The War On Shitcoins Episode 17: Chainlink (LINK). The war on shitcoins is a Crypto.IQ series that targets and shoots down cryptocurrencies that are not worth investing in either due to their being scams, having serious design flaws, being centralized, or in general just being worthless copies of other cryptocurrencies. There are thousands of shitcoins that are ruining the markets, and Crypto.IQ intends to expose all of them. The crypto space needs an exorcism, and we are happy to provide it.
Chainlink (LINK) has been one of the more popular cryptocurrency tokens during the 2019 crypto market resurgence, rallying from $0.20 and a market cap of $70 million in December to as high as $4.51 and a market cap of $1.6 billion at the end of June. This puts Chainlink (LINK) in the top 20 cryptocurrencies on CoinMarketCap. Chainlink (LINK) provides tamper-proof inputs and outputs for smart contracts so that external data can be securely connected to smart contracts, and this fundamentally useful blockchain technology has fueled the rally.
Although the technological design behind Chainlink (LINK) is solid, it seems that supply centralization is an Achilles heel for Chainlink (LINK). One billion tokens were minted when Chainklink (LINK) was originally created, with 350 million of these tokens sold for $32 million in the ICO, another 350 million tokens being reserved to incentivize node operators and 300 million tokens given to the developers.
On July 6, the Chainlink (LINK) developers announced that they would be expanding their team, specifically saying “In order to help us achieve these goals, we do expect additional influxes of capital into Chainlink, which we plan to use for the continued growth of our team, expansion of resources available to the community, and support of integrations with high profile blockchain platform partners, data providers, and smart contract consumers of off-chain data/events. We do sincerely appreciate our community’s continued support and understanding as we expand the number of people working on Chainlink, and we will, of course, do our best to ensure that our expansion plans are accomplished responsibly, carefully managing the company’s resources, capital, and LINK, with a focus on continuing to create an overall positive effect on the Chainlink network over the long-term.”
Roughly four days before this announcement, the Chainlink (LINK) devs had already begun selling off a fraction of their holdings in blocks of 700,000 tokens at a time, worth over $2 million per block. Over the span of about a month, the Chainlink (LINK) devs dumped 9.8 million tokens onto the market, totaling somewhere between $20-30 million. This is almost as much money as was raised in the ICO in late 2017.
The impact on the market is quite obvious, with the price of Chainlink (LINK) declining from $3.80 on July 2 when the devs began dumping tokens to as low as $2.03 on July 30, a loss of 46% — a loss of $600 million from the market cap.
Notably, Chainlink (LINK) has recovered a bit to $2.46 as of this writing, with the last 700,000 tokens sold a week ago, giving the market some time to recover.
This centralized dumping by the Chainlink (LINK) devs is an excellent example of how dumping tokens that are outside of the circulating supply can cause market losses an order of magnitude bigger than the sales. The devs raised $20-30 million at the expense of a loss of $600 million on the market, meaning each dollar raised by the devs via dumping caused a loss of $20-30 on the market. This essentially represents a transfer of wealth from Chainlink (LINK) investors, traders, and users to the devs.
In the fiat world, what the Chainlink (LINK) devs did is equivalent to the Federal Reserve printing a tremendous amount of money and instantly dumping it into circulation, causing currency devaluation.
A shocking aspect of this situation is that the Chainlink (LINK) devs are entitled to 300 million tokens, and only 9.8 million tokens being dumped caused Chainlink (LINK) to lose nearly half of its value in a month.
Blockchain data indicates that the devs’ tokens are partitioned into blocks of 50 million tokens each, and there are at least 275 million tokens still held by the devs. This poses a long term threat to the Chainlink (LINK) market since whenever the devs need to raise money they can easily do so by selling millions of tokens. Even if this causes heavy market losses, it is technically legal.
Also, quite conspicuously, the 350 million tokens allocated to incentivize nodes remain untouched. Apparently, Chainlink (LINK) has yet to setup the capability for node operators to earn money.
This means at some point in the future when Chainlink (LINK) opens up the staking process, the 350 million tokens will begin to be dumped onto the market. This represents another serious threat to Chainlink’s (LINK) value long term.
Thus, despite Chainlink (LINK) having solid technology and a solid fundamental use, the threat posed by the devs’ 275 million tokens and the 350 million tokens earmarked for staking that have yet to be touched pose an unacceptable centralized risk to the market long term. Just 9.8 million tokens being dumped by the devs caused Chainlink (LINK) to lose nearly half of its value within a month, and this may just be a precursor of what is to come as another 600+ million tokens are dumped onto the market long term.
The important lesson to learn here is that it is important to investigate a token’s supply distribution and check how much of the supply is centralized before investing.