The I/O Fund has done some bold things, such as offer an audited portfolio to retail investors, call Nvidia an AI stock five years ago, and, at times, have hedged 100% of the portfolio in 2022 with the help of The Wealth Umbrella.
However, probably more bold than any of those was the decision to hold an altcoin permanently in our portfolio. This was done within a month after launching our site, when Bitcoin was on a downward trajectory, and we were up against an extremely high failure rate in altcoins. Chainlink had launched on Ethereum mainnet about three months prior to covering the token.
Some of my readers are averse to crypto, and for good reason as it can be extraordinarily volatile, so that is everyone’s personal choice to make. However, the number of stocks we’ve held without interruption since the day we launched our site four years ago is very few, not even Microsoft makes that list. But, Chainlink does.
With that introduction, I’d like to update my analysis as Chainlink has expanded from working with off-chain data to now also include cross-chain token transfers and messages. The broader vision is that Chainlink will become the blockchain backbone for the financial system, accomplished by partnering with SWIFT, the system that currently allows 10,000 banks and financial institutions to communicate with one another.
The Internet of Contracts
Before discussing how Chainlink is becoming a single access point for tokenized assets, and why this is needed by the banking system, it’s important to review smart contracts. Chainlink rephrased this to “the internet of contracts” and I think this describes smart contracts succinctly as Web3 proposes to replace the internet, but to do so in a secure, decentralized manner.
Decentralized systems require contracts if a system is to be created where all data, all messages, all token transfers, and all users are validated. Machines need contracts to offer ultimate security and decentralization as contracts ultimately allow for a revocation if a request if found to be fraudulent. In this case, the machine can shut the request down or otherwise deny the user/token transfer/data/message to move forward. The bilateral nature of contracts allows for a validation process to where nodes can determine if the action is trustworthy.
To put it simply, without contracts, trusted systems cannot truly exist as otherwise there is no penalty. This is why Web2, which is not based on smart contracts, is rife with bad actors. One centralized system can create thousands of bots, or a centralized tech company can push its agenda to the top of a newsfeed. There is no contract, and therefore, there is no revocation for unethical behavior.
The bot or the centralized Big Tech company simply does it again and again. In the vision of Web3, even the special interests of a powerful Big Tech company would not be able to dominate a newsfeed, rather all users would be equal and have to prove they are acting in an ethical manner in terms of how messages rank in the newsfeed.
Right now, you can assume what you’re seeing in newsfeeds and on search engines is ranked according to what Big Tech wants you to see and think – you will see more AI news because Big Tech wants you to support AI. You will see favorable news about their own companies because this ultimately helps their stock. We are coming into an election year, the candidates that most support Big Tech’s ambitions to further monopolize and offshore taxes will be seen favorably and/or rank at the top of a newsfeed. If you feel like there isn’t a problem with censorship, then perhaps consider that Big Tech has used its thousands of engineers and done its job quite well, which is to make it look as though it’s not even happening.
That’s the inspirational explanation of smart contracts. We’ve also covered the broader picture in a 1-Hour Intensive Webinar on Chainlink here. For those who want to take a trip down memory lane, here is the original PDF we published back when we published PDFs.
The more technical explanation is that rather than having backend code on a centralized server, backend code runs on a decentralized network, such as the Ethereum platform. Developers use a blockchain like Ethereum for data storage and smart contracts for the app logic. Chainlink was primarily built for off chain data for non-currency smart contracts. The principal is the same where there is a set of rules which self-execute – the more common analogy is that it operates like a vending machine to where there is no middleman.
Decentralized applications (Dapps) rely on smart contracts. Dapps deployed on the Ethereum network are controlled by logic written into the smart contract and cannot be altered by the developer. Smart contracts function like APIs (this was also discussed in the Chainlink webinar). This allows applications to build on one another similar to the way applications use APIs today; except blockchain applications will build on smart contracts.
The front-end application can be written in any language with calls made to the backend. The main qualities are that the applications are decentralized, can perform any action given the required resources (whereas Bitcoin is not Turing complete) and are executed in a virtual environment such as the Ethereum Virtual Machine. The virtual machine acts as a buffer to where if the application is faulty, it does not affect the blockchain network.
There are a few key benefits to dapps:
- Dapps are more secure and inherently protected from denial-of-service attacks.
- Censorship will be nearly impossible as a single entity will not be able to block users from utilizing the blockchain.
- Fraud and other malice will be prevented as the data has complete integrity from the decentralized and cryptographic qualities of the blockchain.
- Because smart contracts are self-executing, they remove the need for a centralized institution. Real world identities can also be anonymous with dapps.
There are also some drawbacks to dapps:
- Most developers do not want to relinquish control over their creation
- If there is a bug that need to be fixed, that developer is unable to take back control of the Dapp once it’s launched onto the Blockchain
- Dapps will need to prove they can scale on Layer 1s with Ethereum’s Proof of Stake largely untested in the real world in terms of scaling to tens of millions or even hundreds of millions of users. Layer 1s such as Solana are competing with Ethereum specifically on its scalability.
- Some developers may utilize centralized servers for the frontend or to store business logic which could eliminate many of the decentralized security/anonymity benefits of the blockchain.
Oracles:
The issue with smart contracts and the proposed use cases for the blockchain is … where will we get the off-chain data, which is key contractual data? When you go to trade a stock, where will the blockchain get the stock price in a way that is trusted, since this is off-chain data. Right now, in other applications, these are done through APIs which act as building blocks so the developer does not have to build the input/output.
Oracles are trusted third-parties that retrieve off-chain information and push that information to the blockchain at predetermined times. Oracles introduce a potential point of failure, however, and this is why Chainlink is critical middleware for Layer 1s.
Without Chainlink, Ethereum’s smart contract utility is confined to currency tokens on its Layer 1 only as data cannot be directly fetched from off the blockchain. The only secure input that can power smart contracts is data that exists on the Ethereum blockchain, which is token inflows/outflows. This becomes problematic for cross-chain token transfers as price also needs to be verified outside the Ethereum blockchain.
Chainlink uses decentralized oracles to solve the smart contract connectivity problem, which is that a smart contract needs to interact with external data feeds that are secure and trusted. There are many inputs and outputs in the form of data feeds and APIs, rather what Chainlink solves is a tamper-proof way of triggering smart contracts with events and data that is tamper-proof.
Decentralized Oracle Networks (DONs) are multiple, independent oracle nodes that incorporate three layers of decentralization: at the data source, at the individual node operator, and at the oracle network levels.
Cross-Chain Interoperability Protocol (CCIP)
Blockchains are fragmented, and naturally prefer to have users locked into their ecosystem. This is problematic as each blockchain and DeFi application has unique strengths, and thus, users often seek to use more than one blockchain and dozens of applications depending on their needs.
This is best illustrated with token transfers. The process to liquidate Bitcoin and buy another altcoin on a DeFi platform is time consuming and overly complicated. This friction is a primary pain point causing a low user adoption rate for crypto.
Clearly, cryptocurrency has its loyal enthusiasts, but what innovation needs is outsized demand. In tech, there is plenty of innovation and supply, whereas demand is the part of the equation that is much, much harder to solve. The friction that exists with transfers for currency and information, plus the overall user experience, must be solved for Web3 to become a replacement for Web2.
This means that Web3 must function seamlessly like Web2 to where the infrastructure (AWS, Azure, GCP), the protocols (TCP/IP, SMTP) the operating systems (Windows, Linux, MacOS, Android, iOS), the applications and the software are seamlessly working together without friction. In the majority of these cases, the user is unaware of the systems that support the user experience.
Chainlink’s CCIP sets out to solve this by providing a bridge between blockchains and DeFi applications. The protocol was launched in July of 2023 to solve the pain point of seamlessly transferring data and currencies across various blockchain networks. At launch, it was integrated with Ethereum, Avalanche, Polygon and Optimism. This allows users to use any decentralized application (dApp) on these blockchains for liquidity purposes and connectivity.
This is not a new concept, rather how it’s approached is what has evolved. Sidechains for popular applications, such as the popular game Axie Infinity, were developed to transfer assets between the game and Ethereum. This allowed Ether to be used for purchases and to also pay gamers with rewards. The sidechain called Ronin Bridge was secured by only 9 nodes, and hackers were able to compromise 4 of these nodes and exploit $25 million worth of Ether.
Clearly, any bridge needs to be handled carefully as this is one of a few hacks which occurred when developers attempted to develop a solution. However, in the past, dApps had to build in-house implementations for cross-chain interactions, which puts immense pressure on application developers to also provide secure interoperability.
At the time, it was presumed that decentralized was inherently “secure enough,” yet this has been debunked as bad actors only need to control the majority of the nodes. With enough incentive, such as $25 million worth of Ether, Ronin Bridge proved this can be accomplished.
This represents the issue for a popular gaming application, but a similar issue exists for banks and institutional investors. The fragmented layer 1 blockchain networks that compete with one another are not interoperable and each has their own functionality and liquidity profile. This creates friction and potentially security issues if layer 2s or sidechains are needed for token transfers or swaps.
Chainlink is uniquely positioned to solve the problem of bridging blockchains and popular applications because it has built a secure oracle network. CCIP extends the idea of an oracle network, which was originally designed to on-load off-chain data, to also offer decentralized oracle computation for performance histories and to monitor for malicious activity. Off-Chain Reporting (OCR) is used to aggregate a report from many validators, which reduces congestion.
In conversational terms, what this means is that Chainlink was once thought of as the Google of Web3, which it can still very well be. However, Chainlink is also evolving to become a critical security layer, which in turn, is what’s needed for blockchains to become attractive for banks.
The financial system has different goals for blockchains than Web3, which is to reduce fees and reduce fraud. What will likely unfold is that there is more urgency with the financial system than there is with Web2 users to advance crypto forward. Web2 users are fairly comfortable with the internet and native mobile apps they use today. Meanwhile, the financial system has serious pain points that blockchains can solve.
Instead of Chainlink only working with off-chain data, CCIP extends its use to include token transfers and messages. The broader vision is that this will be accomplished by partnering with SWIFT, the system that currently allows banks and financial institutions to communicate with one another.
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications (SWIFT) and is the system used by banks and institutions for money and security transfers. Currently, 11,000 banks use SWIFT across 200 countries, and it’s the largest and most streamlined payment system for international transfers. SWIFT facilities secure and efficient communication between institutions with 45 million messages sent in 2022.
Recently, SWIFT successfully completed a test using Chainlink’s CCIP to facilitate transactions with tokenized assets on public and private blockchains using back-end systems. This allows financial institutions to integrate blockchain technology into the existing infrastructure. You can read more about this on Swift’s website here.
The test was done with 10 banks initially to test the settlement process. Findings included a need for nonce management, which refers to transactions being mined in sequence. This acts as a counter for the number of transactions sent by an address, which ultimately helps choose the order that transactions are processed and prevents replay attacks.
Pictured above: By including a timestamp or a nonce, only one transaction is authorized.
Crypto nonces prevent replay attacks where a hacker on the network attempts to replay someone’s credentials or retransmit the login request to the bank server.
Another component to security that Chainlink provides is an abstraction layer. Payment abstraction layers are important because it provides the value of the token that is being paid. As a decentralized oracle network, Chainlink is the industry leader in providing price oracles. Chainlink’s data oracles provide the data that assigns value to cross-chain token transfers, and this is a primary reason SWIFT is partnering with Chainlink. Ultimately, a payment abstraction layer will allow users to pay with a credit card, a bank account, a native blockchain token, a stable coin, or a protocol token – safely and securely.
Chainlink’s Early Success
Chainlink launched on the Ethereum mainnet on May 30th, 2019. We covered the altcoin for the first time in August of 2019.
Prior to launch, Chainlink signed 30 partnerships. By 2020, when we covered Chainlink a second time, total value secured (TVS) had grown from $254 million to $6.3 billion, or 23,000% growth in TVS. At crypto’s peak in Nov of 2021, Chainlink had $75 billion in total value secured across up to 1500 protocols and hundreds of DeFi applications. This has declined to $17 billion today, yet the TVS from 2021 is important as it shows Chainlink is capable of securing $75 billion without a hack. As the CEO stated recently at SmartCon: “Right now, the Chainlink Network has provided the most cryptographic truth in history.”
To date, there has been 10.3 billion data points delivered on-chain. When taking the sum of the USD value of each transaction that has utilized an oracle, the transaction value enabled (TVE) by Chainlink is $8.68 trillion. As stated, there’s been no hacks or otherwise any tokens lost through Chainlink’s secure network.
There have been many oracle solutions launched to compete with Chainlink yet the company has retained 50% or greater market share. The predominant use of Chainlink is for market data for DeFi apps. DeFi apps have grown in total value locked (TVL) from $700 million in December of 2019 to mor than $200 billion today. With the launch of CCIP, Chainlink can use its strong track record in securing DeFi blockchain smart contracts to expand to cross-chain smart contracts.
Tokenomics
One area where critics find fault with Chainlink is the tokenomics. The monthly growth in Chainlink’s circulating supply is at 1.4% per month on average. Over the course of a year, this can dilute token holders 10 to 15%, on average.
Chainlink’s fully diluted market cap tracks 2.1X higher than its current market cap. There is a circulating supply of 568M tokens yet a max supply of 1 billion tokens.
Of the 1 billion tokens, at the initial coin offering, a little more than one-third was to go to node operators, a little more than one-third was sold in the public sale, and a little less than one-third went to the company to be held in reserves. The 350 million held at the company can be released anytime, which dilutes token holders.
When more of Chainlink’s supply is in circulation, there is likely to be stronger price action. About 56% is in circulation now, and so look for Chainlink’s price to be less volatile in 2-3 years if we assume the 1.4% per month rate in circulating supply continues.
Technicals, Technicals, Technicals:
I was recently on a Real Vision interview where they asked me what my investment framework for crypto is and I said: “Technicals, technicals, technicals.” If you want to buy Apple or Microsoft without using technicals, and hold over a long period, that will probably work out just fine. But to participate in these extraordinary companies at an early stage, it’s of ample importance to carefully consider technicals.
We lead with technicals on crypto given it’s early-stage tech. This is different than stocks, where fundamentals lead. The good news is that crypto is sentiment driven, and so it respects price and technicals work quite well when managing these positions.
Our history with Chainlink is quite good – we bought at $1.50 and trimmed in the $25 to $50 range, and then began buying again much lower in the $7 to $11 range.
Below, is Knox Ridley’s update on Chainlink. I asked him to provide an update on Ethereum and Bitcoin, as well, for one comprehensive view of our crypto buying plan. Real-time trade alerts are sent to Advanced Members.
Technical Analysis
By Knox Ridley
Chainlink (LINKUSD)
From a long-term perspective, Chianlink appears to be tracing a diagonal pattern. This is an overlapping uptrend that consists of 5 large wave. These are quite tricky, and exhausting to maneuver due to the relatively large swings in both directions. That being said, the recent bear market, within this context, was only correction within the larger uptrend pattern.
If we zoom in to the recent uptrend, it is moving in a more vertical manner than prior swings and taking the form of a 5 wave pattern that is incomplete. That means that we should see one more drop, then a continuation higher to complete the patter. The current correction appears to have one more drop in it that would be targeting the $12.8 – $10.75 region.
I do not want to see this drop go below $10.5, or else the next swing higher could be in jeopardy. If this happens, I still believe the larger uptrend is still intact, just taking an alternative route to our overhead targets.
On the other hand, there is a chance that the 4th wave is incomplete. If this is playing out and we do not get that final swing lower, then a break above $16.50 will be the signal that we are going directly to the $20 – $22 region next.
Bitcoin (BTCUSD)
From a long-term perspective, the 2022 bear market appears to be a correction within a much larger uptrend that started in late 2018. This uptrend is taking the shape of a 5 wave pattern that should hit the $100,000 – $130,000 target before putting in a bigger top. As of now, this pattern remains valid as long as we hold the $28,000 support level.
If we zoom into the pattern off the 2023 low, what is important to notice is the series of vertical moves higher, which are followed by overlapping corrections. In short, we see higher highs and higher lows, repeating over and over again. This is the hallmark of a classic uptrend.
It is our belief that the current pullback will be one of the last great buying opportunities before investors are forced to chase Bitcoin higher. Bitcoin is now setting up for another correction within this uptrend. Our targets are $38,000 – $35,000 for the most likely spot to find a bottom. However, we can see this drop go as low as $28,000 and still not threaten the larger uptrend we are tracking.
If these levels hold, the next move in Bitcoin should be vertical, which would be targeting the $50,000 – $58,000 region overhead. This will be the last big test for Bitcoin before confirming that we are heading to the $100,000 target.
I’m calling this region the “danger zones” because this is where my alternative count in red would likely top, if it is in play. This count suggests that 2023 was actually a corrective bounce in a much larger downtrend. If this is true, what will follow is a continuation of the bear market to new lows. So, how Bitcoin reacts in this region will be crucial for proper risk management of this position.
In summary, in order to reach the target we outlined over a year ago, there are many steps that Bitcoin has to take in order to get there. So far, it has pushed higher with many vertical moves, and held critical support on the pullbacks. In order for this target to remain valid, we need to hold $28,000 on any deeper pullback than expected, and then break above $58,000 on the next vertical move higher. If Bitcoin fails to make these two steps, then we will be forced to pivot, log our gains in Bitcoin, and regroup.
Ethereum (ETHUSD)
The larger pattern in Ethereum is similar to Bitcoin. The 2022 bear market was likely a downtrend in a much larger uptrend that is still playing out.
If we zoom into the bull market off the low, the posture appears to be in a notably bullish posture. Note the series of vertical moves higher, followed by overlapping corrections that make a higher low. There are three series of 5 wave moves higher that have held the below trend line. My targets for the next pullback are between $2,000 – $1,850. If we get a deeper pullback than expected, we must hold that below trendline, which comes into play around $1,700.
Like Bitcoin, the big test will be the overhead “danger zone” in red. If Etehreum can break above this region at $4,450, there will be little resistance as we move towards our targets around $8,000.
Conclusion:
The broader vision is that Chainlink’s Network and CCIP infrastructure will allow developers to build smart contracts with code across multiple chains similar to how web applications consist of code across multiple clouds. The lack of interoperability is holding Web3 back, and Chainlink is the middleware offering the way forward. The first customers to move forward are likely to be banks, and Chainlink is a clear choice as long as the SWIFT partnership continues to expand.
Chainlink’s story today is much stronger than when we added this altcoin permanently to our portfolio a month after we launched the site. The market has been intense since then, from the Covid pandemic in 2020, to the exuberant 2021 high, to the 2022 bloodbath – yet, Chainlink remained a staple in the I/O Fund portfolio through all of this.
We expect Chainlink to remain a staple for the long-term, which is saying volumes since it’s an altcoin, not to mention that Chainlink has held the conviction ranking of other major winners. In the meantime, while we patiently wait for the fundamentals and product to align, we will provide you all of the technical analysis you need to manage this position as well as humanly possible. As always, we have our eye on the ball.
That’s a wrap for 2023! Thank you for the wonderful year. Our team has never performed better and we are in gratitude for the opportunity to learn and grow together as we move into 2024. Look for a 2024 Annual Webinar plus Q1 Earnings Kickoff Webinar in early to mid-January.
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