Missed Ethereum? My best cryptocurrency to buy now
Cryptocurrencies are powered by blockchains, software that runs on a decentralized network of computers, used to validate, record, and protect transaction data from attacks. Platforms like Ethereum extend this functionality, allowing developers to create self-executing computer programs on the blockchain.
These programs are called smart contracts and form the core of Decentralized Finance Applications (DeFi), products that allow users to access financial services without going through a bank or other intermediary. And by eliminating the middleman, DeFi applications have the potential to make the financial system more accessible, less biased, and less expensive.
Ethereum is currently the largest DeFi ecosystem, with $ 175 billion locked in (invested) in various DeFi products. And with a market value of $ 518 billion, it is also by far the second most valuable cryptocurrency. But while Ethereum still looks like a smart investment, it may offer fewer long-term benefits than some smaller cryptocurrencies. For example, Chain link (CRYPTO: LINK) has a market value of just $ 13 billion, but it plays a vital role in DeFi. Here’s what you need to know.
Make smart contracts more useful
Chainlink is a decentralized Oracle network powered by LINK, a token built on the Ethereum blockchain. Oracles are entities (e.g. connected people and devices) that bring real-world (off-chain) data to the blockchain. To illustrate why this is important, consider the following DeFi products.
Compound is an Ethereum-based DeFi protocol that allows users to earn interest by lending cryptocurrency. For example, you can now earn 3.22% annualized by providing the cryptocurrency USD coin compose. But the platform supports several other cryptocurrencies, and the interest rate on each asset is algorithmically set based on supply and demand. In other words, the Ethereum blockchain contains all the data needed to power the Compound protocol.
But some DeFi products require real world data. For example, consider a DeFi platform that allows users to bet on sporting events or purchase token assets (eg, works of art, real estate). Each of these smart contracts requires data not available on the blockchain, especially the outcome of the sporting event and the current market value of the assets. Chainlink is the bridge that makes these smart contracts possible, and LINK is the token that makes the entire system work.
Specifically, the Chainlink platform allows oracles (real world data providers) to bid on buyers’ requests (real world data buyers). To participate in the network, oracles must first wager LINK tokens, a prerequisite that keeps them honest and ensures their accuracy. Once the job is done, buyers offset the Chainlink oracles with LINK tokens.
Likewise, oracles can perform the same function in reverse, channeling data into real-world applications. For example, imagine you are renting a vacation home and the rental agreement is a smart contract; Once you make your payment on the blockchain, the system could signal an Internet of Things (IoT) device to unlock the door to your rental home.
The investment thesis
So what? As DeFi products become more popular, oracles are expected to experience increased demand. And Chainlink is the most popular oracle network, providing data to smart contracts with a collective value of over $ 75 billion on several different blockchains. This popularity is expected to be a positive wind for the platform, and as more contracts are built to interact with Chainlink oracles, smart contract operators will have to purchase more LINK to compensate oracles for their service, pushing up the the price of the token. This is why this cryptocurrency looks like a smart long term investment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.