Legal Disclaimer: This communication is provided for information purposes only. The views expressed here are those of the individual Maker Foundation (“Maker”) personnel quoted or who present said materials and are not the views of Maker or its affiliates. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but such information has not independently been verified and this communication makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, financial or tax advice. You should consult your own advisers as to those matters. References to any digital assets and the use of finance-related terminology are for illustrative purposes only , and do not constitute any recommendation for any action or an offer to provide investment, financial or other advisory services. This content is not directed at nor intended for use by the MakerDAO community (“MakerDAO”), and may not under any circumstances be relied upon when making a decision to purchase any other digital asset referenced herein. The digital assets referenced herein currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions, including but not limited to the UK, European Union, Singapore, Korea, Japan and China. The legal and regulatory risks inherent in referenced digital assets are not the subject of this content. For guidance regarding the possibility of said risks, one should consult with his or her own appropriate legal and/or regulatory counsel. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.
Analysis part 1/2
Summary of Proposed Risk Parameters
Risk Premium: 2%
Liquidation Ratio: 175%
Debt Ceiling: 5 million
Auction Lot Size: 50,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 100 Dai
From the website:
Chainlink is a general-purpose framework for building decentralized oracle networks that give your smart contract access to secure and reliable data inputs and outputs.
Each decentralized oracle network consists of a collection of independent node operators, a method for aggregating data, and pre-made “Chainlinks” (also called external adaptor) that act as middleware to give you access to any API you want to leverage for data and/or external services.
Chainlink currently provides decentralization at both the oracle and data source level. By using multiple independent Chainlink nodes, the user can protect against one oracle being a single point of failure. Similarly, using multiple data sources for sourcing market prices, the user can protect against one data source being a single source of truth. Both of these ensure that the oracle mechanism triggering your important smart contract is as secure and reliable as the underlying blockchain.
You can use Chainlink to connect to data providers, web APIs, enterprise systems, cloud providers, IoT devices, payment systems, other blockchains and much more.
LINK token use
From the whitepaper:
The ChainLink network utilizes the LINK token** to pay ChainLink Node operators for the retrieval of data from off-chain data feeds, formatting of data into blockchain readable formats, off-chain computation, and uptime guarantees they provide as operators. In order for a smart contract on networks like Ethereum to use a ChainLink node, they will need to pay their chosen ChainLink Node Operator using LINK tokens, with prices being set by the node operator based on demand for the off-chain resource their ChainLink provides, and the supply of other similar resources. The LINK token is an ERC20 token, with the additional ERC223 “transfer and call” functionality of
transfer(address,uint256,bytes), allowing tokens to be received and processed by contracts within a single transaction.
Regarding the token sale, the whitepaper states:
LINK Tokens are not securities, investments or currency, and are not sold or marketed as such. Also: participating in the sale involves significant technological and systemic risks; the sale is not open to individuals who reside in or are citizens of the United States or Canada. The sale period, duration, pricing, and other provisions may change, as stated in the token sale terms. The LINK Token sale involves known and unknown risks, uncertainties, and other factors that may cause the actual functionality, utility, or levels of use of LINK Tokens to be materially different from any projected future results, use, functionality or utility expressed or implied by SCCL in the terms.
LINK tokens are used to pay node operators for retrieving data for smart contracts and also for deposits placed by node operators as required by contract creators. The LINK token is an ERC677 token that inherits functionality from the ERC20 token standard and allows token transfers to contain a data payload. Read more about the ERC677 transferAndCall token standard.
Daily active addresses
The count of active addresses has been continuously rising over the last 12 months. The rise in activity has really sped up since the Black Thursday recovery where it has continuously maintained its level above the two year mean of 1549 daily active addresses. When looking from a distribution point of view, most episodes where the count of active addresses are either above the mean or largely above the mean happened since the second quarter of 2020. The maximum count happened on July 13th where as many as 14253 addresses were active in the network. This rise is likely due also to the increase in token price, where both metrics share a 0.90 two year correlation. However data indicates that the latest rises in price have created more outliers in that correlation between the two variables than historically.
New unique addresses
Along with daily active addresses metric, the increase in the count of newly unique addresses has also been very noticeable since the second quarter of 2020. It has mostly moved in tandem with the active addresses over that period. Here the network added as much as 6,508 new unique addresses in a single day on July 13th. As is the case for active addresses, the creation of new unique addresses has been mostly above its two year mean since the Black Thursday events. New unique addresses have also a high degree of correlation with the token price at 0.89. However, it is important to notice here that both new unique addresses and daily active addresses seem to have a high degree of collinearity when it comes to LINK’s price prediction. That means both independent variables would most likely cancel each other’s predictive power in a regression model.
Another important point, according to data, is the growing number of the zero balance addresses in the last couple of months. These accounts transfer or sell out all of their tokens which could indicate a fair amount of speculative activity happening beyond the network fundamentals and demand for the asset.
Sources: Santiment, glassnode
2 year correlation to token price
polynomial coeff: [ 975.38918393 -376.65582042]
polynomial coeff: [ 439.20430438 -203.16809245]
Daily transaction volume (LINK)
The transaction volume shows the aggregate amount of tokens across all transactions that happened on the network for LINK. According to the distribution the bulk of the transaction volume has mostly hovered around its two year mean value of 2,500,150 LINK per day or 0.25% of total supply,despite recent price increases. The last 12 months show however a few spikes in volume activity which seem to indicate these aligned with intervals of significant price decrease. The most recent spikes being Black Thursday and around mid July 2020.
The Chainlink contract has a fixed and capped supply of 1,000,000,000 tokens. According to data from Etherscan, LINK’s token offering launched on September 19, 2017, after a 32 million fundraise hard cap through the ICO. There were two rounds of LINK sale offerings to the market. One pre-sale where LINK was sold at 0.09 USD per token with a 20% bonus. A second public sale sold LINK at 0.11 USD to investors. In total both sales accounted for 350 million LINK sold to the market out of 1 billion tokens issued in the network. The final ICO allocation of tokens was structured as follows:
- 35% of supply was allocated to token sale investors
- 35% of supply was reserved to Node Operators and ecosystem rewards that would be distributed to incentivise network participants
- 30% of supply was allocated to LINK’s parent company, SmartContract.com and its team members to support protocol development
The details of this allocation can be found on the Etherscan transaction here.
The parent company SmartContract.com that is behind the project team has been active since 2014 with the aim to create a bridge product to bring external data sources into public blockchains, through a decentralised oracle network that works along with node operators. Chainlink’s mainnet went live on Ethereum on June 1 2019.
Due to the nature of the ICO token allocation, the actual circulating supply of tokens in the market was initially 35%, i.e. which went to investors. But since the ICO, the addresses associated with the treasury had a few rounds of selling which brings the current circulating supply to an estimated 385,009,556 LINK. It is interesting to note that this increased circulating supply seems to have had an effect in the market price, as the first spikes in market activity happened at the same moment as the team started offloading some of its ICO treasury. Circulating supply calculation is based on coingecko methodology. Finally, LINK tokens held by the team do not seem to have a vesting schedule, according official documentation.
A number of Chainlink node operators provide data feeds to DeFi services against fees determined in LINK by the operator. This link and here display a list of oracle providers, along with their respective transactions, earned LINK from data feeds and other operational metrics. At time of writing, Chainlink’s official staking program for node operators has not been released to the public. For more information on the notion of implicit vs explicit staking, see article. Other FAQs on node operations, can be found here.
In the following sections we will cover asset price returns, token ownership distribution and exchange activity. Token ownership and its concentration amongst top addresses is a particularly important topic in this risk analysis, as it is very noticeable in comparison to other ERC20 projects.
Sources: Etherscan, Messari, Chainlink
Key general information
Asset price returns
Investors to the LINK token have enjoyed a significant return since the ICO. Those involved in the first presale have seen as much as 18,466% return on their investments. At time of writing, over the last 12 months, investors have seen a 353% yearly return and a two year return of 2,579%. Looking at some technicals, LINK’s price appreciation seems to have been mostly supported by its 200 day moving average over the last year, with only one episode early in 2020 where the 50MA crossed below the 200MA trend. By the end of July both 200 MA and 50 MA were sitting at 4.03 USD and 5.91 USD, respectively. Were the price to drop to its 50 MA levels, that would mean a 31.4% decline. Historically, daily declines below 20% only occurred twice in the last two years: 19 Nov 2018 and Black Thursday. See daily price percentage change distribution below.
Cumulative return 12M
|Date||Return %||Return months||closePriceUsd||Circulating_supply (est.)|
Price and moving average
Downside risks timeseries
From a daily pricing distribution perspective, LINK has seen negative daily returns 358 times out of a 731 timeseries. 3.1% or 23 of those were sharper than -10% decline in a day. Comparatively, ETH has seen daily price declines a total of 366 times and 20 times below -10% in the same period. The average negative decline for LINK and ETH were -4% and -3% respectively in the two year period.
ETH and LINK have insignificant correlation to each other at 0.33 in this interval.
2 year LINK and ETH correlation
Token ownership distribution
Token ownership concentration is one of the topics of greatest concern from a risk perspective in our view. In the following charts we will cover the biggest sticking points when it comes to distribution of assets amongst token holders, the relationship of these to asset pricing and the kind of risks this could bring to the vault portfolio.
Amount held by top addresses: as % of total supply and % of circulating supply
The amount held by top addresses displays the amount of tokens held by the top address holders, which by default includes the top 10 holders. In this metric both exchange and non-exchange top holders are put together. It shows that for the first 12 months of the timeseries the share of ownership as a percentage of total and circulating supplies has remained mostly unchanged at 76% and 35% respectively. Subsequently, those metrics have dropped in the following 12 months.
Amount held by top addresses: exchanges vs non-exchange addresses
However, when it comes to splitting out the token amount held by top holders into two groups, top known exchange addresses and top non-exchange addresses, the data provides a diverging trend in the network. Whilst both have reduced their token ownership share in the network in the first year, we can observe a re-accumulation of tokens in the second quarter of 2020 by top non-exchange addresses. That rise in ownership coincides with increased asset price post Black Thursday events. Top 10 non-exchange address ownership represented 63.7% of total supply by July end. Also the reduced amount of tokens in top exchanges could be one of the reasons for the 2020 recent price increase, drawn out of shortage in liquidity.
Token amount held by number of addresses
When we look at the timeseries dataset at a more granular level, the following chart shows the amount of tokens held by buckets of address counts over time. As we have seen previously, LINK has attracted a substantial growth in daily active addresses and new unique addresses in the last year. However, a significant portion of that growth in address numbers went to addresses holding 1K tokens or less. At the top percentile of the distribution, the count of addresses has remained mostly unchanged. There is a very small number of addresses holding more than 1M tokens, 6 of which belong to the team treasury and one to node operators. Only 328 addresses hold 100K tokens or more. In other words, only 0.16% of addresses hold the largest shares of the network.
The gini index provides an extra insight into the LINK frequency distribution of tokens over addresses. Note that this metric calculation by Glassnode excludes exchange addresses, smart contract addresses, and other special asset-specific addresses e.g. team treasury. This metric is measured on a scale from 0 to 1, where 0 represents perfect distribution equality and 1 perfect inequality of token distribution. As of mid July, LINK has a gini of 0.97. It can be noted that the gini index has increased continuously in the last 12 months, despite the growth in active addresses since the mainnet launch last year and the team treasury offloads into the market. This may be a sign that already existing big buyers are acquiring even more tokens in the market.
This brings a significant ownership risk to the MakerDAO vault portfolio as actions by these holders, whether coordinated or not, may determine potentially significant swings in the asset price and by extension, in case of negative swings, in increased collateral liquidations.
It is important to point out that the use of addresses for the gini index in crypto is purely a proxy for distribution. One entity may own multiple addresses which would bring the gini index even closer to 1.
Note however that this type of high gini index is not particularly uncommon in many crypto projects. This post provides extra insights.
Team treasury fund addresses have been identified from glassnode and etherscan. Since the ICO, the Chainlink team has offloaded a portion of its original 300 million LINK tokens, mainly in the last 12 months. As per ICO terms, these sales have likely been done to secure funding to support protocol development. In total, 32,009,579 LINK has moved from the team original wallets, bringing their share of total supply from 30% to 27%. The move of tokens out of treasury accounts indicates there is no vesting of funds, which may bring asset price risks should a large portion come into the market in a short interval of time. No official documentation analysed indicates a vesting schedule for these funds. In this analysis treasury tokens have been accounted in the calculation of estimated circulating supply.
In terms of treasury management, in a recent announcement Chainlink appears to have placed a portion of its bitcoin (BTC) and ether (ETH) crypto holdings under Celsius’ treasury management service. Unfortunately, this analysis could not identify the addresses holding ETH or BTC on behalf of the team.
Token Velocity & Age consumed
Velocity displays the average number of times that a single LINK token changes addresses daily. Higher token velocity means that a single token is used more often in daily transactions. For the most part of the last 12 months, velocity has hovered around its 2.09 median value, with very little deviance. The biggest outliers in that long term trend happened between February and April 2020, with its highest point on Feb 17, 2020 at 5.67. Since then, velocity has returned to its yearly mean.
On the other end, age consumed may be a valuable metric to observe long term for Risk teams. It tracks the movement of previously idle LINK tokens. The metric shows the amount of LINK changing addresses daily multiplied by the number of days since they last moved. Spikes indicate a significant amount of previously idle LINK tokens moving between addresses. In other words, it gives a sort of view of “network inertia”. This metric can be used to track the movement of big longterm token holders with historically little trading activity. Spikes such as those of July 2019 can be used as preemptive measures for selling pressures. For most of the last 12 months, this metric has not moved much beyond its median 32,054,984 mark. But this recent historical precedent should not be discarded in long term analysis of extreme events.