamper-resistance by using a time sample between 30 minutes to 12 hours.

While a TWAP time sample in this range may work during periods of low volatility, moderate volatility is common in cryptocurrency markets, and both extreme volatility (e.g. Black Thursday) and rug-pulls/exit-scams (e.g. Compounder) have numerous historical examples that result in asset prices rapidly changing (often in the form of a collapsing valuation). In each case, the TWAP will return stale data that is inaccurate during such volatility.

To showcase the implications, let’s look at a theoretical, but plausible example of a decentralized money market using a one-hour Uniswap TWAP. The money market appears to be working during times of low volatility. However, market volatility suddenly increases and the price of a token used as loan collateral drops 50% linearly in ten minutes (this is crypto, it can happen).

Normally, the protocol would have plenty of time to liquidate this position before the collateral drops too far in value (Ethereum produces ~48 blocks in ten minutes). However, because a TWAP of one hour was used, it has not had enough time to catch up and only reports a drop of 5% after this ten-minute period (a 62% deviation from the true market-wide price).

Because of the TWAP pricing deviation, the protocol is unable to liquidate the position within an adequate amount of time and the debt is now worth more than the underlying collateral, resulting in an undercollateralized position. Even when the TWAP oracle catches up and reports the correct price, it will be too late and the position cannot be fully liquidated. The lenders will have to eat the loss due to it being a toxic debt position, as the borrower has zero incentive to pay it back because their loan is now worth more than their collateral.

While an extreme example, this is the exact type of issue that can occur if a TWAP oracle is used during times of volatility, as well as during less drastic situations. Reducing the time sample down to ten minutes or below is not an adequate solution either because it would reduce the price oracle’s tamper-resistance by at least an order of magnitude. Such inaccurate pricing during volatility can also adversely affect other categories of DeFi applications such as algorithmic stablecoins and rebase tokens whose monetary supply relies upon pricing data to ensure a peg is properly held.

Chainlink Price Feeds avoid the issue of stale price data by not using a TWAP calculation methodology, instead opting for the Volume-Weighted Average Price (VWAP) based on data from aggregators. VWAP calculations from data aggregators involve fetching price data from all liquid exchanges (both centralized and decentralized exchanges), weighting it by real volume, and removing outliers and fake volume to arrive at a single price point that reflects the global market price. These Price Feeds update on a deviation threshold basis (e.g. every 0.3% movement in price) and on a heartbeat basis (e.g. every 1 hour) to ensure accurate data is always available to smart contract applications at any point in time.

Since price data is fetched from off-chain sources and delivered on-chain asynchronously, flash loans have zero effect on Chainlink Price Feeds (as flash loans only exist on-chain within a single block). This prevents the issues that TWAP oracles attempt to solve, without compromising on accuracy during market volatility. While TWAP oracles have niche use cases, the real-time, volume-weighted price is what the majority of DeFi applications require to keep user funds safe.

Important to note: AMM DEXs like Uniswap are limited to TWAP feeds, while Chainlink Price Feeds can leverage any pricing calculation methodology, including VWAP, TWAP, or various other custom calculations. However, VWAP is the most common pricing method not just in DeFi, but in traditional finance too.

Market Coverage

Another fundamental issue of TWAP oracles is their lack of market coverage — the number of exchanges an asset’s price takes into account relative to all the exchanges the asset currently trades within. A TWAP only represents the price action of a single AMM DEX, meaning any smart contract relying on this price data is only exposed to a small sliver of the total trading market. This lowers the difficulty of pulling off an attack, as a malicious actor only needs to manipulate a single exchange, rather than thousands of trading markets across hundreds of centralized and decentralized exchanges at the same time.

The tamper-resistance of a TWAP oracle can be increased by extending the time sample taken, but only at the expense of reduced accuracy, making it impractical as a long-term solution. Regardless, extending the time sample still doesn’t provide full market coverage because only a single exchange is being tracked. There are a number of other dynamics in regards to market coverage that need to be taken into consideration too beyond the time sample of the TWAP.

Even if the AMM DEX being used to calculate the TWAP oracle has a sufficient level of liquidity, there is no guarantee that the liquidity will not shift to a different exchange and unexpectedly lower the cost of manipulation. Increasing the TWAP time sample to compensate for such an attack would only result in stale pricing, making it a non-solution to the issue. The shifting of liquidity/volume across exchanges is a problem for all oracles that fetch prices from only a single exchange.

Especially with the rapid innovation in DeFi, it’s entirely unpredictable how on-chain liquidity will shift. New protocols and networks are being launched constantly, leading to several forms of liquidity fragmentation happening within DeFi today:

• Competing DEXs: The competition in the AMM space is fierce, with some protocols even deploying vampire attacks to quickly siphon liquidity away from leading DEXs. This results in liquidity fragmentation, as existing and future AMMs compete for liquidity.
• Same DEX, Different Versions: Some AMMs have opt-in versioning for updates, meaning when a new protocol version is released, such as Uniswap V3, liquidity can be fragmented across two different AMM versions before all LPs have switched over. This results in liquidity fragmentation for a period of time after a new version release.
• Same DEX, Different Chains: In order to stay competitive, AMMs are launching support for new blockchains, such as Sushiswap’s expansion to Fantom, Polygon, xDai, BSC, and Moonbeam. Uniswap V3 will launch on both Ethereum and the Optimism layer-2 network, further fragmenting its own liquidity.
• Same DEX, Different Trading Pair: AMMs use isolated trading pools, where a single asset may have liquidity for a specific token across several different pools (e.g. LINK/ETH, LINK/USDT, LINK/USDC, etc.), fragmenting liquidity for an asset within a single AMM.

Because TWAP oracles only track a single trading market on a single version of a single AMM on a single blockchain, liquidity fragmentation can have significant side effects for any smart contracts relying on this data as a source of truth on market pricing. In addition to these known unknowns, there are also unknown unknowns, where an entirely new type of decentralized exchange could be created that supersedes the AMM model, potentially resulting in a mass migration of liquidity. We cannot predict the future, and therefore it is never ideal to rely on price data sourced from a single exchange, especially if you hope to set and forget your oracle mechanism with the assumption it will always provide high-quality price data.

Aggregating TWAP oracles that track different AMMs and DEXs via a medianizer does not provide a sufficient solution to market coverage either, as the same inverse correlation between security and accuracy still exists. Mixing low-quality data points doesn’t result in a high-quality data point. Aggregating TWAPs can actually lower the cost of attack since only the most illiquid DEXs need to be manipulated to affect the final medianized data point. It also doesn’t take into account the majority of liquidity/volume that occurs on centralized exchanges.

Achieving market coverage means tracking all trading venues (on-chain and off-chain), not just a particular type of exchange that is preferred by a specific set of users or developers. We have already seen what happens when protocols use price oracles that don’t provide full market coverage such as when Compound.finance falsely liquidated $85M of DAI loans based on an irregular price deviation from a single exchange.

Chainlink Price Feeds solves these issues and ensures robust market coverage by leveraging three layers of aggregation: 1) data providers, 2) node operators, and 3) oracle networks.

Chainlink sources VWAP data from multiple professional data aggregators, such as BraveNewCoin, Kaiko, CoinGecko, CryptoCompare, Amberdata, and more. These data aggregators have large full-time teams solely focused on generating high-quality price feeds that reflect global asset prices. Each data aggregator tracks all on-chain and off-chain exchanges, weights each by real volume using refined methodologies to prevent manipulation, fake volume, and other forms of data corruption. Because each Chainlink Price Feed uses multiple data aggregators, a diversity of VWAP-based price calculation methodologies are used to further add resistance to any malicious actors/traders attempting to shift the final aggregated price point.

Each Chainlink node fetches data from at least three independent data aggregators and takes the median value, both preventing API downtime and avoiding any single source of truth. Even more, each Chainlink node generates its median value from a different set of data aggregators to further harden network security. Each oracle network then takes the median value from a multitude of independent nodes to further prevent oracle downtime and malicious/inaccurate node responses. Through these three layers of aggregation, full market coverage is achieved without compromising on tamper-resistance, liveness, or accuracy.

Scalability of Security

If your smart contract application increases in total value locked (e.g. from $10M to $1B TVL), how would you increase the tamper-resistance of your price oracle to enhance protections of user funds? With TWAP oracles, there are two basic ways to achieve this, extending the time sample of the TWAP and/or increasing the amount of liquidity in the AMM pool.

Increasing the time sample of the TWAP runs into the same inverse correlation issues of achieving security but reducing price accuracy. Price oracle accuracy during volatility becomes increasingly important as a protocol scales because more user funds are at stake, meaning the length of a TWAP sample can only be increased marginally. Thus, extending the TWAP time sample does not serve as a long-term solution for DeFi protocols scaling in TVL.

The other method is adding liquidity to the AMM pool, but this comes with its own tradeoffs. First, developers deploying their limited capital into an AMM pool is an extremely capital-inefficient way to scale up their oracle’s security. Second, a pool with a relatively high level of liquidity (but security still needs to increase) will be even more expensive to scale in terms of increasing security by a predefined percentage.

Finally, users don’t receive strong assurances because liquidity can be removed from an AMM pool just as easily as it can be added. This could occur because of malicious reasons (e.g. a rug-pull) or be entirely driven by economic incentives, such as liquidity moving to a different AMM protocol that provides a higher yield for LPs. LPs are not necessarily loyal to any single AMM protocol.

It results in a double-edged sword: capital is added with the collective knowledge that it may be removed at any point in time, or a time-lockup is enforced to prevent liquidity rug-pulls, but creates an opportunity cost and doesn’t solve the risk that a significant portion of unlocked liquidity goes to competing exchanges. As a result, developers have very few options when it comes to scaling the security of their TWAP oracles.

Chainlink offers a much more flexible and multi-faceted approach to scaling Price Feed security. As the value secured by a Price Feed increases, data requesters have the ability to:

• Increase the number of premium data sources, further decentralizing the data sourcing and aggregation processes.
• Increase the number of independent node operators, further decentralizing the data delivery and validation processes.
• Switch to more expensive but higher quality data APIs and node operators who provide superior guarantees.
• Pay each node operator more LINK fees per request fulfilled, establishing a higher opportunity cost for malicious activity.
• Aggregate fees with other users who need the same data, creating shared, collectively funded oracle networks that are more secure than what any project could afford on their own.
• Upon mainnet implementation, utilize additional security methods like DECO for zero-knowledge proofs and Town Crier for trusted hardware.
• After the explicit staking launch, require nodes to stake more LINK in a service agreement to create greater crypto-economic incentives for honest behavior.

These methods provide developers using Chainlink oracle networks with a wide range of adjustable tools and variables to seamlessly scale the security of a Price Feed. Chainlink security scaling methods are more capital-efficient than TWAP methods and don’t require tradeoffs in price accuracy.

Chainlink Price Feeds have already begun to scale their security to match their increased responsibilities throughout DeFi, such as the ETH/USD Price Feed increasing from 3 nodes initially to 31 nodes currently, and the LINK/USD Price Feed expanding from 9 nodes at launch to now also 31 nodes. With the release of explicit staking, the security of Chainlink oracle networks can be further scaled and quantified for even stronger crypto-economic guarantees. Combining all its security scaling methodologies, Chainlink provides a future-proof oracle solution that better services DeFi’s growing TVL.

Concentrated Liquidity

Another important consideration when it comes to the security of TWAP oracles is that AMMs supporting liquidity concentration can significantly lower the cost of manipulation. For context, conventional AMMs such as Uniswap v2 have liquidity distributed uniformly along the entire price curve between zero and infinity, ensuring traders have access to liquidity regardless of the pool’s current exchange rate.

Newer AMMs such as Uniswap v3 deviate from this model by supporting concentrated liquidity — where LPs can allocate capital within a custom price range. For example, LPs for an AMM pair of two stablecoins (USDC/USDT) can allocate their capital solely to the 0.99–1.01 price range. This results in deeper liquidity around the mid-market price.

However, when most of the liquidity is concentrated on a limited price range and an adversary uses their capital to push the exchange rate of an asset out of this range, the cost of manipulating the price further is significantly reduced since there is little to no liquidity left on the rest of the price curve.

Additionally, when liquidity is concentrated around the current mid-market price, an attacker can burn through this concentrated price range with an average execution price close to the true market-wide price, reducing negative price impact and further reducing the cost of manipulation. As a result, the same capital efficiency properties of concentrated liquidity AMMs that increases ROI for LPs and reduces price impact for traders, also benefits attackers by lowering the cost of manipulation.

A real-world example of this issue occurred in November 2021, where the VUSD/USDC Uniswap v3 pool was manipulated in order to drain assets in an on-chain lending market (Rari Fuse Pool #23). The liquidity pool contained 157k USDC and 222k VUSD, but the majority of the liquidity was concentrated near the $1 range as both tokens were stablecoins. After adding $0.1 worth of liquidity in a price range that values VUSD at near infinity (trillions of USDC), the attacker swapped 232k USDC of their own capital for 222k VUSD, burning through the concentrated liquidity near the $1 mark and depleting the pool of its VUSD reserves.

Because the only liquidity beyond the $1 range was the previously deposited $0.1 of tokens concentrated near infinity, the exchange rate of VUSD against USDC in the pool shifted to near infinity. This led to the reported TWAP oracle price of VUSD increasing exponentially over a ten minute period. When using their newly received VUSD tokens as collateral in the Rari pool #23 lending market — which used the concentrated liquidity pool as a TWAP oracle — the attacker was able to drain all other pool assets by borrowing them against their VUSD collateral at an inflated valuation.

This resulted in a net total of ~$3M in profits for the attacker, while the lending pool became insolvent due to the creation of a toxic loan position that was unprofitable to liquidate.

Notably, because liquidity in the VUSD/USDC pool was concentrated near the mid-market price, manipulation of the pool only cost $10k in total as 222k VUSD was purchased for a total of 232k USDC. Even if the AMM pool had an order of magnitude more liquidity concentrated near the mid-market price, the cost of manipulation would still be relatively low, because the attacker would still experience little negative price impact.

Under normal circumstances, manipulation of a concentrated liquidity pool could be reversed by an external party performing arbitrage against another un-manipulated liquidity pool before the TWAP oracle updates. However, in practice, there are multiple reasons why such arbitrage may not occur:

• There are no arbitrage bots: The token may have too low liquidity or trading volume overall for arbitrage bots to track. The token may not conform to the ERC20 standard and therefore may not be recognized by bots. No arbitrage occurred during the VUSD manipulation.
• There is no other DEX liquidity: The token may only have on-chain liquidity located on a single trading pair on a single DEX, meaning risk-free arbitrage cannot occur between DEXs. Arbitrage between CEXs and DEXs cannot be performed atomically, and therefore bots may choose not to take on this risk.
• Other DEX trading pairs also manipulated: Every on-chain liquidity pool with the token may have been manipulated in the same manner, meaning no on-chain arbitrage can occur. This situation occurred with the INV token, leading to the exploit of Inverse Finance.

In addition to the above, the situation becomes even worse when liquidity is mostly concentrated in a range outside the current mid-market price. This can happen during times of market volatility where the mid-market price shifts away from concentrated liquidity and LPs have not rebalanced their liquidity range, whether due to gas costs or manual inefficiencies.

The main takeaway is that even if a concentrated liquidity pool features a high amount of liquidity, the cost of burning through that liquidity may be extremely minimal (or even near zero if liquidity is out of range). This increases the likelihood of manipulation, resulting in a skewed TWAP oracle price.

It’s important to note that if the only liquidity that exists for an asset is within a singular concentrated liquidity pool with an unhealthy liquidity distribution, then it is fundamentally not safe to use any type of price oracle given that the pool’s exchange rate is the market-wide price and can be easily manipulated. However, for assets that have healthy trading markets across a number of trading venues, Chainlink Price Feeds are a superior solution as it avoids the issues of concentrated liquidity on a single exchange by employing a VWAP pricing methodology that ensures market-wide coverage and not that of a single exchange.

Feed Diversity

The final point, and likely the most self-evident, is that TWAP oracles only provide price feeds for ERC20 tokens priced against other ERC20 tokens. For example, a Uniswap pool with AAVE and DAI can provide the AAVE/DAI and DAI/AAVE time-weighted price of that specific liquidity pool. What TWAP oracles cannot do is provide the price of assets that reside off-chain, such as commodities like crude oil and grain, stocks like MSFT and AAPL, forex pairs like GBP/USD and EUR/JPY, real estate like residential and commercial properties, or any other financial market data beyond ERC20 tokens.

Synthetic tokens like sTSLA and mTSLA, both of which track the price of Tesla stock, already use oracle networks to function. Thus, adding these synthetic tokens to an AMM pool to take the TWAP value is a completely unnecessary step. Even when more assets get tokenized and brought directly on-chain (i.e. not just a synthetic), using the TWAP would still not be a suitable solution due to all of the issues explored above.

TWAP oracles also cannot provide the USD/fiat exchange rate of tokens. It is true that stablecoins like USDT, USDC, GUSD, DAI, and sUSD act as a proxy for US dollars, but their peg does not always hold 1:1. The peg of stablecoins are largely dependent on the amount of liquidity in the market and public confidence in the stablecoin’s backing. Using a TWAP oracle for the USD/fiat price is a large assumption around the stablecoin’s peg, which can result in false outputs from a DeFi application if the peg breaks, like during black swan volatility.

As a decentralized oracle network, Chainlink nodes do not have such issues because they can fetch data from any off-chain data source, therefore, can provide the prices on any tradeable asset in the world, whether it resides predominantly on-chain or off-chain. This allows for the creation of Data Feeds on a variety of real-world assets, as well as a wide range of events like the weather, GPS locations, verifiable randomness, and much more (further explored in our Beyond Price Feeds article). Chainlink oracles will also maintain the confidentiality of these datasets while still making the data usable within the execution of smart contracts via technologies like Town Crier, DECO, and Mixicles.

The ability to get virtually any off-chain dataset and off-chain computation through Chainlink makes smart contract development much easier since data feeds can be easily added, adjusted, or switched out with minimal integration work. It also means users don’t have to worry about some part of their protocol using an oracle network with different security and accuracy assumptions, especially when they are much weaker than Chainlink; i.e., TWAP.

Conclusion

Whether its inaccurate price feeds during times of market volatility, extremely weak market coverage, limited options for scaling an oracle’s security, or a lack of feed diversity, TWAP oracles are not suitable for the vast majority of DeFi applications that secure user funds.

While financial market data is only a small part of Chainlink’s generalized utility as a decentralized oracle network, Chainlink Price Feeds provide DeFi with the highest quality price data, backed by the most robust oracle security. These Price Feeds have been time-tested during times of extreme market volatility and blockchain network congestion, continuing to secure billions of dollars of user funds for numerous leading DeFi protocols like Aave, Synthetix, and more. It’s why Chainlink Price Feeds are being adopted at an accelerated pace, and why they have become and continue to be the standard price oracle solution for DeFi ecosystems across all blockchains.

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Cryptocurrencies and tokens are a completely new digital asset class never before seen in financial systems. It’s why one of the first and most commonly asked questions about crypto-assets is what is their purpose and why are they valuable?

Answering these fundamental questions requires a thorough examination of three separate dynamics:

• Identifying what purpose cryptocurrencies/tokens serve within underlying blockchain networks
• Understanding why cryptocurrencies/tokens are preferred over traditional monetary instruments
• Determining how cryptocurrencies/tokens accrue value

We aim to answer these questions, as well as provide examples of how some of the most popular cryptocurrencies/tokens currently function today.

Defining Cryptocurrencies and Tokens

Before diving deeper, it’s important to define the terms cryptocurrency, token, and crypto-asset. Generally, cryptocurrencies are defined as digital assets whose main purpose is to serve as a medium of exchange (MoE) and/or a store of value (SoV). Hence why the word “currency” is denoted in the name, and why cryptocurrencies are often thought of as being a new form of money. The most obvious examples of cryptocurrencies are Bitcoin and Litecoin, which aim to be used as digital money for goods and services (MoE), as well as being a scarce digital commodity similar to gold and silver (SoV).

On the other end, tokens are typically defined as digital assets whose main purpose is to provide some type of utility outside of being a MoE or SoV. We dive deeper into the various utilities in subsequent sections, but some of the most common token use cases include exclusive network access, cash flow equity, staking insurance, protocol governance, and more.

It’s important to note that the line between cryptocurrencies and tokens is not always clean-cut, with most digital assets having both properties. For example, nearly all tokens both store value and serve as a medium of exchange. So while most tokens will likely never be used commonly as a digital currency or make for a better SoV than a digital asset like Bitcoin, they still have the main cryptocurrency properties. Similarly, it can also be argued that nearly all cryptocurrencies have token properties too since cryptocurrency is used as a miner incentivization mechanism to generate and maintain network security. This is by definition an expanded utility that goes beyond MoE and SoV.

Given the extensive overlap in terms, we will use the word cryptocurrency, token, and crypto-asset somewhat interchangeably for ease of use, which all comprise any digital asset cryptographically secured and stored on a blockchain network.

The Purpose of Crypto-Assets

With a proper definition established, let’s extrapolate out the purpose of crypto-assets. Doing so requires unpacking several layers, particularly the function, incentives, and bootstrapping of both blockchains and smart contract applications, which we will refer to collectively as decentralized computation networks.

Defining the Function of Decentralized Computation Networks

In order to comprehend the purpose of crypto-assets, one must first understand the underlying function of decentralized computation networks. This can be most easily understood by comparing decentralized computation networks to traditional businesses.

Businesses are centralized entities that typically own and/or license the Intellectual Property (IP) of the product and/or service they provide. Businesses are legally designed to maximize profits for their shareholders by extracting as much value as possible from their products and services. So while they may aim to provide consumers the lowest price and at times even engage in philanthropic causes, that decision is almost always made with the goal of generating more profits for shareholders.

Alternatively, decentralized computation networks are not businesses; they have free and open-source IP, with the product/service itself maintained by a decentralized network of independent operators. Thus, decentralized computation networks do not have owners nor do they have legal mandates to maximize profits. Instead, they can be thought of as public goods that offer services equally accessible to everyone, without built-in privileges for any set of users.

These digital public goods are operated through the use of Minimally Extractive Coordinator (MEC) protocols — self-running systems of logic that connect buyers and sellers of a particular asset or service together, with the goal of allowing those buyer/sellers to retain as much value as possible during their transaction by minimizing excessive rent extraction. In many ways, MECs are similar to companies like Amazon and Uber, except the company is replaced with a decentralized computation network that automatically matches supply with demand based on preset parameters that all parties can verify, yet no one can tamper with.

MEC protocols are fundamentally designed to facilitate a business process for the minimal cost possible. For example, users of blockchain networks like Bitcoin and Ethereum only need to pay a transaction fee to use the network; no additional upcharge is added given there is no central coordinator to rent seek. The cost to use a MEC protocol is typically determined by the users themselves through an open auction, where supply and demand meet at equilibrium (such as users bidding for scarce blockspace).

On the other hand, when a centralized company facilitates a business process, it owns the facilitation mechanism and runs it as a for-profit operation. This gives the business, which serves as a facilitator, the power to act in their own self-interests, such as raising costs when they establish a monopoly, censoring transactions to favor a particular party, or selling users’ data discretely to turn an additional profit.

As a result, MECs are designed to capture the large network effects that facilitators often do (e.g.; banks, social media, e-commerce, etc) without the negative downsides that often accompany large businesses-based facilitators who become “too big to fail.” By minimizing rent extraction, MEC protocols direct more value back to the users and provide a superior service long-term. The next logical question then is how do you finance and maintain the incentives of a decentralized computation network without a built-in rent extraction mechanism?

Incentivizing the Growth of Decentralized Computation Networks

Decentralized computation requires incentives to bring individual infrastructure providers (nodes) together to perform a shared objective (coordination services) in a highly secure and reliable manner. The incentives have to be sufficiently high too because decentralized computation is purposely inefficient in order to lower the barrier to entry and generate strong determinism.

For example, the Bitcoin Network has approximately 10,000 independent nodes that all verify the validity of each block of transactions on the network to ensure the ledger of who owns Bitcoin is highly trustworthy, tamperproof, and available to everyone. Without incentives, users would have to trust the benevolence and altruism of node operators, which is not a security model anyone would rely on to secure anything remotely valuable, let alone a market worth over $900B dollars (current Bitcoin market cap at the time of writing).

In businesses, incentives to act fairly are driven by profits, legally binding contracts, and brand reputation. The idea is that it is long-term profitable and legally necessary to act honestly. However, extensively large companies can use their network effects and opaque backend processes to protect themselves in situations where they act unfairly, resulting in them never experiencing any negative repercussions for their actions. A few examples of this incentive misalignment include the 2008 bailout of financial institutions, Facebook’s harvesting and monetization of personal information, and Apple’s monopolistic and rent-seeking App Store policies. Thus, if decentralized computation networks are to provide superior services, they require a better financial gain/loss system that properly rewards positive performance and punishes negative performance.

For decentralized computation networks, the most obvious place to start then is financial incentives, which require a source of capital. To even get a decentralized computation network off the ground, there is a chicken and egg problem that must be overcome: users will not pay to use a network that doesn’t exist or is insecure, and node operators will not secure or operate a network if there are no paying users or revenue. Without a financial subsidy to jumpstart network operations, each side of the market will remain in limbo waiting for the other side to make the first move.

Both supply and demand within a common network depend on the existence of the other; (source).

Traditionally, centralized companies receive outside capital to fuel their growth by raising funds from venture capitalists (VCs) or other fundraising means. While this model can work fairly well for providing the initial capital to fund the development team of a minimally extractive network, it is nearly impossible to support a sustained stream of financial incentives required to subsidize the network to the point of long-term self-sustainability. For example, the Bitcoin blockchain still has a block reward ten years after its initial launch of 6.25 Bitcoins (≈ $306k), which is issued roughly every 10 minutes to help fund the mining nodes securing the network (≈ $44M a day and ≈ $16B a year at current rates).

Decentralized computation networks that attempt to rely upon VC funding for long-term subsidization require some type of value extraction mechanism from users (such as an upcharge on network fees) in order to pay back the debt they take on. This would remove the very value proposition the network set out to generate in the first place, being a minimally extractive coordinator. It would also create misaligned incentives where time and resources are spent catering to the demands of the network’s largest investors as opposed to what may be better for the long-term success of its actual users. Thus, the network could not offer any credible neutrality, as the entities providing the capital for subsidization would ultimately have excessive control over the future direction of the network’s development.

Additionally, by extracting value from users, the decentralized computation network’s competitive advantage will weaken in comparison to protocols that do not take on VC debt, particularly because their competitors can undercut them in network costs by being less extractive. It also makes the network less secure by reducing its security budget, as some of the value that would normally flow to nodes who secure the network is rerouted to investors to pay back the debt.

**It’s important to note that VCs are not inherently bad and this isn’t meant to take a shot at them. They play a key role in providing initial capital to development teams of MECs, however, VCs as the source of perpetual funding for network subsidization is likely unprofitable for VCs and antithetical to the ultimate goal of a MEC.

Instead of relying exclusively on outside capital to grow a decentralized computation network long-term, a more advantageous approach is to create a debt-free native crypto-asset (token) specifically for the network. This native token can then be used to fund the network’s growth by making it a required component of the network’s usage and security. Upon doing so, the value of the token on the open market can be tied to the value the network provides to users, which rewards highly adopted projects and allows them to grow the network long-term. It also creates a scenario where the network operators have a direct financial stake in a token specific only to that network, meaning the network’s performance/security is tied directly to the nodes’ own financial well-being.

Native network tokens benefit all parties in the value chain:

• The development team can raise funds in a debt-free manner to support the network’s development by allocating an initial portion of the token’s supply to be sold to users (including VCs) in a token sale (e.g. Initial Coin Offering).
• The MEC protocol is able to bootstrap its own growth by setting aside a large portion of the token’s supply to be paid to network operators over time as a subsidy/block reward for securing the network.
• The users receive the lowest cost for network services through built-in subsidies and zero rent-seeking.
• The nodes securing the network receive the highest rewards possible without value extraction by non-value-producing investors.

Ultimately, newly created capital in the form of a native token allows decentralized computation networks to avoid rent-seeking middlemen, retaining their valuable property of being minimally extractive. However, the only way for those newly minted tokens to actually work in support of the network’s growth and security is for them to have financial value on the open market.

Capturing The Demand of a Decentralized Computation Network in The Value of its Native Token

While the issuance of a native token allows a team to raise funds for development and create a subsidy allocation to bootstrap the network’s growth over time, it is only effective if the token has value on the open market. The only way for the token to have value on the open market is for it to have some type of way to capture the value generated by its underlying decentralized computation network. If it doesn’t capture any of the network’s value, then the token has no intrinsic value outside of speculation or an expectation from holders that the token-economic design will eventually change to capture value. If the token is financially worthless, then the allocation set aside to subsidize the network’s growth is worthless too, as nodes will have zero incentive to spend money to run network infrastructure that earns valueless rewards.

However, when a token’s value is directly tied to network demand from users, the value of the subsidy allocation increases alongside network adoption. An increase in the subsidy allocation results in a larger budget for the network to leverage as a means of generating additional security/utility for users and incentivizing more adoption. This generates a virtuous cycle of growth:

1. A native token is issued by a development team. Alongside its initial distribution method (mining, public sale, airdrop, yield farming), a subsidy allocation is created and held by the protocol, development team, or community.
2. A portion of the token subsidy allocation is used to bootstrap the network’s growth by rewarding infrastructure providers (e.g. liquidity providers, miners, validators, etc) with those new tokens coming into circulation.
3. As a result of the network subsidy, the utility of the network increases for users (e.g. lower slippage trades, more secure network, additional services, etc), leading to an increase in adoption and additional fees paid by users to infrastructure operators.
4. The increased network usage generates more market demand for the native token (though the methods described in sections below), culminating in a higher valuation of the native token’s market capitalization.
5. The rise of the token’s value on the market directly leads to a rise in the value of the remaining subsidy allocation, extending the per-unit ability of those tokens to further grow the network. This enables more reinvestment into the network as a means of stimulating additional network utility, greater user demand, and larger pools of user fees; accelerating the virtuous cycle once more.

The key benefit of token subsidization is being able to bootstrap the supply side of the ecosystem in a debt-free manner before the demand side exists. Once the supply side of the network is sufficient, then the demand side will naturally arise if there is real network utility. As the demand side rises via paying users, the subsidy can gradually be reduced until eventually, the network becomes self-sustainable completely from the aggregation of user fees. The remaining subsidies can then be redirected towards other network initiatives to generate more adoption such as expanding services or growing network security.

Fundamental to this entire virtuous cycle is driving demand for the native token, which in pursuit of this goal, has resulted in a wide spectrum of different token economic designs. Below are some of the most effective methods in which decentralized computation networks today generate token demand via creating token utility, which serves to tie the token’s value to network demand.

Network Access Through Exclusive Token Payments

The most recognizable way to tie network demand to the native token is to require payment for all network services to be made exclusively in the native token. By doing so, all users must acquire and gain exposure to the native token itself before being able to use network services. Having a standardized payment medium for utilizing the network ensures that demand from users must flow through the token. It also means that nodes have a direct incentive to uphold the value of the token via maintaining the health of the network, as their future revenue streams depend upon a well-functioning network that users want access to.

The most noteworthy example of a native payment design is the Ethereum blockchain and the usage of its native token ETH. In order to have a transaction validated and finalized by the Ethereum blockchain, users are required to compensate network service providers (miners) via a “gas fee” that is paid exclusively in ETH. This makes the ETH token a “first-class citizen” on the Ethereum network as all transactions, including interactions with smart contracts and movements of other tokens like stablecoins, require fees to be paid in ETH.

Since every Ethereum block only contains a limited number of transactions, as network demand rises so do transaction fees, requiring users to purchase more ETH on secondary markets to pay for gas. The rising market demand for ETH also increases the value of the subsidy already being paid to miners via its block reward, further strengthening the network’s security and utility as a global settlement layer for financial assets. Even as layer-2 solutions begin to emerge and batch transactions, the per-user transaction fee will decrease, but the total amount of ETH being paid to miners remains the same (or even increases as layer 2 attracts more paying users).

The Bitcoin Blockchain also operates in a similar manner where the native asset BTC is required to make transactions on the network. While Bitcoin’s primary value is derived from its “digital gold” Store of Value narrative rather than smart contract utility, users will need to continually transact on the network to generate enough fees to support the miners that keep the network secure. This is due to the fact that Bitcoin’s block reward halves every four years, meaning user fees must supplement the decline in block rewards over time if the Bitcoin network is to retain its high security.

An important caveat, however, is that while exclusive native token payments increase market demand from the user side, it does not necessarily increase market demand from the infrastructure provider side.* The reason being is that nodes may sell their earned tokens on the open market to pay operational costs, dampening the price appreciation from user demand. Therefore, exclusive payment utility is most effective when combined with an additional form of value creation that requires nodes themselves to acquire and hold the native token such as through some form of staking (e.g. Ethereum moving to Proof of Stake consensus, creating supply-side demand) or a strong social consensus around being a store of value (e.g. Tesla buying $1.5B of Bitcoin).

*Many infrastructure operators are also long-term believers in the network they secure, thus, they will have natural incentives to hold a large portion of their profits, leading to reduced sell pressure. For example, many miners use crypto-earnings as collateral for loans that are used to pay for expenses, allowing them to maintain greater exposure to cryptocurrencies.

Cash Flows Through Dividends and Burns

Another common way to generate value accrual for native tokens involves redirecting some or all of the fees paid by users to token holders. As a result, an increase in network demand from paying users directly leads to a proportional increase in the revenue rewarded to token holders. This provides token holders with a form of passive income and allows for the usage of more formalized valuation models such as discounted cash flow and price-to-earnings ratios.

The method through which network revenue is distributed to token holders can be achieved in various different ways. One approach is to use some or all of the user fees generated by the protocol to automatically purchase the native token on secondary markets and burn it, thereby reducing the total supply of tokens. This method increases the scarcity of the native token through deflationary pressure and is often used in combination with a hard-capped total supply (no inflation). The advantage of such an approach is that revenue is distributed to all token holders equally by increasing everyone’s percentage ownership of the total supply. The most well-known DeFi protocol following this model is MakerDAO, a decentralized stablecoin protocol, which has a native token called MKR. All the interest paid by borrowers is used to purchase MKR tokens off the market and burn them. In return for receiving the network’s cash flows, MKR holders act as the lender of last resort (e.g.; MKR tokens are minted to re-collateralize the network, as seen during black Thursday).

The second variation of token cash flows involves issuing dividends, wherein some or all of the fees collected by users are awarded directly to the token holders. These fees can also be used to purchase the native token in the open market and then distribute it to token holders, providing both price appreciation through market purchases as well as dividends to token holders (who may sell those earnings or keep them to earn even more dividends). One example of this dividend model is the decentralized exchange protocol SushiSwap and its native token SUSHI. Every trade made on the SushiSwap exchange incurs a 0.30% fee, with 0.25% going to the liquidity providers and 0.05% used to purchase SUSHI tokens in the open market and distribute them to xSUSHI token holders (the staked form of SUSHI).

Another example of this dividend model is the decentralized derivatives protocol Synthetix and its native token SNX. Synthetix allows users to stake SNX as collateral and mint the synthetic stablecoin sUSD (500% overcollateralized). sUSD can be sold on the secondary market or converted at zero slippage into various other “synths” that track the value of different cryptocurrencies, commodities, fiat currencies, US equities, and indices. Stakers receive dividends from the fees generated from synth conversions (0.3% of trade value), as well as inflation rewards to compensate for the fact SNX stakers have short exposure to every circulating synth (akin to a clearinghouse).

While in theory, a token burn and issuing dividends should have an equivalent effect on the market value of the token, in reality, market psychology must be taken into account. A token burn occurs in the background, meaning the value accrual is not always immediately apparent to token holders and often cannot be differentiated from market speculation. With a dividend, users directly receive additional tokens, making the economic incentive of acquiring and holding a token with cash flows more apparent. However, how much this difference in perception of cash flows matters for the long-term valuation of a native token is still unclear.

Security Through Staking and Token Lock-ups

Staking is a method through which token holders are incentivized to lock up their tokens in exchange for the rights to provide and/or receive network-specific services. While staking mechanisms greatly vary in purpose and implementation from one protocol to another, the common denominator involves users/nodes taking native tokens off the market and putting them in a state of illiquidity, reducing the circulating supply of tokens available within external markets. Staking is often combined with dividend and network fee rewards, where users provide token-based capital as a form of crypto-economic security and in return receive some form of passive income generated by the network (e.g.; Synthetix).

The most recognized form of staking is Proof-of-Stake consensus, which powers various blockchain networks like Etherum 2.0, Polkadot, Tezos, Cosmos, Aavalance, etc. In the case of Ethereum 2.0, any entity that wants to participate in validating transactions and producing blocks on the Ethereum blockchain is required to lock up 32 ETH. Stakers can have their ETH tokens slashed if they perform malicious activities that attempt to corrupt the network (signing conflicting attestations), resulting in those tokens being permanently burned and the staker’s node kicked out of the network. Thus, staking in this format creates crypto-economic security that incentivizes the honest performance of network services. In return, ETH 2.0 validators are paid via a block reward subsidy and network transaction fees. This has already generated a large token sink, with over $5B of ETH locked in the Ethereum 2.0 beacon chain (as of writing).

A different form of staking involves the creation of an insurance pool that can cover any potential losses of a protocol. The most prominent example is the decentralized money market protocol Aave, which has approximately $2B of its native token AAVE locked in the Safety Module. 30% of this insurance pool can be used to absorb any black swan shortfall events, such as protocol under-collateralization. Stakers are incentivized to lock up their AAVE tokens through a reward in the form of an inflation subsidy as well as the rights to any fees generated by the protocol. This ensures that any users who want access to the protocol’s cash flows must have their AAVE tokens staked as insurance. Aave’s Safety Module covers a much different category of risks when compared to ETH staking, however, it has the same effect of taking tokens off the market and creating an incentive to hold tokens long-term to the benefit of the protocol’s security.

It should be noted that many tokens have some staking utility in that they can be staked as liquidity within automated market makers such as Uniswap and SushiSwap. This means a user can stake their tokens in an AMM as a liquidity provider and in return earn a percentage on the swaps executed using the tokens they provided (albeit, not taking into account impermanent loss and double-sided pools). However, such staking is more of a product of AMMs and not a built-in mechanism for tying a decentralized computation network to its own token. If the token had no intrinsic value on its own network, then it wouldn’t be worth anything in an AMM.

Protocol Governance Through Voting

With the rise of Decentralized Autonomous Organizations (DAOs) — a structure for distributed social coordination — we have seen an increase in the number of native tokens that include an aspect of governance. Governance tokens allow holders to directly vote on proposals to change/upgrade the network itself. In most implementations, each vote is weighted by how many tokens a user holds, meaning anyone who wishes to gain significant influence over the direction of a network’s development is required to acquire tokens off the market to increase their voting power. However, token-based governance from one network to another varies greatly in its ability to influence the network, ranging from simple parameter adjustments to large sweeping changes of its underlying infrastructure

The most direct form of token-based governance is through binding on-chain votes. For example, in Aave, proposals are codified as smart contracts and can be executed immediately on-chain if approved by a sufficient quorum of token-weighted votes. Aave has used this form of on-chain governance for large changes such as the launch of the protocol’s v2 version, as well as the onboarding of new collateral types to its market. A more indirect approach to token governance involves off-chain signaling, such as in Synthetix, where token-weighted polls are created to gauge token holder sentiment and see if changes should be implemented by the DAO. These votes are not binding, meaning acquiring a large number of tokens is not a guarantee of influencing the direction of the protocol away from community consensus.

The value of network governance from one holder to another is highly subjective, making formal valuation models for “pure governance tokens” a near impossibility. Therefore, governance is almost always an additional form of utility for a token, and not its driving value proposition. However, there are always exceptions and this could change as these decentralized computation networks grow in value. Additionally, it’s becoming common to see tokens start out as a pure governance token and only later evolve to become a revenue-generating token after a community vote has been approved. An example of this is the decentralized exchange protocol Uniswap and its native token UNI. Currently, UNI is only a governance token, but it is broadly expected that the community will vote at some point in the future to add additional cash flow utility in a similar vein to Sushiswap.

Tokenomic Fluidity

Most token designs being used in-production don’t implement just one method of linking network demand to the token’s value. Instead, they combine two or more mechanisms together to provide value creation through multiple forms of utility. There is no one-size-fits-all approach to value creation within minimally extractive networks, as each seeks to provide a different service to users, resulting in the diversity of implementations we see today.

Networks are also not locked into using a specific token economic model forever, but can evolve over time given there is enough consensus from network stakeholders. The LEND token (Aave’s previous token ticker) initially had a hard-capped supply and used a buy-back and burn model. However, that was later changed during the token migration to AAVE (100:1 conversion), along with a switch to an inflation-based token supply for subsidies and a new distribution mechanism where protocol fees are issued as dividends to token holders (revenue currently goes directly to the Aave DAO which is controlled by AAVE token holders). Similarly, the ETH token started out as solely being a utility for payments to miners but has since added more token utility through the recently launched ETH 2.0 staking. It’s also incurring a potential third addition to its utility via growing community support for a token burn implementation as outlined in EIP-1559.

Conclusion: Through Tokens, Decentralized Computation Networks Become Public Goods

Decentralized computation networks serving as minimally extractive coordinators (MEC) provide humanity with an unprecedented set of technological primitives that, if implemented correctly, can completely redefine how humans interact with one another both socially and economically. Such backend infrastructure, which replaces centralized for-profit institutions with decentralized non-profit facilitators, brings about open agoras where buyers and sellers can freely exchange value without warlords exercising monopolistic control or leeches sucking out value.

Realizing the power of MECs requires the use of native crypto-assets. Crypto-assets allow MECs to be just that, minimally extractive, as properly deployed tokens can generate large network effects without taking on any debt. This empowers networks to bootstrap themselves to the point of self-sustainability, allowing them to remain focused on servicing users as opposed to appealing to special interests.

The end result is the creation of market facilitators as public goods, where financial, insurance, gaming, social media, and various other markets yet to be imagined are run purely by user input. The benefits of this are not fully understood or realized yet, but it’s bound to re-architect the way we create and manage the value within social groups and economic markets. If the Internet is any indicator, the change we are about to undergo will be profound, and it’s up to all of us as a collective society to use token-based decentralized computation networks to harness human input in a way that generates equal output. In other words, the value you put in is the value you get out; no unnecessary extraction.

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Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

We would also like to give a shout to @TheLinkMarine1 for creating the image banner and infographic within this article. Check out his website for more Chainlink-related content: https://chainlinkecosystem.com/

“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.” — Nick Szabo

In 1997, computer scientist Nick Szabo described what he termed the “God Protocols.” In short, the God Protocols refer to the general idea of a set of computer protocols that could arbitrate and facilitate processes involving an exchange of value between two or more independent parties without any bias, error, or privacy concerns. This perfect third party would be equally accessible to all participants, fairly and flawlessly execute actions according to mutually pre-agreed upon rules and commands, and wouldn’t leak sensitive information to unintended entities.

When extrapolated out to multi-party contracts, the God Protocols are designed to eliminate inefficiencies and counterparty risk by replacing human-based arbitrators/executors with math-based arbitrators/executors, resulting in the correct party consistently getting what they are owed, when they are owed, and from whom they are owed, based entirely on a provably objective interpretation of the events in which the contract is written about. Additionally, the Gods Protocols would extract as little value as possible from the process, only receiving what is needed to cover the costs of performing it.

While this may seem overly idealistic, and we wouldn’t say it’s fully realized or will ever be perfect, it does appear that three core technological pillars have emerged in the form of blockchains, smart contracts, and oracles, which combined create a potential foundation for God-like Protocols that are far superior to current third parties relied on today. This concept of impartial computing infrastructure acting as a neutral third party in an exchange of value between independent entities is what we believe to be the defining value proposition of blockchain technology, hence why it is often referred to as the Internet of Trust or Web 3.0. The idea of highly reliable infrastructure impervious to bias and manipulation is not only valuable for creating and exchanging new forms of digital money like Bitcoin, but it can be applied across nearly every major industry, such as financial services, insurance, supply chain, gaming, and more.

This article is designed to explore this potential foundation of the God Protocols before going deep into the last piece of the puzzle, Chainlink. Given the wide adoption of the Chainlink decentralized oracle network, the God Protocols are closer than ever to reaching a more complete form, revolutionizing how society forms agreements and exchanges value.

PART 1: PRIMER ON BLOCKCHAINS, SMART CONTRACTS, AND ORACLES

In a broad sense, the God Protocols require three distinct components: 1) the physical network that performs the work of a third-party, 2) the software for understanding a wide range of logic and triggering actions, and 3) external connectivity to the outside world so it can consume input data and generate output actions involving any combination of data sources and external systems. These components can be broken down into three core technologies: blockchains, smart contracts, and oracles.

Blockchain: The Physical Body / Decentralized Computer Network

The first component necessary to the God Protocols is the physical computing network responsible for processing the instructions sent to it and facilitating the actual exchange of value between parties (e.g., assets, rights, documents, etc.). Since the God Protocols must form a trustworthy and unbiased third party, the computing network cannot be run by a central administrator able to exercise authoritative control or influence over the process. There also needs to be a way for users to definitively prove that the computation performed by the God Protocols were done correctly.

This is where the blockchain comes into play, serving as a global computer network responsible for physically exchanging value between two or more parties in a non-custodial manner and documenting the results as data stored in an immutable ledger that anyone can verify as being valid. Blockchains achieve this by operating as a decentralized network of independent computers, which all run the same open-source software set to the same specification, redundantly validate the same transactions, and maintain an ongoing copy of the same ledger. The shared ledger (blockchain) consists of public key addresses (akin to user bank accounts) that prove ownership of cryptocurrency/tokens and can only be accessed by users in possession of the corresponding private key addresses (akin to the user’s password), with only one unique private key for each public key.

The question is, how does a network of computers reach a consistent agreement (consensus) about the state of a shared ledger despite malicious attempts to corrupt it? The answer: financial incentives and decentralization. In a Proof of Work (PoW) blockchain, each blockchain node (miner) batches together a bunch of pending transactions sent by users (called a block) and competes to get their block approved by being the first miner to generate a specific cryptographic hash through brute force (i.e., guessing random numbers until correct). The first node to generate a valid hash wins the block reward (newly minted cryptocurrency + transaction fees), and their block of transactions is confirmed by all other nodes on the network and added to the ledger.

The process, which is similar to a lottery competition between computers for a reward, is designed this way in order to make it difficult for a single miner or small group of miners to consistently generate a valid hash, keeping the network decentralized. A decentralized network of financially incentivized nodes is inherently resistant to the actions of a few malicious nodes as long as they don’t get control over a sufficient amount of the computing power of the PoW-based blockchain (which in most cases is 51%). Additionally, each block contains a unique hash of the previous block, creating a continuous chain of blocks dating back to the first “genesis” block. If any historical block was tampered with, it would become immediately apparent to all network participants as the hashes from one block to another would no longer match.

While there are different ways to achieve consensus in a decentralized network (e.g., Classical, Nakamoto, and Avalanche), numerous ways to generate Sybil control (e.g., Proof of Work, Proof of Stake, Proof of Authority), and various degrees of permissions about who can participate in the network’s consensus (e.g., Permissionless, Permissioned), the blockchain described above (Nakamoto, PoW, Permissionless) is generally how the two most widely used blockchains, Bitcoin and Ethereum, currently work. The value in such blockchain network designs is that it’s extremely expensive and highly impractical to achieve 51% control over the network, meaning users can trust to a very high degree that the data stored and computation performed on the network is secure, reliable, and accurate without any realistic possibility of manipulation or tampering of the ledger. Also, since blockchains are decentralized, run on open-source software, operate in a permissionless manner, and keep track of previous state, the network is always online for anyone with an Internet connection to access, ensuring that any user at any time is able to independently verify the validity of transactions.

Bitcoin was the first implementation of a blockchain, which facilitates the exchange and tracks ownership of its own, newly created monetary asset, Bitcoin (BTC). The reason Bitcoin is seen as a reliable store of value is that there will only ever be 21 million Bitcoins in existence (with over 18M already circulating); a feature that is incredibly difficult to change or inflate given the network’s decentralized nature, especially in comparison to central bank-issued fiat currencies. Any users attempting to alter the 21M hard cap on the supply will find it extremely difficult to achieve social consensus, resulting in a fork from the main chain (e.g., similar in concept to Bitcoin Cash, which forked from Bitcoin; however, the reasoning was due to network scaling differences, not supply disagreements).

In addition to decentralization, miners have to spend a lot of money on application-specific hardware only useful for mining Bitcoin if they want to participate in consensus. Thus, in order to turn a profit, they are incentivized to uphold the value of the Bitcoin network by keeping it secure, as a secure network will help maintain the value of the cryptocurrency (BTC) they are exclusively paid in. However, blockchains can be used for far more than tracking and trading cryptocurrency, as Ethereum has thoroughly demonstrated.

Smart contracts: The Brain / Decentralized Applications

The second component to the God Protocols is being able to comprehend a wide range of logic (if x event happens, execute y action), meaning the blockchain is able to process a variety of instructions sent to it by users in the form of applications. As the first blockchain in existence, Bitcoin has a very narrow range of logic that it can process, namely moving BTC from one account to another on the Bitcoin blockchain upon certain conditions being met: 1) the sender signs the transaction with the correct private key and 2) the sender has enough BTC to cover the transaction. While Bitcoin has expanded slightly in the logic it can process to include multi-sig transactions (require multiple specific private key signatures before the transaction is considered valid) and Hash Time-Locked Contracts (transactions in time-bound escrow, used in payment channels like the Lightning Network), both of which can be considered some of the first “smart contracts,” it has largely remained static since.

Though there were some minor advancements in between, the Ethereum blockchain generated the next major advancement in 2015 by launching support for programmable smart contracts. This basically transformed the function of a blockchain from serving as a single application into serving as a world computer able to simultaneously support many different applications at the same time. Ethereum made it much easier for developers to write and maintain their own Turing complete smart contracts on top of the blockchain (written in Solidity), enabling anyone to deploy a decentralized application with a customized set of logic, along with the option to update the smart contract themselves without requiring any change to the underlying blockchain.

Programmable smart contracts lead to the creation of fungible tokens, where specific public addresses were assigned to specific assets. This allowed a single blockchain to support a wide range of digital assets outside of its native cryptocurrency (i.e., a ledger of ledgers). Smart contracts also expanded the types of computation the blockchain could assign to those tokens, such as the creation of Decentralized Autonomous Organizations (DAOs) for decentralized voting between specific token holders, as well as the Decentralized Finance (DeFi) ecosystem that combines tokens and smart contracts to facilitate decentralized lending and borrowing markets, trading exchanges, derivatives products, and more. However, there was still one key problem; the blockchain is inherently disconnected from data and systems in the outside world.

Oracles: The Outside World / Decentralized Internet

The third component to the God protocols is for smart contracts to become aware of events and interact with systems existing outside the native blockchain they run on. External connectivity entails two functions: 1) consuming data originating outside the blockchain and 2) passing instructional commands to external systems for them to perform (e.g., execute a payment on PayPal).

Blockchains are inherently closed and deterministic systems, meaning they have no built-in capabilities to talk to and exchange data between external systems (as doing so could break network consensus). While this generates the valuable security and reliability properties that users seek when using a blockchain, it also severely limits the types of data inputs that smart contracts can ingest and the types of output actions they can trigger on external systems. Most valuable datasets like financial asset prices, weather conditions, sports scores, and IoT sensors, as well as the currently preferred fiat settlement methods like credit cards and bank wires, exist outside the blockchain (off-chain). Given the importance of these resources to real-world business processes, blockchains need a secure bridge to the outside world in order to support a vast majority of smart contract application use cases.

Providing smart contracts connection to the outside world requires an additional piece of infrastructure known as an oracle. An oracle is an external entity that operates on behalf of a smart contract by performing actions not possible or practical by the blockchain itself. This usually involves retrieving and delivering off-chain data to the smart contract to trigger its execution or passing data from the smart contract to an external system to trigger an off-chain event. It can also involve various types of off-chain computations in advanced oracle networks (discussed more below), such as aggregating data from multiple sources or generating a provably fair source of randomness.

Similar to blockchains, the oracle mechanism cannot be operated by a single entity, as that would give the centralized oracle sole control over the inputs the contract consumes, thus control over the outputs it produces. Even if the blockchain is highly secure and the smart contract logic is perfectly written, the oracle will put at risk the entire value proposition of the smart contract if it is not built to the same security and reliability standards as the underlying blockchain network, often referred to as the oracle problem. Why have a blockchain network of thousands of nodes when it’s triggered by a single entity?

This is where Chainlink comes into play, providing smart contracts with a secure and reliable way of interacting with anything outside the blockchain, ultimately allowing it to overcome the oracle problem.

PART 2: HOW THE CHAINLINK NETWORK WORKS

While a substantial amount of focus has been placed on the development and understanding of blockchains and smart contracts, oracle networks are just as critical, given their importance to achieving mainstream adoption. To overcome the oracle problem, Chainlink launched the world’s first decentralized oracle network in 2019. Chainlink has since become the most widely used solution for connecting blockchains and off-chain resources, and currently secures tens of billions of dollars in on-chain value for leading blockchain applications that rely on its oracle services to securely interact with assets.

Although other oracle implementations exist, Chainlink is the industry-leading oracle solution due to its underlying technology, market adoption, development team, token economics, and potential addressable market. Additionally, similar to the Internet, the oracle layer of the God Protocols is likely to be a winner take all, as standardization and network effects are critical when trying to get all of the world’s systems to communicate and pass data between one another.

In order to fully understand why Chainlink is the undisputed market leader and poised to become a universal standard used to connect all blockchains and off-chain systems, we analyze in great detail the underlying architecture of the Chainlink Network, how it generates security and reliability, the types of oracle functionalities it provides, and how its native asset LINK is used.

The Underlying Architecture of the Chainlink Network

The first thing to understand is that Chainlink is not a single monolithic network, but instead, a generalized heterogeneous framework where any number of independent oracle networks can be custom built and run simultaneously without any dependencies on any other oracle network. Chainlink is also open-source and permissionless, meaning anyone can review the software code run by the oracles and launch their own oracle network to meet their specific external data and computation needs.

A Network of Networks

Given its heterogeneous, open, and permissionless nature, Chainlink users can decide exactly how they want their oracle network constructed, including the ability to choose any node operators, data sources, data aggregation strategy, update frequency, and various other security parameters like collateral amounts, reputational thresholds, and historical performance requirements. As a result, Chainlink is best described as being a network of networks, consisting of a free market economy where oracle nodes and networks compete with one another for jobs and/or specialize in providing different jobs.

In contrast to a PoW-based blockchain, where every miner participates in processing every transaction, Chainlink is designed where not every oracle is involved in every oracle job requested by a smart contract. This flexibility and removal of standardization across all oracles allow Chainlink to support any/all types of data requests, regardless if every existing node is compatible or not. It would be impossible to service all types of oracle requests if every node were required in each job, specifically, because off-chain data feeds often cost money to access or are permissioned to authorized users. Having all nodes paying for all the data feeds required by all contracts is not economically feasible, nor will many oracle nodes even be allowed to access most enterprise data types. Instead, oracles can specialize in providing certain oracles services like specific data types and specialized off-chain services, or simply serving certain blockchains (e.g.; permissioned oracle nodes used to service a permissioned blockchain).

Diversity of Chainlink Nodes

The Chainlink Network currently consists of two types of oracle nodes, 1) security reviewed node operators with known identities and approved by the Chainlink team to ensure that the initial set of oracle networks are highly secure and reliable, and 2) non-security reviewed nodes run by either known or unknown entities from the community or traditional markets that require no approval processes. While anyone can launch a Chainlink node today, most of the initial Chainlink oracle networks are being run by security reviewed node operators in order to ensure their reliability in the early stages of the Chainlink Network, particularly to guarantee consistent uptime and maintain Sybil resistance (preventing a single entity from pretending to be multiple independent nodes).

Over time, the Chainlink Network will consist of a diverse array of node operators, including security reviewed oracles for high-value use cases, specialized data providers running their own nodes directly (increasingly happening today), and non-security reviewed nodes for obtaining additional oracle services that require lower quality control measures, employ more decentralization, and/or make use of additional features to further guarantee security and reliability (e.g., staking).

Diversity of Data Sources

Chainlink brings data to blockchains by having oracles connect to Application Programming Interfaces (APIs) — the most commonly used way of allowing other companies/users to access your data and services within their own applications and systems (often for a fee), removing the need to build infrastructure from scratch. For example, Uber leverages three separate APIs to support their ride-sharing platform: a GPS API for location (MapBox), an SMS API for messaging (Twilio), and a USD API (Braintree) for payments. Through its external adapter technology, Chainlink oracles can establish a connection to any open or authenticated API; thus, allowing a smart contract to communicate with virtually any external system.

Chainlink oracles have two methods of getting API data into the blockchain: 1) a simple model where professional node operators transfer data between API providers and blockchain networks, meaning existing data companies don’t need to change anything about their current business model or infrastructure, or 2) an advanced model where data providers operate their own Chainlink node to sell origin-signed data directly to smart contracts and get paid on-chain. These two models, in combination, mean the Chainlink Network can bring all of the world’s data onto the blockchain, either through direct participation by existing API providers or no participation at all in a business-as-usual approach.

Diversity of Blockchains

The Chainlink Network is also natively blockchain agnostic, meaning it can provide native oracle services to smart contract applications running on any blockchain without dependencies on any other blockchain. With the growing diversity of blockchains that specialize in providing certain features like decentralization, speed, and privacy, the demand for blockchain agnostic oracles is high and ever-growing. The ability to connect to any blockchain not only leads to Chainlink having cross-chain communication capabilities, but it futureproofs the Chainlink Network, ensuring data and API providers can quickly connect to any future blockchain that emerges. Chainlink is already running across many of the leading blockchains, with numerous others actively being integrated. The LINK token also has been bridged across numerous blockchain networks such as Ethereum, Binance Smart Chain, Polygon, Avalanche, Arbitrum, Optimism, and more, which allows users to pay Chainlink oracles in the same environment as their smart contract application.

How Chainlink Provides Oracle Security and Reliability

While flexibility is key to becoming a standardized solution capable of supporting all oracle requests, it cannot come at the expense of security and reliability. Unlike a blockchain, which has a single security approach, oracle networks require a multitude of security techniques due to the unique and broad set of functionalities they provide.

Chainlink provides the most expansive set of security techniques in the market, which is why it’s able to protect smart contracts even during extreme black swan events. These security techniques include decentralization, data signing, crypto-economics, reputation systems, privacy, and scalability, all of which can be combined in different ways to create a defense-in-depth approach to security.

Decentralization

Just as blockchain networks generate their security through the decentralization of nodes, the Chainlink Network provides security through the same approach. Decentralization can be applied in the Chainlink Network in three ways, 1) employing numerous different node operators to source and retrieve data, preventing one or a small group of oracles from being a single point of failure, 2) gathering data from multiple independent data sources, avoiding a single API being the only source of truth, and 3) utilizing data providers who specialize in aggregating data themselves across multiple sources depending on the type of data (e.g., using multiple IoT sensors for weather data or collecting from hundreds of crypto exchanges for price data). The multiple data points retrieved by the multiple oracle nodes are then aggregated (e.g., take a median) to create a single data point consumed by the smart contract. These multiple layers of aggregation ensure that data is accurate, delivered on-time, and resistant to manipulation despite any potential malicious activity from a small group of oracles or data sources, resulting in end-to-end decentralization of the smart contract.

Additionally, most Chainlink nodes operating today run two versions of the Chainlink software, meaning in the worst-case scenario, they can failover to the previous software version and continue operating safely (such a situation has never happened). Smart contracts can also choose to implement optional circuit breakers for an additional level of redundancy. For example, using a historical circuit breaker in a Chainlink Price Feed, which compares the current price update delivered by the oracle network to the previous one, and if there is a difference greater than the threshold set by the user (e.g., more than 10%), the circuit breaker can trip and trigger a preventive action like a temporary pause in the application. These further provide hyper-reliability to the Chainlink Network, even amidst an extremely rare black swan event.

Transparency and Data Signing

Chainlink oracles cryptographically sign each piece of data delivered to the blockchain, serving as irrefutable proof that the data came from a specific node operator. The act of signing data is achieved via a unique private key only available to that node operator, which cannot be falsified. Additionally, because the data is signed and stored on the blockchain, it serves as an immutable and tamper-proof record of a node’s historical performance. Thus, node operators are always held accountable for their performance, as anyone can verify their performance history and know it hasn’t been tampered with. Even with the introduction of off-chain aggregation, each oracle report delivered on-chain contains every node’s individual observation and signature for transparency.

Traditional data providers running Chainlink nodes to sell their data to smart contracts can leverage this data signing capability to provide users cryptographic proof about the origin of their data (e.g., smart contracts know it came straight from the source). With oracle-delivered data triggering the automatic exchange of real assets, data signing allows blockchain applications to be certain that they received data from the correct source, making them even more reliable for automating processes.

Reputation System

Because each oracle signs data on-chain, the performance history of each node can be tracked and loaded into reputation systems that potential future users can reference and filter through when deciding which nodes they want to rely on for oracle services. Historical performance data can be coupled with other optional metrics about the node operator, such as their off-chain identity, specialized certifications, ethical contributions, geographic location, and the number of LINK tokens they hold and/or will stake. These metrics are key to node operators showcasing to users why they are high-quality and worthy of being selected for upcoming jobs.

Reputation systems bring additional Sybil resistance and accountability to node operations, wherein a node cannot act maliciously or pretend they are someone else and then hide away from sight and hope people forget about their past actions. Poorly rated node operators would likely be removed from the networks they support and lose potential future revenue in the Chainlink Network, as users are unlikely to select them for upcoming jobs. They could also destroy their off-chain reputation across other blockchain and non-blockchain related endeavors.

For example, if a Chainlink node also operates a validator on a PoS blockchain network like Cosmos, delegators may unstake their tokens to that validator due to fears that the poor services witnessed on Chainlink will carry over to Cosmos. Similarly, if a data provider runs a Chainlink node and provides bad data, they could lose subscriptions to their data feeds across numerous blockchain and non-blockchain markets. Not only could this lead to a reduction in business revenue, but it could end up in lawsuits from the harmed parties in a worst-case scenario (given that nodes are identifiable).

Privacy

Chainlink is developing several novel approaches to data and oracle privacy, designed to mitigate concerns around the general public and/or the oracle node itself being able to read the data retrieved and/or see the computation it’s asked to perform. Generating privacy will greatly expand the number of smart contract use cases, as it unlocks a large portion of data currently unavailable for consumption on the blockchain due to user privacy and data licensing laws. Chainlink’s privacy solutions currently include:

• DECO — Zero-knowledge proofs that prove facts about data within a user’s web session without any data ever leaving the web session or the oracle seeing any data it’s not supposed to. For example, having the oracle accompany someone as they log in to their bank account in order to prove through a yes or no answer whether they are above 18 years old or have more than $100,000 USD.
• Mixicles — An oracle-powered mixer design that generates transaction privacy on the blockchain by separating the smart contract’s logic from its resulting payment. The oracle is used as an intermediary between the two, preventing external actors from correlating a contract’s terms to its subsequent settlement payments.
• Town Crier — Oracles that leverage trusted hardware (e.g., Intel SGX), referred to as a trusted execution environment. Essentially, the oracle runs in a black box computing environment where the node operator cannot see the instructions sent by the smart contract or the data they generate/retrieve, giving smart contracts complete data, computation, and node operator privacy.

Scalability

To improve the performance of oracle networks, Chainlink created a scalability solution called “Off-Chain Reporting” (OCR) which increased data delivery throughput 10x by lowering the on-chain gas costs of updates by up to 90%. OCR provides these scalability gains by enabling Chainlink nodes to communicate directly with each other through a peer-to-peer network (LibP2P), allowing them to aggregate data off-chain at zero cost. This process involves each node individually fetching data from one or multiple APIs, signing it using their private key, and broadcasting the results to other nodes. Once a certain threshold of responses have been generated, a single transaction is created containing every node’s cryptographically signed observation and is validated by an on-chain smart contract.

This order of magnitude improvement in scalability provided by OCR resulted in the increased decentralization of oracle networks, enabled higher frequency and lower latency updates, as well as allowed for the cost-efficient onboarding of more Chainlink nodes. OCR is currently being used in-production by Price Feeds across multiple blockchain networks.

Functionalities of the Chainlink Network

With the Chainlink Network offering a highly flexible framework that can generate a high degree of security, oracle networks built on Chainlink can provide a wide variety of services to smart contracts, leading to the creation of a much broader and more advanced set of digital agreements. Such Chainlink functionalities include:

Data Sourcing and Delivery

The most widely recognized functionality of Chainlink oracles is fetching and delivering off-chain data to smart contract applications. Due to the blockchain oracle problem, smart contracts require external oracles to fetch data on their behalf. The data is then used to inform the smart contract about the current state of real-world events. For example, a smart contract may want to know the closing price of a barrel of oil, the amount of rainfall in New York City, the current location of a specific shipment in transit, the winner of the World Cup, or the current global price of Bitcoin. Chainlink oracles can fetch this data from any off-chain data provider (API) and deliver it to any blockchain network.

Off-chain Computation

In addition to data sourcing and delivery, Chainlink oracle networks can perform various types of off-chain computations, including the aggregation of multiple data sources into a single price point, generating a secure and fair source of randomness, operating layer-2 validators responsible for smart contract computation, running keeper functions to trigger smart contract maintenance and executions, and more. Off-chain oracle computation brings about more advanced and cost-efficient smart contracts, as expensive on-chain computations are offloaded off-chain to trust minimized oracle networks.

Interoperability

The blockchain ecosystem is increasingly shifting towards a multi-chain world, where the adoption of smart contracts is not occurring on just one blockchain, but rather across many different networks with their own unique value propositions. With Chainlink oracles already integrated across a growing number of blockchains, the network is in an ideal position to serve as a universal interoperability solution to mitigate the problem of blockchain fragmentation and low quality cross-chain bridges.

The Cross-Chain Interoperability Protocol (CCIP) is an open-source standard being developed that leverages Chainlink infrastructure to establish a universal connection between hundreds of blockchain networks, both public and private, enabling the creation of secure token bridges and cross-chain applications. To further secure the services built on-top of CCIP is the Anti-Fraud Network, committees of nodes separate to those powering CCIP with the sole purpose of monitoring CCIP services for malicious activity that could lead to user loss. Ultimately, CCIP opens up a world of opportunity where developers can take advantage of multiple blockchain networks to create unified, truly cross-chain smart contract applications.

Blockchain Abstraction Layer

Even with some consolidation over time, it’s likely that various counterparties, industries, and entire geographic regions will be using a diverse set of blockchains that offer different trade-offs. As such, large enterprises or government entities dealing with globally distributed or even locally distributed counterparties will be expected to eventually operate on dozens or more blockchain environments simultaneously.

As a blockchain agnostic oracle network, the Chainlink Network provides a single integration gateway through which enterprises, institutions, and governments can get their existing systems ‘blockchain-enabled’ across all current and future blockchain networks. Instead of spending time and resources integrating with each network individually, they can use Chainlink as a secure middleware to connect to any blockchain, as well as write one set of documentation for how counterparties can interact with their systems from any blockchain via Chainlink. This concept of a blockchain abstraction layer was discussed in-depth in a co-written white paper between Chainlink Co-founder Sergey Nazarov and the World Economic Forum titled Bridging the Governance Gap: Interoperability for blockchain and legacy systems.

Sell Data and API Services

Using Chainlink as a blockchain abstraction layer, data/API service providers can quickly and easily expand their operations to blockchain markets. Whether selling their data through professional Chainlink node operators or running their own Chainlink node, data/API service providers can expand their addressable market to emerging blockchain economies by making their entire suite of APIs blockchain-enabled. Additionally, they can bootstrap the security of their off-chain data by cryptographically signing it on-chain to prove its origin, as well as staking LINK collateral to ensure their data and services are high-quality. Numerous data providers are already running or planning to run a Chainlink node, including The Associated Press, AccuWeather, Kraken, Nomics, New Change FX, TheRundown, Tiingo, and dozens more.

The Purpose of the LINK Token

The native LINK token is used to secure and bootstrap the growth of the Chainlink Network, empowering the creation of highly secure and reliable oracle networks that are sustainable long into the future. It’s very similar to how BTC and ETH are used on the Bitcoin and Ethereum blockchains to incentivize secure and reliable decentralized computation of transactions.

The LINK token has 3 core functionalities in the Chainlink Network: 1) a utility token where users must pay Chainlink nodes in LINK for oracle services, 2) an oracle reward mechanism similar to a block reward to support the early costs of oracle networks until they reach self-sustainability, and 3) a form of crypto-economic security wherein nodes stake LINK as collateral (security deposit) to back the honest and reliable performance of their oracle services.

Since every Chainlink node is paid in the native LINK token, they have a strong incentive to maintain a secure and high-performing Chainlink Network in order to ensure that oracle jobs continue and increase. This represents a form of crypto-economic security known as implicit staking, where any malicious behavior by Chainlink nodes that causes significant user harm would cause the value of the LINK token to drop due to a decrease in the Chainlink Network’s reputation. In turn, this would directly decrease the value of each node’s current token holdings and the potential future revenue they may earn by performing jobs on the network. It’s akin to Bitcoin miners not engaging in malicious activity in order to prevent the devaluation of their BTC holdings and revenue.

As a further demonstration of LINK’s utility, Chainlink nodes can be required to lock up a specific amount of LINK tokens in a service agreement smart contract in order to be selected to perform a specific oracle job, referred to as explicit staking. This serves as an additional financial incentive for nodes to provide reliable and honest oracle services; otherwise, their staked LINK tokens can be taken (slashed) as a penalty for not upholding the pre-agreed upon terms of the oracle job (e.g., data wasn’t delivered on-time, data or computation was incorrect).

Described in detail within section 9 of the Chainlink 2.0 Whitepaper, explicit staking within the Chainlink Network is designed to achieve a super-linear staking impact, where malicious actors are required to have a budget significantly higher than the combined deposits of all nodes within an oracle network. This is achieved through two-tier oracle networks, involving a high-efficiency and low-cost first-tier network made up of nodes that stake LINK tokens and continuously generate new oracle reports. Additionally, there is a maximum-security second-tier network that is used to settle any disputes and determine when first-tier nodes see their staked LINK slashed. This design optimizes for efficiency during normal use and security during the pessimistic cases.

The second-tier network consists of the large and growing collection of protocols relying on Chainlink oracles for accurate oracle reports. Because the correct operation of these protocols depends upon accurate oracle reports, each second-tier participant is highly economically incentivized to correctly resolve disputes so as to not jeopardize the security, reputation, or usability of their application or harm the value of their application’s native governance token. More information on the exact mechanisms of explicit staking, including the math behind the super-linear impact, can be found within this Chainlink blog post.

The threats of stake slashing, value reduction in current LINK token holdings, and loss of future revenue serve as both short-term and long-term financial punishments for undesirable network activity. This creates a skin-in-the-game approach to providing oracle services, as the LINK token is the sole means of making payments, creating economic security, and growing a node operator’s business model (e.g., if a node has 100 LINK, then they can only provide 100 LINK worth of collateral at any given time. As such, they need to acquire more LINK to expand their node operations). Because the LINK token has a direct connection to the network and is necessary to take on more jobs and/or high-value jobs requiring stake, the long-term effectiveness of the token subsidy should further extend out if the network becomes increasingly adopted, providing even more runway to grow the network.

With effective use of the LINK network reward, Chainlink is creating secure and reliable oracle networks that service the current demand for off-chain data, as evidenced by many of the largest blockchain applications relying on Chainlink. The adoption of these networks is creating three complementary paths to self-sustainability, all of which are well underway today:

• Supporting the early launch of projects that go on to be major industry leaders, at which point they can easily fund the costs of the oracle networks they require.
• Having multiple projects collectively support a shared oracle network that provides data they all require. The more users that join a shared oracle network, the less need there is for a subsidy. Eventually, no subsidy is required at all, and each new user from then on lowers the costs for all existing users
• Generating a large network effect wherein many of the world’s largest data providers, institutions, blockchains, and smart applications collectively use Chainlink as the standard gateway between blockchains and traditional off-chain systems. Such a network effect leads to two positive feedback loops, which continually generate more data on-chain for smart contract developers and more user fees for node operators to compete for. The end result is an increasingly diverse set of smart applications that can secure increasingly higher value use cases.

Additionally, exclusive LINK token utility within the Chainlink Network ties each node’s own success directly to the quality of the overall network. It also ensures that node payments and staking are not tied to the security or reliability of any other network. Thus, the Chainlink Network is insulated against external failures from tokens and networks outside its control. As a blockchain agnostic network, Chainlink node operators only need to manage payments and staking in one currency (LINK), ultimately decreasing friction, lowering the barrier to running a node, and resulting in more network decentralization.

PART 3: THE CHAINLINK ECOSYSTEM

As the most widely used decentralized oracle protocol, the Chainlink ecosystem contains a vast array of products, users, and node operators. Chainlink is also a part of numerous enterprise working groups and supports a fast-growing team, an impressive list of advisors, and a flourishing community grant program.

Products and Services

Through these native capabilities, the Chainlink Network currently provides a wide range of oracle services to smart contracts operating across numerous different blockchains. While it’s near impossible to generate a comprehensive list of all Chainlink use cases, these are the primary use cases that Chainlink is currently focused on providing:

Price Feeds

Chainlink Price Reference Data Feeds are a collection of oracle networks that provide financial market data on-chain regarding various in-demand exchange rates for cryptocurrencies, stablecoins, forex, commodities, and indices. These Price Feeds currently secure tens of billions of dollars worth of user funds for Decentralized Finance (DeFi) applications by pricing collateral, settling price predictions/derivatives contracts, calculating rewards, establishing staking amounts, setting exchange rates, and more.

Any API

Chainlink’s highly generalized approach allows oracles to connect smart contracts to any off-chain API/data source, such as retrieving weather data or executing an off-chain payment. This includes free, open APIs, as well as paid, authenticated APIs that only nodes with passwords/credentials can access.

Randomness

The Chainlink Verifiable Random Function (VRF) provides smart contracts with a highly secure and verifiable source of randomness that cannot be manipulated by the oracle, developers, or end-users. This enables developers to create random in-game scenarios, fairly order ticket queues, and develop tamper-proof giveaways with associated proof that the winner was selected in a fair and unbiased manner.

Asset Collateralization

Chainlink Proof of Reserve (PoR) consists of on-chain data feeds that inform smart contracts about the current collateralization of on-chain assets backed by off-chain or cross-chain collateral such as stablecoins, tokenized assets, and more. This allows an application to prove that an on-chain asset is fully backed by the reserves it claims to have.

Data and Oracle Privacy

As stated earlier, Chainlink is currently developing multiple data and oracle privacy solutions, including DECO, Mixicles, and Town Crier, to unlock sensitive data for use in smart contracts without leaking it to the public and/or node operator.

Transaction ordering

The Chainlink Fair Sequencing Services (FSS) enables oracles to fairly order pending blockchain transactions based on different metrics like when they arrived in the mempool. Chainlink FSS is designed to prevent miner extractable value (MEV) such as through frontrunning, as well as lower transaction fees on blockchains like Ethereum.

Keepers

Chainlink Keepers enable the automation of on-chain transactions based on predefined conditions, such as triggering the liquidation of an under-collateralized loan, harvesting a vault on a time schedule, or settling an options contract at expiry using verifiable off-chain computation.

Layer-2 Validators

Chainlink oracles can provide validation services for layer-2 blockchain scaling solutions such as Off-Chain Lab’s Arbitrum Rollups, which involves performing off-chain Solidity computation via the creation of transaction batches and the submission of fraud proofs to secure user funds.

Decentralized Identity

Chainlink oracles can power the creation of decentralized identity protocols such as IC3’s CanDID. By leveraging DECO and/or Town Crier, users can securely import their credentials from existing web services like social media platforms, online bank accounts, or email accounts in a privacy-preserving and backward-compatible manner.

Cross-Chain Communication

Chainlink oracles are able to relay data from any blockchain network onto any other blockchain environment, including between base layer blockchains (public and private), layer-2 networks, or any combination of the two through the previously mentioned Cross-Chain Interoperability Protocol (CCIP).

While commonly recognized as being a price feed solution, Chainlink goes far beyond price feeds and data delivery to encompass a wide range of off-chain services conducted on behalf of smart contracts (potentially on behalf off-chain systems as well in the future). We have only scratched the surface of the Chainlink Network and its functionality, as there will be many future use cases that we simply cannot imagine today, just as someone in 1994 could not possibly imagine all of the future use cases of the Internet.

Chainlink Users

Through these various oracle services, the Chainlink ecosystem has hundreds of in-production and in-development integrations, along with membership in numerous enterprise working groups, recognition from some of the world’s most identifiable organizations, support from an expanding group of Chainlink-specific companies, and the launch of a fast-growing Chainlink Grant Program.

Within the smart contract industry, Chainlink powers a vast number of Decentralized Finance (DeFi) protocols, insurance products, on-chain gaming applications, and more. For a full list of use cases, refer to the blog post 77+ Smart Contract Uses Cases Enabled by Chainlink, however, we will summarize some below, along with a sample of some of the current users:

Lending and Borrowing

Chainlink enables lending and borrowing applications to exist by providing price feeds for calculating the value of collateral, ensuring loans are issued and liquidated according to fair market prices.

• Aave: Multi-chain money market protocol for borrowing and lending a multitude of on-chain tokens.
• Compound: Ethereum-based money market protocol that connects lenders and borrowers of on-chain tokens.
• Sushiswap Kashi: Lending and margin trading solution built upon the BentoBox contract design.
• Venus: Binance Smart Chain-based algorithmic money market for lending and borrowing.

Stablecoins

Chainlink Price Feeds enable the creation of decentralized and algorithmic stablecoins backed by on-chain cryptocurrency by determining the valuation of the collateral backed to help ensure the peg is maintained.

• Liquity: Interest-free lending platform that enables the minting of the LUSD stablecoin backed by ETH collateral.
• Fei Protocol: A decentralized and scalable, reserve-backed, stablecoin aimed at achieving governance-minimized central banking.

Derivatives and Synthetic Assets

Chainlink empowers derivatives markets and synthetic assets by supplying the current price of assets at the time of trades or settlement.

• Synthetix: Largest derivatives platform for zero slippage trading of synthetic assets.
• Alchemix: Future-yield backed synthetic asset platform and community DAO featuring self-paying loans.
• Thales: A permissionless, non-custodial, and uncensorable binary options trading protocol.
• Lyra: A options trading platform on the scalable layer 2 Optimism network.
• MCDEX: Perpetual derivatives platform using automated market makers and order books.
• Jarvis Network: Synthetic asset protocol which leverages the liquidity of existing cryptocurrencies like USDC.
• Opyn: A capital efficient options protocol with automated settlement at expiry.

Exchange and Trading

Chainlink provides price feeds to settle trades, determine the value of liquidity mining collateral, set market-making strategies, and secure the value of collateralized off-chain computation.

• dYdX: A layer 2 decentralized exchange for spot trading and perpetual contracts.
• Loopring: Layer-2 decentralized exchange providing high throughput, low-fee trading.
• DODO: Proactive automated market maker that mimics human market-making behaviors.

Insurance

Chainlink facilitates parametric insurance applications by informing the policy about insured events at the time of settlement, allowing it to determine the correct payouts and/or rebalance insurance funds.

• Arbol: Parametric crop insurance for farmers based on weather conditions.
• Etherisc: Parametric insurance for real-world events such as flight delays.
• Nexus Mutual: Decentralized discretionary mutual as an alternative to insurance.

Pegged Assets

Chainlink supports pegged assets by checking if their off-chain reserves match their on-chain token balances, as well as triggering reserve rebalancing if the peg is lost.

• Paxos: Brokerage and custody platform that provides tokenized real world assets such as US dollars and gold.
• TrustToken: Blockchain-agnostic stablecoin backed by USD held in reserves.
• Wrapped BTC: Tokenized Bitcoin on the Ethereum blockchain custodied by BitGo.
• DefiDollar: Meta-stablecoin backed by centralized and decentralized stablecoins.

Real-World Assets

Chainlink is used to bring real-world assets on-chain by providing data regarding the current valuations of the off-chain assets they represent.

• RealT: Tokenized real estate allowing users to buy fractions of a property’s cash flows.
• CrescoFin: Tokenized invoice protocol providing interest-yielding insured deposited products.

Payments

Chainlink enables the usage of cryptocurrency on commence networks by providing a exchange to exchange tokens into fiat at the market-wide price.

• Flexa: Cryptocurrency payment platform for merchants to accept instant, guaranteed crypto payments while receiving the currency of their choice.
• Crypto.com: Crypto mobile app where users can pay merchants using tokens via a Visa debit card.

Rebase Tokens

Chainlink functions in rebasing tokens by triggering rebases based on a particular price or data feed update.

• Ampleforth: Algorithmic rebase token pegged to the inflation-adjusted dollar.
• Base protocol: Algorithmic rebase token pegged to the total crypto market capitalization.

Asset Management

Chainlink is used within asset management protocols to trigger the automatic rebalancing of on-chain portfolios using various indicators and/or to determine the current gas price before triggering a transaction.

• Set Protocol: Non-custodial asset management protocol for social trading and indices.
• Tornado Cash: Privacy mixer for sending confidential on-chain transactions.

On-chain collectibles and NFTs

Chainlink VRF is relied on to access a provably fair source of on-chain randomness, which is used to generate unique NFT traits and issue random rewards to users.

• Bored Ape Yacht Club: A collection of 10,000 unique Bored Ape NFTs on the Ethereum blockchain.
• EtherCards: NFT gamification and monetization platform that helps artists maximize the value of their art.
• Axie Infinity: Pokémon-inspired universe where users breed and battle Axies.
• Aavegotchi: DeFi-powered crypto-collectibles backed by interest-generating tokens.
• Parallel: A Sci-Fi digital collectible card game being built on the Ethereum blockchain
• Ether Legends: Physical and digital collectible trading card game with PvP and PvE.
• Wildcards: Non-fungible tokens representing a unique animal from a conservation org.
• Illuvium: A community governed AAA blockchain-based video game with collectable NFTs.

Betting platforms

Chainlink supplies randomness and data about off-chain events to determine lottery winners and settle bets.

• PoolTogether: No-loss savings game for users to win prizes without risking deposits.
• EarnBet: Provably fair gaming platform operating in the WAX blockchain ecosystem.
• Bet Protocol: Esports and sports betting platform.

On-chain gaming

Chainlink VRF is key to generating random in-game scenarios and prizes in a manner which no one can manipulate or predict.

• Blocklords: Blockchain-based medieval grand strategy game on layer 2
• Planetarium: Ecosystem for community-powered online games via Libplanet network
• Evolution Land: Ecological cross-chain game application of the Darwinia Network
• War Riders: MMO game based on customizing war vehicles and battling opponents

Enterprises, Working Groups, and Recognitions

In addition to integrations with smart contract applications across numerous use case verticals, Chainlink works with a number of enterprises on their blockchain strategy and participates in a variety of enterprise working groups around the world to help standardize how businesses securely leverage blockchain oracles within their smart contract powered digital agreements. Chainlink has also received multiple recognitions from well-known institutions and works with leading academics and consortiums. Some of which include:

Recognitions

• World Economic Forum: Public-Private consortium that co-authored a report with Chainlink Co-founder Sergey Nazarov on how oracles provide interoperability between blockchain networks and legacy systems, as well as recognizing Chainlink as a Technology Pioneer.
• Gartner: A global research and advisory firm that recognized SmartContract.com in 2017 as a leading blockchain project, and in 2019 discussed how Chainlink is key to Google’s blockchain strategy.

Enterprises

• Google: One of the world’s largest tech companies collaborated with Chainlink to bring Big Query data and NOAA weather data onto the Ethereum blockchain via Chainlink oracles.
• Amazon Web Services: The world’s largest cloud computing platform collaborated with Chainlink Labs to launch the AWS Chainlink Quickstart, a one-click workflow to deploy a security-hardened Chainlink oracle node on AWS across multiple blockchain networks.
• Deutsche Telekom T-Systems: A subsidy of Europe’s largest telecommunications provider launched a Chainlink oracle node to feed real-world financial market data to smart contract applications, supporting and monetizing the growth of the DeFi ecosystem.
• Swisscom: The largest telecommunications provider in Switzerland (51% ownership by the Swiss government) joined the Chainlink network as a node operator to power DeFi applications with aggregated financial market data.
• Oracle: The world’s largest database company collaborated with Chainlink to create a ‘virtuous cycle of innovation’ by launching Chainlink nodes for numerous API startups running on Oracle’s Cloud Infrastructure.
• SWIFT: The global standard in interbank messaging, consisting of a consortium of the world’s largest banks, collaborated to create a Smart Contract Securities Proof-of-Concept in which the interest rates of top banks were aggregated and then used by a smart contract to trigger a bond interest payment made on the SWIFT network using its ISO20022 messaging format.

Enterprise and Academic Research Working Groups

• Baseline Protocol: Privacy-preserving framework for using the Ethereum Mainnet as a common frame of reference between enterprise backend systems.
• InterWork Alliance: Platform-neutral, non-profit organization dedicated to creating the standards frameworks needed to increase innovation across token-enabled ecosystems.
• Hyperledger Avalon: Collaboration between Hyperledger, EEA, and cloud service provider ecosystems to standardize attested off-chain computations for smart contracts.
• Blockchain Service Network (BSN): Chinese government-supported initiative to provide businesses access to low-cost blockchain cloud computing services and tooling.
• Enterprise Ethereum Alliance: The Ethereum Mainnet Integration for Enterprises taskforce provides specifications to integrate the Ethereum Mainnet with ERP, CRM, and other corporate systems of record.
• The Initiative for Cryptocurrencies and Contracts (IC3) — a leading academic research organization working with industry academics and business leaders to achieve mainstream adoption of cryptocurrencies and smart contracts.

Chainlink-Specific Companies

Outside of users and enterprise initiatives, several companies have sprouted up based solely around providing services specifically for the Chainlink Network, such as:

Chainlink Market

Created by LinkPool, market.link is an open and permissionless marketplace where Chainlink node operators can list their oracle services, data source connections, credentials, security reviews, and on-chain performance in order for developers to review and use to construct their own oracle network consisting of nodes they deem trustworthy.

Chainlink Oracle Reputation (COR)

Created by Secure Data Links, reputation.link is a data analytics dashboard that displays the historical performance, uptime, revenue, and on-chain derived statistics of individual Chainlink node operators, data provider APIs, and the Chainlink Network as a whole.

Node Operators

The Chainlink Network consists of a diverse range of node operators, including large telecommunications service providers such as Deutsche Telekom subsidiary T-Systems and Swisscom, experienced blockchain infrastructure providers like Stake.fish and Staked, as well as traditional data providers like Kaiko, Huobi, CryptoAPIs, and many more.

Chainlink Grant Program

The Chainlink Community Grants Program provides financial support for development teams and researchers who are building core infrastructure and tooling for the Chainlink Network. By accelerating virtuous cycles of growth around placing more data on-chain and increasing the security guarantees available to users, the grants program fuels the growth of the Chainlink ecosystem as a whole. Grants are currently given out around four main categories: 1) integrating Chainlink on a new blockchain, 2) improving Chainlink node and developer infrastructure, 3) funding original, cutting edge oracle-related research, or 4) supporting community initiatives.

By applying Grants to key areas of need, Chainlink is further accelerating its two positive feedback loops designed to increase Chainlink Network security and making more off-chain resources available on-chain. The culmination is developers being able to create more types of smart contracts across more blockchains that can be relied on to secure increasingly more value.

Team and Advisors

The Chainlink co-founders have been studying and building externally-connected smart contracts and blockchain oracle technology since at least 2014 when their first company SmartContract.com launched (before Ethereum went live). The team has extensive experience, having worked directly with top enterprises and blockchain developers needing oracles for many years, as well as producing several original research developments like Town Crier, Threshold Signatures, Mixicles, and more. In fact, the first Chainlink whitepaper was one of the first academic research papers on decentralized oracles, essentially pioneering the industry.

Team

The 300+ person development team working on Chainlink features seasoned experts in blockchains, oracles, cryptography, machine learning, artificial intelligence, and business development.

Co-Founder Sergey Nazarov

• Started building smart contracts pre-Ethereum in 2014
• Built the first widely used interface for DEXes
• Built the first blockchain-based email service
• Built the first centralized oracle service
• Last but not least, built the first decentralized oracle network.

Chief Scientist Ari Juels

• Professor of Computer Science at the Jacobs Institute at Cornell Tech
• Former chief scientist of world-renowned cybersecurity company RSA
• Formalized Proof of Work consensus in 1999 (powers Bitcoin and Ethereum)
• Created Proof of Retrievability in 2014 (powers FileCoin and Sia)
• Co-author of the Chainlink whitepaper in 2017 and only works with Chainlink within the blockchain industry
• Co-author of the Chainlink Mixicles whitepaper in 2019
• Co-author of the CanDID whitepaper in 2020 in collaboration with J.P. Morgan
• Co-author of the Chainlink 2.0 whitepaper in 2021
• Co-founder of The Initiative For CryptoCurrencies & Contracts (IC3)
• 36,000 total scholarly citations

Head of Engineering Ben Chan

• Previously CTO of Bitgo, where he built the industry-leading crypto custody solution.
• Architect of Wrapped BTC, the most widely used form of tokenized Bitcoin on Ethereum
• Now building scaling solutions for the Chainlink Network to lower user costs.

CTO Steve Ellis

• Worked previously as a software engineer and team lead at Pivotal Labs
• Built mission-critical systems responsible for securing sensitive HIPAA compliant data and scalable payments automation software
• Oversees countless engineers and integration specialists who aid in the development and deployment of Chainlink oracle networks

CMO Adelyn Zhou

• Lead companies that have been acquired by Amazon
• Expert in applied artificial intelligence
• Best selling Amazon author
• Graduated from Harvard Business School

Advisors

The Chainlink Network is also supported by a top tier list of accomplished academic and business advisors.

Jeff Weiner

• Chief Executive Officer (CEO) of LinkedIn for 12 years, the world’s largest professional network
• Executive Chairman of LinkedIn
• Facilitated the $26B acquisition of LinkedIn by Microsoft
• Founding Partner at Next Play Ventures
• Advisory board member of Intuit and DonorsChoose

Tom Gonser

• Founder of DocuSign, the market-leading e-signature provider around the world and pioneer of the e-signature industry.
• Investment partner at Seven Peaks Ventures
• Joined as a business advisor to Chainlink in early 2019

Balaji Srinivasan

• Former Chief Technology Officer (CTO) at Coinbase, the largest cryptocurrency exchange in the United States
• Former General Partner of Andreessen Horowitz, where he helped the venture capital firm move into the blockchain industry
• Co-founder of Earn.com, which was acquired by Coinbase
• Co-founder and CTO of Counsyl and won a Wall Street Journal Innovation Award for Medicine
• Co-founder of Teleport, which was acquired by Topia
• Co-founder and Board Member of Coin Center, the leading non-profit focused on cryptocurrency policy issues
• Angel Investor

Evan Cheng

• Former Senior Manager at Apple
• Director of Engineering Blockchain at Facebook
• Co-creator of the LLVM, which generates the low-level machine code running every Apple device, as well as much of Google, Nvidia, and Intel

Andrew Miller

• Decentralized consensus researcher
• Associate Professor at the University of Illinois
• Associate Director of the Initiative for Cryptocurrencies and Contracts (IC3)
• Board member of the Zcash Foundation and Ethereum Enterprise Alliance
• Advisor to both Zcash and Tezos

Lynda Smith

• Former Chief Marketing Officer (CMO) of Twilio, helping build it into the world’s leading cloud communications platform
• Faculty member of Stanford University
• Lead marketing initiatives at top technology firms including Nuance and Genpact

Roberta Carraro

• Vice President of Design at HashiCorp, a leader in infrastructure automation software
• Experience designing developer products in cloud-based software companies including Salesforce and Heroku.

Hudson Jameson

• Former Developer Liaison, DevOps Engineer, and Security Engineer at the Ethereum Foundation
• Member of the Ethereum Cat Herders, a decentralized group that supports Ethereum through project management and consensus gathering.

Research Team

Chainlink is also supported by a full-time research team focused on developing the Chainlink Network so it can service all current and future market demand (pictured below).

These are just some of the many other highly experienced and knowledgeable engineers, business leaders, and academics that make up the Chainlink Ecosystem. Chainlink is rapidly expanding too, with numerous job openings for integration engineers and software developers, further evidence of the growing demand for Chainlink.

Smart Contract Summit

In order to support its community and thriving ecosystem, Chainlink launched the Smart Contract Summit (SmartCon) as an annual event designed to bring together DeFi developers, enterprises, dApp builders, node operators, researchers, and more focused on smart contracts. Through keynote speeches, panel discussions, live demos, developer workshops, and community networking, participants explored and shared their cutting-edge research and current thinking about the future of decentralized technology.

SmartCon #0 (2020)

As the largest DeFi conference of 2020, SmartCon #0 featured 8,000+ attendees, including those from 100+ countries and all 7 continents, as well as 130 speakers from leading blockchain protocols, DeFi applications, and beyond. Some highlights during this conference include:

• Ari Juels joined Chainlink Labs as Chief Scientist to lead the new Chainlink Labs Global Research Program.
• Chainlink Labs acquired DECO from Cornell University enabling privacy-preserving blockchain oracles.
• A panel discussion with DeFi leaders including Sergey Nazarov (Chainlink), Andre Cronje (Yearn.finance), Stani Kulechov (Aave), and Kain Warwick (Synthetix).
• OpenLaw developed a Microsoft Office extension to enable the usage of smart contracts within Microsoft Word documents.
• Off-Chain Labs explored how the launch of Arbitrum layer 2 technology will enable highly scalable smart contracts with orders of magnitude more transactional throughput.

SmartCon #1 (2021)

As a follow up conference, SmartCon #1 featured 15,000+ attendees from 140+ countries that listened in to hear from 200+ industry leading founders, researchers, and developers. Some key highlights include:

• Announcement of the Cross-Chain Interoperability Protocol (CCIP), an open-source standard for cross-chain messaging and token movements.
• The mainnet launch of Chainlink Keepers, giving developers a highly secure and reliable way to automate smart contracts.
• Allen Day from Google Cloud collaborated with Chainlink to enable smart contracts to query NOAA weather datasets on Google BigQuery.
• Amazon Web Services (AWS) Partner Network collaborated with Chainlink Labs on the AWS Chainlink Quickstart.
• Swisscom, the leading telecommunications firm in Switzerland, began running a Chainlink node to further decentralize Chainlink Data Feeds.
• exMachina and GoodDollar discussed how blockchain technology and Chainlink decentralized oracles can solve critical problems in climate change
• Celsius Network began using Chainlink Price Feeds to determine the borrowing rates for its platform and announced its intention to use CCIP.
• Balaji Srinivasan announced a collaboration with Chainlink on funding the creation of a censorship-resistant inflation dashboard.

***Continued Improvements

While not the scope of this article, it should be noted that blockchains, smart contracts, and oracles are not yet complete components. Blockchains still need to strike the right balance between security and throughput, as well as provide better ways to obtain transaction privacy. Smart contracts need to mature their code base and expand their functionality through continued development and auditing. Finally, certain oracle features like privacy are still under development, particularly being pioneered by Chainlink.

Fortunately, many key developments are already underway, including layer-2 Rollups and base layer sharding for blockchain scaling, zero-knowledge proofs for transaction privacy, blockchains built specifically for high-throughput, formal verification of smart contract code, standardization of developer tooling, and more. Specifically, when it comes to oracles, Chainlink is providing an all-encompassing suite of generalized oracle solutions to satisfy any oracle need, including several novel features for network scaling (OCR), data privacy (DECO), and crypto-economic incentives (Staking).

CONCLUSION: USING TECHNOLOGY TO BUILD A BETTER TOMORROW

Putting it all together, the Chainlink Network has many unparalleled qualities that make it primed to become an industry standard as the most widely used oracle network relied on by a variety of applications from all blockchains to get any off-chain resource. Some of the core qualities that allow it to achieve such a feat include: a flexible architecture to support an infinite number of customized oracle networks running in parallel without cross-dependencies, a multitude of security techniques to ensure secure and reliable oracle networks across any use case, market-leading adoption within numerous markets and blockchains, strong token economics to bootstrap the network until self-sustainability and ensure network security, and a world-renowned research and development team building cutting edge oracle technology and in-demand oracle solutions.

These features allow the Chainlink Network to help blockchains and smart contracts take the next major leap forward in reaching their true potential, particularly through connecting them directly with real-world data and legacy systems that currently power the world today. In many ways, Chainlink’s effect on blockchains is very similar to computers being completely transformed upon the arrival of the Internet. Chainlink is poised to be that single standard Internet-equivalent for connecting smart contracts to the outside world and already has a large network effect taking root as many of the largest blockchains, top smart-contract applications, and best data/API service providers are choosing Chainlink as their oracle solution.

Having a universal connection layer will be critical to adding the final piece to the God Protocols, allowing blockchain-based smart contracts to exchange value using any input and output needed, along with security techniques to ensure that those inputs and outputs operate without bias, inaccuracies, or privacy concerns. While there is much work to do, it’s fairly clear that blockchains (the body), smart contracts (the brain), and oracles (the senses) will form the foundation of a trustless third-party computing network that powers the world’s next-generation of digital agreements.

The only component left then is the soul. Like any technology, the God Protocols are what we as human beings make them to be. Tools are simply that, tools, and it’s up to us to use these tools to make the world a more fair, equitable, and transparent place for conducting business and honoring contracts. It is the people who create the applications and send the commands to the God Protocols; thus, our ethics, commitment, and higher purpose must guide us in our efforts to apply blockchain-based smart contract and decentralized oracles to achieve the maximum social effect: users receive the outputs they deserve based on the true amount of input they put forward.

“The end of science is not to prove a theory, but to improve mankind.” — — Manly P. Hall

List of Additional Resources

If you want to learn more, we encourage readers to explore the following introductory articles on blockchains, smart contracts, data & APIs, the oracle problem, Chainlink node operators, and 77+ Smart Contract Uses Cases Enabled by Chainlink.

If you already understand the basics, then go deeper with some of our past articles such as:

• Chainlink’s Network Effect Creates More Secure and Lower Cost Oracles for Everyone
• Chainlink: Low-Level Infrastructure for Inter-Oracle Competition
• Chainlink: Beyond Price Feeds and Data Delivery
• How Chainlink Generates Definitive Truth About the Off-Chain World: Opening Up Multi-Trillion Dollar Markets For Smart Contracts
• Connect To All Blockchain Environments Through A Single Chainlink Integration

Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

The Chainlink Network, a framework for building and running decentralized oracle networks, has accelerated in adoption over the years, cementing its position as the most widely used oracle solution across leading blockchain environments and numerous smart contract verticals. With hundreds of live or in-progress integrations, the Chainlink Network actively secures over $5B within the DeFi ecosystem through its vast selection of Price Reference Data Feeds, among various other value-additive oracle services beyond price feeds and data delivery.

Chainlink’s growth is not only attributed to its first-mover advantage as the pioneer of decentralized oracle networks and the first to operate at scale, but also the accumulation of a large network effect wherein each new integration leads to more user fees for increasing oracle security, lowering oracle service costs, and incentivizing off-chain data providers to monetize their APIs on blockchains via Chainlink. This dual flywheel effect around oracle network security and resource accessibility results in developers having a more secure, data-rich environment for building increasingly advanced smart contracts responsible for larger amounts of on-chain value, further generating additional user fees and accelerating the flywheel effect even more.

To better understand the major impact that network effects have on the technological adoption of a protocol, we define what a network effect is, look at its foundations in Bitcoin and Ethereum, explain the benefits of the Chainlink network effect, and showcase how it’s achieved in a completely decentralized and open-source manner.

The Network Effect Explained

A network effect, otherwise known as Metcalfe’s law, is a phenomenon whereby the value of a service or application is determined by its number of users. For every additional user, the network as a whole becomes more valuable/useful to all current users, as well as becoming more enticing for potential new users.

An obvious example of a network effect today is the rise of social media. The reason why Facebook, Twitter, and Youtube are so widely used is that they provide single aggregated platforms where creators can share their content to a large audience while consumers have access to a wide selection of content. Family and friends that collectively use the same platform make it inherently valuable to those users, providing them with the most value/utility per unit of effort. In contrast, having your family and friends spread out across 50 different Facebook-like equivalents requires an extensive amount of work to keep in sync with them all, ultimately leading to a smaller social network with less usefulness to everyone.

Network Effects in Bitcoin and Ethereum

Network effects can also be seen in leading cryptocurrency networks. The reason why new crypto users usually gravitate towards Bitcoin is because it has the largest mindshare in the world. Not only is that due to being the first cryptocurrency in existence, but Bitcoin has also accumulated a massive network effect of over 100M+ wallets spread around the world, which collectively hold over $340B of circulating coins. Each additional user/holder increases the collective belief of Bitcoin being a secure and reliable store of value, further bolstering its value proposition for existing and future users, as well as enhancing its network security via more fees for miners.

Similarly, smart contract developers gravitate towards Ethereum not only because it was the first programmable smart contract platform, but because it has a massive network effect of over 2M deployed smart contracts, 32k daily active users, and over $14B of user funds locked in the DeFi ecosystem. This network effect means developers can build on top of a highly secure blockchain and existing set of smart contracts as opposed to rebuilding core infrastructure and protocols from scratch. We see these benefits ever-present in Ethereum, whether it be:

• User fees that collectively support network security and lower issuance via EIP1559
• DeFi protocols being reused and combined to create more advanced applications
• Projects tapping into a large pool of active users
• Resources invested in developer tooling to make contract development easier

Seeing the rise of Bitcoin and Ethereum as the top two blockchain networks with by far the most adoption and mindshare, it’s clear that network effects are the key to success in decentralized technology.

The Chainlink Network Effect

Chainlink’s adoption as the most widely used oracle solution is equally derived from both being the first decentralized oracle network to operate at scale, as well as the network effect it has generated through the widespread usage of its Price Reference Data Feeds in the DeFi industry and highly generalized oracle solution used by numerous blockchains, dApps, and data/API providers.

Looking closely at Chainlink’s Price Reference Data Feeds — a large collection of pre-built oracle networks providing financial data — we see its network effect is built upon a shared cost model, where instead of users needing to launch their own oracle network and pay the full costs, users who need the same reference data can collectively share and financially fund a single common oracle network. This has already been applied to price feeds for DeFi, but can expand into a wide range of in-demand datasets like Proof of Reserve, VRF, and beyond.

The core advantage of Chainlink’s shared public good network model is that with every additional paying user, the costs for every current and future user goes down, while at the same time growing the network’s security budget via the aggregation of user fees. This increased security budget can then be utilized by paying users to fund oracle network improvements, including:

• Adding additional oracle nodes to further decentralize data delivery
• Adding additional data sources to further decentralize data sourcing
• Upgrading to premium data sources that provide higher quality data
• Lowering the deviation threshold on Price Feeds to provide more frequent updates
• Compensating nodes who stake more LINK to create stronger crypto-economic security
• Paying oracle nodes more LINK per job to incentivize more reliable services
• Granting a rebate to users in order to further lower costs and incentivize usage

Chainlink oracle networks can also be designed where users pay pro-rata according to how much value their contract’s secure and/or the amount of revenue generated, further lowering the costs for new projects with small budgets or recently launched protocols. Additionally, through a flexible governance contract, users can collectively decide on-chain where and how to best allocate funds collected by the user fee pool contract accompanying each oracle network.

Through Chainlink’s shared public good model, a key value proposition is generated to the benefit of everyone: each paying user gets access to a highly secure decentralized oracle network with high-quality data at a cost-efficient price. Such distributed access to industry level security and premium data quality could not be achieved by aggregating a bunch of separate low-quality oracle networks that deliver the same datasets.

The reason for this is that it’s simply not economically feasible for users to fund dozens of disparate oracle protocols for access to the same dataset while also retaining the high standards that users want and require. Users would spread their financial resources too thin, leading to a dilution in quality and reliability for each individual oracle network, and thus a weaker overall oracle solution securing their user’s funds. Such a design not only leads to the creation of insecure oracle networks, but it requires extensive social coordination from users and introduces numerous attack vectors involved with integrating, maintaining, and monitoring numerous different oracle implementations all at the same time. Aggregating low-quality oracle solutions does not generate a high-quality oracle solution, as the sum is only as great as its individual parts.

However, users both small and large can equally obtain access to world-class oracle infrastructure and high-quality data at an affordable price if they collectively pool resources towards funding the development and maintenance of a single decentralized oracle network. The network effects created by this shared cost model, which is already in motion on Chainlink, creates more security for every application, lowers the cost for every end-user, provides a way to scale the oracle network as it secures more value, and allows the open-source community to collectively govern, maintain, and commit developer resources towards shared infrastructure with long-term sustainability.

For example, the ETH/USD Price Feed is a high demand reference price for DeFi applications running on the Ethereum blockchain. To meet this demand, smart contracts can integrate Chainlink’s existing, time-tested, and battle-hardened ETH/USD price feed which is already collectively funded by over 26 DeFi projects on mainnet. The aggregated fees from each of these users (listed in the image below), in addition to the partial LINK token subsidy used for bootstrapping oracle networks, has led to users gaining access to the most decentralized, accurate, and secure price feed for ETH/USD in the blockchain industry, all at a very affordable price.

A Unified, Permissionless, and Decentralized Oracle Network

With decentralized protocols being as minimally extractive as possible, the oracle solution that provides the most value and costs the least will achieve the largest network effect and become a standard piece of infrastructure for the smart contract economy. Chainlink’s network effect is not only orders of magnitude larger than any other oracle protocol, but it is also accelerating at a rate that is far faster than competitors. Similar to Andrew Kang’s hypothesis about a single platform being a blackhole for liquidity, Chainlink is becoming a blackhole of adoption for oracles, providing a wide range of projects with access to the industry’s most secure and reliable oracles for the smallest amount of integration work and financial costs.

Accumulating an industry-wide network effect on Chainlink does not mean it is centralized or a point of failure either. Not only are existing Chainlink oracle networks inherently decentralized and made up of multiple independent oracle node operators, but the underlying architecture of the Chainlink Network is permissionless, generalized, and heterogeneous by design. Anyone can build any type of oracle network using the Chainlink protocol, and any number of oracle networks can run simultaneously on the Chainlink Network without any cross-dependencies.

Based on the wide adoption of its existing oracle networks and the broad design flexibility available to developers, Chainlink is generating a dual network effect around two important implementations: shared-cost oracle networks supported by a large collection of users and completely customized oracle network supporting the unique needs of projects. This complementary combination of standardization and flexibility serves as the perfect framework to support all oracle needs both now and in the future.

…

Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

The world is highly complex, presenting a diverse set of problems that require various technical solutions. Competition naturally emerges as a means of solving these problems, which in turn drives innovative solutions, diverse product offerings, and lower costs for end-users. While most people notice the surface-level competition for customers between these various solution-driven products and applications, many overlook the fact that they often all rely on similar lower-level infrastructure behind the scenes to function.

For example, Social Media websites like Twitter and Facebook are in a fierce competition for user attention, yet both of their business models are completely reliant on the HyperText Transfer Protocol (HTTP), the universal medium for transmitting data from a web server to web browsers. This underlying protocol standardizes how websites deliver their data to users, which web companies utilize as infrastructure to build higher-level consumer-facing web applications. Web applications then compete and differentiate themselves based on their use case, user experience, network effect, etc

Through this lens of low-level standardization and higher-level competition, we can begin to understand how Chainlink is specifically designed to support any and all oracle solutions. Chainlink provides a generalized low-level framework to standardize how smart contracts interact with off-chain data and services, which then supports higher-level competition between Chainlink oracle nodes, oracle networks, and various third party features that enhance their value.

To better understand this dynamic between low-level standardization and higher-level competition within the Chainlink Network, we:

• Define the Underlying Network Infrastructure of Chainlink
• Identify the Differences Between Blockchain Networks and the Chainlink Network
• Showcase How to Build any Oracle Network Design with Chainlink
• Look at Inter-Chainlink Network Competition

By doing so, we can start to view Chainlink in the right perspective — a decentralized network built upon an open permissionless framework which supports unlimited competition between disparate oracle service providers without any cross-dependencies.

The Underlying Network Infrastructure of Chainlink

The broad range of oracle services needed to cover the entire smart contract market has led some to believe that competition will inevitably exist between various oracle solutions. In a certain sense, they are correct in that no single oracle node, oracle network, or oracle design pattern will be able to solve all the market’s oracle related needs. However, many fail to understand that Chainlink’s network architecture is built specifically to accommodate any oracle model and thus supports unlimited competition between oracles.

Chainlink is not a monolithic oracle network, but instead is an open-source, blockchain agnostic protocol that functions as a permissionless heterogeneous network, where any number of oracle networks can be created and run in parallel without requiring cross dependencies on one another. In that sense, Chainlink is a generalized and decentralized low-level oracle framework built to support higher-level competition between disparate oracle nodes, oracle networks, and supporting oracle infrastructure.

While all nodes run the Chainlink Core software, Chainlink as a whole does not provide oracle services as a unified network. Developers are free to build any type of oracle network on Chainlink without having to abide by a preset consensus mechanism, defined security approach, pre-selected quorum of nodes, specific blockchain, or throughput limit. It is for this reason Chainlink is able to support such a wide variety of use cases all being serviced at the same time, many of which are explored in our previous post Chainlink: Beyond Price Feeds and Data Delivery.

To further understand the difference in architecture between a heterogeneous and monolithic network, it’s helpful to compare how blockchains typically operate versus the Chainlink Network.

Blockchain Networks vs. The Chainlink Network

Blockchain transactions are secured through replication of standardized computations across a decentralized network of nodes (often known as miners or validators). The idea is that through a large network of properly incentivized nodes, a quorum of honest nodes will always overpower a malicious group of actors trying to manipulate the blockchain, e.g., prevent the double-spending problem. Public blockchains accomplish this through built-in block rewards (via a native token) and distributed consensus (PoW, PoS, PoA, etc), a process where all nodes communicate with all other nodes in order to fully validate each other’s work across every block of transactions.

While such a monolithic consensus mechanism is quite powerful in terms of security, it requires that all nodes have equal access to all the resources needed to partake in the network. This generates a problem Vitalik Buterin termed as The Blockchain Trilemma, where it’s very difficult for a blockchain to provide optimal support for all three properties: decentralization, security, and scalability. Thus, Blockchains are forced to make tradeoffs, such as Ethereum choosing maximum decentralization and security at the expense of scalability, while Solana opts for extremely high scalability at the expense of some security and decentralization.

On the other hand, Chainlink operates on a fundamentally different network architecture design, where unlike a blockchain, each oracle network operates entirely independently from other oracle networks. This means that the totality of all oracle networks operating on the Chainlink Network can collectively accommodate all the different tradeoffs in oracle designs. Independent oracle nodes and/or oracle networks can be purpose-built to provide certain features to users like specific API data, extensive decentralization, off-chain computation, data privacy, quick update frequency, etc, without having to service all other oracle services on the network too.

In fact, the heterogeneous design of Chainlink is essential to its wide adoption, as it’s not economically feasible for the entire Chainlink Network, made up of thousands to millions of independent nodes, to require that each of those nodes have access to every data point and API service it provides to smart contracts. For example, there is no way an enterprise would openly give a large number of unknown oracle nodes access to their confidential backend data, or for every node on the Chainlink Network to have on-going paid subscriptions to thousands of different premium data providers. Instead, it’s more practical for Chainlink nodes and oracle networks to specialize and differentiate themselves across a variety of features, ultimately leading to an overall framework that’s capable of supporting every oracle need.

Build any Oracle Network Design with Chainlink

The construction of oracle networks using the Chainlink framework can vary across a wide variety of components including inputs, outputs, blockchains, oracle nodes, data security, and performance.

• Any Input — Each oracle network can be designed around what data type needs to be delivered, which data sources it’s pulled from, how many data sources are incorporated, how those data sources are aggregated together, what environment to deliver the data to, etc.
• Any Output — Oracle networks can also be used to customize how smart contract output events are interpreted, such as initiating a crypto payment on another blockchain, triggering a fiat transaction on a traditional payment gateway, storing metadata in the cloud, updating a database entry in an enterprise backend, and more.
• Any Blockchain — Chainlink is a blockchain agnostic oracle network that can run natively in any blockchain environment, either by porting Chainlink’s system of contracts directly onto another chain and bridging the LINK token (via a wrapped version) or simply using an external adapter to bridge data from one blockchain environment to another. Learn more in our blog post Connect To All Blockchain Environments Through A Single Chainlink Integration.
• Any Oracle Nodes — An oracle network can consist of whatever oracle nodes the user prefers, whether that be handpicking nodes based on historical on-chain performance, using a random selection based on a specified off-chain reputation/trust score, choosing nodes based on a specific geographic location for GDPR compliance, or any other selection framework desired.
• Any Security Framework — Users can build oracle networks using any combination of security guarantees necessary, including increasing decentralization by using many data sources/nodes, layering on privacy enhancements via zero-knowledge proofs (DECO) or trusted hardware (Town Crier), using a censorship-resistant or high-performance blockchain, requiring a certain amount of LINK staked in an on-chain service agreement, etc.
• Any Performance Enhancement — Oracle networks can be built to satisfy a variety of performance requirements, such as choosing whether to aggregate data on-chain or off-chain, defining the update frequency of the oracle network, selecting which blockchain to run the oracle services on, using specialized hardware for performance enhancements, and more.

“Chainlink has been designed with modularity in mind. Every piece of the Chainlink system is upgradable, so that different components can be replaced as better techniques and competing implementations arise.” — Chainlink Whitepaper

Inter-Chainlink Network Competition

Through this extensive flexibility, Chainlink offers a complete framework to support any oracle needs via a free market economy enabled by inter-oracle competition across numerous levels of the Chainlink Network. We’ve identified three key areas of competition already underway today: between oracle nodes, oracle networks, and third-party network services.

Node vs. Node

Chainlink is an open-source permissionless network where anyone can operate a Chainlink node and begin immediately providing oracle services to smart contracts on any blockchain. However, oracle services on Chainlink are not standardized like in blockchain networks because not every node has access to the same data or off-chain resources. For example, one oracle node may provide price data from a free tier single exchange API, another may pay for premium data aggregator APIs, and another may be run by the data provider itself. All three can operate in parallel and provide users with different trades offs, as well as be used in tandem within a single oracle design.

Chainlink nodes can be differentiated by users via independent listing services, where nodes are able to showcase information about themselves such as their on-chain performance history (uptime, response time, deviation from the median), what oracle services they can provide (with accompanying data sources), the oracle networks they participate in (including the total number of completed requests), identification information (Keybase, KYC, DNS proofs, security reviews), hardware configurations (AWS, GCP, Azure, on-site), the amount of LINK they have (used for implicit and explicit staking), and much more. Market.link is an example of a permissionless listing service that lists most of the oracle nodes currently operating on the Chainlink Network. It offers a built-in filtering mechanism that enables users to evaluate each node and how they compare to other nodes using historical data and various other real-time metrics.

Oracle Network vs. Oracle Network

Another key dimension in which Chainlink can facilitate inter-oracle competition is between the various different oracle networks that aggregate data from multiple independent node operators. Decentralized oracle networks are the primary way in which oracle services are provided on Chainlink today, as they provide strong guarantees to users around the availability, accuracy, and tamperproof nature of sourcing off-chain data and delivering it on-chain.

Chainlink oracle networks can differentiate themselves based on the quality of nodes used in the network, the number of oracle nodes involved, the frequency at which they update, the blockchain networks they operate upon, their accessibility (open vs. permissioned), the data and computation services they provide, the security features they offer (e.g. privacy-preserving computation), the cost of data requests, the compensation of nodes, and more. Similar to individual nodes, oracle networks can be monitored and tracked according to key metrics in order to verify their reliability and accuracy. Reputation.link is an example of a reputation system that tracks the on-chain performance of various oracle networks, most notably the price reference data feeds widely used by much of the DeFi ecosystem today.

Competition Between Third Party Network Services

Besides the nodes and networks that provide oracle services to smart contracts, there is a variety of supporting services that market participants can compete to provide. These services include listing services for finding Chainlink nodes, reputation systems for evaluating Chainlink oracle networks, certification services that evaluate oracle nodes/networks based on different metrics, outsourced R&D to get systems built and connected, data analysts to generate reports about the state of the network, and much more.

One of the key areas here that are likely to see the most competition is data providers themselves. While data providers can run their own Chainlink node to sell origin-signed data directly to smart contracts, they can also sell data to existing oracle networks to avoid any changes to their current business model and eliminate the need to run any new infrastructure. With data being as important to the proper functioning of a smart contract as its underlying coded logic, there will be strong market demand for services that evaluate data providers both operating as a Chainlink node or simply selling their data to existing oracle networks.

Conclusion

Similar to the Internet being a single protocol supporting the entire ecosystem of competing web Apps, Chainlink is a single low-level framework that can support an unlimited number of independent oracle nodes and oracle networks competing to service the smart contract economy. Unlike blockchain networks that require tradeoffs to meet different user requirements, Chainlink is purposely generalized and its components easily upgradeable in order to provide a foundation capable of hosting all the various oracle designs required by the market both now and into the future, without any cross- dependencies.

Standardization of the oracle protocol layer removes the need for various oracle clients, which only add friction and complexity to dApp development, as well as introduce various attack vectors around quality dilution. Chainlink is purpose-built to be the standard backend infrastructure for all types of oracle networks, serving as a universal, open-source on-chain<->off-chain connection layer with unlimited horizontal scalability, complete design modularity, and permissionless accessibility. Such flexibility means anyone in the world is free to offer and access Chainlink oracle services, leading to competition-driven innovation and specialization as a means of servicing all the market’s oracle needs.

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However, to say Chainlink is only useful for price feeds is completely overlooking the much broader application and functionality of oracles, similar to those that thought the Internet was only useful for email. Chainlink can extend the connectivity of smart contracts to every off-chain data source and system in existence, as well as perform numerous types of computation on such data before it’s delivered to its destination. There is truly an unbounded amount of data and types of computational services that the Chainlink Network can provide and price feeds are truly just the tip of the iceberg.

The Chainlink iceberg of oracle services consists of several categories:

• Price Feeds — Chainlink’s pre-built decentralized price feeds provide DeFi applications a real-time stream of financial market data, including exchange rates for cryptocurrencies, stablecoins, commodities, indices, stocks, fiat currencies, and other key financial datasets.
• Any Web API — Chainlink oracles are able to connect smart contracts to any open or authenticated API, opening up access to IoT data, bank payments, web APIs, enterprise systems, other blockchains, and virtually any off-chain resource used to create smart contract markets in insurance, supply chain, digital marketing, and various other new industries.
• Verifiable RNG — Chainlink VRF (Verifiable Randomness Function) generates a secure source of on-chain randomness that users can independently verify as fair, unbiased, and tamperproof, leading to gaming applications, NFTs, blockchain lotteries, layer-2 protocols, and more that can reliably secure large amounts of value with RNG inputs.
• Off-chain Computation — Chainlink oracles can perform more advanced off-chain computations, leading to an expansion in oracle services such as scalable Solidity computation, blockchain transaction privacy, oracle data privacy/integrity, transaction order fairness, and more.
• Blockchain Abstraction Layer — Chainlink’s continued integration across all the leading blockchains that exist now and in the future, provides enterprises, governments, and data providers with a single integration gateway to connect applications and sell data to every blockchain network, reducing development costs and preventing vendor lock-in.

Please note that the infographic is merely a representation of the five primary categories of oracle services listed in a progressively more expansive manner. However, many of these features are likely to be developed in stages with overlapping timelines, not to mention there will be numerous features introduced that we simply can’t imagine today, similar to how Uber and Tinder were largely unimaginable to Internet users in 1994.

A Framework for Building Heterogeneous Oracle Networks

Before diving into each category, it’s important to emphasize a few key points about the structure of the Chainlink Network that allows it to offer such a diverse array of oracle services simultaneously. Unlike blockchains, which operate as a single monolithic network with a single consensus mechanism, the Chainlink Network is decentralized, made up of numerous independent oracle networks running the same software but operating entirely independent from one another.

Such a design choice allows Chainlink to scale horizontally, as any number of oracle networks can operate in parallel without dependencies on any other oracle network. Each oracle network can freely define:

• Who and how many independent oracles are involved
• Where oracles source data from and what computation the oracle network performs
• How data is secured and the frequency at which it’s provided on-chain
• And various other important parameters.

It’s this heterogeneous design that allows Chainlink to offer so many varying services and operate natively on any blockchain environment without any cross-dependencies.

A heterogeneous framework means that Chainlink-powered price feeds can be leveraged in a multitude of ways. For example, Chainlink’s current iteration of price feeds are plug-and-play decentralized price oracles bootstrapped by the Chainlink team, but developers are free to build their own price oracles using an entirely different or overlapping set of nodes, data sources, update frequencies, and parameters. Blockchains also have the flexibility to read Chainlink’s existing price feeds on other chains, or build their own unique price feeds directly on their own blockchain. By providing developers across any blockchain with both the ability to seamlessly adopt pre-built oracle networks and the tools to construct their own customized oracle networks, the Chainlink Network provides maximum flexibility to fit any oracle need.

The Progression of Oracle Services Enabled by Chainlink

As a direct result of this high level of generalization and horizontal scalability, the Chainlink Network is able to provide a diverse range of oracle services from relatively simple to much more advanced. We hope to shed a light on these different oracle services and show how Chainlink is already providing several of them today on mainnet to secure real value.

Price Reference Data Feeds

The first and most widely used oracle service the Chainlink Network provides is Price Reference Data Feeds, which power a significant portion of the Decentralized Finance (DeFi) ecosystem. Chainlink’s price feeds are built as a shared public resource funded by multiple projects to lower the per-user costs. These feeds operate under a pull model (synchronous), where price updates are triggered on a regular cadence (deviation threshold and/or heartbeat) to keep the price feeds fresh without requiring users to monitor and initiate updates. Each price feed update is stored within a corresponding on-chain reference contract, enabling smart contracts to fetch the latest (or historical) price point atomically within a single transaction at any time.

All price feed networks are composed of multiple oracle nodes that each fetch market data about a particular asset from multiple off-chain data aggregator APIs (ensuring full market coverage, preventing manipulation, and avoiding API downtime). Each node’s multi-source medianized value is then aggregated together to create a median of medians, resulting in a single tamper-resistant data point available directly on-chain.

While Chainlink’s price feeds for cryptocurrencies on Ethereum are widely known for being the gold standard of oracle networks (above the water line in the iceberg infographic), there are also other forms of price feeds that are either live or likely to launch in the future (below the iceberg waterline). These include price feeds running on other blockchain networks beyond Ethereum (e.g. Cosmos, Polkadot, Ava, etc.), as well as an expansion in the type of market data available on-chain, such as FX rates, commodities prices, interbank interest rates, US equities prices, blockchain gas prices, customized indices, total crypto market cap, and much more. Chainlink has still only scratched the surface of its price feed offering, which should only accelerate once off-chain aggregation is launched.

Any Web API

The next major oracle service that Chainlink already provides, which will only accelerate in usage, is the ability to connect smart contracts to any off-chain web API. The scope of this feature cannot be understated as it not only permits smart contracts to receive data inputs from any off-chain system, but it also allows smart contracts to generate outputs that affect external systems in the real world. These oracle networks typically operate as a push model (asynchronous), where a smart contract makes a direct data request to Chainlink nodes within one transaction, and directly receives a response shortly after within another transaction. This provides a method of getting data delivered on-demand directly to a single smart contract and/or setting up a specific cadence of data delivery customized to the smart contract’s unique data requirements (could set up their own synchronous reference data feed too).

By providing connection to any and all external resources, there is no limit to what a Chainlinked smart contract can be written about. Such extreme flexibility opens the floodgates for all the world’s data and APIs to be accessible on-chain in a secure and reliable manner.

Chainlink inputs may include:

• Weather data
• IoT sensors
• Sport scores
• Gaming results
• Credit ratings
• AML/KYC info
• Election results

Chainlink outputs may include:

• Traditional payment rails
• Interbank transfers
• Enterprise ERP/CRM backends
• Smart locks for rentals
• Transactions on other blockchain networks

The combination of Chainlink’s secure inputs and outputs empowers users to create more advanced decentralized applications. For example, Arbol launched a live application that offers farmers in developing nations a parametric crop insurance solution. Their smart contracts autonomously execute payouts based on real-time weather data delivered by Chainlink oracles regarding the weather conditions of a specific geographic location.

Chainlink oracles are also able to connect to and fetch data from other blockchain networks, enabling new use cases such as Proof of Reserve for cross-chain tokens. DeFi applications can use this blockchain data to autonomously verify the true collateralization of nearly $2B of wrapped Bitcoin, including both WBTC and renBTC. Chainlink’s Proof of Reserve model can also expand beyond cross-chain assets and into off-chain collateral such as fiat-backed stablecoins and real-world asset backed tokens.

Chainlink nodes are able to achieve this functionality by having the built-in capabilities to securely handle and store private API keys (via external adapters), extending access beyond open APIs and on to any authenticated, permissioned, or private API. Access to any input and output in the real world removes all barriers when it comes to creating secure end-to-end decentralized applications that replicate or go beyond traditional contracts and business processes.

Verifiable Randomness

Decentralized applications are automated in the sense that they move large amounts of money directly based on the inputs they receive. One of the most critical inputs for many applications that may not be immediately obvious is a tamper-resistant source of randomness, which is derived from a Random Number Generator (RNG). For example, minting a unique in-game artifact or selecting the winner of a lottery requires a source of randomness.

Traditional methods of RNG available to smart contracts are subject to security flaws, such as on-chain randomness solutions like the blockhash being subject to miner attacks or off-chain randomness solutions having to rely on data from a trusted central third party. Both scenarios cannot provide the level of transparency and tamper-resistance required to secure serious amounts of value based directly on their random inputs.

In order to solve this problem, Chainlink developed and launched a computational service run by its oracles called the Verifiable Randomness Function (VRF), which generates a provably fair source of on-chain randomness. Chainlink VRF uses a combination of a user-defined seed and an oracle’s private key to provide smart contracts with randomness data that can be independently verified by users as fair and unbiased via on-chain cryptographic proofs of the computation’s integrity. This proof cannot be manipulated by the oracle node, dApp’s developers, or users, ensuring the highest degree of security possible.

Making verifiable randomness available to smart contracts enables the creation of entirely new categories of decentralized applications. As stated in the recent Chainlink blog post announcing the launch of Chainlink VRF on mainnet, some of the new functionalities include:

Generating non-fungible tokens (NFT) — seeding specific collectible traits, original loot boxes, rare in-game artifacts, and various other unique digital assets

Introducing random elements within gameplay — map generation, critical hits (battling games), matchmaking (multiplayer games), card draw order, and random encounters/events

Ordering for processes — distributing tickets to high-demand events, selecting participants in a popular public sale, and choosing presale winners for luxury items like rare shoes

Random selection of someone — picking a juror for a case, selecting a validator for consensus, drawing a regulated lottery winner, or numerous other selection processes within a protocol or DAO

The unique combination of smart contracts and verifiable randomness is sure to have major effects over time on security and transparency as there now exists unpredictability that can be audited on-chain as being objectively fair, unbiased, and tamperproof.

Additional Off-chain Computations

While Chainlink is widely known for its ability to aggregate and deliver data on-chain, Chainlink can also perform a more advanced set of off-chain computations for smart contracts. Such computations provide smart contracts with robust solutions for achieving scalability, privacy, ordering fairness, data refinement, interoperability, and more. Smart contracts can simply offload more expensive computations to the same off-chain oracle networks already being used for data sourcing and delivery, creating a one-stop-shop for retrieving off-chain data inputs, triggering off-chain outputs, and leveraging additional off-chain computations.

The various off-chain computations that Chainlink oracle networks can provide greatly vary in functionality and purpose. However, each shares the same trait of moving computation off-chain as a means of creating a stronger value proposition for smart contracts.

Off-chain computation services currently being made available through Chainlink oracles include:

• Fair Sequencing Services (FSS) — Order blockchain transactions fairly before they are mined as blocks, effectively leveraging Chainlink oracles to mitigate frontrunning and Miner-Extractable Value (MEV) issues on blockchains, also resulting in lower gas costs.
• Arbitrum Rollups — Operate as validators for layer 2 Rollup chains, allowing Chainlink oracles to execute solidity smart contracts off-chain in a scalable and trust-minimized manner via fraud proofs and staking.
• Mixicles — Create on-chain privacy by monitoring the execution of a smart contract and triggering its settlement on a mixer based on that input, effectively using Chainlink oracles to decorrelate the contract's inputs from its outputs.
• DECO — Generate zero-knowledge proofs (ZKPs) on off-chain data, enabling users to prove sensitive facts about TLS web sessions to Chainlink oracles without revealing the data or requiring server-side modifications.
• Town Crier — Utilize a trusted execution environment (Intel SGX) to process data in a black box computing environment, providing Chainlink oracles with the ability to offer a wide variety of secure, high-throughput, and confidential computations (even to the oracle itself).

By expanding beyond data inputs, Chainlink oracles offer smart contracts a wide range of new capabilities that allow for increasingly more advanced smart contract applications. In the near future, it is not unlikely that we will see the majority of a smart contract’s execution occurring off-chain while using the blockchain as a settlement and dispute layer as needed, resulting in minimized costs, increased throughput, and new privacy options. Furthering this goal is Chainlink’s upcoming off-chain aggregation capability using threshold signatures and P2P networking between oracle nodes, substantially reducing the costs of decentralized oracle computation.

Additionally, the creation of privacy-preserving smart contracts and oracles will allow larger enterprises and institutions who cannot expose their sensitive data or business logic on-chain (even in an encrypted form) the opportunity to finally begin utilizing decentralized technology in a manner that is legally compliant and business-friendly. This opens up a completely new class of smart contracts that require privacy, which is orders of magnitude larger than anything currently being run on blockchains today. In essence, off-chain computation is a little understood, yet incredibly powerful native feature of Chainlink oracles that will open up many multi-trillion dollar markets to smart contract innovation.

Blockchain Abstraction Layer

The Chainlink Network not only provides smart contracts with the ability to access any off-chain data resource but its blockchain agnostic properties mean that it can be used by enterprises and data providers as a single gateway to interact with any blockchain and DLT network.

This means enterprises can monetize their existing APIs across all blockchains through one middleware client, minimizing integration work and empowering enterprises and data providers to focus on their core blockchain strategy rather than rebuilding infrastructure. It also enables traditional Web 2.0 firms and enterprises to start building more comprehensive blockchain products that interoperate across numerous chains, as they no longer need to commit to any specific blockchain due to Chainlink's future-proof nature and ability to seamlessly integrate new blockchains as they appear.

Importantly, utilizing Chainlink as a blockchain abstraction layer doesn’t require enterprises or data providers to make any modifications to their backend systems or business model. Through the creation of a single modular external adapter, Chainlink nodes are immediately able to connect that firm’s APIs to any and all blockchain networks. Additionally, firms that see value in the growing smart contract economy and want to prepare for the future are able to operate their own Chainlink node directly. Doing so gives them access to direct data selling to smart contracts and increased security features such as cryptographically signed data, which provides smart contracts definitive proof that data came straight from the claimed source.

Conclusion

While some may only see Chainlink as a means of getting price feeds, appearances can be deceiving as there is far more below the surface than meets the eye. Chainlink’s expansive set of capabilities requires us to rethink how we define blockchain oracles, as they are clearly more useful than simple data transfer. In the same vein, we must reimagine just how expressive oracles are in terms of the data and services they can provide, likely being the greatest catalyst to building more advanced smart contract applications that go far beyond what we think is possible today.

Chainlink is a highly flexible and generalized oracle solution that is able to offer a broad range of oracle services in parallel. These oracle services include offering a steady stream of price feeds, connecting smart contracts to any Web API, generating provably fair on-chain randomness, performing more advanced forms of off-chain computation, providing enterprises, governments, and data providers with a single blockchain abstraction layer, and countless other services we have yet to imagine.

Akin to the Internet’s impact on computers, Chainlink is bound to transform the value of blockchains and smart contracts in a similar manner. The result will be a rearchitecting of society’s entire economic and contractual foundations, moving away from brand and subjective guarantees, and towards technologically enforced definitive truth on the data, terms, computation underpinning all value transfers.

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Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

The following article is based on a recent presentation given by Chainlink Co-Founder Sergey Nazarov at Chainlink’s blockchain conference, SmartCon 0. He discusses how blockchains and smart contracts create definitive truth about asset ownership and transfer, and how Chainlink is actively extending this property of definitive truth to real-world data and events existing off-chain. By doing so, smart contracts greatly expand their functional capabilities, allowing them to disrupt multi-trillion dollar markets across a variety of industries and use cases.

Contractual Agreements Are Fundamental to Social Progress

When it comes to what drives our global economy, nothing is more foundational than a contractual agreement between independent parties. Contracts enable social coordination and collaboration on both a local and world-wide scale, from the extraction of raw materials and their transformation into products, to the vast global supply chain network and its supporting financial systems. Humanity’s ability to continually create more advanced contractual agreements is one of the core drivers of its social transformation from individual hunter gatherers to the increasingly interconnected and complex modern world of today.

However, the current infrastructure that enforces contractual obligations is based largely around trust in company brands and inefficient legal systems, which generate inherently probabilistic and/or delayed outcomes. While this system of contracts has worked for a long time, there are clear points of friction, particularly when it comes to counterparty risk — the probability another party in an agreement does not fulfill their contractual obligations. This is especially present when large centralized institutions create contracts with less capitalized entities like everyday citizens or small businesses. Since the large enterprise often runs or has influence over the infrastructure executing the contract, they have the power to bully smaller entities into taking unfair deals or risk wasting years of their time in court. As a result, it’s hard to predict with certainty whether or not a contract will be fairly honored, thus increasing the difficulty of managing capital, raising the costs of litigation, and lengthening out dispute resolution processes.

These limitations stemming from counterparty risk do not need to exist in perpetuity forever. There are now technologically enforced contracts built upon mathematical guarantees (blockchains, smart contracts, and oracles) that can produce outcomes which cannot be controlled or unfairly influenced by any centralized entity no matter how influential or trusted the brand. These contracts are able to provide strong guarantees on the contract executing exactly as mutually agreed upon, introducing a new value proposition into the world, technologically generated definitive truth.

How Blockchains Create Definitive Truth on Transactions, Ownership, and Contract State

Definitive truth is a quite simply truth that cannot be manipulated. Arguably the first form of technologically generated definitive truth was the launch of the Bitcoin blockchain in 2009. It initiated the start of an ever growing ledger of transactions managed and validated by an interconnected network of computers distributed across the world. For over ten years, the Bitcoin network has been the golden source of truth about the ownership of BTC (Bitcoin’s native asset), with every transfer validated and updated in the ledger by each node in the network. By using a decentralized network to achieve massive computational redundancy, the Bitcoin blockchain is able to maintain strong security guarantees of immutability and manipulation resistance to even the largest centralized entity.

However, Bitcoin only provides definitive truth on who owns Bitcoin and not any other coin, token, stock, currency, or other asset. It wasn’t until 2014 when Ethereum expanded this concept of technologically enforced definitive truth by launching a global blockchain network that allows for the hosting of censorship-resistant and immutable smart contract applications. With these smart contracts, the terms of an agreement are codified (if x event happens, then perform y action), execution is enforced by a manipulation resistant state machine, and the results are recorded in an immutable global ledger. This creates definitive truth not just on the validity of the transaction and ownership of Ether (the native currency of Ethereum), but on the state of any type of contractual agreement running on the network. This includes the tracking of a multitude of disparate tokens (represented by different smart contracts), effectively making Ethereum a global asset registry.

While Ethereum and any other smart contract enabled blockchain can generate and store definitive truth about each contract’s current state and all previous state changes, they cannot create definitive truth about real world data and events outside of the network (off-chain). This problem is due to the inherent security model of blockchains and is commonly referred to as the oracle problem. For smart contracts to reach their potential as the dominant form of digital agreement, they need bidirectional communication with systems outside the native blockchain they reside on. In order to do so, secure oracles are required to create definitive truth about the external world, ensuring the end-to-end process is secure and reliable.

How Chainlink Oracles Generates Definitive Truth About Real World Data and Events

Chainlink overcomes the oracle problem by providing users with a multitude of security techniques that can be mixed and matched to create definitive truth about the off-chain world. Most notably, these security features include decentralized computation, digital signatures, zero knowledge proofs, crypto-economic incentives/penalties, reputation systems, trusted execution environments, and more. Bringing definitive truth to the much broader and complex off-chain world expands the awareness of smart contracts, allowing them to obtain information from any external database/web server and stay up to date about everyday real-world events. This off-chain data can then be used as tamper-resistant inputs to trigger predefined business logic coded within a smart contract.

This first use case of Chainlink’s definitive truth about the outside world is the decentralized aggregation of public data sets, including market data and exchange rates. This takes the form of a decentralized oracle network made up of multiple independent nodes that collectively source data from multiple sources, with the nodes’ responses aggregated to create a single, highly accurate and manipulation resistant data point to trigger an on-chain smart contract.

Chainlink’s decentralized price oracle networks have spurred major growth of the Decentralized Finance (DeFi) market — a collection of permissionless and censorship-resistant financial services that operate without centralized or rent-seeking middlemen via blockchain-based smart contracts. The ability to consistently obtain definitive truth about changing market prices has enabled DeFi to grow from nothing into a market over $10B today, as nearly all DeFi applications require price feed oracles.

The DeFi ecosystem is still quite young too, and is likely to grow exponentially due to the inherent guarantees it provides to financial contracts and their outcomes. Through these guarantees, DeFi is also providing high yield opportunities to users, which may become increasingly appealing as an offset to the current low yield environment being experienced in traditional finance. In the past month alone, DeFi has doubled in total value locked (amount of collateral locked in DeFi smart contract applications), a trend that will only continue as the value of definitive truth-based contracts becomes clear to the wider public.

Chainlink Moving Smart Contracts Beyond DeFi

While DeFi is showing the demand for highly reliable and deterministic financial products, it is only the tip of the iceberg in terms of industries that oracle-enabled smart contracts will disrupt. While still in the early stage of market growth, where innovators and early adopters are driving adoption, definitive truth is a universal concept that can and will be extended far beyond the crypto space, making its way into all traditional markets.

However, in order to generate definitive truth for contracts utilized in traditional industries, companies need access to private, sensitive, and proprietary data without leaking that data to the public or the oracle itself. Thus, Chainlink has introduced a multitude of privacy-preserving oracle technologies, most notably through its 2018 acquisition of Town Crier (Intel SGX trusted execution environments) and its most recent acquisition of DECO (zero knowledge proofs regarding TLS web sessions). These techniques allow oracles to attest to the accuracy of sensitive data without exposing it, unlocking a vast amount of data for smart contract consumption that is currently unavailable due to privacy concerns. Chainlink has also introduced Mixicles, a clever way of using oracles to create on-chain privacy by decorrelating a contract’s inputs from its outputs.

The other key consideration is how to connect the data and services of legacy systems to smart contracts while retaining the blockchain’s guarantees around definitive truth and execution. The concern stems from an automated contract being hindered by a centralized off-chain component, such as a data provider sending faulty data, thus corrupting the execution of the contract. Chainlink brings a novel solution here as well through the use of on-chain binding service agreements, staking , and reputation systems. Legacy systems are able to serve as Chainlink oracles that sell their data/services directly to smart contracts and stake their own financial capital (LINK) in on-chain enforced service agreements as a form of insurance on their performance. The Node’s stake can be automatically taken as a penalty (slashed) if their services are not in accordance with the terms of the pre-agreed upon agreement and their performance documented as an on-chain immutable record. These on-chain performance records can be aggregated by reputation systems to let other users know the precise reliability of a particular legacy system, effectively bootstrapping higher security guarantees onto it without remaking its backend.

Through the use of privacy preserving oracles and staking-backed service agreements, a framework emerges that both allows oracles to attest to sensitive data within legacy systems without leaking it, and enables legacy systems to make their data and services available directly to smart contracts as trusted oracles. In both scenarios, the backend processes are uninterrupted, the data is kept private, and the legacy system is held to a similar standard of definitive truth as the blockchain it’s interacting with.

This massive expansion in the ability to generate definitive truth about external off-chain data and legacy system interactions exponentially increases the addressable market size of smart contracts to include the world’s largest and most important industries. Effectively, there becomes almost no limit to how smart contracts are developed and applied as a new form of data-driven automation, ultimately leading the smart contract economy past the chasm of early adopters and into the mainstream.

The potential for growth here simply cannot be understated. Even in the crypto sphere, DeFi is just a small but growing blip ($10B) compared to the market cap of cryptocurrencies as a whole ($360B). However, as the demand for high interest yield grows, definitive truth based contracts like DeFi applications will swallow the cryptocurrency market whole.

Still, on a grander scale, the cryptocurrency market itself is only a tiny fraction of the value within the global economy. As the growth of oracle-enabled smart contracts accelerates, a larger percentage of the world’s economic activity will begin to transition to definitive truth based infrastructure.

From commodities like gold ($10T), to the stock market ($90T), to the global real estate market ($280T), to the derivatives market ($1,000T), the collective economic value of these markets will not only demand definitive truth based smart contracts, but more value will be created in the process due to a major reduction in the costs associated with alleviating counterparty risk.

Putting this all together, it’s clear that the market size of oracle enabled smart contracts is nearly limitless in size, as more reliable and equitable infrastructure for economic exchange will inevitably win out across the majority of markets when compared against less reliable and corrupt alternatives. As is the case with the Internet today, we will eventually reach a point where it’s unfathomable to think about conducting economic exchange without technologically enforced definitive truth via oracle-enabled smart contracts. This is a powerful new tool at humanities disposal and we encourage everyone to participate so that its potential can be applied in a way that can benefit individuals as well as society as a whole.

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Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

Recently, an anonymous and fraudulent entity going by the name ‘Zeus Capital’ published and heavily marketed a hit piece on Chainlink as part of a ‘Short and Distort’ scheme. The fraud is driven by greed and built upon an entire campaign of misinformation, false accusations, and easily debunkable lies about the Chainlink network, the LINK token, and the SmartContract team. Instead of putting reputational risk behind their outlandish claims, they are attempting to make a quick and dirty profit by hiding behind anonymity and using disinformation to emotionally manipulate LINK token owners into selling their holdings and betting against one of the most widely adopted technologies in the entire blockchain industry.

We broke our analysis down into several different sections (click on the hyperlinks to jump straight to any section, unfortunately only works on desktop and not mobile):

Define a ‘Short and Distort’ scheme

Showcase Chainlink’s industry-leading adoption

Explain Zeus Capital’s manipulation campaign on Chainlink

Explain why Zeus Capital LLP is a fraudulent entity

• Fraudulent Misuse of Company Logos and Brands
• Anonymous Entity
• Impersonation
• Twitter Account

Debunk the executive summary

• Claim #1: Market Manipulation
• Claim #2: Permissioned On-boarding
• Claim #3: Broken Tokenomics
• Claim #4: Only on Testnet
• Claim #5: Founders are Dumping
• Claim #6: LINK is a Security
• Claim #7: On-Chain Token Data
• Claim #8: Max Addressable Market
• Claim #9: Secondary Provider
• Claim #10: Economics and Competition
• Claim #11: Team
• Claim #12: Code Progress

Conclusion

Short and Distort: A Primer

Before we dig into Zeus Capital or the actual report itself, we first must set a baseline understanding of what it means to perform a short and distort scheme. Investopedia summarizes it in a few key points below.

In order to drive the price of the asset down, malicious short-sellers have a strong incentive to distort the truth and control the narrative by spreading fear, uncertainty, and doubt (FUD). Sometimes this goes as far as knowingly spreading disinformation about a project/company to convince others to sell their assets and go short as well. Short and distort schemes can involve a myriad of activities, including but not limited to:

• Writing and publishing false research reports/articles
• Using a pseudonym to hide their true identity
• Lying about credentials and impersonating an established firm
• Circulating false rumors on social media
• Accusing malicious intent/fraud by a project’s founders
• Manipulating data sets to fit a specific narrative
• Lying through omission using half-truths
• Using provocative and hyperbolic language
• Paying for advertisements and coverage

While “short and distorts” are possibly effective for subpar and already failing projects, these schemes used against fundamentally solid technologies that consistently deliver often result in massive financial losses. The reason being that the positive momentum of technological innovation and adoption is so strong that it cannot be overcome by manipulative and dishonest bearish entities. By failing to control the narrative, short-sellers can become increasingly desperate and turn malicious, especially as their short position collapses and they are deeply underwater financially. Sometimes it even results in unintended consequences like an innovative project’s community rallying together to expose the short and distort scheme in a public manner, e.g. Tesla’s community rallying to bankrupt short sellers.

Zeus Capital’s attack on Chainlink is the most recent example of a short and distort in the cryptocurrency market, going to great lengths to try and create a false narrative. Not only are they pushing their own false agenda, but they continually attempt to pay others to help spread it.

Both Bitcoin and Ethereum both experienced similar phenomena, such as Bitcoin being declared dead over 380 times and TechCrunch publishing an article titled “The collapse of ETH is inevitable.” But as we have seen with Bitcoin and Ethereum, short-sellers get crushed when betting against next-generation technology that provides real-world value.

Chainlink: The Industry Standard Blockchain Oracle

Since its live mainnet launch over a year ago, Chainlink has become the most widely used oracle mechanism across the entire smart contract ecosystem, making it a foundational piece of infrastructure for both the growing DeFi ecosystem and a wide variety of use cases across all blockchain platforms. Chainlink plays a critical role at the intersection of traditional economies and blockchain ecosystems, acting as a secure communication bridge between the two. By doing so, Chainlink allows smart contracts to use real-world data to automate blockchain transactions and trigger actions on legacy systems.

Since its inception, Chainlink has cemented itself as the industry-leading decentralized oracle network. It is widely adopted by blockchains, dApp startups, and enterprises alike. A few of Chainlink’s notable accomplishments include:

• The industry standard oracle mechanism within decentralized finance: Securing over a billion dollars of value for leading DeFi projects such as Synthetix, Aave, Loopring, Nexus Mutual, Bancor, and many more. Also increasingly being used by numerous Centralized Finance (CeFi) companies such as Celsius and Digitex.
• Most widely adopted blockchain middleware for enterprise: Working with multinational enterprises like Google, Oracle, Deutsche Telekom subsidiary T-Systems, and SWIFT; numerous top-tier South Korea banks; and is part of the first public/private initiative to help modernize the Colorado State Lottery. They are also spearheading and/or contributing members to numerous standardization and enterprise working groups such as Cornell Tech’s IC3, Hyperledger Avalon, Baseline Protocol, EEA Task Force EMINENT, and the Interwork Alliance. These enterprise alliance organizations count some of the largest companies in the world as members like Microsoft, EY, and IBM.
• Most flexible and adaptive blockchain abstraction layer: Integrated within most of the leading blockchains like Ethereum, Polkadot, Kava, IRISnet, Tezos, Ava, NEAR, etc and with in-progress integrations with Hedera Hashgraph, Harmony, Matic, Zilliqa, Conflux, Solana, China’s BSN, CasperLabs Hyundai’s Hdac, and Kakao’s Klaytn, and the vast majority of industry-leading blockchains.
• Selected by the top independent research institutions: Chainlink was selected by the World Economic Forum as one of its ‘100 Technology Pioneers for 2020’ — a collection of the world’s top “early to growth-stage companies”. It was also featured by Gartner in numerous articles praising Chainlink’s innovation and technology and discussed by the MIT Technology Review as tackling the most critical pain point to widespread smart contract adoption.

These are just some of the 200+ partnerships, collaborations, integrations, and recognitions regarding Chainlink, more details of which can be found here. It’s also one of the most discussed projects on social media and widely recognized as a leading cryptocurrency in the blockchain market due to its strong fundamentals and deep liquidity across exchanges.

Additionally, the number of smart contracts on the Ethereum blockchain that interact with the Chainlink protocol has been steadily growing, even recently turning exponential to now include over 16,000 contracts. This growth is being driven by an accelerating number of projects launching with Chainlink on mainnet, further fueling its strong network effects as a single standard for oracle data.

The Short and Distort Scheme Against Chainlink

On July 17, 2020, an anonymous source referred to as ‘Zeus Capital LLP’ published a 66-page report titled “The Chainlink Fraud Exposed.” They accompanied it with a large-scale spam email campaign, promoted ads on twitter, and private messages to larger cryptocurrency influencers/traders about paying them to do bearish technical analysis on the LINK chart.

Besides the anonymous source and paid disinformation campaign — often capitalizing words like ‘STRONG SELL’ and making hyperbolic claims without supporting evidence — it becomes immediately obvious that they undertook writing the report with ill and dishonest intentions. Most points in the report only require a simple Google Search to debunk. For example:

• They claim Chainlink is on Testnet when in fact it has been on mainnet since May 30th, 2019, and provides oracles for countless live applications that collectively secure over $1.5B USD in value. They tried to explain this away as Chainlink wasn’t a live blockchain, but it was never designed to be a blockchain. It’s middleware that runs both on-chain (any blockchain) and off-chain (to connect to any external system).
• They claim that Chainlink’s adoption is declining when in fact it’s been growing exponentially since launch, with over 200 partners/integrations/collaborations. Numerous market-leading projects have stated that integrating with Chainlink allowed them to obtain critical off-chain data resources, go-to-market quicker, and become more secure through increased decentralization.
• They claim projects are freeloading and even get paid to use the Chainlink network, when in reality numerous project founders that have integrated with Chainlink, such as Kava and Aave, have publicly confirmed that they pay to utilize the Chainlink network.
• They claim the team is small and inexperienced when in fact the Founder is the pioneer of the blockchain oracle space (involved since 2014), the team is rapidly growing (now 40+ members), and they have outspoken and highly experienced advisors such as Ari Juels (former Chief Scientist of RSA), Tom Gonser (Founder of DocuSign), Evan Chang (Director of Engineering at Facebook), and numerous others.
• They claim the Google and SWIFT partnerships are fake because the logos were “taken off the website” when in reality Google is prominently shown on the chain.link website. All you have to do is exert a tad of effort to scroll through their panel of quotes to find one from Google’s Allen Day. On the other hand, SWIFT is featured on the smartcontract.com website, with links to the Sibos PoC work they conducted.

These are just a few of the very easily debunkable claims that anyone can independently verify with minimal effort.

Zeus Capital LLP: A Fake Anonymous Entity

Before dissecting the information presented in the report, it’s important to examine the entity that released it. According to the website linked within the report, they claim to be “an asset management firm focused on alternative investments, market infrastructure inefficiencies, and event-driven opportunities.” However, once you exert the slightest amount of effort, it becomes clear they are anything of the sort.

Fraudulent Misuse of Company Logos and Brands

Zeus Capital’s website features a list of “Zeus Friends” which contains various news outlets, companies, and projects. The purpose was to form social proof around Zeus’s legitimacy, however, their “friends” have publicly and/or privately stated that they have no connection to Zeus and have requested to be removed.

Below is Marc Zeller of Aave — a developer for a top three DeFi protocol that currently has around a billion dollars in value locked into its decentralized lending platform — stating that Aave did not give any consent to be listed on their website and demanded to be removed immediately. The irony is that Aave is actually one of the largest live users of Chainlink and has stated on multiple occasions the importance of Chainlink in their success as a project.

As of writing this article, Aave has yet to be removed from the Zeus Capital website. He is not the only one either who has requested to be removed yet still remains. A fellow community member contacted numerous firms listed on Zeus’s website and they all said they had no affiliation with Zeus Capital and their logo was posted without their consent. None of these false affiliations have been removed. In fact, they haven’t even issued any kind of statement clarifying the matter, leading to the conclusion that Zeus knowingly lied about their partners in order to further their agenda.

No legitimate firm would ever act in such an unprofessional matter and it’s clear that Zeus Capital is not well connected with anyone. Zeus aimed to “appeal to authority” to gain the reader’s trust, but all of this falls apart when you contact their supposed partners directly. While a major red flag on its own, this is only the tip of the iceberg of the malicious behavior and shady tactics that Zeus Capital has employed.

Anonymous Entity

Zeus Capital is entirely anonymous, with no listed people on their website, no known office locations, no history of activity before this report, and not registered with any regulatory bodies required to operate as a private asset firm. For example, they claim to have office locations in New York and London, but are not compliant with SEC/FCA regulations. In fact, investment firms are not even allowed to be registered as a Limited Liability Partnership in New York and you have to register with the New York Secretary of State (which Zeus hasn’t done). This basic research alone shows that they are clearly lying about their name and the “firm” is fraudulent in nature.

When looking deeper into their website using the WayBackMachine (an Internet Archive service), it shows that it was essentially non-existent until July 17th, 2020, just days after the Chainlink report was published. Additionally, Zeus has never published a report prior to the launch of their website.

Well known media outlet CoinTelegraph reported in a recent article that they were unable to get into contact with the firm as the phone lines offered by Zeus were switched off or went straight to voicemail.

“The purported asset management and research firm claims to be based in New York, London, Singapore, and Hong Kong, however, Cointelegraph was unable to contact the firm — with the phone number for its London office appearing to be switched off, and the Hong Kong office diverting calls straight to voicemail.”

Impersonation

Apart from being unreachable, Zeus Capital LLP took the name of a legitimate investment banking firm Zeus Capital Ltd. While companies may accidentally have similar names, Zeus Capital LLP never made a single attempt to address the confusion or apologize for any inconvenience despite being constantly informed about it on social media. Not only is it a very sleazy way to operate, but it forced the legitimate Zeus Capital Ltd, an established investment banking firm based in the United Kingdom, to go out of their way and publicly denounce any relation or affiliation with “Zeus Capital LLP” or the Chainlink “research” report.

Zeus Capital Twitter Account

Part of Zeus Capital’s strategy has been spending time and money paying for promotional tweets. It’s not just a casual occasional promotional tweet either, but a constant wave of ads sent to the same people, even causing many Crypto Twitter accounts to start voicing their frustration about being spammed by Zeus’s advertising.

The substance of the tweets is rather unprofessional as well, including provoking “American-Russian’’ tensions to spark emotion in the mind of the innocent reader and associate it to the Co-founder of Chainlink, Sergey Nazarov, who happens to be a Russian American. One of the screenshots posted above (in white) is from a promoted tweet by Zeus that contains a collage of screenshots from articles published in the early 2010s discussing Russian companies being charged with fraud, all of which are completely unrelated to Chainlink and happened before Chainlink was even created.

It is also interesting to note that Zeus Capital is likely paying for likes and retweets as the majority appear to be from bots and non-crypto users. They block anyone who voices opposition or offers counter-narratives to the report, opting instead for an echo-chamber to support their own narrative. More recently, Zeus Capital was even caught trying to pay for bearish TA (technical analysis) charts from popular traders on Crypto Twitter that they could then retweet to further their narrative.

Debunking the Executive Summary

Now that we have some basic context on the entity that released this report, the next logical step is to go through the main points. Given its extensive length (66 pages), we are going to provide a debunk of the points made in the executive summary, with verifiable web links that anyone can independently verify themselves. This should provide anyone new to the situation with more context, which will make it quite obvious that the report is intentionally dishonest and designed specifically to enrich the creator through a short and distort scheme that preys on people’s emotions.

Besides the many outright lies throughout the document, two distinct tactics stand out, both of which are logical fallacies. The first is an “argument from ignorance,” which is the tactic of making a claim without evidence and assuming it’s true because it hasn’t been debunked. This tactic often is used to shift the burden of proof to someone else to disprove it with the assumption it’s true despite no evidence. In actuality, the burden of proof is always on the person who makes the claim.

The other logical fallacy is referred to as “gish gallop,” wherein a debater confronts an opponent with a rapid series of many specious arguments, half-truths, and misrepresentations in a short space of time, which makes it impossible or incredibly time-consuming for the opponent to refute all of them within a reasonable amount of time. The goal is to make so many technical-appearing claims in order to appear legitimate to a novice reader and overwhelm a more advanced reader not wanting to spend the time and effort to independently address each and every one of the claims made.

With that in mind, let’s briefly analyze the multiple claims made in the executive summary.

Claim # 1: Market Manipulation

Zeus starts with the classic “pump and dump” accusation based on numerous unbacked claims. There is no evidence to suggest that the team is performing any form of market manipulation or malicious behavior. While the SmartContract team has sold a small portion of its founding tokens, which were allocated to them as part of the ICO, they have also grown the team tremendously (40+ people from around the world), subsidized the early growth of the network (bootstrapping it through a quasi block reward for oracles similar to Bitcoin and Ethereum’s block reward for miners), and have a growing list of paying users (of which no other oracle project compares).

Chainlink’s price has remained in a steady consistent uptrend during its entire existence, including during one of the worst crypto bear markets in 2018–2019, where most tokens lost the majority of their value and dropped over 90%. The positive momentum is highly correlated to the adoption of the Chainlink network, which has increased dramatically over the last two years and become the most widely used oracle network today.

This adoption is evident in its over 200+ integration pipeline, the over 35+ price reference feeds live on mainnet, and 38+ independent Chainlink nodes being paid on-chain for oracle services in the LINK token. These price feeds are used in production by 31+ paying DeFi projects that collectively secure over $1.5B+ in user funds. This represents only a small sample size of the target market for Chainlink too, which is nearly limitless and can expand across numerous other market verticals like traditional finance, gaming, insurance, supply chain, energy, advertising, enterprise, government, and more.

This growth is also evident in the clear uptrend in smart contracts that interact with the LINK token on Ethereum.

Thinking objectively, it would actually be irresponsible for a team with aspirations of long-term success to not sell any tokens after the large price appreciation over the last few years. Proper risk management is critical in order to lock-in a long-term runway and grow the network. The Ethereum Foundation itself performed the same strategy, selling portions of their Ether during ATHs in 2018 to ensure they had a predictable runway. Proper risk management means no matter the greater economic factors of the crypto market, the SmartContract team has a stable source of funds to pay employees and continually develop the Chainlink Network. It not only secures the continued development of the network, but it provides Chainlink users assurances on its long-term viability of being able to supply data for many years to come.

Not to mention, the team would be doing an objectively terrible job of ‘pump and dumping’ their token considering they have never mentioned it on Twitter, never posted hype or ‘announcements of announcements,’ nor do they allow price discussion in their official telegram or discord. All of this is easily verifiable by scrolling through the history of their social media channels. Their primary focus is security and adoption, which naturally fuels appreciation of the LINK token as the team delivers.

Claim #2: Permissioned On-boarding

This statement shows clear confusion and a lack of research on how the network fundamentally works. Chainlink is a permissionless, open-source framework that anyone can use today to run their own Chainlink node and/or build their own Chainlink oracle network using whatever nodes, data sources, and network parameters they desire. There are also third-party sites (such as market.link and honeycomb.market) where node operators can publicly list their services and smart contract creators can search and filter for nodes.

Chainlink’s Price Reference Data networks are one type of oracle network design, which exclusively use professional, high quality, and time tested nodes that have been thoroughly security reviewed by the team. These nodes are independent of the Chainlink team, instead run by leading blockchain and DevOps teams, many of which run PoS infrastructure for several other leading blockchains and secure millions of dollars in user funds. In fact, Deutsche Telekom’s subsidiary T-Systems operates a Chainlink node as well as major cryptocurrency exchange Huobi.

The reason these price reference networks currently operate on a permissioned node model is that users want certain quality control standards in place in order to cultivate trust in the networks responsible for securing over a billion dollars in value in DeFi alone. Being the most widely used collection of oracles in the market, Chainlink’s Price Reference Data is clearly filling the market demand, as oracle networks without quality control standards currently have zero adoption in production.

As more features such as threshold signatures and binding service agreements with staking go live, Chainlink-powered projects may feel they can incorporate a greater amount of unknown nodes in their networks and still get the security guarantees they need. Sergey also stated in a recent video that they will continue to decentralize the governance of reference feeds over time.

Ultimately, Chainlink’s Price Reference Data is just one type of oracle design available on Chainlink, but by no means is it the only. Chainlink is not a monolithic network, but an open framework that can support an infinite collection of independent and customizable decentralized oracle networks operating in parallel. This extreme flexibility is what has earned Chainlink the status of being the industry leader with the greatest network effects in the oracle space.

Claim #3: Broken Tokenomics

In the last three years, all the stakeholders mentioned above have benefited: holders have seen the LINK price steadily appreciate in value, clients are getting subsidized on-chain data for their applications, and the founding team has expanded their operations around the world and across numerous market verticals. In addition, Chainlink node operators are getting paid to run oracle infrastructure through a shared cost model, where multiple teams contribute to paying for the same oracle data feed. Each new project that shares in the costs effectively lowers the costs for each individual user.

The LINK token is already proving its utility, as it is exclusively used to pay nodes for oracle services. By being paid in LINK, nodes take part in a form of implicit staking, where the quality of their services on the network are aligned with their personal interests of growing wealth. If nodes become malicious and try to cheat the network, the value of the LINK token decreases. This not only puts at risk their current business model and any current LINK holdings, but it jeopardizes any future revenue opportunities. It is simply more profitable to be honest and help grow the network than to try and perform a one-time attack, especially considering it wouldn’t work without numerous other independent entities involved. This is a major contributory factor to why networks like Bitcoin have not been 51% attacked.

In the future, this crypto-economic security will extend out further through explicit staking, where nodes must stake their LINK tokens as collateral in the service agreement to act as a form of quality-backed insurance of oracle services. The staked LINK can be taken away (slashed) if the node fails to meet the terms of the pre-agreed upon service agreement. This not only encourages nodes to acquire more LINK in order to service more contracts, but it ties the token directly to the security and overall economic value of the network.

The current price of LINK doesn’t matter for end-users or data requesters as the cost of data requests is not set to a fixed-rate payment. If a data requestor is concerned about token volatility, the token can be abstracted away into the background through meta-transactions — when a user purchases oracle services in fiat on-demand via a relayer service that handles the backend payment to the Chainlink Node in LINK. The Chainlink team is also building a network model where data requests can be priced in USD amounts of LINK (e.g. $0.30 of LINK per request) to automate the cost balancing.

The team’s share of the tokens also benefits from increased adoption of the Chainlink network. The more adoption, generally the more demand there is for LINK by both users and nodes. This is likely to result in an increase in the value of the token and thus increase the total value of the team’s supply that can be used to grow the network even further.

In the Chainlink ecosystem, there is no entity that benefits from a decreasing price of LINK. More information about the crypto-economic security of the Chainlink network can be found in a recent presentation by Sergey below.

Claim #4: Only on Testnet

Chainlink has been on mainnet for over a year now (May 30th, 2019), so to claim that Chainlink is on testnet is both an objective lie and shows genuine disregard for intellectual honesty. Chainlink is today on Ethereum today, securing over $1.5B in DeFi and continually expanding to support a wider array of blockchains, applications, and use cases.

Zeus Capital tried to walk back their testnet claim when challenged on it by saying that Chainlink wasn’t a live blockchain, but this only further supports the conclusion that they either lack knowledge on the subject or are straight-up lying. Chainlink is not and has never been designed to be its own blockchain. It is a blockchain agnostic oracle network that exists as middleware between any blockchain and any external system to bridge data between them. Hence why it’s being integrated onto so many blockchains simultaneously, including Etheruem, Polkadot, Cosmos, Avalanche, Tezos, China’s BSN, and 60+ others.

Ethereum‘s gas price fluctuations, network congestion, core bugs, and ETH price volatility are not an inherent component of Chainlink, but attributes of the Ethereum mainnet itself. This is one blockchain environment that Chainlink operators within, and all decentralized applications and smart contracts on Ethereum experience these attributes. With Layer-2 solutions such as zkRollups becoming more prominent and the expected launch of ETH 2.0 phase0, Ethereum’s network congestion is being mitigated head-on by the Ethereum community. Regardless, being blockchain agnostic means Chainlink can support smart contracts within any environment, including more scalable environments.

It is true that staking is not yet live, however, enforcing on-chain penalties for off-chain data outliers within an aggregated data set is a complex distributed systems problem. No other project has presented any research on this solution and Chainlink has proven through other academic research and innovative solutions that it is the leading candidate to solve it. In fact, they were the first to even introduce the concept of staking in oracle systems, and their team includes one of the smartest cybersecurity and distributed systems researchers in the world in Ari Juels. While some oracle projects claim to have staking already implemented, that form of staking is only the right to produce blocks within an application-specific blockchain network, not to secure the external data being transported and aggregated.

Additionally, it is important to note that staking becomes more important after other key upgrades are implemented, such as Threshold Signatures and the FluxAggregator contract, which will allow for orders of magnitude more decentralization at a much lower cost. In essence, staking is an additional layer of security and not a fundamental requirement during these early days of adoption, especially when the contracts being secured are not yet near the valuations of the traditional financial world.

Claim #5: Founders are Dumping

Like many of the other arguments made, this is yet another wild claim that is not based on any evidence or facts. All objective data shows that the funds are being sold to grow the network by subsidizing the costs of running nodes, as well as growing the team to keep pace with its exponential growth. Token movements are fully viewable on-chain and the team has been public about how such funds will grow the network.

There is no evidence to suggest that the “founders are dumping their tokens at a substantial discount” and they provide no context as to who these “selected institutions” are. Additionally, the math backing their claim of “a substantial discount” is highly flawed as they’re comparing rates on an open market where node operators set their own prices to subsidized networks that bootstrap the supply side. Subsidizing oracle networks is not “dumping tokens on retail” but using token allocations for their intended purpose of seeding network infrastructure, which has been publicly known since day one.

Their logic on a downward spiral is equally flawed and based on the assumption of staking never being implemented. This is similar to saying ETH will never accrue its full value because ETH 2.0 will never launch. Even without staking, it’s hard to believe there are more than two other projects providing as much value to the blockchain space as Chainlink. Furthermore, throughout all traditional markets, asset value is driven to a large degree by upcoming improvements that users expect to see happen, not just current metrics (which we’ve demonstrated are impressive too). Future expected growth is almost always priced in.

Claim #6: LINK is a Security

Chainlink is indeed a decentralized ecosystem today as evidenced by the 30+ price reference feeds live on mainnet, operated by 30+ independent nodes and 7+ different data sources. The token is being used for its intended purpose (pay nodes for their off-chain data) and its utility is no different in this regard than Ethereum’s native token ETH (pay nodes for verifying transactions and producing blocks), which has already been declared not a security by SEC Chairman Jay Clayton. When LINK begins to be staked by nodes, this will be similar in concept to ETH2 staking, which the SEC considered when looking at ETH.

The Crypto Rating Council, a consortium of crypto business and lawyers like Grayscale and Coinbase, developed a framework to analyze cryptocurrencies and answer the question if a crypto asset is a security or not. Their framework determined that both Ethereum and Chainlink rank at a level 2 (on a scale of 1 to 5, where lower is better) meaning that they are both equally unlikely to be securities due to their decentralization and utility token nature. Since the SEC already considers ETH to not be a security, this leads to the conclusion that LINK is unlikely to be any different in this regard.

Additionally, numerous top-tier and U.S. based regulated exchanges such as Coinbase and Gemini have listed LINK for trading not only within the United States (where the SEC operates) but also within New York state, which has some of the world’s strictest security laws. When some of the most reputable and trusted crypto exchanges in the world list LINK in such a highly regulated region, it is clear that they have done their due diligence and deemed LINK not a security.

The “x token is a security, so stay away” scare tactic has been around for years in the crypto space, and at this point and has become a meme similar to the revolving “China has banned Bitcoin” narrative. This is a common tactic to scare the uninformed into selling their tokens. Such a claim usually requires extensive proof, and Zeus Capital offers none.

Claim #7: On-Chain Token Data

This is factually not true, adoption of the Chainlink network is continuing to go exponential. Where Zeus Capital is confused here (more likely intentionally dishonest) is that Chainlink-powered projects (DeFi and CeFi alike) utilize and contribute funding to the same common oracle networks to reduce costs, ultimately creating a shared public good model. This allows projects to get access to an oracle network that is cheaper and more secure than what they could create on their own.

Thus, instead of ten projects creating their own ETH/USD price feed and paying the full cost, they can share the costs of a single ETH/USD oracle. This is a good thing, as it reduces the costs for each individual, making it a major contributor to Chainlink’s growing adoption and network effects.

The number of projects integrating Chainlink oracle networks, which is the metric that matters, is continuing to increase rapidly, with often 5+ live or upcoming integrations a week. Additionally, network activity is actually at an all-time high, processing more data requests than ever before as more projects get integrated. Growth has accelerated in the number of nodes, number of data requesters, total daily fees, response times, and more. Reputation.link, third party data analytics site, shows the current statistic of the Chainlink network over the past seven days.

As adoption continues to accelerate, these on-chain metrics will maintain their upward trajectory and hit an inflection point of going exponential, which we are already seeing the beginning stages of today. This metric is fully verifiable using on-chain data and can be generated by anyone with only a connection to an Ethereum node.

Claim #8: Max Addressable Market

This argument shows genuine dishonesty, as Chainlink is already securing more than $1.5B+ in DeFi alone. To say that Chainlink’s addressable market in three years will only be $300M when it is already over 5x times that today, puts the whole report into serious question. Zeus Capital’s claim is based on a false assumption about the market the Chainlink network is aiming to capture.

Contracts are a fundamental component of society today, used in all types of functions whether people realize it or not. All contracts require inputs to produce outputs, which puts Chainlink’s addressable market at nearly all contractual agreements, as smart contracts set out to be the dominant form of digital agreement. The legal industry is $849B, the insurance industry is $1.3T, the global stock market is $90T, and the derivatives market is $640T. Additionally, the World Economic Forum estimates that the blockchain industry is expected to worth roughly $176B in 2025 (586x Zeus’s prediction in 2023) and $3.1T in 2030 (10,000x Zeus’s prediction in 2023). The market to capture here is nearly limitless.

Let’s just focus on a few of the immediate target markets for Chainlink, which include:

• Securing smart contracts and the DeFi economy
• Decentralizing traditional finance (CeFi) and FinTech
• Providing a blockchain abstraction layer for enterprises

To begin, Chainlink has been a major factor in the success of the decentralized finance industry, which is growing exponentially right now and has huge upside as a parallel financial ecosystem. We are seeing a wide range of DeFi applications integrate Chainlink such as exchanges (Loopring), derivatives (Synthetix), money markets (Aave), insurance (Nexus Mutual), asset management (Set Protocol), futures (FutureSwap), privacy mixers (Tornado Cash), domain names (ENS), real-world assets (DMM), and more. As existing DeFi platforms grow in value and new use-cases emerge, Chainlink will continue to absorb a larger market share by being the standard oracle solution used throughout.

The next logical product market fit is centralized finance (CeFi) and FinTech (e.g. RobinHood), where Chainlink can be used to gradually decentralize services and provide users with more transparency. This involves Chainlink’s decentralized on-chain price feeds being used as a price anchor and/or to determine product outcomes. For example, ensuring the internal price feeds of a CeFi system don’t deviate too far from Chainlink’s price data or using Chainlink to supply interest rates for determining interest payments on loans. Firms like Celsius (over $600M in user funds) and Digitex are already working with Chainlink to implement these features and many of the largest South Korean banks are working to provide data feeds for it.

Lastly, Chainlink serves a blockchain abstraction layer for enterprises, allowing them to interact with any blockchain platform through a single gateway. By providing a single communication bridge with access to all blockchains, enterprises can sell data and services across blockchains. They can also build on and/or integrate with any blockchain environment as part of a comprehensive strategy of both internal dApp development and external synchronization with blockchains used by their counterparties. This vastly reduces the time and costs of integrating with all the various chains and prevents lock-in to a single platform.

As an example, the Depository Trust & Clearing Corporation (DTCC), the post-trade financial services company clearing and settling the majority of financial securities in the United States (handles $1.7 quadrillion dollars worldwide), developed a case study of using the Ethereum mainnet, a Compliance Oracle, and APIs to tokenize securities and use them within the decentralized finance ecosystem. As the largest financial value processor in the world, DTCC is actively looking to use blockchain oracles as a fundamental piece of their infrastructure that connects together all the various elements, which will no doubt have to be flexible enough to support any existing or future chain and any legacy systems. A DTCC compliance oracle alone absolutely dwarfs any notion of Zeus Capital’s estimate.

Claim #9: Secondary Provider

This is another provable lie where no evidence is provided to back up its claim. The vast majority of DeFi projects that require oracles are utilizing Chainlink, with the next closest being Maker’s stagnating oracle network. Every other oracle project out there is either not yet live or doesn’t receive any in-production adoption. Chainlink not only has more users and secures more value on mainnet today than any other oracle network by a wide margin, but it’s also accelerating in adoption, which can’t be said about any of its competitors.

There hasn’t been a single project who has ever stated that they were using Chainlink to “take advantage of Chainlink’s deep pockets” or anything similar. This claim has no proof and goes against public statements by paying users who have integrated Chainlink as their primary/sole oracle solution. It’s exemplified best in a recent blog post published by bZx, a margin trading DeFi protocol that integrated Chainlink, stating:

Chainlink is the industry standard and most widely used oracle solution in the smart contract ecosystem; to say it is only a ‘secondary data provider’ is simply a lie.

Claim #10: Economics and Competition

This claim falls apart for the same reason as claim #7, Chainlink oracle networks are utilized and funded by numerous entities, where each new user lowers the cost for every existing and future user. After a data request is on-chain, any smart contract can query the Chainlink aggregator contract for its current value, only paying for the gas costs which are network dependent. Additionally, with Chainlink networks being subsidized to bootstrap the network during its early days, the costs are lowered even further (a key advantage of having a native network token).

Chainlink oracle networks do not sacrifice on decentralization, transparency, or accuracy. Quality comes at a cost, and while there are cheaper options, every other oracle project makes serious trade-offs that put it at a disadvantage to Chainlink. Many other oracle networks only showcase lower costs by running a centralized operation, relying on on-chain data, or utilizing low-quality free APIs, all of which are subject to several severe attack vectors that put users’ funds at serious risk. There is no clearer evidence that these tradeoffs are important to dApp developers than Chainlink being the most used and fastest-growing oracle network in the market bar none.

Chainlink is also clearly aware that it must lower costs while maintaining still core features, hence why it is set to launch the Flux Aggregator and Threshold Signatures. These two features will make it the cheapest oracle network to use in the market in addition to the shared cost model and all the other superior guarantees it provides.

Other oracle projects are extremely unlikely to ever reach tech parity with Chainlink, as many are only applicable within DeFi while Chainlink is fully generalized and can be used far beyond just crypto price feeds. The network effects of Chainlink will be near impossible to contend with, especially considering all the other oracle networks mentioned run oracles as a secondary function of their protocol, whereas Chainlink is solely dedicated to oracles. Chainlink’s network effects on both usage, addressable market, and first-mover advantage are nearing a point of escape velocity.

Let’s briefly examine some of the issues with the competitors mentioned above:

• MakerDAO’s oracles are highly opaque, where 75% of the whitelisted nodes are anonymous. Maker oracles’ data quality is vulnerable to volume shifts, especially in thinly traded markets, as nodes pull data from pre-selected exchanges. This is especially concerning given all the new collateral additions. Additionally, they only offer oracles for a few crypto price feeds and only have a handful of users, which appears to have stagnated in new adoption.
• Uniswap v1 is a highly insecure oracle solution, which has led to protocols getting oracle attacked and losing user funds. Uniswap v2 and it’s Time Weighted Average Price (TWAP) based oracle is set up in a manner where price accuracy is inversely correlated with tamper-resistance, meaning it’s hard to get both price accuracy and security. Additionally, Uniwap only supports price feeds for Ethereum tokens and the only known user is Augur, showing real limitations in network effects.
• Compound’s current oracle solution is centralized, completely under the control of the core team, and only used by Compound. They are working on an Open Oracle System which is designed to support signed price data (a feature Chainlink has supported since day one) taken directly from cryptocurrency exchanges, opening it up to similar attack vectors like Maker. Compound’s OOS is not live and does not have any planned users outside of Compound.

Any oracle network you could ever desire can be built using the “toolbox of Chainlink.” There is no need for another oracle solution when Chainlink is already decentralized at both the node operator the data source level, connects to every blockchain imaginable, and offers connections to every off-chain service that exists today or into the future with modular and expandable external adapters. Anybody wanting additional security can use the Chainlink Meta Oracle.

Claim #11: Team

While credentials are important, the initial assumption of ‘professional experience’ being the main and only critical driver to success in a new industry is a bit misguided. New industries require pioneers, hence Vitalik didn’t have professional experience before he created Ethereum and many of the best blockchain developers are not always involved in the corporate professional world.

Despite that, a quick look at the team and its advisors shows that the team is unparalleled in the blockchain space. The Chainlink co-founders have been studying and building externally-connected smart contracts and blockchain oracle technology since at least 2014 when SmartContract.com was launched (before the launch of Ethereum). The team has worked directly with top developers and enterprises who need blockchain oracles and has produced original research developments like TownCrier, Threshold signatures, Mixicles, and more. Chainlink’s 40+ person development team features seasoned experts in blockchains, oracles, cryptography, machine learning, artificial intelligence, and business development.

Co-Founder Sergey Nazarov

• Started building smart contracts pre-Ethereum in 2014
• Built the first widely used interface for DEXes
• Built the first blockchain-based email service
• Built the first centralized oracle service
• Last but not least, built the first decentralized oracle network

CMO Adelyn Zhou

• Lead companies that have been acquired by Amazon
• Expert in applied artificial intelligence
• Best selling Amazon author
• Graduated from Harvard Business School.

CTO Steve Ellis

• Worked previously a software engineer and team lead at Pivotal Labs
• Built mission-critical systems securing sensitive HIPAA compliant data and building scalable payments automation software.
• Oversees countless engineers and integration specialists who aid in the development and deployment of Chainlink oracle networks

Additionally, they have a top tier list of business and technical advisors:

Ari Juels

• Professor of Computer Science at the Jacobs Institute at Cornell Tech
• Former chief scientist of RSA
• Formalized Proof of Work consensus in 1999 (powers Bitcoin and Ethereum)
• Created Proof of Retrievability in 2014 (powers FileCoin and Sia)
• Co-author of the Chainlink whitepaper in 2017 and only works with Chainlink
• Co-author of the Mixicles whitepaper in 2019
• Co-founder of The Initiative For CryptoCurrencies & Contracts (IC3)
• 36,000 total scholarly citations

Tom Gonser

• Founder of DocuSign, the industry-leading e-signature provider in the world
• Joined as a business advisor to Chainlink in early 2019

Andrew Miller

• Decentralized consensus researcher
• Associate Professor at the University of Illinois
• Associate Director of the Initiative for Cryptocurrencies and Contracts (IC3)
• Board member of the Zcash Foundation and Ethereum Enterprise Alliance
• Advisor to both Zcash and Tezos

Evan Cheng

• Former Senior Manager at Apple
• Director of Engineering Blockchain at Facebook
• Co-creator of the LLVM, which generates the low-level machine code running every Apple device, as well as much of Google, Nvidia, and Intel

Hudson Jameson

• Ethereum Core Dev and developer liaison at the Ethereum Foundation (the glue between Eth core devs and the community)

These are just some of the many other highly experienced and knowledgeable engineers, business leaders, academics, and more that make up the Chainlink team. Chainlink is rapidly expanding too, with numerous job openings for integration engineers and software developers, further evidence of the growing demand for Chainlink.

The “focused on marketing” claim is ironic too, considering for the first year after their 2017 ICO Chainlink got mocked by many for its lack of advertising and community outreach as they put their head down and built the foundation of what would become the Chainlink network. This was in stark comparison to every other crypto project that was heavily promoting themselves and claiming it could solve the world’s problems. In fact, you will be lucky to find a single instance of the Founders or team talking about the token.

Claim #12: Code Progress

This is provably false as the SmartContract developers and other open source contributors have launched major changes and upgrades to the Chainlink repo on Github over time. Cosmetic changes exist but are only minor additions that pale in comparison to the technology being built. The team is working on numerous new innovative technologies in order to scale the Chainlink protocol, enable data privacy, and generate secure randomness.

The first major development being worked on is Threshold Signatures, which will enable transaction batching within oracle networks and substantially reduce gas costs. This enables highly decentralized oracle networks that are economically and technologically feasible, allowing Chainlink oracle networks to secure more value in-production.

The second major development is Mixicles (mixers + oracles), which provide smart contracts privacy for both the terms and outcomes of the financial instruments they execute. Additionally, this is done without expensive cryptography and can support rigorous regulatory and auditing requirements, all of which are a requirement for enterprise adoption of smart contracts.

The last, but definitely not least major technological innovation being built is Chainlink VRF, a verifiable randomness function that gives smart contracts access to on-chain randomness that is tamper-resistant against miner attacks and fully verifiable by users. This will initially power blockchain gaming and NFT applications that need a secure source of RNG. PoolTogether and countless other blockchain gaming applications have already committed to using Chainlink VRF. Additionally, this work is being done in tandem with threshold signatures to solve data withholding attacks.

In the past month alone there have been 4 new Chainlink client updates, 74 merged pull requests, and dozens of contributions from the Chainlink team and external developers. The majority of the activity was not cosmetic, but upgrades to the Chainlink protocol itself, the node software, and system of smart contracts, which can be fully verified on Chainlink’s open-source GitHub activity page. The team also has an active bounty program on Gitcoin to allow the open-source community to contribute in its development and help make it more secure.

The team makes their development progress transparent and available to everyone through their public pivotal tracker, which shows the development progress over time and the features currently being worked upon. This means rather than a vague roadmap with arbitrary deadlines, the Chainlink team provides context into the work being done on the protocol.

There has also been numerous contributions to the Chainlink codebase on GitHub from external projects such as Parity (the team behind Polkadot), Tezos, Ontology, Harmony, Near Protocol, Binance, and more. These teams are actively developing native support for Chainlink within their own platforms and have merged changes that allow this to be possible.

Conclusion

Now that we have laid out all the evidence and disputed their report, let’s take a holistic view of the situation. This report was created by a completely anonymous and untrustworthy source known as “Zeus Capital LLP” that not only impersonated a legitimate investment firm “Zeus Capital Ltd” and lied about being a limited liability partnership, but paid for non-stop advertisements containing hyperbolic claims and unbacked accusations of mal-intent. The contact information on their website and in the report is fake, making them impossible to contact, identify, or openly debate.

Their claimed partners have denied any connections and have already asked numerous times to be removed from their website. They have paid influencers to drive their narrative and have blocked anyone on Twitter who dare question it. Lastly, Zeus has openly stated they are short LINK and continually encourage others to follow along using leverage, even giving people a step by step guide on how to do so.

Looking beyond the firm, the Chainlink report is filled with an overabundance of provable lies, unbacked claims, and gross misinformation that tries to overwhelm a novice reader and waste the time of an honest researcher. As we have shown above, Zeus never had honest intentions when they published their report, hence why they are hiding their identities. It was designed solely to manipulate the emotions of the reader and craft a very specific narrative that’s completely disconnected from the scope of reality in order to deceive others into selling.

Zeus Capital has unilaterally failed in its attempt to short and distort the Chainlink project and its token LINK. Not only has the price of LINK appreciated since Zeus published their report, but it actually had a complete inverse effect of rallying the wider blockchain community around Chainlink in order to push back and call out Zeus’s heavy-handed tactics and paid disinformation campaign. Shorting one of the most innovative and fastest-growing projects in the blockchain ecosystem has not only turned out to be an abysmal failure but it serves as a perfect case study for why you can’t trust everything you read. In general, betting against technological innovation, especially one with a track record of consistently delivering and winning, is a surefire way to be on the wrong side of history. The entities behind Zeus Capital are likely to never recover financially, which is why they continue to lash out and showcase their utter desperation.

Despite this disinformation campaign, Chainlink and its ecosystem of partners, users, developers, and token holders are completely unphased and continue towards the same goal of making smart contracts the dominant form of contractual agreement throughout the world. Chainlink is stronger than ever and continues to grow at an exponential rate with new integrations and developers joining the ecosystem every day.

Hopefully, by reading this article, you understand the great lengths that desperate entities will go to in order to cover their financial losses. We recommend you independently verify all the information within this article and become more educated on the innovation taking place by Chainlink and smart contracts as a whole.

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