Brief content

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

You can think of Chainlink as a committee of sages, always looking for ways to determine what is closest to the truth. But why is this committee more credible than others? Let's see.

 

Introduction

Smart contracts automate transactions in the blockchain. They evaluate the information and if certain conditions are met, they are executed. However, this presents a problem.

Blockchains don't really have a good way to access external data. The difficulty of connecting off-chain data with on-chain data is one of the serious problems faced by smart contracts.

Chainlink tries to solve this problem by providing a decentralized oracle service. In short, an oracle is a program that translates external data into a language understood by smart contracts (and vice versa). If you want to learn more about them, check out our article Blockchain Oracles Explained.

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

 

Chainlink is a decentralized network of blockchain-based oracles that allows smart contracts to connect to external data sources. These can be APIs, internal systems, or other types of external data feeds. LINK is an ERC-20 token used to pay for this online oracle service.

So what makes Chainlink decentralized? Well, first we need to understand what a centralized oracle is. It is not difficult to guess that this is the only provider of external information for the smart contract. This is just one source. Big problems can arise. What if that one oracle provides false or incorrect data? All systems that rely on it will fail. This is often referred to as the oracle problem, and it's what Chainlink is trying to solve.


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

Suppose a smart contract needs real data, and it sends a request for it. The Chainlink protocol registers this event and forwards it to the Chainlink nodes to accept their bids upon request.

What makes this process powerful is how Chainlink can validate data from multiple sources. Thanks to its internal reputation system, Chainlink can determine which sources are trustworthy with relatively high accuracy. This can significantly improve the accuracy of the results and protect smart contracts from all kinds of attacks.

So how does this relate to LINK? Well, smart contracts that request data pay Chainlink node operators in LINK in exchange for their services. Prices are set by node operators based on market conditions for this data.

Node operators also stake in the network to secure long-term project commitments. Similar to Bitcoin's crypto-economic model, Chainlink's node operators are motivated to act securely, not maliciously.


Since decentralized finance (DeFi) has become more popular, there has been a growing interest in high-quality oracle services. After all, most of these projects use smart contracts in one way or another. They also need external data to work properly.

Due to centralized oracle services, DeFi platforms can become vulnerable to a wide range of attacks, including flash loan attacks through oracle manipulation. Numerous incidents like this have already occurred and are likely to continue if centralized oracles continue to be as prevalent as they are.

Many people may be inclined to think that Chainlink can solve all these problems, which may not be the case. Although projects such as Synthetix, Aave and others rely on Chainlink technology, new types of risks are also emerging. If too many platforms rely on the same oracle service, they will all experience disruption if Chainlink suddenly stops working properly.

This may seem unlikely. After all, Chainlink is a decentralized oracle service that supposedly has no single point of failure. However, in September 2020, Chainlink nodes were subjected to a spam attack in which an attacker potentially spent up to 700 ETH from node operator wallets. The attack was quickly blocked and the problem resolved, but it's a reminder that not all systems are completely immune 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 are in the hands of the company that created the project.

Unlike many other crypto-assets, LINK has no mining or staking process, which increases its circulating supply.


LINK does not have a native blockchain of its own. It exists as a token on the Ethereum blockchain. LINK tokens conform to 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 do LINK staking as a way to offer a stake to a prospective data buyer. The node operator that won the bid must provide information to the smart contract sending the request. All payouts for node operators take place in the form of LINK tokens.

This approach encourages node operators to continue hoarding. Why? Holding more tokens means access to ever larger data contracts. If the node operator decides to break the rules, he will have his LINK tokens removed as a result.

 

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Crypto projects often give nicknames to members of their community. Chainlink was one of the first and most successful examples of this phenomenon with LINK Marines.

This type of community building is becoming an increasingly effective marketing tactic in the cryptocurrency space. The main supporters can attract a lot of attention to the project, including in social networks, which can then affect other indicators.

 

Final thoughts

Chainlink technology has proven to be one of the most important pillars of DeFi and the broader crypto ecosystem. While this does create risks for Ethereum DeFi, reliable external data sources are among the most important building blocks for a healthy on-chain product ecosystem.

Do you have more questions about Chainlink and LINK? Visit our Ask Academy Q&A platform where the Binance community will answer your questions.