Important Notice: If you do not understand the basics of blockchain, distributed ledger technology, smart contracts, and oracles then it might be helpful to first read the following article, as it will help you understand the contents of this article. It also provides a very in-depth look at Chainlink for those who want to learn more.
Emerging technologies, such as blockchain-based assets, can be extremely volatile investments that are largely driven by emotion and speculation. The up and down nature of this new market, which predominately consists of unproven start-ups that currently produce no revenue, leaves institutional investment managers with perplexing decisions when it comes to whether or not they can and will participate in this new space.
Unlike individual speculators who can afford to take more risk, institutional managers have exponentially more pressure and responsibility, given they’re managing trillions of dollars worth of others peoples money. Much of this capital is not simple play money either, but rather money people rely on in their day-to-day lives, such as their retirement funds.
Despite the obvious risks, lacking any exposure to blockchain investments comes with many downsides as well, such as missing out on potentially massive returns compared to the more traditional markets. Just imagine how much money most investment funds left on the table by choosing not to participate in the tech boom, especially after the initial crash. Having just a minimum amount of exposure, such as 1% of assets under management, could bring about immense returns for their clients, especially if they pick a project that goes on to become the blockchain equivalent of Apple or Google.
With traditional markets struggling to stay above water, let alone appreciate in value, and blockchain starting to establish itself as a legitimate enterprise technology for the future, it makes sense for institutional investors to consider taking positions in a couple of fundamentally sound blockchain-based investments. Everyone recognizes Bitcoin and Ethereum as potentially good investments, but one project that every institutional investor needs to become familiar with, and ultimately establish a position in, is the decentralized trustless middleware/oracle service, Chainlink. Here are the top five reasons why.
1) Crucial Use Case
Many people are starting to come to terms with the fact that smart contracts are the future of digital agreements, given all the benefits they bring about, such as cost savings and trust enhancement. The problem though is that most applications that utilize smart contracts are very limited in functionality because their network is isolated from the legacy systems of enterprise today. Basically, blockchains are like digital islands cut off from the data of the rest of the world, which clearly is a problem if they intend to see widespread adoption.
These technical limitations mean that smart contracts cannot access the data sitting in existing systems, which is required to trigger their execution, for example knowing the outcome of a sports game to determine who gets paid out in the sports bet. They also are disconnected with external resources like bank payments, which is another hurdle to mass adoption since most smart contracts are more than likely going to be done in fiat, at least initially. Smart contracts that can’t access data and can’t trigger bank payouts will be limited to a niche market with little interest from the greater enterprise world.
Most of the world’s data exists outside the blockchain, so having a bridge between old legacy systems and new distributed ledger technology (DLT) is crucial. It allows legacy systems and new DLT to leverage the advantages of one another, allowing them to benefit from each other. Chainlink provides this bridge by introducing a third party, trustless middleware into the smart contract ecosystem, which connects these two worlds together through the use of APIs. This new level of connectivity will make most DAPPs operational for the first time, since a majority of them need connection to external data sources to execute protocols. It also monetizes the data in legacy systems, which is vital since most existing businesses will want to offer their resources to smart contract creators, thus opening up new revenue streams.
The truth is that the blockchain ecosystem and legacy enterprise desperately need Chainlink’s middleware to commingle and thrive. While most blockchain startups are aiming to replace legacy systems, Chainlink is uniquely positioned to allow both worlds to support one another, which is promising since the legacy enterprise isn’t going away any time soon and neither is the blockchain as a service. Given this reality, it makes investing in it a much easier decision, since the purpose for it to exist is extremely warranted and there are clients, both startup and established, already waiting to use it. Being able to benefit both sides of this technological divide is an extremely promising proposition for a startup to offer.
2) Long-Term Vision
Most people with knowledge in the space understand that distributed ledger technology is still in its beginning stages and will take years to fully realize its potential. For this reason, having a long-term vision for your project that is capable of solving both immediate and long-term issues is crucial to sustained success. As a result, Chainlink is putting a heavy emphasis on their medium-to-long-term vision of providing off-chain computation for smart contracts in groundbreaking new methods known as Trusted Execution Environments or TEE for short.
Utilizing Trusted Execution Environments, through the use of trusted hardware like Intel SGX, Chainlink can offer both scalability and privacy to smart contract platforms and legacy enterprise alike. These are the biggest problems facing the blockchain space today, along with connectivity, which is their immediate focus as discussed above. The use of off-chain computation takes much needed pressure off smart contract platforms, which allows them to focus on being databases for finality settlements. This speeds up processing, provides privacy of data, and keeps the main chain fully decentralized. This is similar to how the Lightning Network is aiming to take most of the day-to-day transactions off-chain, while final settlements are conducted on the Bitcoin main chain.
There is also the possibility of WASM (WebAssembly) being introduced, which could allow all types of processes to happen in these trusted execution environments, giving rise to use cases far beyond smart contracts. The fact that the Chainlink team is looking at several privacy solutions, several computational features, and constantly working with research institutions like Cornell’s IC3, enables them to remain at the cutting edge of this new technology, which is deeply promising for the future trajectory and success of the project. They clearly understand the core problems holding back adoption, privacy, and scalability, and by solving them they would position themselves as one of the premier projects in the entire space.
3) A Well Connected Team
The most important aspect when evaluating new, unproven assets is gauging the quality of the team backing the project. The team is the one steering the ship and even if the ship malfunctions, good captains can right the wrongs and still make it to shore. Chainlink’s founder, Sergey Nazarov, and his company SmartContract have been building enterprise oracles for companies like premier bank messaging service, SWIFT, for years prior to the launch of Chainlink. This success led to two successful proof of concept’s for SWIFT, in which they showcased a smart bond that was able to take the interest rates of five banks, aggregate them into an average rate, and use it to execute a payment that translated into a SWIFT payment message.
Their connection though goes beyond SWIFT and their founder Sergey, and extends to some of the most fundamentally solid partnerships in the blockchain space. This includes partnerships with many of the base protocols setting the standards for the decentralized legal system (Accord and OpenLaw), the decentralized web (Web3 and Polkadot), decentralized shipping and logistics (Morpheus), and decentralized finance (SWIFT and Market Protocol). These are not your average startups either, as Accord is supported by many of the top law firms in the world, OpenLaw is backed by ConsenSys (Joseph Lubin, cofounder of Ethereum) and partnered with the online legal service Rocket Lawyer, Web3/Polkadot is lead by Ethereum co-founder Gavin Wood, and SWIFT is the largest interbank payment messaging network in the world.
They also have two solid advisors in Ari Juels, a leading PhD security expert from Cornell and former Chief Scientist of RSA, and Evan Cheng, Head of Engineering for Facebook and recently tapped to head the Blockchain Department at Facebook as well. Both of these advisors have a wealth of knowledge and experience in both legacy systems and the blockchain space, which is very fitting given Chainlink aims to be the bridge between the two.
Another major development for Chainlink is their recent acquisition of Town Crier, a software paired with SGX hardware oracles developed by Cornell’s IC3, the leading blockchain research and development group, headed by none other than Ari Juels. By absorbing Town Crier, Chainlink inherits the clients already exploring the use of the SGX oracle, as well as close access to the big name clients in the IC3, of which Chainlink is also a member. As stated, in the long-term vision, the use of trusted hardware is essential to big business adoption of smart contracts, so by Chainlink acquiring the industry software standard in SGX oracles, they become the market leader in off-chain computation through trusted hardware. This is not to be understated.
It has become rather apparent that Chainlink has a highly capable and experienced team, with the advisors and business connections needed to establish itself as the industry standard for oracle services and off-chain computation using trusted hardware. While some projects advertise the smallest of strategic partnerships, Chainlink’s non-hype mentality, despite having arguably the most well connected team in the space, is very appealing to investors, especially since they’re driving interest from both the blockchain world and legacy enterprise. Having the brightest minds and most powerful institutions in the world behind a project is about as good of a ‘recipe for success’, as a potential investor could ask for.
4) Lack of Competition
In any new, worthwhile market there will surely be competition. In fact, if there is not competition then usually that market is not lucrative. However, when it comes to the competition, Chainlink is far and away the market leader, which is echoed by their partners in their partnership press releases.
There are really three types of competition Chainlink faces: centralized oracles, other decentralized oracle networks, and other off-chain computation environments.
In terms of centralized competitors, Oraclize would be the main one, as it is the current choice for smart contracts needing oracle services. The problem though is that smart contracts are supposed to be trustless end-to-end, meaning they are highly secure and tamperproof throughout the entire process. Using a centralized oracle service, like Oraclize, will take the features of trustlessness away since it provides a single point of attack for a hacker and allows the opportunity for the centralized oracle provider to tamper with the contract. This creates major issues of trust and security and will likely not see adoption for self-executing contracts of any real importance and of any large monetary value.
The other possibility as it pertains to centralized oracle competition is that a company could choose to make their own centralized oracles in-house, or use a distributed permissioned oracle. This method also leads to complications, especially as it pertains to trust. Companies will have to trust each other with their data, which they are not likely to do. They also run into trust issues stemming from intellectual property as whoever developed the oracle may be able to exert more influence over the network than others.
The decentralized oracle competitors consist primarily of Shintaku and Witnet, while there are oracle market places that aim for decentralization like ZAP and Mobius. While these projects could compete for market share, the reality is that they are far behind in terms of development, business connections, and implementation. Some are barely past the whitepaper stage, while others don’t differ much from centralized oracles, leaving real doubt in their viability to compete with Chainlink. Even if they do take market share, it is likely to be the low hanging fruit, as Chainlink is well positioned to be the industry standard in the legal, financial, and business worlds.
There is also Enigma, and Ekiden, which are aiming to compete in terms of off-chain computation. These projects do have more solid foundations in terms of academic support, but they are still very much in the beginning stages of development. Some people even think these projects could compliment Chainlink by providing different options for Chainlink users when it comes to choosing a trusted execution environment. Regardless, Chainlink obviously doesn’t need 100% market share in order to be successful, so it’s encouraged that competition come into the market and challenge them. The fact that Chainlink is already referred to as the ‘market leader’ by its partners, bodes well for Chainlink’s future. First mover advantage in the decentralized oracle space will have huge benefits in terms of network effects and adoption.
5) Token Economics
Since these are new assets, new economic models are required when determining how to value the asset underpinning the network. The use case can be crucial, the team can be phenomenal, and the competitors can be weak, but if the economics of how the token is implemented are less than favorable, then investing in the project is ultimately fruitless. Chainlink’s token economics are very strong, meaning the token should have immense value if they reach their full potential.
There are primarily two use cases for the token, paying node operators for their services, whether that be for connecting them to off-chain resources or providing off-chain computation, as well as acting as collateral insurance on smart contracts. This means that the value of the token has to equal both the amount of total payments to node operators at a given time, plus the amount of total collateral needed to cover all the contracts at a given time.
The implications of this are that the higher the token value, the more secure the network becomes, and the higher the network bandwidth is. It also means there is sufficient insurance backing all the smart contracts using the network to execute. This should ease the concerns of those entities concerned with being hacked or tampered with, since the responsibility for obtaining good data is placed onto the node operators, via staked tokens, as opposed to the smart contract creators themselves. Companies could even choose to have their smart contract fully backed, with the maximum depth of defense approach, utilizing high decentralization and multiple hardware requirements, which is the ultimate form of security.
The other positive is the development of fiat relays. This should enhance the customer experience since smart contract creators can pay in fiat, while the swapping of the token is done in the background. The user friendliness, mixed with the actual utility of the token, showcases solid fundamentals in terms of the actual use of the token, which is what people are speculating on in the first place when investing in Chainlink.
As profitable opportunities dry up in traditional markets, Chainlink could turn out to be one the best investment prospects for those seeking assets uncorrelated to the usual portfolio of stocks, bonds, and real estate. Given the crucial need for their product both short and long term, the quality of their team/network, the lack of competition, and the lucrative tokenomics at play, it could pay off to start viewing Chainlink as a blue chip blockchain asset like Bitcoin or Ethereum, especially given their current valuation in comparison.
Obviously no one is expecting institutional money to jump in headfirst, but giving consideration to a small portfolio allocation might make some sense. If you’re wrong, well there wasn’t a lot at risk, but if you’re right, it will likely be one the best investments in your entire portfolio. Is the risk vs. reward ratio worth it? I say Yes.
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