Chainlink 2025: Transforming the Verifiable Web

ChainLink Research Report

Key Takeaways:

• Cross Chain technology has gain significant traction, growing 600%+ YTD and is expected to hit 10B annually

• Chainlink’s CCIP to be instrumental in LINK’s price trajectory by bridging $quadrillions from Web 2.0

• Preliminary estimates that Cross Chain fees alone could inject minimally $6.36 value into LINK’s price

• Partnerships with SWIFT could attribute an additional $21.5 of value into LINK

• Despite LINK’s recent rally, it remains undervalued as we believe growth should persist, estimating LINK to capture an additional 1.4 – 2.3b txns from CCIP

Picolo Research Target a price range of LINK between $74 and $134 by 2025

Disclaimer - Please read

Picolo Research and its team hold positions in the stated token(s). This report is not to be construed as financial advice. While we do our best to ensure that the data within this report is accurate, we cannot guarantee that mistakes are not made either by us or the data providers that we utilize. Please do your own due diligence.

Chainlink - Pioneering a Voyage in Decentralized Oracle Networks

In the world of blockchain, a missing piece that is critical for its advancement is the seamless integration of external data points. This integration is quintessential for the expansion and efficiency of smart contracts, demanding a solution that is both innovative and robust.

Enter Chainlink 'Oracles,' a powerhouse pioneering an era of decentralized oracle networks. Since its inception in September 2017 and subsequent mainnet launch in May 2019, Chainlink has become a fundamental architectural pillar, underpinning the trustless provision of price and data feeds, verifiable random functions (VRF), automation through its Keeper network, and its latest CCIP (Cross-Chain Interoperability Protocol) among other integral functions.

Now, over 4 years into its journey, Chainlink boasts a network of nearly a thousand decentralized oracles, responsible for over 10.6b on-chain data points and a staggering $8.7T in transacted value. It has glorified its role as the ecosystem's invisible backbone, propelling forward the frontier of being the verifiable web. As it continues to fuel broader adoption and innovation, Chainlink is actively evolving, promising more groundbreaking products on the horizon.

A Microscopic Analysis of Chainlink's Fee

As we dive deeper into Chainlink’s numbers, it is important to first understand its revenue streams and the nuances of fee generation across its diverse product offerings. Despite its broad spectrum of innovative products, Chainlink's strategy in monetization exhibits a slower pace than most protocols in the blockchain.

Their revenue and fees accrued from various segments average $4.6m across a 30 day period, with Price Feeds significantly outperforming the others. Interestingly, CCIP, albeit in its nascent stages and confined to limited Early Access, has been contributing nearly half the average 30-day fees of VRF.

Source: Defillama, *Token Terminal. ** Dune Analytics @ericwallach (updated 27 Oct 2023)

When these figures are projected annually, we observe a total average fee generation of approximately $55 million. This translates into P/E (price-to-earnings) multiples of 74x and 132x for its market capitalization and fully diluted valuation (FDV), respectively. A comparative lens with Ethereum (ETH) — using as a proxy considering the parallels in token utility and structural design — suggests an undervaluation of $LINK.

Source: Defillama, *Token Terminal. ** Dune Analytics @ericwallach (updated 27 Oct 2023)

But what is stopping LINK’s growth? The significant drop in fee generation (since Jul 2022) led us to believe that this could be contributing to the stagnation of LINK's price trajectory for the past 2 years, which has been trading in the $5.50 to $9.50 range. 

However, it's paramount to consider the foundational robustness and growth potential that Chainlink encapsulates. The platform's credibility and stability have generated a reputation, having orchestrated over 10.6 billion data points and facilitated over $8 trillion in transacted value over the years.

With that, our focus shifts next to exploring how CCIP is poised to be a potential game-changer in recalibrating the overall valuation narrative for LINK.

*Note (updated 27 Oct 2023): Included revenue streams for Price feeds, leading to lower multiples and undervauation against ETH

The battle of Cross Chain Technology – Traditional Bridges vs Messaging

The trajectory of blockchain technology has entered a phase of rapid expansion. Recent trends underscore a significant uptick in cross-chain usage, a movement that has gained considerable momentum over the preceding months.

Traditional bridge volumes exemplify this surge, boasting a staggering 600% growth YTD. This remarkable escalation has been spearheaded by platforms like Stargate and the Arbitrum Bridges, with the sector peaking in July 2023 and facilitating over $5 billion in cross-chain transactions.

Parallel to the growth in bridge volumes is the development of cross-chain messaging, a sector that has witnessed an acceleration in activity. Since Q2 this year, there has been a consistent climb, producing a 30d average of nearly 8 million transaction counts across various networks.

A report from Token Terminal accentuates this narrative, highlighting Layerzero's dominance in the sector, connecting 40+ chains and handling the bulk of transactions. It is also worth noting that there has been a consistent month-on-month growth exhibited by contenders like Axelar and Wormhole, each linking 45+ and 30+ chains, respectively.

The implications of cross-chain messaging are profound. The innovation is poised to support enhanced efficiency and security - by significantly reducing gas costs and minimizing attack vectors, it empowers decentralized applications (dApps) to operate natively across diverse networks, thereby broadening their utility and appeal.

The trajectory is clear: cross-chain activity isn't just a temporary phenomenon but an evolving standard as investors and users demand higher throughput and enhanced access to liquidity. This paradigm shift, characterized by a seamless and more integrated blockchain experience, is inherently going to benefit Chainlink.

Chainlink’s Revolutionary Leap in Cross-Chain Interoperability

The space has seen its fair share of turmoil, with poor architectural designs, complex user experiences, and numerous security exploits leading to over $2.6 billion lost in bridge hacks.

The clamour for a robust solution was needed, and CCIP emerged as the much-anticipated answer.

Mid-2023 witnessed a pivotal development - the mainnet launch of Chainlink's Cross-Chain Interoperability Protocol (CCIP). This milestone was not just another technical advancement, but a transformative moment, especially evident as the LINK price surged from $5 to an impressive high of $8.50 within a span of July.

CCIP could be the core of the flow of data and tokens across diverse blockchain networks, a strong capability in an increasingly fragmented ecosystem. What distinguishes CCIP are its innovative features, including a rate limit on token transfers, the implementation of Arbitrary Messaging, and the establishment of a Risk Management Network, all contributing to a streamlined cross-chain interaction.

Similar to TCP/IP, much like the protocol that underpins the internet, CCIP introduces a transformative architectural breakthrough. It is set to redefine the way users and Web3 applications interact, promising seamless connectivity.

This is not just about linking one blockchain to another; it's about bridging entire world. The implications are twofold:

1.       Cross-chain interoperability (Blockchain – Blockchain)

2.       A new frontier of connectivity (Web 2.0 – Blockchain)

So, how does Chainlink harness these ripple effects?

Since the debut of its Cross-Chain Interoperability Protocol (CCIP) in July 2023, Chainlink has seen a modest yet promising increase in activity. The protocol's 30-day average fees hit $23,200, and cross-chain transactions have doubled from 3,200 in Aug 2023 to over 6,100 in Sep 2023.

These initial numbers, while not staggering, indicate significant growth potential. Currently, in its 'Early Access' stage, Chainlink began with support for major chains like Ethereum and Polygon and has since grown to seven chains, with the latest including Base, Arbitrum, and BNB Chain. Its integration into top protocols like Synthetix and AAVE further highlights its expanding influence.

A detailed analysis shows an average transaction fee of approximately $5.87. Interestingly, fees for L2s appear higher compared to those for Ethereum or Polygon, potentially stemming from CCIP's unique billing model that allows users to pay on the source chain while CCIP facilitates execution on the destination chain.

Projecting the financial trajectory and considering LINK's market share of potential transaction counts (specifically those utilizing cross-chain messaging), preliminary estimates suggest that Cross Chain fees could infuse an additional $6.36 into LINK's value.

This assessment is conservative as we primarily focus on the base case (95m txns ann.) and not accounting for the potential market share from traditional bridges, which is estimated at over 10 billion transactions annually.

Expanding these projections dynamically, should LINK capture over 1 billion cross-chain transactions, the additional value of LINK could skyrocket, potentially exceeding $100. Various scenarios are shown in the table below.

However, it's reasonable to anticipate a reduction in costs as Chainlink scales and operational efficiencies take effect. A more nuanced valuation could possibly settle at a more sustainable $28.5 to LINK, based solely on cross-chain fees. This concise outlook underscores Chainlink's strategic positioning in the competitive cross-chain landscape.

SWIFT Alliance: A Core to Chainlink's True Market Potential

We believe Chainlink’s partnership with SWIFT will be a pivotal development that could significantly influence LINK trajectory. This alliance is a potential game-changer, primed to unlock vast capital flows from Web 2.0 markets (including capital markets, real estate, etc) into the blockchain ecosystem. The synergy between Chainlink and SWIFT aims to streamline the transfer of tokenized value globally, enhancing the fluidity and accessibility of cross-border transactions.

Recently, preliminary trials have shown to underscore the partnership's viability, with SWIFT successfully showcasing its secure access points to multiple blockchain networks through Chainlink's CCIP. This feat, achieved without substantial operational hurdles, involved collaborations with major financial institutions like ANZ, BNP, BNY, Citi, and more, solidifying the project's credibility and potential scale.

LINK’s potential value attributed by SWIFT

Considering SWIFT's current average of 16 billion transactions annually, even a modest 0.5% market share captured by Chainlink could translate to a $12.5 billion rise in value. This translates into an additional $21.5 into LINK token price.

This projection becomes even more staggering when expanded: should Chainlink manage to channel 2.5% of SWIFT's transactions (approximately 400 million transactions annually), the value attributed to the LINK token could soar beyond $107, assuming transaction costs remain constant.

Another crucial thing to note is that these estimates focus solely on the SWIFT partnership. Potential collaborations with other major settlement entities like DTCC and Euroclear remain unaccounted for in this valuation, suggesting even greater untapped potential.

The alliance with SWIFT, therefore, is not just a milestone but a significant leap forward in accruing value in this new era of growth for Chainlink.

Potential Risks

Chainlink's trajectory is intricately tied to the success of its Cross-Chain Interoperability Protocol (CCIP), especially given the slower-than-expected revenue streams from its existing data requests and Verifiable Random Functions (VRFs). The anticipated monetization impact previously has not reached its full potential and could underscore CCIP's role in our financial forecasts.

Moreover, the integration process with traditional finance (tradFi) infrastructures is notoriously slow, potentially spanning several years before tangible value from synergistic collaborations is realized. Despite this, early experiments have yielded promising results, demonstrating cost efficiencies and operational improvements that bode well for future endeavors.

In addition, another headwind is the issue of locked tokens. Approximately 556 million LINK tokens have been unlocked, with a substantial reserve of 444 million still pending release. The past year has seen a release rate of around 7%, a figure that remains fluid, subject to considerations of market sustainability and cryptoeconomic security.

Amid these internal challenges, the rise of external competitors, particularly Chronicle Protocol, stands out. Emerging from the roots of MakerDAO, this service presents a challenge, threatening to undercut Chainlink's market share. Nonetheless, we anticipate that Chainlink's strategic agility and innovation will not only endure these market pressures but also fortify its standing, preserving its momentum and market niche in the long run.

Conclusion - Chainlink's Future Landscape

As a pivotal player in this realm, Chainlink is expected to capture substantial value overflow from the increasing cross-chain activity, solidifying its role as a central figure in the future narrative of verifiable web.

It becomes increasingly evident that the Cross-Chain Interoperability Protocol (CCIP), and notably its partnership with SWIFT, will be instrumental in steering LINK's price trajectory. 

CCIP stands as a cornerstone in orchestrating the seamless transfer of data and tokens amidst a spectrum of blockchain networks, an essential competence in a domain riddled with security vulnerabilities that have already exploited over $2.6 billion in losses due to bridge hacks.

Earlier this year, the realm of bridge volumes witnessed an explosive uptick, registering a remarkable 600% growth year-to-date. This could facilitate more than 10 billion transactions annually, a momentum anticipated to surge with escalating user demands for superior throughput and broader access to liquidity.

Last but not least, the successful collaborative efforts between SWIFT and Chainlink spotlight the potential influx of '$quadrillions' from traditional capital markets, which is poised to bolster Chainlink's transaction volumes. In an optimistic scenario, considering a cost remain constant, CCIP could potentially inject an additional $300 or more into LINK's token value in a pronounced bull market.

However, adopting a more conservative lens, the current 10% month-over-month growth rate in transaction counts suggests that Chainlink could feasibly reach 300 million annual transactions in the near term. This suggests a $30+ increase in LINK's potential value, which puts it ~3x its  current price.

On a broader perspective, assessing the factors discussed above, we believe there is potential for LINK to capture between 1.4b and 2.3b CCIP transactions (encompassing Native and SWIFT) annually with a widespread adoption over the coming years. Even with economies of scale potentially lowering transaction costs, our outlook remains bullish.

We forecast a target price range for $LINK between $74 and $134 by 2025.

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