Chainlink: The Crucial Component in the Success of Tokenized RWAs
Oracles are integral to crypto, but we should reconsider adding useless tokens to DeFi
Chainlink has been busy.
While its token has only recently surged in price, the protocol has been teaming up with some of the world’s largest financial institutions throughout the year. We’re talking about the likes of the ANZ Bank, DTCC, Citi, BNY Mellon, and more.
What’s the reason behind these collaborations and why should you care? As we covered in our RWAs report, the tokenization of real-world assets can bring trillions of dollars into capital markets and the DeFi sector. More importantly, it can accomplish one of crypto’s original goals —to improve our outdated financial system by making it more accessible and efficient to the masses.
Chainlink is currently well-positioned to play that determinant role in the success of RWAs and the leap toward mass adoption. Let’s dive in.
The Importance of Oracles in Bridging Blockchain With the Real World
Oracles can be thought of as the middleware in which multiple networks and apps can retrieve accurate outside data and execute smart contracts based on this input.
Their main job is to feed off-chain data to smart contracts, as these cannot source information independently outside of their respective blockchain network —if you’re wondering why, click here.
Data source: DefiLlama, Chainlink
The value of oracles like Chainlink in the RWAs narrative becomes apparent then; they bridge the information gap between TradFi and DeFi, which will be crucial for the success of RWAs and the tokenization market. Without oracles, the blockchain cannot meet the outside world and vice versa, making tokenization impractical and data retrieving impossible.
Below, we’ll review how Chainlink’s Functions, Data Streams, Proof of Reserves, and CCIP are valuable for the tokenization of RWAs.
The Surge of RWAs Can Be Chainlink’s Bull Case
Our RWAs report covered why the tokenization market could reach over $10T by 2030. With the potential wave of institutional capital, Chainlink and competing oracles could see a surge in demand for their services.
RWA protocols will need to import off-chain data accurately.
Institutions will want access to crypto-native RWAs across different chains or the settlement of institution-native RWAs across tokenized marketplaces.
By acting as the middleware between DeFi and TradFi, oracles can take away the complexity of interacting with blockchain-based protocols.
Further, by connecting multiple public and private blockchains, financial institutions can trade RWAs in a cross-chain and cross-currency fashion.
Chainlink addresses those elements with the following services:
CCIP: The Cross-Chain Interoperability Protocol
The CCIP has been sought after by multiple financial entities this year as it allows traditional backend infrastructure and dApps to interact with any blockchain network through a single middleware solution.
In September, post-trade financial services company DTCC used CCIP to work on Swift’s Blockchain Interoperability Project. Similarly, Australia and New Zealand Banking Group (ANZ) leveraged CCIP to allow customers to transfer ANZ-issued stablecoins cross-chain to purchase nature-based assets.
Chainlink Functions & Data Streams
Chainlink Functions is a serverless platform that allows Web3 developers to connect smart contracts with Web2 APIs. The Data Streams service is what it sounds like —it’s a decentralized off-chain system that retrieves real-world data into on-chain validation contracts. Functions and Data Stream can help deliver RWA data in real-time to on-chain protocols even while this data is being transferred to Web3
Chainlink Proof of Reserves
Verifies the on-chain assets backed by off-chain assets in DeFi projects.
How Far Can Chainlink Go Thanks to RWAs?
It has been an interesting year for LINK; the token has been sidelining for most of 2022 and 2023 but just recently saw an explosive surge in price. LINK went from $5.9 in early September to $11 on October 25th, roughly a 90% surge in price.
Looking at this chart, we noticed that this is the first since May 2022 that LINK breaks the $10 resistance level, and the token is nowhere near its ATH of $50 during DeFi Summer.
That said, there’s a lot of headroom for LINK, but what’s behind the growth? The catalysts for this explosive momentum can be:
Key developments and updates in the Chainlink ecosystem, like the upcoming Staking v0.2 platform
The integration of five Chainlink services into seven different chains, including Base and Arbitrum
The dozens of collaborations with financial entities like SWIFT to work on asset tokenization and cross-chain interoperability using Chainlink’s Cross-Chain Interoperability Protocol (CCIP)
The surge in TVL in the RWAs sector and the hype surrounding the narrative
The last two reasons in the above list are what could push LINK towards new highs in the upcoming years. If RWAs can attract 1% of the total global asset market (around $900T) then roughly 9 trillion dollars worth will enter the cryptocurrency market.
By the same logic, the oracle that manages to facilitate data transfers of tokenized RWAs and the interface needed to interact with blockchain-based apps could generate roughly $9B in revenue by 2030, and a significant price appreciation beyond previous ATH in 2021, in this case, Chainlink.
The Surge of Oracles, And Chainlink’s Competition
The top oracles by market cap have seen healthy gains in the last 30 days. Most likely, they have benefited from the RWA narrative, yet, the primary source of their growth comes from recent protocol developments and the integration of multiple chains into their stacks, among other important news.
If we try to search for oracles working with institutions to facilitate the tokenization of RWAs, Chainlink is the only one that stands out. However, even knowing it dominates in terms of TVS and market cap, it doesn’t mean there’s no competition out there.
The second-largest Oracle by market cap. While we can attribute the token’s price increase to higher network activity, demand for RWAs, and its recent deployment to the Manta Mainnet, most analysts believe the token had its run-up orchestrated by whales.
Band Protocol was built on the Cosmos Blockchain, but it works as a chain-agnostic Oracle.
Most of the growth Band Protocol partnered with Horizen’s EVM-compatible sidechain EON to facilitate
UMA differs from most Oracles as it allows developers to create synthetic assets
Synthetic assets are wrapped-up versions of an index on a blockchain, essentially a tokenized stock.
UMA has been surging following a series of on-chain governance modifications and the RWA narrative.
API3 is arguably a more affordable and accessible Oracle.
It allows projects to access external data through decentralized application programming interfaces (dAPIs).
API3 is surging after being integrated into five popular networks: Mantle, Base, Linea, Kava, and Rootstock.
About Tokens and Utility
A token’s performance doesn’t necessarily reflect how well a project is doing. Maybe that project has solid fundamentals and a good product. A token can be used to pay node validators for their duties and tasks through generated fees.
But this can make governance and staking seem useless if the protocol can do just fine going tokenless as long as its product has good PMF. Sometimes, governance justifies its existence, but more often than not, a token is just a means to raise funds based on future protocol performance and speculation.
Protocols with ERC-20 tokens could simply charge fees with ETH, and they would do just fine with their products. This is why there are significant disparities between price and TVL in certain protocols. That said, a project may have a large TVL because its product is good and lots of funds are deposited in its contracts, but if the project focuses on providing more value capture to its token, then it can narrow the gap between these two metrics.
So, Why Do We Need a LINK Token?
LINK, for example, is used to pay node validators for retrieving data, and just recently, for staking thanks to the release of its Staking feature —and the upcoming Staking v0.2.
But the token doesn’t offer any utility besides that. One could argue that Chainlink as a business can thrive without the LINK token, and If we apply that same logic to RWA-based tokens, we run into an issue; most tokens from RWA protocols would automatically become yield-bearing assets, which I’m sure the SEC would absolutely love.
Further, governance and decentralization become somewhat useless if we’re dealing with institutions and tokenization of real-world assets.
In that sense, RWA protocols have more chances to succeed if they instead focus on:
Being licensed —that will give them a competitive advantage
Being audited by protocols like PeckShield or CertiK to check for smart contract risks and other vulnerabilities,
Reassuring trust to investors —this can be done by using Chainlink’s Proof of Reserve to verify on-chain assets backed by off-chain assets and a centralized custodian.
The crypto community frequently reverberates the benefits and use cases of blockchain technology in multiple industries.
If that’s the case, we should pay more attention to the tokenization of real-world assets (RWAs) and how this sector delivers that utility we just discussed. Chainlink has been busy developing upgrades on its platform and integrating some of the most popular chains in the market.
Chainlink’s merit in the RWAs narrative is working toward becoming that crucial infrastructure that could facilitate the trade of these assets on-chain, blending traditional and decentralized finance.
The Road Ahead
After Oracles, auditors and compliance and infrastructure protocols are the next stop in our research on what could make (or break) the RWA narrative.
And why? The RWA sector is targeting big, traditional markets, and some of them are highly illiquid. To obtain this liquidity, we can reach out to institutions, but they won’t come to DeFi unless they’re certain that 1) they’re working within the confines of the law and 2) there are no smart contract risks or vulnerabilities.