Chainlink up 800% since the start of the year: hype, speculation or technology

In 2020, LINK surged by 830% and outpaced Bitcoin and most liquid altcoins in terms of returns. At the time of writing the asset ranks fifth by market capitalization.

The project has many detractors who regard LINK’s rise as a speculative bubble. But supporters point to the high popularity of decentralized oracles in the DeFi sector and say the demand for the technology is the reason for its success.

ForkLog has examined the arguments on both sides and determined what lies behind Chainlink’s success—speculation, fundamentals or a confluence of circumstances.

Active community and fierce critics

The rise in LINK’s price this year has been accompanied by record trading volumes, a threefold increase in new addresses and growth in active wallets.

Since the start of the year the number of addresses in the network rose from 200,000 to 674,000, of which non-zero balance addresses

The number of addresses with non-zero balance grew from 82,000 to 207,000, with zero-balance addresses rising from 118,000 to 467,000.

According to analytics platform IntoTheBlock, in June this year the network added an average of 1,300–1,700 new addresses per day; in July there were peaks from 2,000 to 6,000, and in August spikes from 3,000 to 10,000. A year earlier the figure was only 300–500.

The number of active addresses in early summer stood at 3,000–5,000 per day, but by August it ranged from 7,000 to 23,000.

Chainlink has an active community that promotes the coin. The most ardent supporters call themselves LINK Marines — it is estimated that their number reaches 50,000 people. They flood Twitter, Reddit, Medium and other social networks with messages about the project.

In mid-July, unknown actors published a report ‘Chainlink Fraud Exposé’ under a fake Twitter account of the British investment bank Zeus Capital and accused the Chainlink team of a scam. The authors claimed to have opened a short position on LINK and urged others to follow suit. They also offered some Twitter bloggers to publish negative reviews of the project for money.

The publication of the report briefly pushed LINK’s price down, but it soon emerged that the real Zeus Capital had nothing to do with it. The Chainlink community concluded that the report was the work of competitors.

What are decentralized oracles?

Chainlink is a decentralized oracle service on Ethereum.

Blockchains do not have access to information outside the network, so they require special programs — oracles — that provide data from external sources for smart contracts. Chainlink connects them via APIs to external resources: to decentralized applications, payments and corporate systems.

Oracles are in demand among data providers, blockchain startups and in the DeFi sector. Many companies using smart contracts have their own oracle solutions, but even for many tasks they need third-party decentralized systems. In addition, many teams prefer to develop the core product and delegate oracles to external services.

Centralized oracles rely on only one information source. In such cases there is always a risk of error. For example, if a smart contract needs to know the price of two assets, querying data from only one exchange is not ideal.

Chainlink is supported by a network of oracles. Smart contracts receive information that has been verified by the consensus of oracles. This eliminates the chance of data distortion.

LINK fuels the Chainlink ecosystem and is used to pay for services in the network. Any company using Chainlink oracles buys coins to pay for data collection and provisioning. The token has a capped supply — 1 billion coins.

Partnerships and integrations

The Chainlink team continually announces new partnerships, but many are cosmetic, and their real impact on the project’s development is overstated. The market, however, reacts positively to such news.

In 2019 the project announced dozens of partnerships with major firms, including Google Cloud and Oracle.

We’re thrilled to work with great companies like Oracle and their @oraclestartup team, which has graciously offered to support 50+ Chainlink nodes/teams that will be providing high-quality inputs and outputs into Oracle’s various blockchain environments @fribeiro1 #smartcontracts pic.twitter.com/MqFW6faS5d

— Chainlink — Official Channel (@chainlink) June 25, 2019

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There is no official agreement with Google: the company simply published a blog post about how to use the service.

Learn how to use Chainlink services to provide data from #BigQuery crypto public datasets on-chain, which helps reduce inefficiencies & enables new on-chain business models to emerge by adding entirely new capabilities to Ethereum smart contracts ↓ https://t.co/yVekclgafQ

— Google Cloud Platform (@GCPcloud) June 13, 2019

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At the beginning of the year the Chainlink ecosystem counted more than 100 participants and partners. Now there are several dozen more.

On Twitter, the team posts at least one partnership per week. Here are the most significant ones announced this year:

• Chainlink announced integrations with Fantom, Celsius Network, Cypherium, Swipe and Plasm, and others.
• A Deutsche Telekom unit launched a Chainlink node.
• China’s infrastructure blockchain platform BSN plans to launch a cross-chain hub based on Chainlink oracles in October this year. Read more about BSN at the link.
• Chainlink joined the governing committee of The Baseline Protocol — the corporate Ethereum protocol from EY, Microsoft and ConsenSys.

Chainlink as an industry standard in DeFi

Chainlink has become an important part of the DeFi sector. A substantial part of the ecosystem relies on the project’s oracles, which have already become an industry standard. The project has carved a niche with virtually no competition, which has allowed it to effectively become a monopoly.

Decentralized oracles improve the security of DeFi protocols. For example, they determine cryptocurrency prices when issuing loans. In February this year a hacker siphoned almost $1 million from bZx by manipulating prices. This was possible because bZx relied solely on the Kyber oracle. After the incident, bZx switched to Chainlink. Read more about the attack at the link.

Chainlink oracles are already used by Aave, Ampleforth, bZx, Celsius Network, Loopring, Polkadot, Synthetix and others.

Conclusion

The LINK rally is, to some extent, a consequence of hype and the fear of missing out (FOMO); however, demand for decentralized oracles is indeed rising rapidly due to their immunity to data distortion.

Looking ahead, Chainlink may face the following challenges:

• Scalability and dependence on Ethereum (primarily high gas fees);
• Rising competition from centralized oracles and from DeFi-protocols’ own solutions;
• A prolonged testing period (most core features remain unavailable, e.g., staking); launch timelines for the mainnet have not been disclosed;
• Price manipulation. Some observers have noted that the project founders could dump large volumes of coins at price peaks, manipulating the price. For example, in August 2019 the Chainlink team could dispose of up to $40 million worth of coins when the price peaked.

Victor Sikirin

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