Before I begin, my name is Max Sarafin. I am a Junior business student at The University of North Carolina at Chapel Hill Kenan-Flagler Business School. If you are looking for a guide to fully understanding what Chainlink ($LINK) is, I will refer you to a different article written by a valuable member in our community. The link will be located at the bottom of the article. If you have any questions my social media link and email is located at the bottom of the article. I encourage you to reach out, even if I do not respond directly, I will try to answer questions in future articles.

Please read my first article first to have a more basic understanding: https://medium.com/understanding-basic-chainlink-tokenomics/the-basics-bb6fca307703

The tokenomics of $LINK need to be analyzed to understand why this asset is considered such a rare long-term hold. We have the basics:

- Appreciation due to a finite supply

- Utility due to use-case

- System of compounding interest

I drew a basic model of supply and demand with arbitrary price and quantity points. This model is based on the assumptions of: Staking being live, and this is a period of opening adoption. Demand (D0) and Supply (S0) are the starting points at a price (P0) and quantity (Q0). Let us assume we have three main parties interested in the token: Corporations, investors, and node operators (note: node operators could also be investors, but due to the arbitrary numerical basis, we are separating them for simplicity). Although our finite supply is one billion tokens, this is set for the purpose of worldwide adoption. Corporations will need $LINK tokens to pay node operators fulfilling their service agreements. There will be a small percentage of service agreements that can be fulfilled with 0 $LINK as collateral, but besides these, node operators will need stacks of $LINK tokens in order to fulfill requests that require collateral. (Skip paragraph if you already understand how the collateral system works)

In basic terms, the collateral system will create a system of checks and balances. There will be a decided “penalty fee” as collateral for more pertinent API data requests (such as insurance or legal contracts). This penalty fee will only be taken if the node does not complete the request. To make the process decentralized, multiple node operators will work on the same fulfillment request. Thus, if one fails, the majority has the correct data and the oracle will take the information from the majority. The one that fails will pay their fee and the data will still be sent accurately. This collateral system is important as it is a safety net to make sure the majorities of nodes do not fail.

In the future, there will be open node operators that allow for user deposits. These node operators will pay interest or percentage payments on fulfillments to those who deposit. This allows for node operators to create a pool of tokens in order to take on multiple collateral-required agreements at one time. At this point, we have node operators, investors, and corporations incentivized to hold stacks of $LINK tokens. Node operators and investors are receiving interest on their tokens and corporations are able to utilize decentralized oracles to incorporate smart contracts into their business.

Now let us move back to our simple model. If the demand from $LINK tokens stems from corporations needing to pay node operators, and node operators needing $LINK to fulfill collateral based requests, then our demand will have to shift. This is where D0 moves to D1. This means, those wanting to buy $LINK tokens are putting a demand pull on the current finite supply. In order to equalize supply and demand, price and quantity demanded will rise. For a normal economy, this would cause consumers to begin to consume less as prices will be at a point where expected utility will begin to drop. For example, a normal good such as chicken. If prices go up due to a high demand, people are going to buy less chicken and substitute something cheaper. The difference with $LINK is it appreciates and gains interest simultaneously so the average investor and node operator will not be inclined to sell. Corporations need $LINK to transmit decentralized data and utilize smart contracts, so they are not going to sell either.

This brings us to our next point on the model, the shift from S0 to S1. Normally, supply only shifts when there is some sort of event. For example, the BP oil spill lost 200 million gallons of oil thus shifting supply left (decrease in supply). What is interesting about $LINK is the event that is causing the supply to shift left is the incentive to not sell. The token is finite, it cannot increase or decrease in token allocation. Thus, the more tokens being held by investors, node operators, and corporations, the less tokens that are available on the market. This creates a left bound shift causing the quantity able to be supplied to decrease and the price per $LINK token to increase. Now this can stop if people find more utility in selling their tokens which will put more on the market, but once we get to industry adoption, this will not be enough to cause the price to dip. In the assumption I am creating, we are moving through the time of adoption. More and more companies are using $LINK and more and more people are seeing the value in holding it. This creates something cyclical as demand will keep shifting right and supply will keep shifting left. With a normal asset, this would get to the point where we run out of supply and then what? Well, $LINK is special. With the ability to breakdown 1 token into 18 decimals, the shift from S0 to S1 is actually fictitious. The supply will never get to a point where it is in low demand due to the ability for it to be broken down into such small numbers. But what this does is make price have no capacity. Price will continue to rise and rise and rise with no consequence on low supply. Instead, people will have no incentive to sell so price will skyrocket, and node operators will be paid less and less $LINK but at the same per dollar price point. Thus, the first node operators may be getting paid .01 $LINK per job which could be $1. Eventually, that .01 $LINK will be worth $10 and the tokens they have collected from fulfilling requests will keep rising in price while they collect more and more tokens as payment. In time, they may be getting paid .0001 $LINK per fulfillment which is the new $1 price point.

I understand this is a difficult concept, and I sort of ramble at times, but the important idea to understand is, demand will never stop. Given a token is used worldwide by corporations and consumers to make money, there will never be a point where sell orders will overtake buy orders. The finite supply combined with the decimal breakdown creates this unique ability for huge price hikes. Data has increasingly become more valuable and with the implantation of smart contracts, the value for data will only grow more. Now you have the ability to put money into a system that is directly correlated with a secure, trustless system of moving data. There is always the possibility this may fail, but with the potential for the greatest ROI one will see in their lifetime, I personally would rather lose my entire investment than exit early.

Questions I have received:

Could $LINK ever be a stable coin?

No, because then supply does come into effect. Example: $5 per $LINK token and the average fulfillment payment is .5 LINK. If the token cannot be broken down, there is a finite number of tokens able to be utilized and companies would have to pay node operators less and less $LINK for fulfillments. This is similar to what is explained before, but without the price rising, the amount paid to operators will reach a point where it costs more to run the node versus the amount of payment they are receiving. The coin must be able to appreciate in order for fulfillment requests to remain at the same monetary price point. If the token price rises, it does not matter if the amount of $LINK being paid to the node operators is decreasing as long as the average price in dollars remains similar per request.

How much do you think $LINK will be worth at the end of 2020?

No idea. Arbitrary idea as we do not know what is going to happen. Could be worth $5, could be worth $100. Who knows. The only thing that matters is getting to the point of adoption and the demand pull we discussed above.

Will update with more questions as they come or I will include them in future articles.

My twitter: https://twitter.com/ScruFFuR

Email: MaxNSarafin@gmail.com

My direct messages are open and I attempt to respond to everyone. I look forward to working on the next article within the next week.

What is an ERC-677 Token? http://blockchainers.org/index.php/tag/erc-677/

A complete guide to understanding chainlink — https://blog.goodaudience.com/chainlink-the-missing-piece-to-the-god-protocol-fd455dde92ab?gi=f6368a69d3f