Is Chainlink the Craigslist of Web3?
Value creation without value capture is a story that gets told in every new technology boom. In web 1.0 telecom providers created tremendous value laying undersea cable but were unable to capture much of it due to technical advances that resulted in little pricing power from overcapacity. In web 2.0 Craigslist was the first to monetize many of the verticals that would eventually become unicorns of their own.
In web3, there’s no denying that Chainlink has built a suite of very useful products.
Chainlink continues to dominate the oracle market and there’s no question on the utility of their product suite. The big questions people have had for Chainlink have centered around security. How can you secure a multibillion dollar defi ecosystem with only ~$100m value at stake by Chainlink stakers? Staking on Chainlink right now is permissioned which in the short term trades off the risk of malicious node operators for the long term risk of regulatory actions against Chainlink itself.
In an ideal world we would have all of these middleware services fully decentralized with a lot of value at stake to guarantee security. Chainlink is not in a position to do this as staking rewards would be prohibitively expensive if they allowed all token holders to stake. Typically 50% of a network will stake their tokens which would be $3.5b at stake at Chainlink’s current FDV of $7b (yes, only 50% of the supply is currently circulating, but we are looking long term). Staking rewards under such a scenario even at 5% would amount to $175m in annual rewards, a cost that would have to be paid in cash and/or token inflation.
With a shared securlty model, offered by platforms such as Eigenlayer, it’s now possible to build middleware service that can borrow a trust layer instead of building one from scratch. Shared security has the potential to decrease staking rewards by 80%-90% as the rewards are incremental to the primary staking rewards received from the main network (ETH in the case of Eigenlayer). See our restaking report for justification of what shared security will do to the cost of creating a trust network.
In the Craigslist web 2.0 analogy, Craigslist was disrupted by platforms offering users a more secure environment to transact. Instead of renting a place on Craigslist where you had no clue if the person on the other end was some kind of scammer, AirBnB offered a secure place to transact. Is Chainlink ripe for disruption by companies offering the same middleware services in a fully decentralized manner at lower cost? Time will tell.
