The Bull Case for $LINK (Chainlink)

the end case of what onchain finance will ultimately look like where it will be a hybrid of both onchain executing code as well as these offchain collateralized assets or natively issued onchain assets like tokenized bonds moving through the system using chain link price data using chain L proof reserves using identity data like all these useful data inputs is ultimately the economy that we're trying to create and a lot of that will end up settling on ethereum itself as like this neutral meeting ground between different distrusting counterparties where each counterparty has their own chain but they want some settle ground to execute

their contracts upon so like this is a bull case for the whole industry it's growing the pie for everybody effectively is really what what chain Link's trying to build towards Bank list Nation welcome to the bull case for chain link a few weeks ago we hosted a long awaited interview of Sergey nazarov the founder of chain link we got the pitch for why chain link what it does what it wants to do and what economic activity it potentially unlocks for the on chain world if you haven't listened to that episode yet and you're

going down the chain link Rabbit Hole I definitely recommend listening to that episode this episode you're currently listening to is what I feel is the second half of that first conversation with Sergey during our episode with Sergey we stayed pretty high level about chain link and what it is and what an oracle network is we never really got the chance to talk about the link token specifically chain link is understood to me now but the role and function and upside of the link token specifically inside of the chain link system was a

stone we left unturned in that episode with Sergey in this episode we attempt to turn over that stone what is the link token how does it fit inside the chain link system How Does It capture value who is going to pay fees to chain link and why and how do those fees become reflected in the link token Sergey said that chaining wants to unlock the hundreds of trillions of dollars of real world assets and bring them on chain with chain link as the conduit of course if that happens how does link token

capture that value in that process these are the questions I asked two of chain Link's most prominent community members chain link God and fishy catfish two crypto Twitter anons who have seemingly committed their online lives to spreading the good word of chain link so I brought them on the show so I could hear from them directly what exactly is the bull case for link bankless Nation I am putting on my bull cap today that means that this conversation is biased to bullish I am here to understand the bull case for link and share that with you all and if you want to understand the bare case for link and the risks

that the link token has this episode will not provide that you will have to do your own research bare hats don't fit very well on my head I prefer making bullish content so that is what you'll be getting today disclosures before we get into the episode with chain link God and fishy catfish nothing in particular I don't hold any link tokens I'm just here to help articulate the bull case I do own a bunch of eth and we frequently talked about ethereum in this episode but that likely comes as no surprise to bank list listeners there is a link to all Bank list disclosures in the show notes Bank list.com disclosures so let's

go ahead and get right into this episode The Bull case for link with two of chain Link's most prominent community members but first a moment to talk about some of these fantastic sponsors that make this show possible especially our preferred crypto Exchange in 2023 Kraken if you not have an account with Kraken consider clicking the link in the show notes to getting started with Kraken today you can buy chain link the link token on Kraken as well as many of the other assets that they have listed because they're an exchange let's go hear from them right now Kraken Pro has easily become the best crypto trading platform in the industry the place I use to check the charts and the crypto prices even

when I'm not looking to place a trade on Kraken Pro you'll have access to Advanced charting tools real-time Market data and lightning fast trade execution all inside their spiffy new modular interface kraken's new customizable modular layout lets you tailor your trading experience to suit your needs pick and choose your favorite modules and place them anywhere you want in your screen with Kraken Pro you have that power whether you are a Season Pro or just starting out join thousands of traders who trust Kraken Pro for their crypto trading needs visit Pro docren.com to get started today cell is

the mobile first evm compatible carbon negative blockchain built for the real world and now something big is happening introducing the cell layer 2 it's a game-changing proposal that's going to bring cell's rapidly growing ecosystem home to ethereum vitalic has shared its excitement for the cell layer 2 on the cello Forum so has Ben Jones from optimism but why the cello layer two will bring huge advantages like a decentralized sequencer offchain data availability and one block finality what does all that mean Rock Solid security a trustless bridge to ethereum and more real world use cases for ethereum

without compromise and Real World Adoption is happening active addresses on cell have grown over 500% in the last 6 months with the cell layer 2 gas fees will stay low and you can even pay for gas using erc20 tokens but cell is a community governed protocol this means that cell needs you to weigh in and make your voice heard join the conversation in the cell Forum follow sorg on Twitter and visit c.org to shape the future of ethereum bankless nation I'm super excited to bring to you chain link God a chain link Community Ambassador focus on

breaking down the information asymmetry on the role of decentralized Oracle networks we're going to talk about them today with chain link and the role that they play in the onchain economy commonly seen in the wild jungle of crypto Twitter role playing as a frog wizard you probably know who chain link God is if you've ever encountered link Marines all opinions from train link God are his and his alone train link God welcome back to bankets it's been a while my man yeah it's been a couple years thanks for having me on and coming in as well we have fishy catfish fishy catfish has been a minor investor and

all around crypto Enthusiast since about 2013 in 2016 one of his friends recommended him to get on Twitter and he's been trapped in the mental Asylum that is crypto Twitter ever since uh in 2017 he happened to find chain link on/ Biz a forchan uh forum and he has been link pilled ever since fishy catfish welcome to bank list for your first time hey David thank you for having me bud appreciate to be here and thank you for uh extending the invitation to us to come on here is this the part where we say that this is not Financial advice and that goes doubly for me because I'm

just a guy who found off the streets of Twitter so yes this is certainly the place it'll also be at the end this is not Financial advice this I think is just like the other half of the conversation uh that we did with Sergey uh not too long ago um Sergey we got like the big download on what is train link what is an oracle Network what is its Ambitions uh but we were never really able to talk about the link token specifically so I I want to take a moment to talk about one of the largest communities the one of the biggest tokens that's had just like this crazy

reputation over the years I want to approach that subject head on the link token specifically uh and so we have to get two members of the community to help uh navigate that question you guys uh guys ready to do that let's dive in I think we are okay so I kind of want to first set the stage um we did the what is chain link episode with Sergey and I I learned uh an immense amount of material all throughout that podcast uh but that was 90 minutes of saying what is chain link and so I kind of want to just try and get the two sentence

version the three sentence version of what what is chain link how do you very simply explain what chain link is train link God you want to take this one yes I'll keep it brief you know if you want the full explanation then definitely check out the bankless episode with Sergey very in- depth but basically at a very high level blockchains are very uh decentralized secure networks for processing transactions but through their security model they can't connect to external systems so they can't connect to external data sources to trigger a contract they can't connect to external uh data servers to trigger

events in the real world like iot devices or any kind of other devices and oftentimes blockchains can't even connect to each other so they're kind of these isolated Islands so what chain link ultimately aims to solve is what's called The Block blockchain Oracle prom providing a secure decentralized source of both inputs and outputs so smart contracts can extend their capabilities Beyond what's just a possible onchain and connect to all the external data resources the institutional backend systems and to other blockchains in a secure way so you can create this interoperable secure internet of

contracts where all the systems web 2 and web 3 combined create more useful onchain applications like at a at a very high level that's what Chan's aiming to achieve but you know watch sergey's interview on Bank list to get the get the full deep dive there yeah Serge's interview will explain how chain link gets that done but I I thought that explanation was pretty pretty powerful just the the blockchain Oracle problem this is a problem that exists if we roll the dice of crypto like that is it's a fundamental constraint of what blockchains have is blockchains know

about themselves but nothing else uh and so the problem of bringing external data external State external events onto a blockchain is not a solution that a blockchain produces internally endogenously it needs an external Source an external system to bring that data into a blockchain system so like if we were to reroll the dice of crypto and like there would be a different Bitcoin or a different ethereum and a different salana there would still be the blockchain Oracle problem and there would still be some version of chain

link is this correct chain link God yeah absolutely because it just comes down to the security model like the reason blockchains are so secure is because they're isolated and the only blockchain's validators care about is is this transaction valid or is it not invalid and that's what makes them so robust against the taxs but you need you still need these ex external inputs and outputs and so you want to replicate basically the blockchain security model but apply it to all these external data points that are fundamentally required for all the amazing use cases people love like like defi it's probably the biggest one that if we didn't have

oracles defi would basically be Unis swap like you wouldn't have basically any of these other Financial applications that people want to do and in my mind at least Le 90% of useful useful smart contracts fundamentally need Oracles in order to exist in the first place fishy what would you add to this definition I view it as this kind of heterogeneous general purpose framework for compiling together these kind of external validator sets to basically provide services that blockchains need but can't do themselves beautiful beautiful and I think before

we go on and start talking about the way that the link token plays a role in this uh it's worth uh talking about these two potential Futures that exist there's like the potential for crypto blockchain defi that exists without something like chain link and then there's the version that exists with something like chain link the my aspirations for crypto is that it is the Global Financial fabric that blankets the world right everyone's using it uh but that there's like a there's two different paths there's one that takes and has external data and

then there's one that's just like insular maybe chaining God you can like talk about like the the difference of crypto's success story with external data with something like chain link or without and like why we kind of need it to be the one with it yeah so when you look at what blockchains do and what you can do natively with just a blockchain you can kind of bucket it into like three different things you can you can mint a token you can move a token around you can swap a token for another and I guess also a fourth you could do dow voting with private keys but if you want to do anything else you need some other type

of Trigger or some other type of external connection so in that world crypto would be very useful as a medium of exchange for payments since you don't need external data resources you just move tokens from one wallet to another so like stable coins would be a good use case for that but if you want to go and use those stable coins and you want to lend it out or you want to collateralize a loan or you want to do any more complex financial application with that then that's the world where you need to start stepping into oracles if you want to you know deposit your eth onto a and then you want to borrow some usdc you

know a needs to know what the price of eth is so it can keep the loan collateral Iz and it needs to know what the price of usdc is so you know if there's a spike in value it can it need it can liquidate the position to keep the protocol solvent that's where oracles fundamentally come in but it also comes in in terms of when institutions start to step in and they start tokenizing you know trillions of dollars of tokenized assets they need to be able to access the most amount of liquidity across all these different chain environments so they need a secure cross-chain solution to do that and cross Chain Solutions are just Oracle

networks where the data source is another blockchain like if boil it down so if we want to create this interconnected economy where all these blockchains are connected together assets can move from A bank's own uh private blockchain to another bank's private blockchain or even to a public blockchain like ethereum you need this interoperability solution to move these tokens around and inject the data that's required like identity data proof reserves pricing uh net asset value all these data points that institutions require for their assets those are oracles like you need oracles to do that so in my mind the Future Vision of

blockchains is that they're the ultimate settlement layer for all the Assets in the world but if we want to actually achieve that Vision you need the oracles and all these external services to make that possible from offchain data offchain compute cross chain interoperability like that's the world I want to live in uh like we can have a world like with Bitcoin where bitcoin's value prop is that you know it's its monetary policy it's the store of value meaning of exchange it's very useful but that's like a subset of what blockchains can be used for and I I think the vision is way grander once you start to have Oracles in the mix here yeah I think to

to put on like my Oracle Network bull hat the world of which in which crypto only has data about itself is one where it remains kind of Niche and a curiosity and only Services um a small fraction of the total spectrum of what could be Financial activity on a blockchain which I think that Financial on financial activity on a blockchain is fundamentally better for all the reasons why people are crypto people um but without having data about the world like the world of Finance the world of Wall

Street they can make statements uh in their financial contracts about the state of the world because of just the nature of pen and paper contracts uh it's all subjective it can be contested in court and so they kind of have this world of like the state of the world state of Finance uh much more accessible to them uh so maybe it's a little bit harder in the world of crypto networks because cryptography is inherently just math and numbers and that is harder to get data about the world in order to be interoperable with defi with smart contract

but nonetheless if we were just confined to a world in which defi was about itself and not about the rest of the world then in my mind the crypto experiment is kind of failed like we want to be the Global Financial system for the entire world and that needs means that we need to be able to ingest State and data about the world in order to have a fully-fledged financial system that does operate on a blockchain that's kind of how I would articulate the most bullish version of crypto's future uh chain that got in anything you would add to that yeah I mean I think one thing is

that people you know the crypto market cap in the ecosystem is about a trillion dollars and I think people don't see how much value actually exists in the traditional system like it's sery kind of touched on this as well but like it's not about adding another trillion it's about adding the hundreds of trillions of private and public assets that exist in the financial system and importing them into an onchain format like that is finance is where all the money lives and so if we want blockchains to actually reach a global societal scale and impact people's daily liveses even if they don't realize they're using a blockchain

you have to connect with the external uh Financial system itself and it's not like uh all the institutions are going to go away they're going to replace the whole infrastructure with the blockchain and that'll be the world like that's not it's not very practical so you have to like take these baby steps of connecting more and more systems to blockchains Bringing more and more assets on chain to the point there's not going to be onchain finance and trafi it's just going to be finance and assets will be represented in whatever the most efficient format is and you know our bull cases is that it's going to be onchain it's more transparent it's more efficient it's faster to settle it's

cheaper to move like all these great properties it it'll naturally just converge towards an onchain format but the you know this is hundreds of trillions of dollars we're talking about this is not like this not a small small bull case that we're talking about here it's it's a large opportunity I think this was a really good setting at the table and just providing context for the vision for what chain link wants to to go after and I want to start to narrow this conversation about specifically the link token and the role that link the token plays in in this future this future version of the world that we all want uh so like let's talk about

actually where link came to be like where did it come from what's the Genesis story of Link how did it come to exist so before [ __ ] was even a thing um Sergey and Steve Ellis had founded and they uh ran a company called smart contract back in 2014 which was actually a centralized orgal as a service company um and so I actually got a chance to even meet Sergey uh before chink's Madea launch back in 2019 and we actually got a chance to even talk a little bit about smart contract itself and you know one

of the points he made to me was that you know it doesn't make any sense to use a blockchain that has large numbers of nodes you know executing your onchain contract code and then you just combine that with like you know three guys in a basement somewhere who control your Oracle and then they end up triggering your smart contract with external inputs right and so I'm kind of like speculating here obviously but I took his comments to mean that they had likely realized that the path they were on was sort of destined to end with them being the three guys in the basement where they would eventually sort of hit

this hard ceiling in terms of the scale of adoption and value secured their system could safely support and that this service provider model would not be the correct path if they wanted to fulfill their larger Vision as we now know it of enabling a cryptographically secured verifiable web so it's impressive that they were able to recognize this kind of so early in their journey and they kind of began their pivot towards repurposing and transforming their centralized or as a service company into the initial building blocks of what became chain

link which is this open network general purpose protocol um for kind of putting together these decentralized validators to perform offchain services that blockchains need but can't do themselves so it was impressive that they kind of figured that out and you know basically start it from scratch and really just to kind of set the stage of the era that that was in crypto 2013 that was 2 years before ethereum uh and so I think that when you are you mean to say that it was impressive that they just thought they ran through this idea maze so early there wasn't a lot of clay and crypto to

work with prior to like defi defi didn't exist ethereum didn't exist smart contracts were a concept but not in production and so like fishy what you're saying is that they kind of just ran through simulated in their brains what the future of crypto would be and kind of came to the conclusion that we're going to need something like a decentralized Oracle Network in order to get this job done yeah it was actually a year L was 2014 I'm not sure if you misheard me but um I don't know the full kind of text stack of what they were using at the time um I know I've heard later on Sergey talk about that uh he you know came across

the theorum and realized that they'll be building this portion of the tech stack so then they kind of focused on the other pieces of of the TCH stack but I think back then um they may have even even been kind of been building the piece of where the code kind of execute so these were kind of very centralized types of services and I remember back on Biz I occasionally come across screenshots of past work they actually done um as part of smart contract right where they had um kind of built these smart contracts I think I came across I remember like two or three of them I think one was like a um a smart contract

they built that was tied to SEO performance where basically they buil a smart contract that said hey if your companies right now like ranked 30 on the search rankings you know let us you know do SEO for you and then kind of pay us for the performance moving you from like the number 30 slot up to like the number 10 slot kind of thing so it's basically like a payer performance smart contract where somebody does SEO services on behalf of your business or company and then you basically have a smart contract that can just measure the Delta of hey your your company used to organically come up in the search

rankings at this number now it's at this number you know pay for performance kind of thing okay so how did we get to the link token where does the link token enter this story before we kind of get into that I kind of just kind of back up for just one more second so to kind of set the stage for um um you know how kind of protocols work in their kind of early stages and then we can kind of uh time specifically like the role of the link token with within the link ecosystem so every single uh protocol kind of has this two-sided Marketplace of you know

consumers on one end and suppliers on the other end right so on bitcoin those are miners valuers on ethereum liquid providers you know in defi or and chain link right and you can kind of think of them as um you know independent contractors who are these kind of self-interested um economically rational agents that fulfill a set of purposes for a protocol and they keep performing those Services as long as it's profitable for them to do so and that's independent from the profitability of the overall Network right and so there's only two ways to pay them you either

have fees from users or you have inflation of the protocol's owned token right so your protocol needs to have a source of funds to pay these you know independent contractors on day one so the protocol uses you know inflation to pay them to kind of solve what's known as like like the cold start or chicken egg problem right and so um so like a well-run you know team is sort of using this token allocation to basically find product Market fit for their protocol to build up a sort of self-sustaining source of user fees to over time replace

the inflation of its own token right and so most Protocols are designed to have kind of pre-programmed declines in their inflation schedules but that doesn't necessarily mean they're going to have proportionate growth in their user fees to kind of offset that declining inflation right so if the protocol is not able to um you know generate utility that users are willing to pay for the fees will stay low the inflation eventually runs out and then you'll be basically left with a token that's not worth anything right you'll have a kind of dead two-sided Marketplace no users

which means no user fees obviously and then no more inflation left to kind of pay the validators or like the LPS of your protocol right alternatively if a protol is able to build up a lot of user fees and then sort of like you know taper down its inflation and then sort of achieve the revenue needs to pay its validators entirely from user fees and if Revenue still keeps kind of growing past that point then you can you're you're kind of setting the stage to have what becomes kind of an attractive token basically right and so I I basically

just say I'll kick over back to CG in a second here but I first want to kind of set the stage for like what CLG and I see as what are the kind of desirable properties of a token in general and then we kind of talk about how does the link token do that do that itself and so to me least like a token that's desirable is one whose inflation rate is small as possible and then on top of that it has real yield meaning that's yield generated from protocol use and not simply inflationary issuance of its own token right so you kind of combine these two metrics into one and you have

basically real yield net of inflation right so um I don't know if CG wants to kind of uh talk a little bit about like you know the link token now specifically but I kind want to set the stage for this kind of general definition for people to kind of a mental model of what protocols are trying to do in the early days of of their starts with their tokens and how the tokens are used um to basically kind of work towards this kind of self- sustaining uh equilibrium yeah so like with what I consider decentralized infrastructure protocols you know that's a protocol with independent validators said to come to

consensus about some service that's blockchains but that's also Oracle networks and they use tokens and basically very very similar reasons fishy touched upon like the chicken or egg prom where you know not operators aren going to join a protocol unless it's profitable users can't pay to use a protocol unless there's already profitable node operators providing a service so tokens bootstrap a network into existence in the first place so you can't even have these networks without a native token in the first place unless you raise debt or Equity that has to be paid back and that's just not credibly neutral or scalable way to to achieve

that the other side of this coin I would say is the cryptoeconomic security that a token can provide a decentralized infrastructure protocol specifically what I cut a bucket down to like explicit incentives and implicit so like explicit incentives would be something like note operators service writers have to lock up the token stake it and they're slashed if they don't meet certain protocol uh requirements of them so I I think people generally understand that mental model the other aspect that I think people don't see as much or it's uh it's more implicit it's not necessarily protocol enforced but it's when service providers have Financial

exposure to the Network's native token they are financially exposed to the Network's Health overall so like an example that that I use sometimes is like Bitcoin miners they have EXP exposure to bitcoin both that's what they generate in revenue and that's what they hold on their books as well as their Asic mining equipment itself which is tied to the value of Bitcoin itself so if miners colluded and attack the network they would effectively devalue their Holdings both their Bitcoin and their Asic so each independent actor within the Bitcoin Network independently has their own Financial incentive to be

honest because it is more profitable to be honest Bitcoin doesn't have staking but Bitcoin is still secure because of these strong economic incentives so it's kind of more more of a Nuance point but that's kind of a key aspect of how even if you don't have staking or you don't have slashing because a lot of networks have staking without slashing it's still secure because of this financial exposure to the Token itself which I think is a really really key aspect to this to the story here okay so I think what you guys are doing is you're starting to like draw us a map of how link Maps itself into the chain link

ecosystem right where chain link is the Bitcoin system link is the the the incentive mechanism and that keeps everything cohered uh and so let's go into specifically the link tokens role in in chain link so like what what does the link token do in the system how does it fit yeah I can hop into this one I I kind of bucket this under two different things on the one side of the coin you have link as a payment token so link is the standard form of payment for all Chain Link services and that's both

directly users or applications paying in link to network service providers for some service like data compute or cross chain but also chain link is increasingly working on what's called like a payment abstraction solution where end users applications can actually pay in the assets that they already have and on the back end it gets converted to link and paid to the node operator so it abstracts that whole process away and so in web 3 that could be users paying in in Native L1 gas coins or stable coins that they already hold and and this can even expand in web two do paying like with a credit card or paying with a you know a bank account

using something like account abstraction like it it it abstracts that whole process away while on the back end and still enshrining link as the currency paid to network service providers which is uh basically means as as services are consumed that means more link has to be consumed and and acquired in order to pay the service providers who then have their performance tied to the value of Link itself and that's kind of that's always been kind of the historical utility of Link ever since the day one launch the other side of this coin I would say is link as a staking token which that's something that's

increasingly expanded over time chain link launched initial version of staking uh last year in December and a new versions rolling out later this year v0.2 but that's effectively network service providers locking up link to back as a commitment the performance of their of the Oracle services that they power and it's very similar to blockchain staking in the sense that you're locking up tokens but it's also very different because blockchain validators that stake they're securing the validation of transactions and network state which can

be done in a very deterministic predictable way using historical state in cryptography but in Oracle networks you know you're dealing with a very non-deterministic a very unpredictable environment it's a little bit harder to come to a ground truth so like you have some metrics like uptime and latency and participating in consensus that you can track but when it comes to each individual chain link service data cross chain or compute there may be different attributes that a user cares about like data accuracy matters for data feeds for transaction automation that's not really a concept that exists that you can slash

uh Val node operators for so each service can have different basically service level agreements defining this is what a node operator needs to do but I think what people would really be interested in here is that you know eventually Chain Lake node operators are going to basically be on par in terms of performance they'll be you know you 99.99% uptime reliability participating in consensus so how do node operators differentiate themselves because chain Link's not one monolithic Network it's actually this two- side Marketplace for building networks ultimately that's how

much staked link that they can actually uh put up as collateral to back their uh the the performance that they can offer users and so it becomes this inner competition between node operators competing with one another of who could provide the most collateral and ultimately eventually even competition between different chain link networks within the whole chain ecosystem of you know different service providers launching their own price feeds with their own properties all operating on the same economic layer but different independent networks competing with one another and the Stak link is effectively

how they compete with one another so like as Chain Link services become more sustainable and more economically profitable basically the Surplus Revenue gets paid to stakers to increase the cryptoeconomic security of those networks whether through higher yield attracting more stakers to come participate and secure that service or just hire p&l for the note operators themselves because that means a higher opportunity cost if they're for malicious for whatever reason so it's really these two different sides of the coin so it kind of takes elements from Bitcoin it kind of takes elements from ethereum and it's also kind of kind of

its own name because Oracle networks just operate in a fundamentally different way than than blockchains do but it it takes a lot of the same properties cuz why reinvent the wheel if we know that cryptoeconomic security already Works in blockchains it just needs to be kind of modified to work in this this Oracle Universe I think that that was really well said the the patterns that I'm I'm seeing between chain link and uh other blockchains are pretty clear so link is the native currency of chain link in the same way BTC is the native currency of Bitcoin eth is a native currency of

ethereum and when you want to pay for economic activity on any of these chains including chain link you need to use the currency of the Native system so you pay link for the services to link validators but what you're saying chain link God is like the the nature of being a chain link validator is a little bit more like unwieldly versus an ethereum validator where ethereum validator is pretty like you know step a step B step C pretty objective pretty straightforward uh pretty binary uh whereas chain link validating is um a full broad spectrum