Summary

Chainlink has become one of the most used projects in the cryptocurrency space. It is a decentralized oracle service that provides 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 wise men who are always looking for the closest thing to the truth. But why do people think they are more trustworthy than others? Let’s learn more about it.

Introduction 

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

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

Chainlink attempts to solve this problem by providing decentralized oracle services. Simply put, an oracle is a piece of software that converts external data into a language that a smart contract can understand (and vice versa). For more related content, please read our article "Detailed Explanation of Blockchain Oracles".

But what is the difference between Chainlink and other blockchain oracles? Let's find out.

What is Chainlink?

Chainlink is a decentralized oracle network based on the blockchain, which allows smart contracts to connect to external data sources. They 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 is a centralized oracle? It is not difficult to guess that it is the single provider of external information to smart contracts. It's just a single source. This can cause big problems. What happens if an oracle provides wrong or incorrect data? All systems that rely on this oracle will malfunction. This is often referred to as the "oracle problem" - which is exactly what Chainlink is trying to solve.

How does Chainlink work?

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 issues a request. The Chainlink protocol can register this event and forward it to Chainlink nodes to "bid" for this request.

The power of this process is how Chainlink validates data from multiple sources. Because it has an internal reputation system, Chainlink can determine which sources are trustworthy with relative accuracy. This can greatly improve the accuracy of results and protect smart contracts from various attacks.

So, how does all this relate to LINK? Smart contracts that request 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 this data.

Node operators will also pledge their interests in the network to ensure long-term investment in the project. Similar to Bitcoin’s cryptoeconomic model, Chainlink node operators are incentivized to behave in a trustworthy rather than malicious manner.

Chainlink and DeFi

As decentralized finance (DeFi) becomes more and more popular , people are also increasingly interested in high-quality oracle services. After all, most projects will use smart contracts in some way and also require external data to function properly.

Centralized oracle services make DeFi platforms vulnerable to various attacks, including flash loan attacks through oracle manipulation. Events like this have happened many times, and they may continue to happen if centralized oracles remain commonly 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 all rely on Chainlink’s technology, new types of risks continue to emerge. If too many platforms rely on the same oracle service, all platforms will face outages if Chainlink suddenly stops working properly.

This seems unlikely. After all, Chainlink is a decentralized oracle service and there should be no single point of failure. Even so, in September 2020, Chainlink nodes suffered a "spam attack" in which attackers may have stolen as much as 700 ETH from the node operator wallet. While the attack was quickly resolved, it serves as a reminder that not all systems are completely immune to malicious activity.

LINK Supply and Issuance

The maximum supply of LINK is 1 billion tokens. 35% of these have been sold during the initial coin offering (ICO) in 2017. Approximately 300 million tokens are controlled by the company that created the project.

Compared to many other crypto-assets, LINK has no mining or staking process to increase its circulating supply.

How to store LINK

LINK does not have its own native blockchain. It exists as a token on the Ethereum blockchain. 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.

What are the uses of LINK?

As mentioned above, Chainlink node operators can stake LINK as a way to bid to prospective buyers of data. The node operator that wins the "auction" must provide information to the requesting smart contract. All payments to node operators are made in LINK tokens.

This approach will incentivize node operators to continuously accumulate tokens. Why? Because having more tokens means access to larger and larger data contracts. If a node operator violates the rules, it will cause their LINK tokens to be emptied.

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Who is LINK Marine?

It is not uncommon for crypto projects to give nicknames to their community members. Chainlink is one of the earliest and most successful examples of this phenomenon, and its community members call it the "LINK Marine".

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

Summary

Chainlink’s technology has proven to be the most important pillar of DeFi and the broader cryptocurrency ecosystem one. While this does create risks for 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? Please visit our Q&A platform Ask Academy, where members of the Binance community will patiently answer your questions.