Chainlink: The Oracle the Crypto World Needs

Oracle networks like Chainlink (LINK 7.09%) could redefine the future of the decentralized finance world, as was recently discussed between Motley Fool contributor Chris MacDonald and Motley Fool analyst Asit Sharma on this episode of "The Crypto Show" from Backstage Pass, recorded on Oct. 27.

Asit Sharma: Let's start with Chainlink. This is, by market capitalization, the 15th largest crypto, about $14 billion in market capitalization.

Chainlink is a decentralized Oracle network that enables universally connected smart contracts. I'll try to explain this in just a second. It allows blockchains to securely interact with external data feeds and payment systems. This is interesting. When we think about how digital assets interact with each other, we often think of peer-to-peer transactions on the blockchain. Let's say validation is a big part of that, so a transaction occurs on the blockchain. 

We've discussed mining of Bitcoin (BTC 4.29%) as a proof-of work mechanism to validate that. But I think what is less understood about this space is that as blockchains have more utility in the outside world, I'll call it the real world, although I will confess, Chris, I'm not sure what is actually the real world and what's the virtual world anymore.

As these currencies start to interact with the outside world, you need secure mechanisms to be able to link up data from that world into these peer-to-peer transactions. For example, think of a price feed. If we look at assets we discussed last week, say Compound, Aave -- these are decentralized finance platforms. We discussed their gear toward providing liquidity and maybe gaining some interest through those coins and having personal finance transactions on them -- lending, borrowing, even insurance. You need some kind of link from the price feed into the asset, so the underlying data feed for those, especially compound for those networks has to be supplied by someone.

Chainlink is an Oracle network. By that I mean that it supplies external data feeds and Oracle is -- I think, the easiest way to think of it is -- just a conduit of data from any data source into the blockchain. What Chainlink does, is it pulls outside data and then it has utility inside a network.

What other thoughts or comments you have? And I'll talk some more about this as we go on.

Chris MacDonald: I think that utility piece is very important and what Chainlink provides in terms of allowing for off-blockchain data to be integrated with on-blockchain data.

Being that Oracle and crypto middleman, I suppose, does create a lot of utility in the crypto world for blockchain networks that basically rely on being integrated with the outside world. There are a number of examples of this, where data from the real world, like you said, what's the real world anymore? But data from companies, businesses, whatever that they want to store on the blockchain, well there needs to be a way for them to do that.

Chainlink's value is really linked to the utility it can provide, and that's like you said, it's an intriguing one to look at.

Sharma: To give you an example of a real world application, I noticed that, last week the Associated Press said that it is partnering up with Chainlink to put its journalism on the blockchain.

A real world example in terms of technology is maybe the API, application programming interface. We're very used to looking at software-as-a-service companies, Chris, and understanding that if you're a developer and you have access to, let's say a DocuSign's (DOCU -2.35%) API. If you have access to that API, then you can put an e-signature on your page, whatever your website is or your mobile application.

The blockchain is interacting with these external data feeds, actually using API and other methods to give all sorts of information. Associated Press, either they supply some price data for stocks, but they also have all sorts of interesting data, like sports information, the outcomes of sports games, election, race calls, which is something they put in their press release on this. If you think about the data, that we watch, maybe on a big election night that's coming in, and you see the percentages changing every minute. You're trying to see who's going to win the race you're interested in. You see your candidate has 51 percent of the vote and now it's 51.1 percent of the vote. That's supplied by organizations like the AP.

How do they move that to the blockchain if there is a token that is going to help? I'm sure this is out there because I've seen this in other guises. Help users place bets on an election outcome. It will do that using its API.

Really putting that through a note into Chainlink's blockchain and then Chainlink will enable the smart contracts to happen that represent the bets that one person may be using with real digital money. You can see how it seems like it's something very complex, but at its essence, it really is connecting pieces of technology that we already use.

Again, what is essentially a network of information -- that's all the blockchain is. At the end of the day, it's a series of records. One long database of sequential records that inter-relate with each other. Any other comments or thoughts before we move on to the next one?

MacDonald: Just that I'll be the first user of football or hockey pool that is run on the blockchain. Maybe there is already one out there. I don't know, but stuff like that, the actual applications of it, that's what gets me excited about crypto. Chainlink is just really, that intermediary that's making a lot of stuff happen, and I think that's why so many people are excited about it.

Sharma: It's a fun asset to follow. Lastly, we should say that I like the capitalization that's flowed into it. I like the fact that it's a huge asset. In some ways, it's already proven.

When you see press releases by organizations like Associated Press, you understand it's got utility, but the fact that the native token itself, Link, has so much money behind it right now, what we said, the 15th biggest asset by market capitalization. Those are the types of assets that I'm looking for first, rather than the most speculative assets and trying to build out a portfolio for myself.