With Smartcon 2023 upon us, it’s time to talk about Chainlink.
Being the primary Oracle provider in DeFi, Chainlink needs no introduction. This year, the procotol has continued to make waves with initiatives like Chainlink BUILD, an integration with SWIFT, and Chainlink CCIP (Cross-chain Interoperability Protocol).
Over and out ⬇
Background on Chainlink & Oracles
Chainlink operates Oracle networks, which are computational environments for trust-minimized calculations.
These Oracle networks extend the blockchain's native capabilities, allowing consensus on things beyond just token ledgers, private key signatures, and state machines.
Chainlink doesn't have its own blockchain but serves as a framework for creating Oracle networks tailored to specific problems.
These networks aggregate data from multiple sources, making them resistant to manipulations like flash loan attacks.
It can be complicated and costly for application creators to build this kind of infrastructure themselves.
CEO Sergey Nazarov believes developers and founders would rather focus on building applications using existing and reliable infrastructure.
Multiple DeFi protocols already use separate Oracle networks for different types of data and functionalities like automation and cross-chain connectivity.
Chainlink automation helps protocol self-regulate and even handle identity data if the asset is to be purchased by a bank.
Oracle networks deal with more than just data; they also handle off-chain computation, including inter-chain communications. Sergey says that these networks have found adoption among the trust-sensitive DeFi user base.
Oracle networks and blockchains have a symbiotic relationship, each increasing the utility of the other.
Chainlink has processed over $8.5 trillion worth of transaction value, the majority of this being processed in 2022.
They are also the largest provider for proof of reserves and other types of data.
Chainlink secures 344 protocols and ~$11.35B in TVL, laying claim to nearly half of the market share in the Oracle space.
Source: DefiLlama
Chainlink's Oracle networks are soon to include functions that offer critical capabilities for interacting with various external systems.
CEO Sergey Nazarov compares Chainlink's evolution to that of Amazon Web Services (AWS), which also started with a specific focus but expanded its services over time.
Chainlink CCIP
Sergey says that the real issue in crypto isn't about where the value is stored—be it in banks or crypto wallets—but rather that all these values are disconnected.
Chainlink is working on the Cross-Chain Interoperability Protocol (CCIP) to solve this issue.
CCIP aims to create a single "internet of contracts" where all chains, whether bank chains or public chains, can connect to each other.
Recently, the protocol has implemented cross-chain communication features, which utilize Oracle networks as a validator set.
This feature allows for the movement of both value and messages across chains.
It can also combine value with messages, offering advanced functionality where you can instruct what should be done with your value upon reaching its destination.
CEO Sergey Nazarov compares Chainlink's evolution to that of Amazon Web Services (AWS), which also started with a specific focus but expanded its services over time.
From a banking perspective, CCIP offers a one-stop integration to connect to thousands of blockchain networks.
Banks can use their existing infrastructure to integrate with these networks, which is crucial because they are unlikely to abandon their decades-old systems.
This connectivity is essential because banks will become their own sources of liquidity, customers, and users, requiring them to interact with multiple chains within the traditional financial sector.
Chainlink's approach also allows data and value to be combined, facilitating easier integration for banks and other financial institutions with the crypto ecosystem.
By reducing friction, value can flow from the traditional sector, which is in the hundreds of trillions of dollars, into crypto and DeFi protocols.
Banks can also contribute real-world asset tokens to the DeFi ecosystem, diversifying its collateral and reducing systemic risk.
This means if there's a downturn in crypto, DeFi protocols wouldn't be as vulnerable if they're backed by other forms of assets like treasury bills or gold coins.
Chainlink's role isn’t to mint these RWA tokens, but to enrich them with real-world data through its proof-of-reserves service.
This ensures that the token remains backed by a certain amount of real-world assets, like gold in a vault.
Chainlink's CCIP system will also facilitate the purchase of these tokens across various chains, providing critical data to maintain the token's real-world anchor.
Without real-world anchors, these tokens would not be genuine real-world assets.
Chainlink's CCIP network aims to be the largest global single liquidity layer across all public and private chains, keeping tokens updated, or "enriched," with real-world data to manage risk effectively.
Vision for the Future
Sergey presents two scenarios for the future of crypto: the fast case and the slow case.
In the slow case, he says the crypto industry will continue to gradually attract more users and grow, improving in terms of experience, speed, privacy, and scalability.
He mentions that the industry has passed the point of no return and is large enough to attract talented people to build great applications.
In the fast case, Sergey describes a situation where significant financial or societal failures that cannot be managed by governments lead people to realize the fragility of existing systems.
This, in turn, makes the cryptographically guaranteed world extremely attractive.
He says that any organization that does not offer cryptographic guarantees will be at a disadvantage, similar to not being on the Internet.
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