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What is Chainlink (LINK)?

José Oramas 3 May, 2021 | 4 min read

Chainlink is an open-source project built on Ethereum. The protocol has a decentralised network of data providers called "Oracles," which collect price, events, and other essential data from the external world to smart contracts.

Created in 2017, Chainlink has become a wildly popular option for many DeFi protocols, integrating it as their oracle solution to connect on-chain and off-chain data.

How Does Chainlink Work?

The way Chainlink works is by connecting the blockchain to external environments. The process starts when the smart contract sends a request for information, which the protocol registers as an event, creating an SLA (Service Level Agreement Contract). The process is relatively simple:

  • When a smart contract requests information, a node operator drafts an SLA agreement, another smart contract on the blockchain, outlining a specific set of data requirements to access off-chain data.
  • Chainlink uses this SLA to match the requester with oracles that can provide the requested data in a process called Order-Matching Contract.
  • Once the oracles are matched, these start to connect with the external sources to obtain off-chain data through a process called Aggregating Contract. This process takes all the data from the oracles, validates the information of each, and returns an accurate score to the user (the smart contract).

Once the process is complete, the issuer (the smart contract) pays the node operators for their work in LINK, which is the protocol's utility token and main incentive. Oracles can be updated to meet technological changes.

What Does Chainlink Solve?

To truly understand the importance of Chainlink, we have to recap two essential concepts first: Oracles and smart contracts.

  • Oracles are centralised third-party devices that are not part of the consensus system on which a blockchain relies. This makes it difficult to trust them since one cannot be entirely sure if the information provided is trustworthy, taking away the benefits of blockchain technology. For instance, a smart contract could execute an action based on erroneous or outdated information.
  • Smart contracts are two-party agreements that can execute and enforce themselves autonomously and independently without counterparties by translating the contract terms into scripts written with programming languages.

With those two concepts in mind, smart contracts can't interact with external real-world data and systems without centralised, unreliable third parties. This is where Chainlink comes into play by becoming a decentralised middleman, bridging smart contracts and real world-data without counterparty risks.

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The idea behind Chainlink was to create a decentralised oracle network where node operators provide data feeds and APIs (application programming interface) directly to smart contracts in exchange for LINK tokens. Through this method, smart contracts can access off-chain resources like bank account payments, market data, and retail payments.

Think about an oracle as a software agent that acts as an intermediary. It finds and verifies external data, translating and sending the information to the blockchain used by the smart contract, granting the necessary external data to trigger the contract's execution when conditions are met.

Founders

Chainlink goes back to 2017 created by tech experts Sergey Nazarov, current CEO, Steve Ellis, CTO, and researcher and computer science professor Ari Juels. The three of them wrote Chainlink's whitepaper.

Their focus was to provide a platform for everyone in the industry, regardless of their experience with smart contracts and blockchain technology. Before SmartContract, Nazarov was the co-founder of crypto-exchange Secure Asset Exchange together with Ellis.

Chainlink's debut came with an Initial Coin Offering in September 2017, raising USD 32 million that same day, with a total supply of 1 billion LINK tokens. The team distributed 35% of the supply to the network, so node operators were incentivised to do their tasks, while 30% stayed with the protocol to fund future network development.

Protecting Smart Contracts

Being a decentralised network of oracles, it's not surprising that there might be malicious actors looking to exploit smart contracts. To avoid dishonest and untrustworthy nodes, Chainlink verifies the Reputation Contract, which checks an oracle provider's track record to verify its performance history, evaluating and discarding unreliable nodes.

With this reputation system, Chainlink validates data from multiple sources by relying on one answer delivered by the node majority. If one or two other nodes provide a different response, the Aggregating Contract will mark those nodes are faulty or untrustworthy —keeping smart contracts safe from malicious attacks.

LINK Token

LINK is the native and utility token of Chainlink. It is an ERC-20 token used to pay services to oracles. Node operators set the price depending on demand for the data they can provide and the current market. Once done, Smart contracts reward node validators with LINK, incentivising the community to perform their tasks.

The token derives its value from the amount of work of the network. The more traffic there is, the more valuable the token becomes.

Staking

Validators can then stake LINK, and the greater their stake, the better contracts they receive. However, staking is not available for non-validator nodes. Only validators who complete their tasks are eligible to stake.

Staking LINK is also a way to prove your long-term commitment to the protocol and incentivise good services. Chainlink punishes malicious actors for inadequate services by taxing their staked LINK.

When the Reputation Contract search data to fulfill a contract, it will use the size of the node's LINK stake —so the nodes with greater stakes have a higher chance to be chosen to fulfill requests, earning LINK after the process.

Buying LINK

LINK can be bought and traded on almost any major crypto exchange like Binance, Kraken, and Huobi. Besides, almost every wallet supports Chainlink, like cold storage and digital wallets. Cold storage wallets are usually expensive but safer to store large amounts of LINK, while web-based wallets are perfect for suiting smaller amounts.

Conclusion

Chainlink has performed successfully since its creation, solving the critical “Oracle Problem'' that many blockchains struggled with by providing a trustworthy, decentralised oracle network. Many in the crypto and DeFi community have integrated LINK to their portfolio for its success in the market, so it’s worth keeping an eye on this project considering how valuable it has become for the industry.

Author's avatar
José Oramas
Fintech and finance writer, with keen interest in blockchain and crypto.

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