Summary

Chainlink has become one of the most 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 with the real world.

You can think of Chainlink as a committee of wise men who are always looking for something that is closest to the truth. But why do people think they are more trustworthy than others? Let’s find out in detail.

 

Introduction

Smart contracts automate agreements on the blockchain. They evaluate information and, if certain conditions are met, execute it. However, this presents a problem.

Blockchain does not have a good way to access external data. The difficulty in linking on-chain data with off-chain data is one of the biggest challenges facing smart contracts.

Chainlink attempts to solve this problem by providing a decentralized oracle service. In simple terms, an oracle is a piece of software that converts external data into a language that smart contracts can understand (and vice versa). For more information, read our article “Blockchain Oracles Explained”.

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

 

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

So, how does Chainlink achieve decentralization? First, we need to understand what a centralized oracle is? It’s not hard to guess that it’s a single provider of external information to a smart contract. It’s just a single source. This can be very problematic. What happens if the oracle provides wrong or incorrect data? All systems that rely on this oracle will fail. This is often called the “oracle problem” — and it’s exactly what Chainlink is trying to solve.


Chainlink uses a network of nodes to make the data provided to smart contracts as trustworthy and reliable as possible.

Let’s assume that a smart contract needs real data and it sends a request. The Chainlink protocol can register this event and forward it to the Chainlink node to “bid” on this request.

The power of this process lies in how Chainlink verifies data from multiple sources. Thanks to its internal reputation system, Chainlink can determine with relative accuracy which sources are trustworthy. This can greatly improve the accuracy of the results and protect smart contracts from a variety of attacks.

So, how does this all relate to LINK? Smart contracts requesting data pay Chainlink node operators in LINK in exchange for their services. The price is determined by the node operator based on market conditions for that data.

Node operators also stake their stake in the network to ensure long-term commitment to the project. Similar to Bitcoin’s cryptoeconomic model, Chainlink node operators are incentivized to act in a trustworthy and non-malicious manner.


As decentralized finance (DeFi) becomes more and more popular, there is growing interest in high-quality oracle services. After all, most projects use smart contracts in some way and require external data to function properly.

Centralized oracle services make DeFi platforms vulnerable to a variety of attacks, including flash loan attacks through oracle manipulation. Similar incidents have occurred many times, and they may continue to occur if centralized oracles are still widely adopted.

Many people may be inclined to think that Chainlink can solve all these problems - this view is wrong. Although projects such as Synthetix and Aave rely on Chainlink's technology, new types of risks continue to emerge. If too many platforms rely on the same oracle service, then if Chainlink suddenly stops working properly, all platforms will face disruption.

This seems unlikely. After all, Chainlink is a decentralized oracle service with no single point of failure. Even so, in September 2020, Chainlink nodes were hit by a “spam attack” that allowed attackers to steal up to 700 ETH from node operator wallets. While the attack was quickly resolved, it serves as a reminder that not all systems are fully protected against malicious activity.


LINK has a maximum supply of 1 billion tokens. 35% of them were sold during the initial coin offering (ICO) in 2017. About 300 million tokens are controlled by the company that created the project.

In contrast to many other crypto assets, LINK has no mining or staking process that increases its circulating supply.


LINK does not have its own native blockchain. It 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 mentioned above, Chainlink node operators stake LINK as a way to bid for prospective buyers of data. The node operator that wins the “bid” must provide the information to the smart contract that made the request. All payments to node operators are made in the form of LINK tokens.

This approach incentivizes node operators to accumulate tokens. Why? Because having more tokens means having access to larger and larger data contracts. If a node operator breaks the rules, their LINK tokens will be liquidated.

 

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It’s not uncommon for crypto projects to give their community members nicknames. Chainlink is one of the earliest and most successful examples of this phenomenon, with its community members calling it “LINK Marine.”

This type of community creation is becoming an increasingly effective marketing strategy in the cryptocurrency space. Core supporters can generate a lot of engagement and social media attention for a project, which is then reflected in other metrics.

 

Summarize

Chainlink’s technology has proven to be one of the most important pillars of DeFi and the broader cryptocurrency ecosystem. While this does bring risks to Ethereum DeFi, trusted external data sources are one of the most important components of a healthy on-chain product ecosystem.

Have more questions about the Chainlink network and LINK? Visit our Q&A platform Ask Academy to get answers from Binance community members.