Chainlink has become one of the most commonly used projects in the cryptocurrency space. It’s a decentralized oracle service that can provide external data to smart contracts on Ethereum. In other words, it connects blockchains with the real world.
You could think of Chainlink as a committee of wise men and women who are always looking to determine the closest thing to the truth. But why can they be deemed more trustworthy than others? Let’s see.
Smart contracts automate agreements on the blockchain. They evaluate information, and if certain conditions are met, they execute. 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 great challenges facing smart contracts.
Chainlink attempts to solve this problem by providing a decentralized oracle service. In short, an oracle is a piece of software that translates external data to a language that smart contracts can understand (and vice versa). If you’d like to read 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 blockchain-based decentralized oracle network that allows smart contracts to connect to external data sources. These can include APIs, internal systems, or other types of external data feeds. LINK is an ERC-20 token that’s used to pay for this oracle service on the network.
So what makes Chainlink decentralized? Well, first, we need to understand what a centralized oracle is. It isn’t hard to guess – it’s a single provider of external information to a smart contract. It’s only one source. This can present great problems. What if that one oracle provides false or incorrect data? All the systems that rely on it will fail. This is often called “the oracle problem” – and is what Chainlink is attempting to solve.
Chainlink uses a network of nodes in an attempt to make the data provided to smart contracts as trustworthy and reliable as possible.
Let’s say a smart contract requires real-world data, and it puts out a request for it. The Chainlink protocol registers this event and forwards it to Chainlink nodes to take their “bids” on the request.
What makes this process powerful is how Chainlink can validate data from multiple sources. Due to an internal reputation system, Chainlink can determine with a relatively high accuracy which sources are trustworthy. This can greatly increase the accuracy of the results and protect smart contracts from all sorts of attacks.
So, how is this connected to LINK? Well, the smart contracts that request the data pay Chainlink node operators in LINK in exchange for their service. The prices are set by the node operators based on the market conditions for that data.
Node operators also stake on the network to ensure long-term commitment to the project. Similarly to Bitcoin’s cryptoeconomic model, Chainlink node operators are incentivized to act in a trustworthy manner instead of being malicious.
Ever 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 the other, and they also require external data to run properly.
With centralized oracle services, DeFi platforms can leave themselves vulnerable to a wide range of attacks, including flash loan attacks through oracle manipulation. Multiple incidents like this have already occurred, and they’ll likely keep happening if centralized oracles are still common.
Many people may be inclined to think that Chainlink can solve all of these problems – that may not be correct. Despite projects such as Synthetix, Aave, and others all relying on Chainlink’s technology, new types of risks are also introduced. If too many platforms rely on the same oracle service, they will all face outages if Chainlink suddenly stops working as intended.
This may seem unlikely. After all, Chainlink is a decentralized oracle service that supposedly has no single point of failure. Even so, in September 2020, Chainlink nodes suffered a “spam attack” where an attacker drained potentially up to 700 ETH from node operator wallets. The attack was quickly solved, but it’s a reminder that not all systems are completely resilient to malicious activity.
LINK has a maximum supply of 1 billion tokens. 35% of those were sold during the ICO in 2017. About 300 million are in the hands of the company that founded the project.
In contrast to many other cryptoassets, LINK has no mining or staking process that increases its circulating supply.
LINK has no native blockchain of its own. It exists as a token on the Ethereum blockchain. LINK tokens follow 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’ve mentioned, Chainlink node operators can stake LINK as a way to offer a bid to the intended buyer of the data. The node operator that "wins" the bid must provide the information to the smart contract making the request. All payouts for node operators happen in the form of LINK tokens.
This approach incentivizes node operators to keep accumulating. Why? Owning more tokens means access to bigger and bigger data contracts. If a node operator decides to break the rules, they’ll have their LINK tokens removed as a result.
It’s not uncommon for crypto projects to give a nickname to their community members. Chainlink was 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 create a lot of engagement and social media attention for the project, which can then reflect in other metrics.
Chainlink’s technology has proven to be one of the most important pillars of the DeFi and broader crypto ecosystem. While that does introduce risks onto Ethereum DeFi, trusted external data sources are one of the most important building blocks for a healthy on-chain ecosystem of products.
Do you have more questions about the Chainlink network and LINK? Check out our Q&A platform, Ask Academy, where the Binance community will answer your questions.