Most recent update: [March 11th , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Chainlink, made available on the VirgoCX Platform, including an opinion that Chainlink is not itself a security and/or derivative.
What Is Chainlink?
Chainlink is a decentralized oracle network that functions as middleware between on-chain and off-chain systems. The networks provide access to real world data feeds from off-chain sources and allow these to become inputs in smart contracts via oracles.
Smart contracts are simply a pre-specified set of conditional rules or agreements on the blockchain that execute certain actions if certain conditions are met, based on information. Think of a smart contract as an IF Statement in Excel or simply as “if X is true/false, then execute Y.”
Typically, smart contracts rely on information that is available on the blockchain as the input, but to craft smart contracts that go beyond the cryptosphere, they will require off-chain or real-world data feeds as inputs. This is where oracles are useful, as an oracle is ‘middleware’ software that acts as an intermediary that translates real world data to a smart contract on a blockchain and vice versa.
A simple way to think about Chainlink then is to imagine a security token that relies on real-time stock market price feeds, or a blockchain based sports betting platform that relies on live sports scores, these can be achieved using Chainlink oracles to bridge the gap between real world data and on-chain smart contracts or crypto assets.
How Does It Work?
Chainlink has an innovative three step process that is used to allow communication between on-chain smart contracts and off-chain data sources. The process begins when a smart contract needs input data, and the contract puts out a request for information. We call this a Requesting Contract. The protocol takes note of this request as an ‘event' and creates a corresponding smart contract on the same blockchain to go and pull this off-chain or real-world data. This is called the Service level agreement or SLA Contract. It is important to note that the Chainlink SLA Contract then generates three other Chainlink subcontracts:
- Reputation Contract – This contract checks an oracle providers performance history to verify data authenticity and will then discard and disreputable or unreliable nodes.
- Order-Matching Contract – This contract is based around the Requesting Contract (RC) explained above. The order matching contract will deliver the RC’s requests to the protocol nodes and take their bids on the request, then it will select the right type and number of nodes to fulfill the request (this is the process when the Requesting Contract doesn’t specify a specific set of nodes to fulfill the request, it is left up to the order matching contract to determine the specifics).
- Aggregating Contract – This contract accumulates all the data from a chosen oracle and reconciles/validates the data for accuracy and returns a weighted score to the user based on the data received.
The Chainlink node takes the RC’s request for real world data and utilizes the Chainlink Core software to interpret and transform the data from on-chain programming languages to an off-chain language that is routed to an external application via API to collect the called upon data. Once the data is collected, it’s translated back to an on-chain language through Chainlink Core and sent back to the Aggregating Contract.
The next step is where you could say the magic happens.
The Aggregating Contract can validate data for both single and multi-source data and can reconcile data from multiple sources. For example, if 7 nodes deliver a single common answer from a weather sensor and 3 other nodes deliver a different answer, the contract will determine that the 3 other nodes are dishonest or faulty and discard the data. This leaves with you high quality reliable data.
If you would like to know more about the Chainlink protocol and the technical, please refer to the link here
What Is the History of Chainlink and Who Is the Founder?
The first ideas for what Chainlink is today were created by Sergey Nazarov and Steve Ellis back in 2014, under their crypto startup called SmartContract.com. The firm is registered in the Cayman Islands and the first whitepaper for Chainlink, as we know it today, was not published until September 4th 2017. The project did not go live on the Ethereum mainnet until the middle of 2019. In April 2021, a new updated v2.0 whitepaper was released that outlines the future of the project.
Sergey Nazarov is the son of Russian immigrants who settled in New York in the early 90’s, he is a graduate of New York University with a degree in Philosophy and Management. Nazarov is in his early thirties and lives in the Bay Area. Nazarov has been a serial entrepreneur for over a decade, starting his first crypto venture in 2014 called CryptaMail, which was a failed project around decentralized email. He later went on to co-found Secure Asset Exchange, SmartContract, and Chainlink Labs, Nazarov is the founder and current CEO of Chainlink.
Steve Ellis is a graduate of New York University with a degree in Computer Science, he resides in New York City and is also in his early thirties. Ellis is the cofounder and CTO of Secure Asset Exchange and SmartContract, so it’s clear that Nazarov and Ellis have a history of working together.
What Problem Does Chainlink Solve?
In short, Chainlink has solved the smart contract oracle problem.
The oracle problem stems from a very basic limitation. Blockchains cannot access external data on their own and using centralized oracles or networks to add external feeds would compromise the privacy of smart contracts.
Since blockchains cannot access external data on their own, they are inherently isolated networks similar to a computer that isn’t connected to the internet. The isolated nature of blockchains are one of the properties that make them secure and reliable. However, in order for smart contracts to realize over 90% of the potential use cases, there must be a way to connect them to the real world to pull and push data off-chain and on-chain. Oracles are the bridges that provide the solution.
Oracles are pieces of code or software that are often referred to as ‘middleware’ due to their purpose of acting as an intermediary and translating data from off-chain sources to on-chain smart contracts and back again.
The oracle problem has been one of the most important issues to resolve if dApps using smart contracts on various blockchain networks are to achieve mass adoption and have a variety of use cases.
The solution that Chainlink provides is used in many cryptocurrency projects that rely on information produced by oracles. Without Chainlink, the development of the entire crypto ecosystem would not be where it is today, as Chainlink has allowed for accelerated innovation by removing a technical barrier for many crypto related projects that need external data feeds. To date, there are over 300 projects that have integrated with Chainlink.
To learn more about the Blockchain Oracle problem and how Chainlink provides a solution, please refer to the Chainlink Blog.
What Makes Chainlink Unique and What Gives the LINK Token Its Value?
There are many unique traits of the Chainlink network but one that is most interesting is the architecture as Chainlink is powered by three types of smart contracts (the aggregating contract, order-matching contract, and reputation contract) and two-part nodes consisting of the Chainlink Core and Chainlink Adapter (see above for more details).
Chainlink is also the most adopted decentralized oracle network to bridge real world data with blockchains. This is in part, due to the high-quality data, generalized architecture, and reputation systems. The other part being that many decentralized applications that deploy smart contracts and ultimately, many new innovative crypto projects depend on Chainlink as core infrastructure in their business model. DeFi, Insurance, NFT gaming, and blockchain based sports betting are just a few examples as Chainlink currently sports over 77 different smart contract uses cases. You can learn more about them here.
At its core, Chainlink is inherently blockchain-agnostic since smart contracts can be deployed on many different blockchains.
The LINK token derives its value by being the native token to Chainlink network and is the key token used to pay for services and network operations, specifically, it is used to pay node operators for retrieving data for smart contracts and is also used for contract creation deposits by node operators. The LINK token is an ERC-677 token that inherits the functionality of ERC-20 token standards but allows token transfers to contain a data payload or “transferAndCall'' function. You can read more about it here.
What Is the LINK Token Supply?
The current circulating supply of LINK tokens is around 443 million. The max supply is capped and there will only ever be 1 billion LINK tokens minted. 35% of the total supply was sold in an ICO in 2017. There is currently 44.3% in circulation. There is no formal process to token inflation.
What Are Some Future Developments for Chainlink?
The next big step for Chainlink is laid out in the Chainlink 2.0 whitepaper which was released earlier this year and it mentions a hybrid smart contract model for the future of Chainlink. These contracts are already revolutionizing the area of DeFi. Hybrid smart contracts would combine off-chain data and computation provided by Decentralized Oracle Networks (DONs) with the blockchain based code or on-chain data.
There is also mention of the expansion of the Decentralized Oracle Networks (DONs) which could see a second layer of oracles to supervise the network.
In August 2021, Chainlink announced the blueprint for the Cross-Chain Interoperability Protocol (CCIP). This is a new initiative that is being created to help solve the current security problem with cross chain bridges and allow the Chainlink community to capture greater value across multiple blockchains. This is no easy task, but definitely a project worth keeping tabs on.
What Are the Risks or Drawbacks of Chainlink?
There are not many drawbacks to Chainlink as a protocol that enables and accelerates innovation in the crypto space.
One possible perceived drawback could be that the token supply is too high. A max supply of 1 billion LINK tokens may causes long term prices to stay relative flat or low, given the LINK token use cases.
Another possible drawback could be that the success of Chainlink in the long term depends on the relevance and adoption of smart contracts to retrieve real world or off-chain data. If a competitor comes up with a better, more simplistic solution to solve the oracle problem, in the long run the LINK token wouldn’t have enough value drivers to keep the token price from collapsing. Very doubtful that this would happen, but it's still a potential protocol risk.
Prior to listing Chainlink on the VirgoCX Platform, VirgoCX performed due diligence on Chainlink and determined that Chainlink is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Chainlink and/or its primary development team;
- The supply, demand, maturity and liquidity of Chainlink; and
- Legal and regulatory risks associated with Chainlink.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.