Chainlink tokenomics: Continuously monitoring its token economy health

Chainlink has emerged as a key player in the blockchain space, offering a decentralized oracle network that bridges the gap between smart contracts and real-world data. Chainlink's token, LINK, is essential for the operation and security of the network. It incentivizes data providers, secures the system, and aligns the interests of all participants.

Understanding Chainlink's token economy is critical for both users and investors, as it reflects the project's health and potential for growth. Today we are happy to introduce a new tokenomics product: our Continuous Monitoring dashboard. 

In this post we will explore the Chainlink token economy using our continuous monitoring approach. The simulation results can be found here.

Cenit's Continuous Monitoring Tool: Bridging Simulation and Reality

Effectively managing a token economy means being prepared for various outcomes and making informed decisions. Cenit’s Continuous Monitoring tool is specifically designed for this purpose. It aids in refining token economies, improving performance indicators, and mitigating negative impacts on token values. The tool integrates real-time data with simulated scenarios, providing a more precise representation of how a token economy may evolve.

Simulations play a crucial role in token economy management. They enable protocols to envision potential performance based on different configurations of their token design. This process is also vital for investors who need to thoroughly understand a project before investing.

However, setting up simulations presents certain challenges. They rely on assumptions, and actual user behavior can deviate from these predictions. Moreover, as the token economy evolves, so does user behavior, necessitating regular updates to the simulations.

Cenit's tool addresses these issues by merging simulations with real-time data. This synergy ensures that your assumptions align with the actual developments in your project. The tool offers two principal features:

1. Daily updated data: Connecting your protocol data to our software keeps your models current with the latest developments in your token economy. This means your strategies are always informed by the most recent data, enhancing the reliability of your planning and decision-making.
2. Simulation Scenarios: This lets you use current data to forecast the future. You can simulate different future situations like you can do with our no-code tool, helping you in planning ahead and adjusting strategies as needed.

In this post Cenit's Continuous Monitoring tool will blend Chainlink tokenomics real-data with its forecast. But before jumping into the results, let’s do a quick overview of the Chainlink tokenomics.

Chainlink tokenomics design

Chainlink token economy overview

As of January 2024, Chainlink is actively advancing its token economy by introducing new dynamics, primarily through the introduction of a staking service. This evolution is a part of Chainlink Economics 2.0, which aims to add a layer of cryptoeconomic security to the Chainlink Network. Here's a breakdown:

• Data and Operators: Data enters the Chainlink system through operators, who run nodes to provide real-world data to the blockchain. These operators are crucial for the functioning of the Chainlink network, as they facilitate the reliable transfer of external data onto the blockchain.
• Staking: The staking mechanism allows both node operators and community members to back the performance of oracle services with their staked LINK tokens, thus contributing to the network's security. By staking their LINK tokens, participants not only provide an additional layer of assurance regarding the performance and reliability of the network's oracle services, but also contribute to the fees for operators. Out of the total rewards earned, 4% is allocated as a fee to the operators.
• LINK as currency: Fees within the Chainlink network are paid in LINK tokens. These fees are split between operators, community stakers, and the protocol. In addition to the fees paid by users, which are expected to be the future engine of the economy, current incentives are being rewarded in LINK to node operators and stakers until the project becomes self-sustainable. This reward offers an APR of 4.5% for all stakers, and then a portion of it is allocated to the operators as a delegation fee.

Chainlink tokenomics particularities

Unlike many other protocols, Chainlink is introducing its staking scheme in a step-wise approach. In this pool, only a fixed amount of tokens is allowed for staking. Approximately 10% of the tokens staked will be by operators, and the rest will be by other stakers.

In version 0.1, the limit for staking was set at 25M LINK. Now, the pool has expanded to 45M LINK. In the near future, the staking pool is expected to continue increasing until it becomes completely uncapped. These upgrades are a testament to Chainlink's ongoing effort to develop its token economy, striking a balance between the need for security and the advantages of increased participation and network growth.

Tokenomics simulation results

At the time of writing, the market price LINK is approximately $14 USD. This valuation results in a fully diluted market capitalization of around 14 billion USD.

According to Token Terminal, the current fees generated by the Chainlink project are around $20,000 USD per month. This revenue stream is critical as it demonstrates the real-world utility and demand for Chainlink's services. Additionally, based on information from https://dune.com/gsm/Chainlink, there are approximately 250,000 data feeds utilized by the Chainlink network on a monthly basis. When we break down these numbers, it translates to an average cost per data feed of about $0.07 USD per data feed. 

For our initial simulation, we have set an ambitious yet plausible target: estimating a monthly growth rate of 10% in the fees generated by the Chainlink network. This growth rate, while optimistic, aligns with the potential increase in adoption and usage of Chainlink's oracle services across various blockchain applications. 

Optimal time to open up the staking pool

Based on the hypotheses mentioned above, it is not until early 2026 that we should expect an uncapped staking pool. This is because only at that time does the amount of fees generated by the protocol become significant compared to the incentives given to node operators.

Token price evolution 

Studying the token price, we project that the economy will experience a decline over the next few years until early 2027. At that point, the amount of fees generated by the protocol is expected to become comparable to the incentives given to the node operators, approaching a one-to-one ratio.

It is important to understand that this price projection takes into account just the organic price of the token, influenced by utility-driven supply and demand, and not speculative movements.

Simulation assumptions

For this simulation, we've made several key assumptions to model the future of the staking pool and the broader Chainlink token economy. These assumptions are crucial as they form the basis of our projections and analyses.

• Firstly, we anticipate significant upgrades to the staking pool at specific intervals: in April 2024, January 2025, and a notable change in December 2025, which we're referring to as 'pool deregulation'. This last date marks a critical turning point where the staking pool will transition into a less restricted or 'deregulated' state, potentially impacting the overall dynamics of the network. Once the pool is uncapped, the incentives for that pool will continue at the same rate of tokens as in the previous phase.
• Regarding the incentives structure, our model assumes that once the staking pool is no longer constrained, stakers will seek an Annual Percentage Yield (APY) of 5%. 
• Additionally, to cover some of its operational expenses, the Chainlink Treasury will reportedly sell $1 million worth of tokens annually. 
• Another assumption involves the current holders of Chainlink tokens (those who are not otherwise engaged with the token utilities). We estimate that these holders will seek to sell about 10% of their holdings each year. 

However, it's important to note that all of these assumptions are adjustable within the simulation platform. Check it out for yourself and see how altering these assumptions can change the course of the simulated outcomes!

Conclusion

Finally, a small recap:

• We have witnessed the effectiveness of combining continuous monitoring with simulations. This approach has led to a more comprehensive understanding of token economies.
• We have developed an informed perspective on the future evolution of the Chainlink token economy.
• Through our analysis, we have identified the most opportune moments for updating Chainlink staking dynamics.

At Cenit, our ongoing mission is to enhance the quality and transparency of tokenomics. To this end, we offer a variety of products that enable the creation of token economies without any need for programming knowledge. We invite you to explore our no-code simulator tool and begin simulating your own economies today.