Tokenomics review: Chainlink

The study of the economic models underlying a cryptocurrency token or other digital asset is known as tokenomics. It includes several elements, such as the overall supply and potential dilution, initial distributions, vesting schedules, utility, burn mechanisms, and stability of the economy.

A project’s tokenomics, or face, represents the team’s working style, the efficiency of internal procedures, and the project’s long-term sustainability. Benchmark-based allocations, well-thought-out token utilities, vesting dates, and a well-written description of all processes and utilities are all crucial components of excellent tokenomics.

We will highlight important factors that investors should consider when selecting a project and that teams should concentrate on when creating their tokenomics, using Chainlink’s tokenomics as an example.

Name: Chainlink

Token: LINK

Market cap (27.03.24): $11.5B

Description: Founded in 2017, Chainlink is a blockchain abstraction layer that enables universally connected smart contracts. Through a decentralized oracle network, Chainlink allows blockchains to securely interact with external data feeds, events, and payment methods, providing the critical off-chain information needed by complex smart contracts to become the dominant form of digital agreement.

Website

Whitepaper

• Useful token utilities. LINK is the utility token of the protocol. It is mainly used to pay for Chainlink node operators to provide data and information from off-chain sources to on-chain smart contracts via decentralized oracles. The second use case is for node operators to stake LINK as collateral to provide oracle services.
• Allocations and vestings are at the benchmark level. Chainlink’s allocations, vestings, and cliffs are fixed at values close to the best practices, which indicates a sound distribution of funds in the protocol.
• Detailed description. The whitepaper of Chainlink includes explanations of the processes taking place in the protocol: for instance, there is a detailed explanation role of Decentralized Oracle Networks (DONs) in the blockchain ecosystem.

LINK is an ERC-20 utility token used inside the Chainlink ecosystem to incentivize data providers. Nodes providing data have to stake a certain number of LINK tokens. The network rewards them with additional LINK if they perform their duties accurately and diligently.

The primary function of LINK is to serve as collateral. If the data source delivers harmful data, they may lose their locked LINK token. Enforcing LINK as required collateral builds trust in a sector that might otherwise be untrustworthy because data suppliers stand to lose from subpar performance.

Investors have the option to stake their LINK tokens in addition to using them as collateral. Recently, Chainlink released the initial iteration of its eagerly anticipated staking service. Oracle services now provide investors the option to strengthen the crypto-economic security of their holdings by staking their LINKs. In exchange, they receive a fixed 4.75% APY rate as passive income from the protocol.

Upon initial inspection, it may appear that the allocation of tokens for the project stands in stark contrast to the established industry benchmarks that have emerged in recent years. Specifically, the distribution of the 1,000,000,000 LINK tokens is divided amongst only 3 categories (Figure 1). By comparison, the average tokenization typically involves a more extensive partitioning of tokens, often consisting of between 5 and 7 partitions (Figure 2).

Figure 1. LINK token allocation. Source: CoinGecko

Figure 2. Market standards for the allocation. Source: Liquifi Finance

Let’s look at each category in more detail:

1. Node Operators & Ecosystem. The share of tokens that will be used for development and maintenance of the ecosystem is within market values (35–47%).
2. Company. It is also worth noting that the distribution for the company is also in line with market standards (20–30 %).
3. Public sale. The share of tokens allocated for sale to a wide range of investors exceeds the average market values by more than 7x. In general, getting a large number of tokens on the market can have a negative impact on the price dynamics, reduce the degree of influence of the core team on the project (in the case of DAO), and, in the worst case, indicates the team’s desire to make cash out.

However, in this case, de-allocation is not a sign of unbalanced allocation and is logically explained by the peculiarities of the project:

• First, the protocol does not separately categorize “private” (322M of tokens, $29M) and “public” (27M of tokens, $3M) rounds, combining them into the “public” category.
• Second, Chainlink is an infrastructure project. Creation of such projects requires significant costs for development and maintenance at early stages, which leads to the need to attract large funds.

Let’s take a look at the vestings and cliffs (Figure 3).

Figure 3. The vesting schedule of the Chainlink protocol. Source: CoinGecko

The principal aim of the endowment process is to avert token devaluation by preventing the sudden release of a large volume of coins into the market. The project’s vesting schedule displays a degree of overlap between the ownership groups. This circumstance could result in a scenario where multiple groups possess a significant number of tokens concurrently and can initiate their sale, causing the token price to plummet.

According to the timetable, 50% of the token supply was scheduled to be unlocked on January 1, 2020. Investors wary of a large supply have been actively selling tokens since November 2019, dropping the LINK price by 42% (from $3.05 to $1.75) (Figure 4).

Figure 4. Chainlink token price. Source: CoinGecko

However, the unlocked tokens did not hit the market, allowing LINK’s price to recover to past values within a month, as well as ensuring the integrity and reputation of the team behind the project.

It is important to note that the main goal of the whitepaper is to provide the most detailed and understandable information, enabling investors to conclude the project. If you look at the entire whitepaper of the project, it has a well-structured format and a detailed description of processes.

The Chainlink whitepaper is very structured and covers all the key aspects of the protocol’s operation. Furthermore, the project elaborates on the workflow process and highlights the main instruments used in the protocol.

The Chainlink tokenomics framework stands out as a unique example that highlights the significant responsibility placed on end beneficiaries for the success of a product. The LINK token plays a crucial role in incentivizing data providers and serving as collateral within the Chainlink ecosystem. While the project’s allocations, vesting schedules, and cliffs are non-standard, the team’s high level of commitment prevented any negative impact on the token price or the project’s development as a whole. A detailed technical description provides investors with comprehensive explanations of the protocol’s processes and functions, enabling them to make informed decisions about the project.