Chainlink’s Network Effect Creates More Secure and Lower Cost Oracles for Everyone
The Chainlink Network, a framework for building and running decentralized oracle networks, has accelerated in adoption over the years, cementing its position as the most widely used oracle solution across leading blockchain environments and numerous smart contract verticals. With hundreds of live or in-progress integrations, the Chainlink Network actively secures over $5B within the DeFi ecosystem through its vast selection of Price Reference Data Feeds, among various other value-additive oracle services beyond price feeds and data delivery.
Chainlink’s growth is not only attributed to its first-mover advantage as the pioneer of decentralized oracle networks and the first to operate at scale, but also the accumulation of a large network effect wherein each new integration leads to more user fees for increasing oracle security, lowering oracle service costs, and incentivizing off-chain data providers to monetize their APIs on blockchains via Chainlink. This dual flywheel effect around oracle network security and resource accessibility results in developers having a more secure, data-rich environment for building increasingly advanced smart contracts responsible for larger amounts of on-chain value, further generating additional user fees and accelerating the flywheel effect even more.
To better understand the major impact that network effects have on the technological adoption of a protocol, we define what a network effect is, look at its foundations in Bitcoin and Ethereum, explain the benefits of the Chainlink network effect, and showcase how it’s achieved in a completely decentralized and open-source manner.
The Network Effect Explained
A network effect, otherwise known as Metcalfe’s law, is a phenomenon whereby the value of a service or application is determined by its number of users. For every additional user, the network as a whole becomes more valuable/useful to all current users, as well as becoming more enticing for potential new users.
An obvious example of a network effect today is the rise of social media. The reason why Facebook, Twitter, and Youtube are so widely used is that they provide single aggregated platforms where creators can share their content to a large audience while consumers have access to a wide selection of content. Family and friends that collectively use the same platform make it inherently valuable to those users, providing them with the most value/utility per unit of effort. In contrast, having your family and friends spread out across 50 different Facebook-like equivalents requires an extensive amount of work to keep in sync with them all, ultimately leading to a smaller social network with less usefulness to everyone.
Network Effects in Bitcoin and Ethereum
Network effects can also be seen in leading cryptocurrency networks. The reason why new crypto users usually gravitate towards Bitcoin is because it has the largest mindshare in the world. Not only is that due to being the first cryptocurrency in existence, but Bitcoin has also accumulated a massive network effect of over 100M+ wallets spread around the world, which collectively hold over $340B of circulating coins. Each additional user/holder increases the collective belief of Bitcoin being a secure and reliable store of value, further bolstering its value proposition for existing and future users, as well as enhancing its network security via more fees for miners.
Similarly, smart contract developers gravitate towards Ethereum not only because it was the first programmable smart contract platform, but because it has a massive network effect of over 2M deployed smart contracts, 32k daily active users, and over $14B of user funds locked in the DeFi ecosystem. This network effect means developers can build on top of a highly secure blockchain and existing set of smart contracts as opposed to rebuilding core infrastructure and protocols from scratch. We see these benefits ever-present in Ethereum, whether it be:
- User fees that collectively support network security and lower issuance via EIP1559
- DeFi protocols being reused and combined to create more advanced applications
- Projects tapping into a large pool of active users
- Resources invested in developer tooling to make contract development easier
Seeing the rise of Bitcoin and Ethereum as the top two blockchain networks with by far the most adoption and mindshare, it’s clear that network effects are the key to success in decentralized technology.
The Chainlink Network Effect
Chainlink’s adoption as the most widely used oracle solution is equally derived from both being the first decentralized oracle network to operate at scale, as well as the network effect it has generated through the widespread usage of its Price Reference Data Feeds in the DeFi industry and highly generalized oracle solution used by numerous blockchains, dApps, and data/API providers.
Looking closely at Chainlink’s Price Reference Data Feeds — a large collection of pre-built oracle networks providing financial data — we see its network effect is built upon a shared cost model, where instead of users needing to launch their own oracle network and pay the full costs, users who need the same reference data can collectively share and financially fund a single common oracle network. This has already been applied to price feeds for DeFi, but can expand into a wide range of in-demand datasets like Proof of Reserve, VRF, and beyond.
The core advantage of Chainlink’s shared public good network model is that with every additional paying user, the costs for every current and future user goes down, while at the same time growing the network’s security budget via the aggregation of user fees. This increased security budget can then be utilized by paying users to fund oracle network improvements, including:
- Adding additional oracle nodes to further decentralize data delivery
- Adding additional data sources to further decentralize data sourcing
- Upgrading to premium data sources that provide higher quality data
- Lowering the deviation threshold on Price Feeds to provide more frequent updates
- Compensating nodes who stake more LINK to create stronger crypto-economic security
- Paying oracle nodes more LINK per job to incentivize more reliable services
- Granting a rebate to users in order to further lower costs and incentivize usage
Chainlink oracle networks can also be designed where users pay pro-rata according to how much value their contract’s secure and/or the amount of revenue generated, further lowering the costs for new projects with small budgets or recently launched protocols. Additionally, through a flexible governance contract, users can collectively decide on-chain where and how to best allocate funds collected by the user fee pool contract accompanying each oracle network.
Through Chainlink’s shared public good model, a key value proposition is generated to the benefit of everyone: each paying user gets access to a highly secure decentralized oracle network with high-quality data at a cost-efficient price. Such distributed access to industry level security and premium data quality could not be achieved by aggregating a bunch of separate low-quality oracle networks that deliver the same datasets.
The reason for this is that it’s simply not economically feasible for users to fund dozens of disparate oracle protocols for access to the same dataset while also retaining the high standards that users want and require. Users would spread their financial resources too thin, leading to a dilution in quality and reliability for each individual oracle network, and thus a weaker overall oracle solution securing their user’s funds. Such a design not only leads to the creation of insecure oracle networks, but it requires extensive social coordination from users and introduces numerous attack vectors involved with integrating, maintaining, and monitoring numerous different oracle implementations all at the same time. Aggregating low-quality oracle solutions does not generate a high-quality oracle solution, as the sum is only as great as its individual parts.
However, users both small and large can equally obtain access to world-class oracle infrastructure and high-quality data at an affordable price if they collectively pool resources towards funding the development and maintenance of a single decentralized oracle network. The network effects created by this shared cost model, which is already in motion on Chainlink, creates more security for every application, lowers the cost for every end-user, provides a way to scale the oracle network as it secures more value, and allows the open-source community to collectively govern, maintain, and commit developer resources towards shared infrastructure with long-term sustainability.
For example, the ETH/USD Price Feed is a high demand reference price for DeFi applications running on the Ethereum blockchain. To meet this demand, smart contracts can integrate Chainlink’s existing, time-tested, and battle-hardened ETH/USD price feed which is already collectively funded by over 26 DeFi projects on mainnet. The aggregated fees from each of these users (listed in the image below), in addition to the partial LINK token subsidy used for bootstrapping oracle networks, has led to users gaining access to the most decentralized, accurate, and secure price feed for ETH/USD in the blockchain industry, all at a very affordable price.
A Unified, Permissionless, and Decentralized Oracle Network
With decentralized protocols being as minimally extractive as possible, the oracle solution that provides the most value and costs the least will achieve the largest network effect and become a standard piece of infrastructure for the smart contract economy. Chainlink’s network effect is not only orders of magnitude larger than any other oracle protocol, but it is also accelerating at a rate that is far faster than competitors. Similar to Andrew Kang’s hypothesis about a single platform being a blackhole for liquidity, Chainlink is becoming a blackhole of adoption for oracles, providing a wide range of projects with access to the industry’s most secure and reliable oracles for the smallest amount of integration work and financial costs.
Accumulating an industry-wide network effect on Chainlink does not mean it is centralized or a point of failure either. Not only are existing Chainlink oracle networks inherently decentralized and made up of multiple independent oracle node operators, but the underlying architecture of the Chainlink Network is permissionless, generalized, and heterogeneous by design. Anyone can build any type of oracle network using the Chainlink protocol, and any number of oracle networks can run simultaneously on the Chainlink Network without any cross-dependencies.
Based on the wide adoption of its existing oracle networks and the broad design flexibility available to developers, Chainlink is generating a dual network effect around two important implementations: shared-cost oracle networks supported by a large collection of users and completely customized oracle network supporting the unique needs of projects. This complementary combination of standardization and flexibility serves as the perfect framework to support all oracle needs both now and in the future.
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