What is the Chainlink protocol?
Chainlink is a decentralized oracle network, meaning it’s a protocol that helps blockchain smart contracts (code that executes automatically once a certain condition is satisfied) verify data inputs and outputs. Blockchains do not inherently allow for a connection with ‘real-world’ data, so Chainlink helps smart contracts do so in a secure way. Chainlink extends the functionality of blockchains by connecting smart contracts to real-world data, events, payments, and more in a highly tamper-resistant and reliable manner.
Smart contracts rely on data points to trigger certain automated events, and this process can introduce a vulnerability where a single input/output that is not subject to the same consensus protections as the blockchain must be relied upon at the most crucial juncture of the contractual relationship. What differentiates Chainlink from other oracle solutions is that it operates as a fully decentralized network to remediate the single source vulnerability identified above.
Chainlink collects data by having a group of decentralized (but hand-picked) nodes to help smart contracts verify the legitimacy of data that comes from an external source. The data sourcing work often happens outside of a blockchain—like a thermometer that takes temperature, for instance—while the validation work occurs on the blockchain.
What is LINK?
Chainlink node operators are rewarded for their efforts in LINK, an ERC-677 token built on top of the Ethereum blockchain network. ERC-677 tokens inherit functionality from ERC-20 tokens while also allowing for the transfer of data. LINK is used to reward node operators for retrieving data for smart contracts. In order for a smart contract to use a Chainlink node, it will need to pay its chosen Chainlink Node Operator using LINK tokens.
As of May 2021, around 43% of LINK’s maximum supply of 1 billion is in circulation. In 2017, Chainlink sold 35% of minted LINK in an ICO to help fund development. Another 35% of minted tokens were earmarked for distribution to node operators that do the verification work, and 30% is held by the Chainlink core team to pay operations and development expenses.
Put simply, the LINK token is how Chainlink platform participants pay for its services. Conversely, node operators must deposit LINK to demonstrate their commitment to the network and incentivize good service.
How does LINK differ from Bitcoin
LINK differs from Bitcoin in a few important ways.
Bitcoin is based on the Bitcoin blockchain, which only mines bitcoin transactions on the Bitcoin blockchain.
By comparison, LINK is a token based on the Ethereum blockchain. It is a modified version of the ERC-20 token that allows it to transfer data as part of a transaction. You can’t mine it, and only those hand-picked by the Chainlink team themselves are able to validate information (in this sense, Chainlink isn’t as decentralized as Bitcoin, which is not run by a centralized company and did not hold a token sale). That said, Chainlink’s services require a certain amount of quality control to be useful and reliable, and the LINK payment and staking cycle allows for some automation of this quality control process.
LINK’s market is also far smaller than Bitcoin’s. As of May 2021, its market cap of $22 billion puts it at a fraction of Bitcoin’s market cap of $1.1 trillion.
LINK’s success is also dependent on different factors than Bitcoin. Chainlink has a centralized team that makes decisions about its services. By contrast, Bitcoin is a decentralized blockchain run by a network of thousands of mostly anonymous miners. And while Bitcoin has been out on the market for a decade and its size means that it has been stress-tested by millions, Chainlink is far newer. That said, with a daily trading volume of over $3 billion, Chainlink has clearly established a market for its contributions to the crypto ecosystem.
As a holder of LINK, you are not solely limited to using it for Chainlink services. You can lend your LINK on platforms like Aave and earn yields on your assets.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Chainlink including an opinion that LINK is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of LINK prior to making it available on Wealthsimple Crypto and has concluded that LINK is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated LINK based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Chainlink, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Chainlink;
- The supply, demand, maturity, utility and liquidity of LINK;
- Material technical risks associated with LINK, including any code defects, security breaches and other threats concerning LINK and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Chainlink, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of LINK.
Like all other crypto assets, there are some general risks to investing in LINK. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that the Chainlink network presents some concentration risk with a significant portion of its circulating supply held by the largest 100 holders. This risk will lessen as the network matures. Further, the Chainlink community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of LINK have no recourse to Chainlink or Wealthsimple if LINK declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading LINK. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021