Data is the oil of the digital era, its applications powering much of the digital world, including crypto. The blockchain ecosystem is a network of participants with common business objectives and processes. In the initial stages of the evolution of the blockchain ecosystem, decentralized projects could not connect with the external systems that fed vital data required by smart contracts to execute transactions. The disconnect hampered the growth of blockchain protocols, with the crypto and traditional markets functioning like two separate entities.
At this stage of the blockchain ecosystem’s growth, blockchain oracles came to the rescue by enabling smooth data flow between the two worlds. In other words, they act as a bridge between on-chain and off-chain networks to facilitate the free flow of information. Essentially, oracle networks collect and collate data from various sources and supply it to Defi projects. Chainlink, the biggest of them, procures data from sources as varied as the news agency Associated Press.
In this blog, we will be discussing Chainlink in detail and why it is important in the world of crypto.
What is Chainlink (LINK)?
Chainlink is a decentralized blockchain-based oracle network that enables universally connected smart contracts. The problem with existing smart contracts of different blockchain protocols is that they cannot import data from external data sources or off-chain data and convert it into an on-chain format compatible with smart contracts.
For example, PAXG is a gold-backed stablecoin, which tracks the prices of gold in real-time. But as gold is a traditional asset class, PAXG needs price data to be imported through blockchain oracle, which converts the real-world price data feed to a smart contracts-compatible format.
How exactly does Chainlink do?
Trusting single and centralized oracles can create a huge problem for any blockchain network, raising the risk of failure and compromised systems. And this is where Chainlink makes a difference.
Chainlink is a decentralized network of nodes that collects and confirms data from external/off-chain blockchain sources and makes it compatible with smart contracts. For example, if 10 nodes collect the same information and the protocol records data mismatch in two nodes, it becomes easier to spot the faulty node and discard the information. Chainlink has incorporated this security feature of blockchain technology into its oracle network.
Nodes providing correct information get LINK tokens as a reward, while faulty nodes must forfeit the staked LINK tokens. This feature helps Chainlink to keep the network trustless and decentralized.
LINK and its tokenomics
LINK, the native utility token of Chainlink, is an ERC-677 token that drives the whole Chainlink network. ERC-677 is an extension of ERC-20 tokens that integrated transfer and call functions.
The requesting smart contract holder (the smart contract that requests information from the oracle network) pays the Chainlink node operators in LINK tokens for their services based on the data requested.
The node operators stake the requisite LINK tokens in the Chainlink network to become a part of the network and showcase their commitment to building a truly decentralized oracle network.
LINK has a total fixed supply of 1 billion tokens, of which close to 49% are in circulation. Chainlink came out with its initial coin offering (ICO) in September 2017. The firm offered 350 million tokens or about 35%. The node operator gets 35% of the total token supply, while the Chainlink team holds the remaining 30% to fund future development.
Features of Chainlink crypto
The primary task of Chainlink oracles is to communicate with smart contracts and supply them with the off-chain data requested. Thus, one can direct any off-chain payment network or banking network through smart contracts. Some of the features of Chainlink oracles are:
Reputation assessment: Chainlink deploys an oracle reputation service called a service level agreement that equips smart contracts with a specific range of parameters. Oracles that fail to provide off-chain data within the set parameters or violate the rules of the network are penalized.
Working with external data: When out-of-line nodes/ oracles are selected, they make a programmatic agreement and provide the requested data.
Aggregation: Chainlink allows smart contracts to aggregate the data collected by off-chain oracles and then average it down to create a weighted average response.
Is Chainlink the most important crypto?
Chainlink allows compatibility between different blockchain networks and external centralized systems like banks and payment networks. Through Chainlink oracles, users can get data feeds on price and smart contracts data from other blockchain protocols. Chainlink also secures off-chain data and makes it compatible with smart contracts.
The decentralized structure of nodes on the Chainlink network helps to enhance the security and accuracy of information.
Chainlink has a large user base, and DeFi applications such as Synthetix Network, Loopring, AAVE, Compound, Swipe, and Linkpool use its oracle services.
How is Chainlink different from other crypto projects?
Chainlink project is not a competitor to other crypto projects or smart contract platforms but has a key role to play in accelerating the mass adoption of the DeFi ecosystem. It also helps harness synergies of both centralized and decentralized finance.
The crypto project is a crucial bridge between decentralized and off-blockchain data sources. Chainlink solves blockchain oracle problems. One of the key shortcomings of blockchain is that it cannot pull or push data out to any external system as built-in functionality. The isolation of the blockchain system makes it highly secure and reliable but limits its growth.
Outside the world of smart contracts, there is a larger non-blockchain digital ecosystem comprised of all internet-connected devices. Both worlds need to interact with each other and let smart contracts realize their full potential use cases. For example, trade finance smart contracts require market information for settlement, while many smart contracts want to settle transactions in fiat currency.
Specifically, Chainlink does not solve any problem related to the centralized financial world. In fact, it enables blockchain technology to gather data from the non-blockchain world seamlessly, a capability it lacks.
What makes Chainlink valuable?
Chainlink was launched about the end of 2017 after a successful ICO round, with the LINK token priced at $0.11. It reached an all-time high of $52.88 in May 2021 and is currently worth around $5.50.
Chainlink has survived multiple market turmoils, displayed resilience, and established its credentials in expanding the DeFi ecosystem. In short, Chainlink is a battle-tested project.
Chainlink is currently ranked #21 by market capitalization and has a distinct competitive edge. Its nearest competitor, iExec RLC, ranks #169, while Band Protocol ranks #318 by market capitalization. It is one of the most decentralized oracle networks, and roughly around 5% of the circulating supply of LINK tokens is staked.
Is Chainlink Network secured?
The function of a blockchain oracle is to extract, format, validate, compute, and broadcast the data feed. And, Chainlink does it efficiently and securely. Chainlink’s reputation as a secure network rests on the following features:
- It is an open-source network where the project’s source code can be checked and verified independently and contribute to its enhancement.
- Enables nodes to store API keys and allow secure account logins.
- The decentralized network of nodes eliminates instances of a single point of failure, assuring users that data will be accurate and delivered as promised.
- Nodes must sign off the data they provide to smart contracts so that users can know which node sent the data and ascertain their overall performance.
- Service agreements bind all nodes on the Chainlink Network.
- The reputation system for nodes on Chainlink Network enables users to choose nodes based on metrics like completed jobs, clients served, average reaction time, etc.
Chainlink serves as the crucial bridge between the traditional world and the technology of the future. As the lines blur between conventional and decentralized finance (DeFi), blockchain oracles will gain more prominence and speed up the adoption of blockchain technology and crypto.
What is Chainlink used for?
Chainlink is a decentralized oracle network that connects smart contracts to real-world data, enabling them to access external information like prices, events, and more, making smart contracts more versatile and powerful.
Is Chainlink a good investment?
Investment decisions depend on various factors like risk tolerance, market conditions, and personal research. Consult a financial advisor for guidance.
Is Chainlink a coin or token?
Chainlink (LINK) is a cryptocurrency that operates on its own blockchain network. Therefore, it is considered a coin rather than a token, as tokens are usually built on existing blockchain platforms like Ethereum.
Why is Chainlink so valuable?
Chainlink’s value is driven by its role in the blockchain ecosystem as a crucial decentralized oracle network. It ensures reliable data inputs for smart contracts, enhancing their use cases and adoption, which attracts demand and contributes to its value. Additionally, Chainlink’s active development, partnerships, and community support also influence its valuation.