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Chainlink is a decentralized oracle service provider that has built a name for itself in crypto by powering most of DeFi. Chainlink bridges the gap between various blockchain networks by enabling them to seamlessly transfer data (e.g. through price feeds) via decentralized oracles.
Today’s article tackles the tokenomics behind Chainlink and the LINK token. You’ll learn more about what LINK is used for, how it works, and the role it plays in incentivizing data providers while fending off malicious actors.
Chainlink’s main mission is solving the oracle problem. The oracle problem is a modern-day issue in which blockchain protocols and their smart contracts can’t trust the data they receive from 3rd-parties. For the oracle problem to be solved, there must be a solution that transfers data between multiple parties in a decentralized, trustless, and secure way.
Chainlink solved the oracle problem for the blockchain industry by introducing decentralized oracles. Decentralized oracles are networks, such as nodes, in which multiple participants collect data, and send that data to the node. The node is then integrated into a crypto protocol via an API connection, and the protocol’s smart contracts can receive the oracle’s data.
A classic example is a Chainlink price node. The node collects live price data for a cryptocurrency from multiple sources. These sources report an asset’s price to the node, which in return calculates the average sum and reports it to the entity utilizing the service.
Data providers show their trust via a reputation system. Those who maliciously report bad data have their staked assets slashed – similar to how Proof of Stake networks punish bad actors. An entity requesting highly sensitive data may require the node to provide a certain number of LINK as collateral. And if they do a bad job, the network takes a piece of the collateral.
Chainlink’s tokenomics has become increasingly important throughout the years. The native LINK token is slowly being integrated into the Chainlink system through a series of use cases – mainly staking. The following two sections discuss the distribution and use cases of LINK.
The LINK token launched with an initial coin offering that took place in September 2017. The ICO had a hard cap of $32 and sold LINK at a price of $0.09 per token. Moreover, investors had a 20% depending on how early they participated.
A subsequent token sale raised additional funds while selling LINK at $0.11 per token. Both the ICO and the additional sale had sold around 350 million tokens in total. LINK has a total supply of 1 billion tokens. LINK tokens were distributed in the following fashion:
At the time of writing, CoinMarketCap ranks LINK 21th on its cryptocurrency leaderboard. The token has a market cap of $3.3 billion and has a circulating supply of 507 million tokens. LINK is priced at $6.63 per token.
LINK is an ERC-20 utility token used inside the Chainlink ecosystem to incentivise data providers. Nodes providing data have to stake a certain number of LINK tokens. The network rewards them with additional LINK if they perform their duties accurately and diligently.
LINK’s most important role is acting as collateral. Locked LINK tokens can be taken away from the data provider if he maliciously sends the wrong data. Enforcing the use of LINK as mandatory collateral creates trust in an otherwise trustless sector because data providers have something to lose if they don’t perform their job well.
Slashing is an important way of controlling and establishing trust in decentralized networks. Slashing collateral has been traditionally used in Proof of Stake networks – blockchains secured by investors who lock their tokens. The mechanism is important in Chainlink as well because smart contracts are highly sensitive and require high-quality data.
Apart from serving as collateral, investors can also stake their LINK tokens. Chainlink has recently launched the first version of its long-awaited staking service. Investors can now stake their LINK holdings to increase the cryptoeconomic security of oracle services. In return, they earn passive income from the protocol in the form of a fixed 4.75% APY rate.
Chainlink is an important layer of technology that serves as the pillar of the blockchain industry’s cross-chain data highway. The protocol offers a network of decentralized oracles to data providers and dApps. Price oracles are Chainlink’s most popular iteration of a decentralized oracle network.
Decentralized oracles facilitate decentralized and trustless communication between blockchains. They’re becoming increasingly important as the crypto sector becomes more and more decentralized. The most noteworthy example of expansion in decentralization is the new DeFi ecosystem.
The LINK token is used to regulate Chainlink’s oracle services by serving as collateral. Data providers must lock a certain number of LINK tokens when applying for tasks in order to prove that they’re trustworthy. Malicious actors who fail to send data, or send inaccurate data, are punished by having their collateral slashed.
Being the most dominant decentralized oracle network in the blockchain industry, Chainlink has built quite a reputation both in DeFi and outside of it. As crypto continues to evolve we may see more utilities being developed for both Chainlink and its native LINK token.
Want to learn more about Chainlink and decentralized oracle? I recommend reading the following articles:
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