Many crypto projects have taken it upon themselves to solve various pain points in the cryptocurrency industry. Chainlink is one such project. Chainlink is a decentralised oracle network and a cryptocurrency that enables the bridge from external data to smart contracts that run on top of a blockchain.
With its wide use cases, it is at the forefront of trustworthy data interoperability between blockchains.
In brief:
- Chainlink makes external data available on-chain
- Chainlink provides accurate data price-feed by using multiple data providers called oracles
- Chainlink smart contracts are provably reliable
- Node operators in the Chainlink ecosystem can run the data infrastructure required for the success of blockchains while earning revenue in the form of LINK tokens
- Powering a wide range of decentralised price feed oracles, Chainlink powers widely used dApps and DeFi applications that secure billions in value like Aave, Synthetic, Ampleforth and more
Why Chainlink?
Chainlink is a first-of-its-kind oracle service that is based on the Ethereum platform. Per the brief explanation on its website, Chainlink describes itself as a network that provides “reliable tamper-proof inputs and outputs for complex smart contracts on any blockchain.”
Its uniqueness comes from its ability to find the missing link in smart contracts, solving the interoperability problem that smart contracts have with the outside world in a trustless manner.
In other words, it can form a bridge from many blockchains to real-world businesses, assets, data and vice-versa.
How does Chainlink work?
Chainlink works by connecting blockchains to applications. On one hand, it connects to the blockchain, and on the other hand, it is integrated with an Application Programming Interface (API). In other words, Chainlink forms the bridge from off-chain data to smart contracts that run on top of a blockchain.
Smart contracts make it possible to automatically enforce the terms of a predefined agreement, and many of these agreements rely on off-chain data like stock price data or insurance data. Here, Chainlink bridges real-world data through data providers (called ‘oracles’) to the blockchain. To ensure the data is reliable, Chainlink uses multiple data providers and computes a trusted answer in real-time. Solving the problem of data integrity, which is essential for a blockchain, Chainlink has grown to one of the largest decentralised ecosystems, providing an essential function to dozens of blockchains.
The bridge that Chainlink provides for blockchains is a key milestone to mass adoption for the crypto space. Making it possible to use real-world data within the blockchain enables developers to create various dApps that combine the security of the blockchain with the variety of traditional assets and data.
The data service makes it possible to bridge the gap between multiple asset classes like fiat currencies, stocks, and bonds to the blockchain and making it possible for users to interact, tokenise and trade these assets securely on the blockchain.
As an example, Chainlink provides data like the price for Silver, that can then be re reliably used by others through their API. In their data feed for XAG/USD (XAG is the Ticker for Silver) all data the oracles provide can be tracked through their transactions on the Ethereum blockchain. Each oracle provides the price for XAG/USD based on their available data and connects it to the Chainlink smart contract. To provide a trusted answer the smart contract for the XAG/USD price feed needs the data from 11 out of 16 oracles. The price gets updated if a large deviation is noticed by the smart contract or when 86400 seconds pass, ensuring the data is always up to date. This price data can then be used through the Chainlink API by other services to reliably show or compute with a price feed of XAG/USD that can be trusted.
What is a Chainlink oracle?
An oracle is essentially a middleware software that sources data from the real world in a way that is compatible with smart contracts on the blockchain and vice-versa. For instance, a DeFi protocol that provides a way to tokenise stock markets has to have accurate information on the USD value of said stocks.
This poses a challenge for the protocol since, while smart contracts are secure, price-feeds cannot be 100% guaranteed. This is where the Chainlink oracles come in to ensure there is no incorrect or untrustworthy data passing through. Calculating a trusted answer based on multiple data providers ensures trustworthy data through the oracles.
The LINK token
Chainlink is an ERC-20 Token built upon the Ethereum Blockchain. It is secured by a Proof of Stake consensus mechanism that selects node validators through their amount of staked LINK.
Chainlink is a decentralised oracle network, and the LINK token is staked by users to determine an oracle’s reliability (as well as to earn rewards). In addition, oracles also receive payment in LINK tokens for providing their services. This is Chainlink’s tokenised market ecosystem. If, on the other hand, oracles provide incorrect data, a penalty function ensures that tokens are distributed among oracles with a higher reputation (which are provably reliable).
The distribution of the LINK token is as follows:
- 45% of LINK tokens were distributed through public sales and are currently in circulation
- 35% are distributed via staking fees and payments for node operators
- The remaining 30% of the LINK tokens are held and used by Chainlink’s founders for the continued development of the Chainlink ecosystem.
Chainlink governance
Chainlink has no governance model, as opposed to various other DeFi protocols. The oracle network is administered by the Chainlink team. However, it’s important to note that the ecosystem functions independently from the team, which is to say that oracles are controlled by owners. Of course, this creates a hybrid semi-decentralised network with various third party-clusters.
Putting it all together
Every other day, the crypto industry is rife with stories of the next Bitcoin or the next Ethereum. Chainlink does not pretend to be either of those things. Instead, it solves a real data feed problem, and in doing so unleashes the full power of decentralised apps out into the open market. Needless to say, accurate data feeds have incredible potential even outside financial markets. The size and scope of Chainlink as a top 20 coin, with over $10 billion in market capitalisation (as of September 2021) is telling of this potential.
Key takeaways
- Chainlink shows its massive potential through the value that it brings to the blockchain space
- Making external data reliable through oracles, Chainlink fixes a key problem for multiple blockchains
- Become a node operator or stake your LINK tokens to provide value in the Chainlink ecosystem and get rewarded by doing so
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