Thread by @ChainLinkGod

1/ I want to give some perspective on the economics of #Chainlink services, both in their existing form today and how it will evolve into the future

This includes many nuances regarding user fees, cost-efficiency, network subsidies, economies of scale, and sustainability

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2/ The ultimate long term goal is that all Chainlink services become self-sustaining through user paid fees

Many services already achieve this today, but how pricing is determined and the role of $LINK in terms of demand for these services is a common question

3/ I'll start with Chainlink Any API as it's the easiest to conceptualize

Any API enables smart contracts to fetch data from any off-chain data source via Chainlink nodes, which can be operated either by DevOps teams or the data providers themselves

4/ This follows the "request and receive" model where a smart contract sends a query transaction along with payment in LINK to a Chainlink node, which then fetches the data and delivers it back on-chain directly to the smart contract in a separate fulfill transaction

5/ Chainlink nodes can choose the specific data sources they wish to support and the pricing in LINK for each query

Pricing is in static amounts of LINK, which can be adjusted over time to ensure it covers gas costs and provides a profit

6/ With this service, the revenue generated by nodes come from user fees as it's an "on-demand" service with a single consumer per on-chain data point

In other words, if you want to fetch data from any API or data provider oracle nodes, you need to acquire LINK

7/ Chainlink Verifiable Random Function (VRF) works in much the same way

But instead of fetching data, Chainlink nodes generate randomness locally alongside a cryptographic proof for on-chain verification

But the same "request and receive" and payment logic applies

8/ Smart contracts send LINK along with a request of randomness to a Chainlink node

Current pricing of VRF
Ethereum Mainnet: 2 LINK
BSC Mainnet: 0.2 LINK
Polygon Mainnet: 0.0001 LINK

Payment channels can be set up to lower the gas costs of payments
docs.chain.link/docs/vrf-contr…

9/ Adoption of Chainlink VRF has accelerated significantly

Ethereum: 26,809 requests
BSC: 264,713 requests
Polygon: 2,583,344 requests

dune.xyz/gsm/Chainlink

10/ Announced at SmartCon 2021, it was noted that VRF will be improved with a subscription model where payments could be pre-funded, with payments simply allocated to the node (among other gas cost reductions)

11/ Likewise with Any API, if a smart contract requires verifiable randomness, they need to acquire LINK and send it along with the request for RNG

This means the revenue generated through VRF comes from user paid fees

12/ Chainlink Keepers is the newest service that provides smart contracts a decentralized transaction automation solution

Rather than being a "Request and Receive" model, Keepers is just a "Receive" model, nodes monitor off-chain when a contract needs a function called

13/ Because there is no request transaction, users pre-fund the registry with LINK tokens,

This allows tokens to be allocated to nodes after they successfully perform an "Upkeep" job (calling a contract’s function when it needed to be triggered)

14/ Uniquely, rather than prices being set in static amounts of LINK, the payment model of Keepers is determined by a "gas costs + premium" model

This is a much more automated model, rather than setting static pricing and updating as needed when gas prices change

15/ After a Keeper performs an upkeep, the gas consumption of that transaction is determined (how much was paid in ETH/BNB/MATIC for gas), converted into the equivalent LINK value using a Chainlink Price Feed, and a percentage premium added on top

16/ This creates much more predictable profits for Chainlink nodes as their gas costs will always be covered and their profit margins is the premium added on top

Ethereum: 20% gas premium
BSC: 30% gas premium
Polygon: 70% gas premium
docs.chain.link/docs/chainlink…

17/ Likewise with Any API and VRF, the revenue generated for Keepers upkeeps comes from user paid fees

Ultimately, what this means is that there are already a number of Chainlink services that are sustainable based on user paid fees

18/ Additionally, I imagine at some point that both Any API and VRF will also shift to support the "gas price + premium" model as it provides significant advantages in terms of predictable profitability and automates a previously manual process of updating pricing

19/ This covers many data and computation services in the Chainlink network, but what about the bread and butter Chainlink Price Feeds?

Price Feeds are a shared data resource, with continuously updated on-chain reference contracts

20/ The reference contracts of Price Feeds enable smart contracts to request & receive data in a single transaction

To achieve this, fresh data needs to be regularly put on-chain so it can be accessed at any time, such as if loans needs to be liquidated during volatility

21/ Chainlink Price Feeds are also designed to be sustainable through user fees at scale

User fees are aggregated together, generating an economies of scale effect, where no user is paying the full cost, rather it's *shared* across many users

22/ As more paying users join a network, the costs of every existing and future user decreases

The additional fee revenue could also go towards greater security (more nodes, sources, etc.)

Or a mix, such as lowering costs some for users while increasing some security

23/ Price Feeds that aggregate fees from many users provide the greatest amount of security for the lowest per-user cost

This is the end-game goal of such feeds, a strong network effect that benefits all ecosystem participants with high-quality data
smartcontentpublication.medium.com/chainlinks-net…

24/ But there is a chicken or egg problem before reaching this scale

Nodes won't put Price Feed data on-chain regularly if there are not enough user fees, and early users are not going to want to pay the full costs before there are already paying users to share costs with

25/ This is where the role of the subsidy comes into play

A subsidy solves the bootstrapping problem by lowering the costs of early users so they are not paying the full costs, akin to as if there were already a set of paying users

26/ Therefore, Price Feeds are launched funded almost entirely by a subsidy, then as more paying users begin to use that network, the percentage of subsidy compared to user fees drops, eventually reaching the point of full user-fee driven self-sustainability

27/ As a result, users are *never* paying the full costs of the feed's operation, even if they're the first user, significantly lowering the barrier to entry, thereby enabling more users to join and increasing the pool of user fees available over time

28/ When does a Price Feed become self-sustainable? When user fees > gas costs of putting data on-chain

The point at which self-sustainability is reached is dependent on the gas costs of the receiving chain, update frequency, volatility of the asset, and popularity of the feed

29/ Sustainability of a Price Feed on a low-cost blockchain like Polygon, Solana, or L2 rollups can be reached with a lower number of users paying fewer fees each than a network like Ethereum

What's common to all feeds is that more paying users -> reduced reliance on a subsidy

30/ While nodes may liquidate some revenue to pay gas fees, it's akin to how miners pay electricity costs

As we see with miners, they hold many of the coins they mine as they're invested in the network's success

They can also borrow against their holdings to pay for such costs

31/ Not only that but Chainlink node operators are keenly aware that explicit staking will require the locking of tokens to back oracle services

Explicit staking will ultimately make holding LINK a *requirement* to capture the network's growing pool of user fees

32/ Like @Crypto___Oracle covered in his recent thread, long term sustainability has always been the goal and explicit staking plays a key role in this

Fine-tuning the long term sustainability and tamper-resistance of staking is of critical importance

https://twitter.com/Crypto___Oracle/status/1468536600225202178?s=20

33/ Furthermore, I've only covered the current Chainlink services that exist today

The Cross-Chain Interoperability Protocol (CCIP) is a massive opportunity to bring in significant amounts of revenue, serving as the layer zero of the multi-chain economy
blog.chain.link/introducing-th…

34/ In summary, the Chainlink Network has been designed from the very beginning to optimize for long term growth, providing smart contracts access to the critical off-chain infrastructure they require in a manner that naturally becomes sustainable over time with adoption

35/ Subsidies enable Chainlink oracles to provide key services at the most cost-efficient price, enabling the multi-chain ecosystem to flourish

At the same time, it creates a path to become the dominant leader in each vertical and cultivate a massive pool of user fees

36/ Solving the chicken and egg problem through subsidies is a major contributor to Chainlink’s success in providing the most widely used Price Feeds across the ecosystem

All while creating a path to user fee driven sustainability as we already see with Any API, VRF, and Keepers

37/ This is why integrations and adoption is so important

It grows the pool of user fees available to Chainlink nodes, reduces the reliance on the subsidy, and creates inter-node competition to capture such fees, leading to greater security and more adoption

38/ As a result of its economics, #Chainlink has become not only the most widely adopted oracle solution in the entire crypto ecosystem

But it's the only oracle solution that is in a position to sustainably power the smart contract economy for many more decades to come