Though public opinion about cryptocurrencies run the entire gamut of human emotions, from utter skepticism to raging speculation and everything in between, the divide tends to focus on the fundamentals of cryptos or lack thereof. Interestingly, Chainlink (CCC:LINK-USD) was one of the digital assets — a blockchain-based token in this case — to help establish mainstream credibility. But so far, progress has been wanting.
At first glance, though, you might assume that Chainlink has all the right ingredients to bridge the gap between the blockchain and traditional technological functions. CoinMarketCap provides this definition:
“Chainlink is a blockchain abstraction layer that enables universally connected smart contracts. Through a decentralized oracle network, Chainlink allows blockchains to securely interact with external data feeds, events and payment methods, providing the critical off-chain information needed by complex smart contracts to become the dominant form of digital agreement.”
Wow, what a mouthful. But let’s just try to break this down in pieces.
Chainlink as an Evolution
If you’re new to the crypto sector, you should prepare yourself for these convoluted descriptions. To fully appreciate Chainlink, you should consider blockchain development as an evolution. First, cryptos focused on peer-to-peer (P2P) transactions, basically allowing people to send assets of value across borders cheaply and without a human intermediary.
Next came the concept of smart contracts. In the traditional or “analog” business world, contracts usually require a human intermediary (i.e., a broker) to ensure contractual integrity. However, blockchain technology can theoretically replace such intermediaries and become a perfect, faultless broker.
But the problem with the above is that such contractual agreements must occur within the confines of the blockchain. The beauty of Chainlink is that it can grab data that resides outside the blockchain.
Through this innovation, Chainlink can oversee and facilitate smart contracts levered to off-chain data (i.e. weather reports, oil prices, sports scores, whatever), thereby bringing unprecedented flexibility to the blockchain.
There’s just one nagging problem, because of course there is.
What’s the Economic Incentive for LINK?
While the technical infrastructure that undergirds Chainlink and many other blockchain projects is impressive, it may also miss the point altogether without an enticing economic incentive. That is to say, what the heck is the point of LINK?
Sure, the concept of connecting blockchain-based smart contracts to off-chain data is incredibly innovative from a programming perspective. But the idea itself is nothing new. For example, look at binary options contracts. These derivative financial instruments are tied to the outcome of an off-infrastructure event, such as whether the price of LINK will be above or below $20 by July 15.
In order for the binary options contract to mean anything, it must “grab” data from outside the exchange where the options are listed. So the idea of taking off-platform data to execute contracts is absolutely nothing new. What is new is the intermediary. For binary options, humans ultimately oversee the process (although of course technology is involved).
For Chainlink, the blockchain is the perfect, immutable, non-human intermediary. Herein lies the allure and the pitfall.
To people unfamiliar with the economic rationale of blockchain projects, LINK sounds like a watershed moment. Yes! Get rid of those vulturous brokers and middlemen. I completely understand the sentiment; who doesn’t? But then, you must ask yourself: who’s going to pay people to oversee Chainlink or similar decentralized oracle networks?
Let me back up — the trust mechanism of the blockchain requires no human intervention. It’s immutable after all. But the issue is that someone’s got to keep the lights on for a decentralized network to survive. Transactions within blockchain infrastructure may be cheaper than other platforms, but they’re not free.
Why It Can Rise or Go Awry
Finally, we have arrived at the central problem not only for Chainlink but for every single blockchain project. Imagine you want to transfer some tokens from your hometown halfway across the world. A bank wire transfer is onerously expensive. But you heard that the blockchain is cheaper, so you decide on that route.
But then, because blockchains (usually) operate on a decentralized protocol, you need the public’s cooperation in verifying your transaction. But to perform that verification requires “real” money. Electricity isn’t free and in most places, it ain’t cheap. Neither are computers and graphics cards and all that jazz.
So, in order for you to send tokens cheaply across the world, you need to provide a reason for other people to care. And maybe in Chainlink’s case, they will care. Yet there’s also a very real possibility that they won’t. Therefore, you will want to make sure demand exists before taking a big risk.
On the date of publication, Josh Enomoto held a LONG position in LINK. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
