Summary

Chainlink has become one of the most commonly used projects in the cryptocurrency space. It is a decentralized oracle service that can provide external data to smart contracts on Ethereum. In other words, it connects blockchain to the real world.

You can think of Chainlink as a committee of educated people who seek to determine the closest thing to the truth. But why might some people be considered more trustworthy than others? Let's find out together.

 

Introduce

Smart contracts automate agreements on the blockchain, evaluate information, and if certain conditions are met, the contract automatically deploys. However, this also presents a problem.

Blockchain cannot access data from outside. The difficulty of connecting external data to data already available on-chain is one of the major challenges smart contracts face.

Chainlink tries to solve this problem by providing a decentralized oracle service. In short, an oracle is a software that translates external data into a language that smart contracts can understand (and vice versa). If you want to learn more, read our article What is a data feed (oracle) on blockchain.

But what makes Chainlink different from other blockchain oracles? Let's find out.

 

Chainlink is a blockchain-based decentralized oracle network that allows smart contracts to connect to external data sources. These sources may include APIs, internal systems, or other types of external data feeds. LINK is an ERC-20 token used to pay for services on the network.

So what makes Chainlink decentralized? First, we need to understand what a centralized oracle is. It's not hard to guess - it's the only external source of information for a smart contract, and one source only. This can cause big problems. What happens if an oracle provides wrong or inaccurate data? All systems that rely on that supply will fail. This is often called the “oracle problem” - and is what Chainlink is trying to solve.


Chainlink uses a network of nodes that strive to make the data that powers smart contracts as trustworthy and authentic as possible.

Let's say the smart contract requests actual data and it makes the request itself. The Chainlink protocol records this event and forwards it to the Chainlink nodes to receive the requested "bid".

What makes this process powerful is how Chainlink can authenticate data from multiple sources. Because of its reputable internal system, Chainlink can determine which sources are trustworthy with relatively high accuracy. This significantly increases the accuracy of results and protects smart contracts from all types of attacks.

So, what does this have to do with LINK? Well, smart contracts that require data will have to pay Chainlink node operators with LINK to use their services. Prices are set by node operators based on market conditions for that data.

Node operators also stake in the network to ensure long-term commitment to the project. Similar to Bitcoin's cryptocurrency economic model, Chainlink node operators are incentivized to act positively rather than negatively.


Since Decentralized Finance (DeFi) has become more popular, there has been more and more interest in high-quality oracle services. After all, most of these projects use smart contracts in some way and also require external data for stable operation.

With centralized oracle services, DeFi platforms can make themselves vulnerable to a variety of attacks, including flash borrowing attacks through the use of oracle services. Many incidents like this have occurred, and they will likely continue if centralized oracles remain popular.

Many people tend to think that Chainlink can solve all these problems – this is not necessarily true. Although projects like Synthetix, Aave and others rely on Chainlink's technology, new types of risks are also gradually emerging. If there are too many platforms relying on the same oracle service, they will all face problems if Chainlink suddenly goes down.

This may be unlikely. After all, Chainlink is a decentralized oracle service that is supposed to have no weaknesses. Despite this, in September 2020, Chainlink nodes were subjected to a "spam attack" in which attackers drained up to 700 ETH from the node operator's wallet. The attack was quickly resolved, but it's a reminder that not all systems are completely resistant to malicious activity.


LINK has a maximum supply of 1 billion tokens. 35% of them were sold during the ICO in 2017. About 300 million were in the hands of the company that founded the project.

In contrast to many other cryptocurrencies, LINK does not have a mining or staking process to increase its circulating supply.


LINK does not have its own native blockchain. This currency exists as a token on the Ethereum blockchain. The LINK token follows the ERC-667 standard, which is an extension of the ERC-20 standard. In short, you can store LINK in any supported wallet, such as Trust Wallet or MetaMask.

 

As we mentioned, Chainlink node operators can stake LINK to make bids to data buyers. The node operator that wins the bid must provide information to the smart contract that sent the request. All payments to node operators will be in LINK tokens.

This approach incentivizes node operators to continue accumulating. Why? Owning more tokens means access to increasingly larger data contracts. If a node operator decides to break the rules, they will have their LINK tokens deleted as a result.

 

➟ Are you looking to get started with cryptocurrency? Buy LINK now at Binance!

 

It's not uncommon for cryptocurrency projects to give nicknames to members of their community. Chainlink is one of the earliest and most successful examples of this phenomenon with “LINK Marines.”

This type of community creation is becoming an increasingly effective marketing tactic in the cryptocurrency space. Core supporters can generate more engagement and social media attention for the project, which will in turn have other benefits.

 

Conclude

Chainlink's technology has proven to be one of the most important pillars of DeFi and the broader cryptocurrency ecosystem. While that poses risks to Ethereum DeFi, trusted external data sources are one of the most important foundations for a healthy on-chain ecosystem of products.