What is behind Chainlink’s rapid price growth this year?
In 2020, LINK grew by 830% and outperformed Bitcoin and most famous altcoins in terms of profit for investors. At the time of writing, the asset was ranked fifth in terms of capitalization. The project has many critics who see LINK’s growth as a speculative bubble. But its supporters point to the high popularity of decentralized oracles in the DeFi- sector and call the demand for technology the reason for success.
An active community and implacable critics
This year’s rise in the LINK price was accompanied by record trading volumes, a three-fold increase in new addresses and an increase in the number of active wallets. Since the beginning of the year, the number of addresses in the network has increased from 200 000 to 674 000, including those with a non-zero balance. The number of addresses with a non-zero balance increased from 82 000 to 207 000, with a zero balance — from 118 000 to 467 000.
According to the IntoTheBlock, in June this year an average of 1300 to 1700 new addresses appeared online every day. In July there were already peaks of 2000 to 6000, and in August there were spikes of 3000 to 10 000. A year ago, the figure was only 300–500. The number of active addresses at the beginning of summer was 3000–5000 a day, but already in August it was between 7000 and 23 000.
Chainlink has an active coin promotion community. The hottest supporters call themselves LINK Marines — it is estimated that this community consists of more than 50 000 people. They flood Twitter, Reddit, Medium and other social networks with reports about the project.
In mid-July, unknown sources published a report titled “Chainlink’s Fraud Detection” under a fake Twitter account with British investment bank Zeus Capital and accused the Chainlink team of being a scam. The authors stated that they had opened a short position on LINK and encouraged them to follow suit. They also suggested that some Twitter bloggers publish negative feedback on the project for money.
The publication of the report briefly lowered the price of LINK, but it soon turned out that the real Zeus Capital had nothing to do with it. The Chainlink community concluded that the report was the work of its rivals.
What are decentralized oracles?
Chainlink is a decentralised oracle service on Ethereum. Blockchains do not have access to information outside the network, so they need special programmes — oracles that provide data from external sources for smart contracts. Chainlink connects them via API to external resources: decentralised applications, payment and corporate systems.
Oracle is in demand among data providers, blockchain startups and DeFi sector. Many companies using smart contracts have their own oracle solutions, but even they need third-party decentralised systems for a number of tasks. In addition, many teams prefer to develop a core product and oracle solutions to be delegated to third party services.
Centralised Oracle teams rely on only one source of information. In such cases, there is always the possibility of error. For example, if a smart contract needs to know the value of two assets, it is not very correct to request data from only one exchange.
Chainlink supports the oracle network. Smart contracts receive information that has been verified by the oracle consensus. This eliminates the possibility of data corruption.
LINK powers the Chainlink ecosystem and is used to pay for services on the network. Any company that uses Chainlink oracles buys coins to pay for collecting and providing information. The token, however, has a limited emission of 1 billion units.
Partnerships and integration
The Chainlink team is constantly announcing new partnerships, but many are formal and their real impact on project development is exaggerated. The market is responding positively to such news.
In 2019, the project reported dozens of partnerships with major firms, including Google Cloud and software supplier Oracle. There is no formal agreement with Google: the company simply published a blog post about how to use the service. At the beginning of the year, there were over 100 participants and partners in the Chainlink ecosystem. Now there are several dozen more.
On Twitter, the team posts about at least one partnership per week. These are the most important ones this year:
- Chainlink has reported on its integration with Fantom, Celsius Network, Cypherium, Swipe and Plasm, among others;
- Deutsche Telekom has launched the Chainlink node;
- The China Infrastructure Block Platform (BSN) is going to launch a communication crosschain hub based on Chainlink oracles in October this year;
- Chainlink has joined the ruling committee of The Baseline Protocol, a corporate Ethereum protocol from Ernst&Young, Microsoft and ConsenSys.
Chainlink as industry standard in DeFi market
Chainlink has become an important part of the DeFi sector. A significant part of the ecosystem relies on project oracles, which have already become the industry standard. The project has occupied a niche in which there is little competition, allowing it to become a virtual monopolist.
Decentralized oracles improve the security of DeFi-related protocols. For example, they determine the price of cryptocurrencies when issuing loans. In February this year, a hacker took almost $1 million out of bZx by manipulating prices. This was possible because bZx only relied on the Kyber oracle. After the incident, bZx switched to Chainlink. Chainlink oracles already use the protocols Aave, Ampleforth, bZx, Celsius Network, Loopring, Polkadot, Synthetix and others.
Conclusion
The LINK rally is, to some extent, a consequence of hype and fear of missing out effect (FOMO), but the demand for decentralised oracles is indeed growing rapidly due to their immunity to data corruption.
Chainlink may face the following challenges in the future:
- Scaling up and dependence on Ethereum (above all, high fees);
- Increasing competition from centralised oracles and proprietary DeFi protocol solutions;
- Protracted test period (most of the core functions are still not available, e.g. staking), no deadlines for launching the core network;
- Price manipulations. Some observers have pointed out that the project founders can sell large volumes of coins at price peaks by manipulating the price. For example, in August 2019, the Chainlink team could get rid of up to $40 million worth of coins when the price peaked.
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