- Chainlink’s Oracle technology could play a significant role in the growth of the decentralised finance (DeFi) economy.
- In turn, the success of Chainlink could also be significantly influenced by DeFi.
In a recent blog post, the Chainlink team analyzed the DeFi ecosystem and outlined how Chainlink (LINK) will contribute to the success of the decentralized financial economy. If the DeFi reaches a billion dollar value, as ConsenSys recently predicted, Chainlink and its LINK token could benefit massively.
The decentralized financial economy (DeFi) has shown continuous growth over the past year, regardless of the bear or bull market. At the time of writing, there were USD 814.84 million in Ethereum (ETH 3.115 million) locked up in all Ethereum-based DeFi projects. Most recently, Chainlink has entered into collaborations with Binance, Synthetix and Conflux in the field of DeFi.
How can Chanlink help DeFi and benefit from it?
Blockchains are designed to be basically a closed system. They rely exclusively on on-chain data that is already present in the blockchain. This ensures that the decentralized consensus is maintained and cannot be manipulated. However, the use cases of the blockchain are strongly limited by this premise.
For example, price and interest data sets that are created outside a blockchain (off-chain) and that differ in value and format from different sources are not accessible. In addition, the diversity of data makes it difficult for blockchains to obtain reliable data without sacrificing consensus reliability. In this respect, the Chainlink team states:
Taking into account the realities of modern data and blockchain consensus, there’s a pressing need for a standard bridge between DeFi applications and all types of off-chain data. As discussed below, Chainlink is a standard, yet customizable protocol for enabling DeFi to securely and reliably connect with off-chain resources.
By using Chainlink, DeFi projects can thus increase the variety of products offered and make the market more attractive to regulated players. In total, Chainlink lists four concrete advantages offered by Chainlink Oracle technology: Connectivity, data protection as well as confidential and cost-effective data.
Advantages of Chainlink Oracles
Most DeFi applications rely on data to execute their smart contracts. The Chainlink Oracles, as a digital agent, can be used by a Smart Contract to retrieve and/or connect data and systems outside its blockchain. The Oracles enable off-chain connectivity for Ethereum smart contracts by providing external connection points (APIs) to data providers, web APIs, enterprise systems, cloud backends, IoT devices and payment systems through Chainlink.
Furthermore, Chainlink enables the retrieval while maintaining the decentralised consensus. While centralized aggregation of data is vulnerable to manipulation, Chainlink has developed decentralized Oracles. The data is computed based on aggregation from independent, security-checked nodes and is regularly updated.
Another major problem in the development of DeFi projects is the on-chain gas cost. When applications require constant price feeds and/or use multiple Oracles and data sources, retrieving the data can quickly become very costly. In this regard, Chainlink is currently working on implementing threshold signatures in the Chainlink protocol. These represent a new aggregation protocol that requires only a single on-chain gas charge.
Another major issue is privacy, as Sergey Nazarov, co-founder of Chainlink, explained:
Most contracts in the real world simply cannot happen without privacy.” The lack of on-chain privacy outside of more expensive Zero Knowledge Proof (ZKP) designs means that many contracts cannot be redesigned as potentially more efficient smart contracts. Privacy is essential for concealing internal positions and trading strategies, as well as abiding by data privacy laws and regulations.
Chainlink has therefore implemented two data protection solutions. Mixicles” are also used to create privacy.
As the blog post shows, the success of the DeFi could be an important factor in the success of Chainlink and the LINK token. Meanwhile, the Chainlink price is in a continuous uptrend and has seen a 57% increase over the last 30 days. At the time of writing, LINK is trading at USD 2.79.