Chainlink: RWA becomes a key catalyst, can the project welcome more positive developments?
The value of Chainlink in the RWA narrative lies in its efforts to become a key infrastructure that facilitates the trading of these assets on-chain, bridging traditional finance and decentralized finance.Original Title: Chainlink: The Crucial Component in the Success of Tokenized RWAs
Original Author: Jose Oramas
Original Translation: 深潮 TechFlow
Chainlink has been getting things done.
Although its token recently surged, the protocol has collaborated with some of the world's largest financial institutions this year, such as ANZ Bank, DTCC, Citibank, BNY Mellon, and more.
What are the reasons behind these collaborations, and why should you care? The tokenization of real-world assets (RWAs) could bring trillions of dollars to capital markets and the DeFi sector. More importantly, it can fulfill the original goal of cryptocurrency—by making it more accessible to the public and efficiently improving our outdated financial system.
Chainlink is currently in a decisive position to play a role in the success and mainstream acceptance of RWAs. Let’s dive deeper.
The Importance of Oracles in Connecting Blockchains to the Real World
Oracles can be seen as middleware, where multiple networks and applications can retrieve accurate external data and execute smart contracts based on these inputs.
Their main job is to provide off-chain data to smart contracts, as they cannot independently obtain information outside their respective blockchain networks.
The value of oracles like Chainlink in the RWA narrative becomes evident; they bridge the information gap between TradFi and DeFi, which is crucial for the success of RWAs and the tokenization market. Without oracles, blockchains cannot interact with the outside world, and vice versa, making tokenization impractical and data retrieval impossible.
Next, we will examine how Chainlink's functionalities, data streams, proof of reserves, and CCIP are valuable for the tokenization of RWAs.
The Surge of RWAs Could Be a Catalyst for Chainlink
With the potential influx of institutional capital, Chainlink and competing oracles may see a surge in demand for their services. Why?
RWA protocols need to accurately import off-chain data.
Institutions will want access to crypto-native RWAs across different chains or institution-native RWAs across tokenized markets.
By acting as middleware between DeFi and TradFi, oracles can eliminate the complexities of interacting with blockchain-based protocols.
Additionally, by connecting multiple public and private blockchains, financial institutions can trade RWAs in a cross-chain and cross-currency manner.
Chainlink uses the following services to address these issues:
CCIP : Cross-Chain Interoperability Protocol
Multiple financial entities have been seeking CCIP this year, as it allows traditional backend infrastructure and dApps to interact with any blockchain network through a single middleware solution.
In September, the post-trade financial services company DTCC worked on Swift's blockchain interoperability project using CCIP. Similarly, the Australia and New Zealand Banking Group (ANZ) utilized CCIP to allow customers to transfer ANZ-issued stablecoins across chains to purchase nature-based assets.
Chainlink Functions and Data Streams
Chainlink Functions is a serverless platform that allows Web3 developers to connect smart contracts with Web2 APIs. Data streams work as it sounds—it's a decentralized off-chain system that retrieves real-world data to validate contracts on-chain. Functions and data streams can help transmit RWA data to on-chain protocols in real-time, even as the data is being transmitted to Web3.
Chainlink Proof of Reserves
Verifying on-chain assets backed by off-chain assets in DeFi projects.
How Far Can Chainlink Go with RWAs?
It's an interesting year for LINK; the token has been trading sideways for most of 2022 and 2023, but recently saw an explosive price increase. From $5.9 at the beginning of September, LINK reached $11 on October 25, marking an approximate 90% increase.
Looking at this chart, we notice that LINK has broken the $10 resistance level for the first time since May 2022, and the token is still far from the $50 all-time high during DeFi Summer.
That said, LINK has significant room for growth, but what is driving this increase? Possible driving forces include:
Key developments and updates in the Chainlink ecosystem, such as the upcoming Staking v0.2 platform;
Five Chainlink services being integrated into seven different chains, including Base and Arbitrum;
Numerous collaborations with financial entities like SWIFT, utilizing Chainlink's Cross-Chain Interoperability Protocol (CCIP) for asset tokenization and cross-chain interoperability;
The surge in TVL in the RWA space and the hype surrounding this narrative.
The last two reasons on the list above could drive LINK to new highs in the coming years. If RWAs can attract 1% of the global total asset market (about $90 trillion), then approximately $9 trillion in value would flow into the cryptocurrency market.
By the same logic, by 2030, oracles that manage to facilitate the tokenization of RWA data transmission and the necessary interfaces for interacting with blockchain-based applications could generate around $9 billion in revenue, and by 2021, prices would significantly appreciate, surpassing previous ATHs.
The Surge of Oracles and Competition for Chainlink
By market capitalization, the top oracles have seen healthy growth over the past 30 days. Most likely, they are benefiting from the RWA narrative; however, their primary growth sources are recent protocol developments and integrations across multiple chains, along with other significant news.
If we try to find oracles collaborating with institutions to promote RWA tokenization, Chainlink stands out as the only one. However, even knowing it dominates in TVS and market capitalization, this does not mean there is no competition.
Tellor
The second-largest oracle by market capitalization. While we can attribute the token's price increase to higher network activity, demand for RWAs, and its recent deployment to Manta Mainnet, most analysts believe the token's surge is manipulated by whales.
Band Protocol
Band Protocol is built on the Cosmos blockchain but operates as a chain-agnostic oracle. Much of Band Protocol's growth has been achieved through collaboration with Horizen's EVM-compatible sidechain EON.
UMA
UMA differs from most oracles in that it allows developers to create synthetic assets. Synthetic assets are tokenized versions of indices on the blockchain, essentially tokenized stocks. UMA has risen following a series of on-chain governance modifications and the RWA narrative.
API3
API3 can be considered a cheaper and more accessible oracle. It allows projects to access external data through decentralized application programming interfaces (dAPIs). API3 has risen after being integrated into five popular networks: Mantle, Base, Linea, Kava, and Rootstock.
On Tokens and Empowerment
The performance of a token does not necessarily reflect the performance of a project. Perhaps that project has solid fundamentals and a good product. Tokens can be used to pay for the duties and tasks of node validators.
But this can make governance and proof of stake seem useless; as long as its product has a good product-market fit, the protocol can function well without tokenization. Sometimes governance justifies its existence, but more often, tokens are merely a fundraising tool based on future protocol performance and speculation.
Protocols using ERC-20 tokens can simply charge fees in ETH, and their products can perform well. This is why there is a significant discrepancy between price and TVL in certain protocols. That is to say, a project may have a large TVL because its product is good and has a lot of funds deposited in its contracts, but if the project focuses on providing more value capture for its token, it can narrow the gap between these two metrics.
So, why do we need the LINK token?
For example, LINK is used to pay node validators for retrieving data, and recently, due to its PoS release—and the upcoming PoS v0.2.
But beyond that, the token does not provide any utility. One might argue that Chainlink as a business could thrive without the LINK token. If we apply this logic to RWA-based tokens, we encounter a problem; most tokens from RWA protocols would automatically become revenue-generating assets, which I believe the SEC would love.
Moreover, if we deal with issues related to the tokenization of institutions and real assets, governance and decentralization become somewhat useless.
In this sense, RWA protocols are more likely to succeed if they focus on the following:
Gaining licenses—this would give them a competitive advantage;
Conducting audits through protocols like PeckShield or CertiK to check for smart contract risks and other vulnerabilities;
Ensuring trust for investors—this can be achieved by using Chainlink's proof of reserves to verify that on-chain assets are backed by off-chain assets and a central custodian.
Concluding Thoughts
The crypto community often emphasizes the benefits and uses of blockchain technology across multiple industries.
If that’s the case, we should pay more attention to the tokenization of real-world assets (RWAs) and how this sector can provide the practicality we just discussed. Chainlink has been busy upgrading its platform and integrating some of the most popular chains in the market.
The value of Chainlink in the RWA narrative lies in its efforts to become the key infrastructure that facilitates the trading of these assets on-chain, bridging traditional finance and decentralized finance.
