Is Chainlink The Next Big Opportunity In Crypto?

Is Chainlink The Next Big Opportunity In Crypto?
Stéphane Renevier, CFA

over 2 years ago4 mins

  • Chainlink allows users to integrate external data into smart contracts in a safe and robust way.

  • It’s the best decentralized oracle network out there, and should be a prime beneficiary of the growth of DeFi.

  • If you believe the potential for profits outweighs the risks, you could directly buy the LINK token or invest in the Grayscale Chainlink Trust.

Chainlink allows users to integrate external data into smart contracts in a safe and robust way.

It’s the best decentralized oracle network out there, and should be a prime beneficiary of the growth of DeFi.

If you believe the potential for profits outweighs the risks, you could directly buy the LINK token or invest in the Grayscale Chainlink Trust.

Mentioned in story

Decentralized finance (DeFi) has an almost unlimited number of use cases, and demand for products in the space is skyrocketing. But one of these products could be more essential than most to the market’s future growth, and its name is Chainlink.

What is Chainlink?

To understand what Chainlink is and why it’s so promising, we need to start with smart contracts.

Even if you only follow crypto from afar, you’ve probably heard of them. They’re one of the most promising innovations in the space: immutable and verifiable contracts that automatically execute themselves when certain conditions are met – a bit like a vending machine dispensing your order.

A smart contract could, for example, be programmed to send someone $100 on their birthday every year. There’s no third party involved and – since the rules are coded – no room for interpretation, which means it’s cheaper, safer, and more efficient than a traditional written contract.

But they do have one big issue: smart contracts typically only use data stored within the blockchain. That’s a problem because the most promising applications for smart contracts need real-world data from off-chain sources to be executed. A smart contract on high-value derivatives, for example, might need to know what the current interest rate is. That’s where oracle networks come in.

What are oracle networks?

Oracles essentially act as a bridge between on-chain smart contracts and the off-chain outside world. But they aren’t perfect either: oracle networks are typically centralized, which means the entire network could be at risk if even one source of data is corrupted, negating the whole point of using a blockchain in the first place.

And that’s why Chainlink is so hot right now: it’s a decentralized oracle network (DON), meaning it eliminates the single point of failure inherent to centralized networks and allows its customers to leverage the technology’s full power in a more reliable manner.

That opens up a lot of exciting opportunities – not least in the world of DeFi, which, as we mentioned, has an almost unlimited number of use cases. But to really reach its full potential, smart contracts need to be able to link to external data in a safe and robust manner.

So could Chainlink be the next big thing?

Yes, there’s a good chance it could. The network provides a solid solution to a real problem, and its use cases will continue to expand as DeFi grows.

Chainlink has established itself as the most trusted DON, and it’s already used in some of the highest profile DeFi projects: AAVE, for example, which allows depositors to earn interest by providing liquidity to a pool. It’s also established partnerships with key counterparties, like Google, SWIFT, Binance, and Oracle. Chainlink’s also designed to be used with any blockchain, making its potential applications even broader.

What’s the opportunity here?

Here’s the thing: anyone using Chainlink will have to pay the node operators using Chainlink’s native token, the LINK token. LINK is also currently used to incentivize its operators to provide high quality data.

That means that as the number of applications grows, the demand for LINK will too. And unlike bitcoin or ether, no more tokens can be created. That growing demand and fixed supply could send the token’s price much higher.

So if you believe in the bull case, there are two ways to profit: you could either buy the LINK token directly in a crypto exchange like Coinbase or Binance, or (if you have access) you could invest in the recently launched Grayscale Chainlink Trust.

What’s the catch?

As with anything crypto-related, the rewards can be high, but so can the risks. And I see three big risks to Chainlink:

It’s up against stiff competition. Chainlink isn’t without its critics, and there are plenty of other projects vying to become the top DON. And while it should benefit from network effects due to its leading position in the space, it still covers a relatively small number of oracles, meaning the number of clients actually implementing the technology remains somewhat limited.

LINK won’t necessarily succeed even if Chainlink does. There are a few reasons that could happen. Another token could, for example, be used within the network, reducing the demand for LINK. It’s not necessarily likely, but it definitely remains a possibility.

DeFi could fail to live up to expectations. DeFI is a young field, and there are plenty of potential risks from regulation, technological barriers, and even fading demand. And if that happens, Chainlink and LINK would probably be among the first casualties.

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