Following the recent launch of our dxFeed Chainlink node, we wanted to take some time to explain the importance of this moment, as well as to place it in the broader context of where Fintech specifically, and finance in general, appear to be heading. But before we wax poetic about all that in the concluding paragraphs, we also want to explain how some pieces of the blockchain puzzle fit together and why we feel our services are such a good fit for the space.
What is Chainlink, and what role does it play in the decentralized economy?
Chainlink is what’s known as an oracle. Oracles are crucial to blockchains as they bridge the gap between the on-chain and off-chain worlds. The on-chain world is simply all the transactions and ledger updates that take place on any given chain. The off-chain world comprises all the relevant events taking place in what we still like to call the “real” world.
One of the biggest weaknesses of blockchain systems is that they’re great for keeping track of all that takes place on the blockchain itself, but are deaf, dumb, and blind to the outside world. This means that without a way of bringing reliable data in from outside, the smart contracts deployed on any blockchain are limited to referencing only what takes place on-chain. This is a far cry from the long-standing crypto vision of decentralizing all the things.
What are oracles, and how do they work?
Oracles sit between blockchains and the real world. They aggregate real-world data from multiple authoritative sources, allowing for redundancies and error correction. These data are then used to inform on-chain smart contracts about the state or outcome of specific events in the actual world.
In this way, you can have decentralized prediction markets that reference the outcomes of elections or sporting results. You can also have decentralized insurance where unforeseen events can be hedged against, such as adverse weather conditions. Tamper-proof supply chain management, identity verification systems, the possibilities are endless. Essentially, any verifiable data source can be plugged into a blockchain and used to inform its smart contracts.
What is the oracle problem, and how is it solved?
We’ve already discussed the first part of the oracle problem. It’s the fact that blockchains can’t verify events that take place outside of them. In fact, their impressive security characteristics stem from this very constraint; that they only have to achieve consensus on a very limited set of rules within the protocol itself.
The second part of the oracle problem is that if a blockchain refers to an external data source, such as the API belonging to a centralized entity, this completely undermines the decentralization of any smart contracts that rely on that data source. After all, centralized sources can be manipulated by bad actors within the organization itself, but they can also be compromised by man-in-the-middle attacks.
Chainlink solves the oracle problem by decentralizing its data sources so that no one node can ever be a single point of failure. It requires nodes to cryptographically sign data, ensuring that feeds are tamper-proof, and allowing the user community to keep tabs on a node’s historical veracity. It also introduces rewards and penalties for nodes in order to incentivize good behavior and the provision of consistently accurate data.
Why launch a dxFeed Chainlink node?
For those who know our products and services, the launch of our own Chainlink node will make complete sense. For those unfamiliar with us, we run one of the largest and most comprehensive “ticker plants” in the world, providing 2.5 million instrument price feeds to 200,000 simultaneous streaming clients, which in-turn serve around 6 million end-users. In short, the provision of consistently accurate data is kind of our bread and butter.
Our extensive experience in exchange-traded assets and instruments such as equities, futures and options, all of which pose their own data retrieval, cleansing, normalization and aggregation challenges; means that we’re perfectly placed from a systems and experience standpoint to handle the myriad data feeds of the burgeoning crypto economy. What’s more, at dxFeed we are completely asset agnostic, which has allowed our technologies to be stress-tested in an array of different market environments and conditions. For instance, our work in FX (the largest decentralized market in the world) has prepared us for working with disparate data feeds of varying quality and differing standards across geographical locations. Despite the unique challenges of each market and asset class we venture into, our API feeds continue to maintain a 99.98% uptime record.
Beyond the price feeds
But it’s not just about the raw data. While serving both buy-side and sell-side institutions with price information encompassing the entire asset spectrum, we also specialize in the creation of custom feeds and other derivative products that we expect to be even more meaningful to the crypto-asset ecosystem than just price data. The dominoes that DeFi has set in motion are leading to a Cambrian explosion of evermore innovative and unusual crypto derivatives. Not only are these derivatives heavily reliant on robust and resilient data sources, but they also call for new construction methodologies and entirely new sets of custom analytics.
For example, we recently delivered a set of analytics tools for the crypto options market. The brief called for the construction of crypto-specific volatility indices based on bitcoin and ether options data aggregated from a number of different crypto derivatives exchanges.
So, while reliable data is the cornerstone of the crypto economy (the most obvious use case being cryptocurrency price information aggregated from CEXs and DEXs for DeFi smart contracts), the really exciting work is likely to be in synthetic index and asset construction. There has already been some experimentation with these ideas in crypto, and we believe that we have something meaningful to add to the discussion, both from a methodological and best practice standpoint.
Another intriguing use case could be a range of stablecoins tracking baskets of other crypto stablecoins across blockchains, or synthetic baskets of fiat currencies. We can also create thematic instruments that allow for exposure to specific sectors of the crypto landscape, like lending platforms, derivatives exchanges, DAOs, proof-of-stake protocols and more.
Our experience in synthetic index construction can be leveraged in a variety of crypto derivatives and synthetic asset markets. These new protocols and assets emerging on the DeFi scene require more than just price data. We foresee that ready-to-deploy SaaS-style custom data provision for use in smart contracts will be an area of growth as space matures. An example of which could be a service that reliably determines any kind of customizable digital outcome on an underlying price feed. Say, whether the price of an underlying instrument was within a predefined boundary in a given period of time. This requires more than just “feelers” to bring external data into the blockchain, but also the engine for creating and calculating the criteria for these outcomes.
Finally, if the current market cycle has taught us anything, it’s that the next big deal in crypto will undoubtedly be all things cross-chain. This will only multiply the available possibilities and data requirements of existing DeFi projects, but will also lead to an avalanche of new entrants to the space.
The Waxing Poetic Conclusion
Over the years, we’ve observed the various boom and bust cycles of the crypto space as it has emerged from obscurity to a planetary phenomenon. Meanwhile, the world of traditional finance has been our primary focus as a company, ticking along as it always has, at its own very definite pace.
In the mere two decades since bitcoin’s inception, each subsequent crypto bull market has brought with it incredible innovations. It seems as though the lofty dreams of prior bull markets are being forged into working products during each subsequent crypto winter, when the world isn’t paying attention because the price is low. Not many people recall that during the bubble of 2017 there was no such thing as decentralized finance, a multi-billion dollar industry today.
We provided market data to our clients in the financial world when they didn’t know what crypto was. Then we were asked to construct crypto feeds for them. Now our products are serving the crypto ecosystem itself as it edges closer to providing legitimate alternatives to the incumbent financial system. Whether or not this comes to pass, crypto’s innovations are guaranteed to be emulated. From Central Bank Digital Currencies to tokenized stock trading. It’s all coming.
And so we here at dxFeed have decided to dip our toe in, not just as an alternative method of monetizing our data, but also with the goal of lending the resilience and anti-fragility that our products can provide, to the next wave of financial products being built on these exciting new platforms.