Credit: Binance

Note: If you’re not familiar with Chainlink, make sure to go through my previous article first: “Chainlink: A Fundamental Analysis”.

Before we start, here are some key terms to know:

Blockchains are essentially very secure, distributed, and decentralized databases.

Smart contracts are lines of code that automatically execute a function when given an input — just like a vending machine.

Chainlink is a form of digital infrastructure that secures data transmission.

Smart contracts, such as high-value smart derivatives, need real-world data from off-chain sources in order to execute. They need a software called an oracle to fetch said data, parse it, and feed it to contracts on the blockchain. All oracles are currently centralized, thereby negating all the advantages that come from using a decentralized blockchain. Chainlink is a decentralized oracle network that eliminates any single point of failure in a smart contract by utilizing multiple oracles. For a more in-depth look on how the network works, check out my other article: “An In-Depth Look at the LINK Token”.

In a recent blog post, Binance announced that they are going to use Chainlink to advance the Decentralized Finance (DeFi) space. One very interesting quote was:

“While base layer development is accelerating, it’s important to remember that the smart contract’s logic is totally reliant on the data it receives. The code can be flawless, but if the data triggering the contract is not reliable then the smart contract fails. If the functionality and market demand of DeFi is to expand, then developers need access to highly reliable and trusted data via secure oracles.”

Binance stated in this blog post that they are looking to expand the DeFi market with derivatives instruments such as futures, options, and swaps. Derivatives are financial securities with a value that is reliant upon or derived from, an underlying asset or group of assets. All of these use cases will be powered by data fed from the Chainlink network. This is further expounded upon in another quote from the article:

“DeFi applications using Binance can introduce a plethora of new options for traders who want to automate trades around a variety of different data points. That could include trades triggered by large transaction alerts, hashrate fluctuations, or automated portfolio adjustments based on market data. The possibilities are really limitless given that the Chainlink oracles can use any data point to trigger some type of action.”

This allows for some very interesting and exciting use cases for Chainlink, such as automated portfolio adjustments based on changes of other data collected by the Chainlink network.

Imagine investing a certain amount of money each month and being able to choose a different risk/reward allocation. Then the portfolio automatically distributes the money between different investments based on the risk/reward allocation, changes asset investments based on market fluctuations, and can even hedge into other assets if need be.

Along with the possibilities enabled by Chainlink, the decentralized data feeds like the ETH/USD price aggregator that it provides for free are crucial to decentralized derivatives such as the ones that Binance will be offering because they allows for the true price of ETH, at least in this example. These averages over a large pool minimize disparity and failure so when contracts are executed, they are done so in a trustless manner. Any data feed that Chainlink nodes are aggregating becomes the one true data feed for that thing because it is being verified by multiple sources. Instead of using a centralized oracle, firms can take advantage of the data that Chainlink provides for free through its reference data contract service. These price reference feeds are free because they are subsidized by the Chainlink team from the 35% that was allocated for the ecosystem, which can be seen as the first bullet point in the image below. As the price of the LINK token increases, less LINK is needed to subsidize each of the price feeds, which means that these subsidies could go on for a very long time with an ever increasing LINK token price. What’s important to note as well is that Chainlink jobs can be pegged to USD (ie. $0.10 of LINK per request of a certain job), which will also help extend the amount of time before this subsidy fund runs out.

For paid data feeds, a percentage of the volume will go to the Chainlink network as a fee for aggregating the data. For example, if Chainlink nodes are aggregating price feeds for a specific future, then a certain portion of that future’s volume will go through the Chainlink network as fees paid to the nodes gathering the data for the future’s price feed.

Note: Before reading this hypothetical scenario, reminder that staking is not out yet, so none of this is possible at the moment.

Just for fun, we can come up with a hypothetical scenario of a Bitcoin future derivative on Binance that uses the decentralized price feeds aggregated by the Chainlink network. Let’s assume that these price data feeds are not free as they are now, and that each call for the price feed contains a fee that goes towards the nodes that collect that data. Let’s use the daily futures volume for the Bitcoin future on Binance which is around $700,000,000 per day and use a hypothetical percentage that 1% of this volume, or $7,000,000 in this scenario, is going towards fees paid to Chainlink node operators that are aggregating the BTC price data feed that the future is using.

This would mean that for every Chainlink node aggregating the price of Bitcoin for this specific future, they would be paid daily $0.01 per token in fees based on how many LINK tokens they are staking. In this hypothetical scenario, a Chainlink node operator with 10,000 LINK staked for gathering this price feed would make $100 per day in fees, paid for in LINK tokens.

What’s important to note is that the 1% of the derivative’s volume, or $7,000,000 in this hypothetical scenario, which is going towards fees to the Chainlink node operators that are aggregating the data is not paid for in dollars, but in the LINK token. As I mentioned in my previous article on the LINK token, Chainlink node operators require LINK in order for the network to function. They use the token as collateral on each contract, along with triggering certain actions in the contract, such as inputs and outputs. This means that as more contracts are being run in this manner, more LINK will be required to be paid in fees. However, with more and more LINK already being locked up in other contracts, the value of each token will have to go up due to the increasing demand and shrinking supply.

These fees are just one part of the equation, the other half is the LINK locked up by those nodes as collateral. The LINK token price will become a direct and immediate function of the velocity of the LINK tokens — the frequency with which they move around the Chainlink economy. The value of each token will not be speculative at all, but directly driven by the activity within the Chainlink ecosystem.

This entire hypothetical scenario is based on one specific price feed for one specific use case for one specific exchange: a Binance future for Bitcoin. This is one of the many data feeds Chainlink nodes can gather, one of the many use cases it has, and is for one specific exchange. Again, all of this is hypothetical, and will likely not be used for the BTC price pair since Chainlink is giving this reference data feed out for free, but it’s fun to think about the potential for being a node operator feeding data to the various use cases Chainlink enables.

This doesn’t cover everything else in the blog post, so I recommend reading it for more use cases on how Binance will use Chainlink.

Conclusion

Chainlink’s model of weeding out bad/fake data can be applied to any data in the world. Formulate a data feed that confirms that something is true based on multiple feeds of data; thousands upon thousands of data feeds all going through this oracle network, aggregating, and sorting for the TRUTH. This TRUE data allows for a trustless network of data that the world can tap into. For once in human history do we have a source that is trusted enough to advance automation in all industries, such as contractual agreements, AI, robots etc.

Blockchain is the past — the memory of what happened and is stored forever.

Chainlink is the present — the data that is now which is sent to the blockchain.

AI is the future — artificial intelligence that makes decisions affecting what will happen.