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Competitive Advantage

Chainlink launched in 2019 and has since broken out to become the industry leader and standard for decentralized oracle networks. The project has amassed over 100 different integrations and is critical in the billion-dollar DeFi ecosystem, having secured over $65 billion in Total Value Secured (TVS) in DeFi. As of Q3 2022, Chainlink secures over 51% of the value secured across all oracles in DeFi, with over 1000+ Chainlink price feeds operating across several blockchain networks.

Major DeFi projects like Kyber Network, AVA, Graph Protocol, Synthetix, and Frax Finance are utilizing Chainlink’s oracles, largely because Chainlink remains open-source and blockchain agnostic. While most applications are currently built on Ethereum, Chainlink oracles can be used by other chains as seen by the recent announcement of Binance’s intent to use Chainlink with its Binance Smart Chain blockchain. In comparison, Maker is the second largest Oracle by TVL.

There are competitor projects attempting to solve the “oracle problem” each in different ways with different tradeoffs. Augur v2, which launched in July 2020, can serve as a decentralized oracle solution that utilizes human betting markets to incentivize accurate on-chain data and event reporting. If a user in a particular market “bets” on an outcome that ultimately proves accurate, they receive a share of the reward. If they disagree with the majority and are incorrect, they lose their stake. This, in a way, makes Augur a potential decentralized oracle itself. Smart contracts can use the market outcomes in Augur and bring that off-chain data into their own systems. Other crypto-native oracle projects include Tellor, Band Protocol, and Maker.

With Chainlink’s current economic security model, larger stakes in the system are seen as more reliable. Thus, most protocols require a data feed provider to have a node with more assets staked than assets ‘secured’ (assets that rely on a particular data feed). Chainlink, with about 20x the market cap of its next largest competitor at its peak during the bull market of 2021, simply has more defensibility around its oracle feeds: there’s just more money on the line.

To be fair, Chainlink oracles actually don’t offer a ‘perfect’ solution to the assets-secured program, with the $LINK token market map smaller than assets secured–but the game theory around this is that a specific validator can’t find an opportunity to manipulate prices in a way that’s economically viable.

Liquidity

As a top 25 project by market capitalization as of July 2022, Chainlink is featured on every major centralized and decentralized exchange, with over 400 being listed for the LINK/USD pair, and the LINK/BTC pair often being listed as well. Thanks to Chainlink’s first-mover advantage, it does not need to produce large emissions and dilute current or new token holders unlike other projects that are forced to incentivize liquidity on-chain with emissions that inflate token supply. 

Chainlink was the first project to attack the space, and the unique value proposition behind the project has meant that an astounding number of token holders (they call themselves ‘Link Marines’) have turned themselves into a faithful community we see all too often in crypto.

Chainlink has been able to carve itself out as the ubiquitous oracle provider for DeFi. Popular protocols that rely on outside price information (Frax Finance, Dopex, GMX) will often use Chainlink either on its own or with a combination of other exchanges to source external price data.