What is Chainlink?
Chainlink, also known by its ticker LINK, is a decentralised oracle solution looking to bring accurate real-world data onto isolated blockchains.
Blockchains use math, or cryptography, to guarantee security, trust, and decentralisation. The problem is each blockchain is isolated all by itself, with no communication to the outside world to maintain that security.
Theoretically, retrieving information from the outside world creates a possible vulnerability in trusting a source outside the math-backed blockchain to provide accurate information.
Yet, this is where ChainLink comes in.
Chainlink is a crypto oracle founded by Sergey Nazarov and Steve Ellis back in 2017 and would first launch onto the Ethereum mainnet in 2019.
In short, an oracle is a mediator between the isolated blockchain network and data from the real world, which is needed to run complicated smart contracts.
Initially, Chainlink was founded as a startup called SmartContract, established in 2014. The company aimed to harness smart contract technology to make contractual agreements that anyone can use, regardless of their skill level or expertise.
The 2 fundamental problems Chainlink aims to solve
Fundamentally, LINK aims to solve two fundamental problems. First, blockchains cannot access external off-chain data by default. Therefore Chainlink aims to work as a bridge between the two.
And secondly, as an alternative to the use of centralised data feeds, which weaken the decentralised nature of smart contract technologies, as it creates a single point of failure that can be more easily exploited.
Chainlink figured out how to source information and relay that to the blockchains in a secure, trusted, and decentralised manner.
To achieve this, Chainlink created a network of nodes that all independently provide information for Chainlink to send to the blockchains requesting the data.
The information Chainlink provides can be anything from the results of a sports match through the current, active price of Bitcoin.
Whatever the client needs, Chainlink is there to find a way to get that information through multiple trusted parties to be transmitted to the blockchain where the information requested is required to carry out pending smart contract computations.
A trivial example might be sports betting on DeFi, where the blockchain must know which sports team won to give the correct bettor their reward.
Consequently, the project would need to plug into an off-chain oracle to provide them with that information.
A more significant example could be to confirm the current price of Bitcoin on the Ethereum blockchain, which allows for a complex but reliable and secure way to know the constant, current price of Bitcoin.
That can be important for Wrapped Bitcoin, or WBTC, a Bitcoin stablecoin pegged 1:1 on the Ethereum blockchain. For its information to be accurate, it needs a trusted off-chain source to provide that constant, updated Bitcoin price.
But why does this matter?
Once something is committed to the blockchain, it becomes immutable. Meaning, an input of incorrect data can have lasting consequences, but more specifically, Chainlink can also be utilised as a way to prevent flash loan attacks in DeFi.
These are usually a result of using a single, centralised source of information being exploited.
The nature of Chainlink’s setup dictates that for false information to be propagated, it would need to be provided by multiple different nodes before being accepted as fact by the blockchain.
So does this all work?
Chainlink is a decentralised network consisting of buyers and sellers of data.
When a buyer requests data, sellers bid to provide that data. To ensure accurate results, sellers must commit a stake of LINK tokens when they bid. This way, if they are caught misbehaving, this sum can be confiscated as a punishment.
Chainlink furthers this security by employing a reputation system, which further aggregates and applies weight to any provided data.
This has proven beneficial when allowing new nodes into the network, as it takes time for that node to become trusted to the same level as the nodes which had been previously running the network.
In addition, the problem with a centralised oracle being it may give way to fraudulent data. If, for instance, a user contract relied only on one oracle to provide a report on a financial audit, this oracle could tamper with the data.
Source and Oracle distribution
To solve these security issues, Chainlink utilised source and oracle distribution.
Essentially, this is where a user puts in a request for data with the network, and that request is contracted out to multiple off-chain oracle nodes to source their results.
To highlight this, let’s say that a client submits a contract request for crypto market data. In line with ChainLink’s oracle distribution, this request is then paired up with Oracle A, Oracle B, and Oracle C.
Due to the network’s emphasis on source distribution, Oracle A gathers its data from Coingecko and Binance, Oracle B from Coinbase and Yahoo Finance, and Oracle C from CoinMarketCap and TradingView.
Thanks to this approach, the client no longer receives the data from a more vulnerable centralised source but instead gains a balanced aggregation of the requested information.
To carry out these requests for data, buyers and sellers must utilise the LINK token. Bringing us to our next question: What exactly is the LINK token?
What is the LINK token?
The LINK token is the native cryptocurrency for the Chainlink protocol and is used to pay for all activity, such as requesting or receiving data. Additionally, LINK will also be used for staking in the future once development is completed.
Though the LINK token isn’t where Chainlink makes its value, it’s in the utility it provides.
ChainLink currently provides more than 75 price feeds to over 300 smart contracts and applications.
For example, it is used by MakerDAO as a collateral option when issuing the Dai stablecoin.
In addition to this, BitGo, which issues Wrapped Bitcoin, or WBTC, uses ChainLink for its Proof of Reserves to ensure BitGo’s WBTC is always pegged exactly 1:1 with BTC.
On top of this, Chainlink is integrated directly into the Ethereum blockchain. Given the year Ethereum has had, this can only be seen as a positive for Chainlink to be this closely combined with the largest altcoin.
Furthermore, TrustToken, which issues the stablecoin TUSD, also uses Chainlink for their Proof of Reserves, in addition to layer-two Ethereum scaling solution, Polygon, whose MATIC tokens are integrated natively with ChainLink’s data feeds.
The five products of Chainlink
Presently, Chainlink is mainly valued for its Proof of Reserves functionality. However, their functionality extends beyond this, with the following five products listed on the Chainlink website:
- Market and data feeds: Decentralised and high-quality data feeds for DeFi, sports, weather, and more.
- VRF: Verifiable, tamper-proof random number generation for blockchain gaming, NFTs, and more.
- Keepers: Secure, cost-efficient DevOps automation and off-chain computation for smart contracts.
- Proof of Reserve: Autonomous, reliable, and timely audits of on-chain and off-chain reserves.
- Cross-chain Bridging (CCIP): Global, open-source standard for secure cross-chain applications and bridges.”
This last point, Cross-chain Bridging, could result in a massive demand for the LINK token. With Chainlink promising a seamless integration gateway, through which Chainlink serves as a future-proof mediator that enables isolated blockchains a way to interact with smart contracts on any public or private blockchain network that exists today or in the future.
Chainlink also ensures the secure delivery of data through trusted execution methods while also completing the technical complexities of sending on-chain transactions.
Furthermore, Chainlink claims to offer confidential transactions via its novel privacy-preserving protocol that allows data to be provided to various blockchains and interact with smart contracts while maintaining the confidentiality of sensitive datasets.
In addition, when Chainlink provided the first secure way of implementing random number generation, or RNG, to the Ethereum blockchain, another giant leap in innovation took place – resulting in massive strides forward for crypto gaming.
With crypto gaming touted as the next potential niche to go parabolic, helping to pave the way for that to happen on the most prominent smart contract protocol in existence will likely significantly improve the overall brand recognition for Chainlink.
Chainlink partners with SWIFT
Perhaps most interestingly, Chainlink is also partnered with global transaction giants SWIFT. SmartContract initially developed a proof of concept for SWIFT transactions back in 2016 using Chainlink.
The concept highlighted how Chainlink solutions could automate bond coupon payments. Chainlink proved this hypothesis at a SWIFT conference in 2017.
There, it successfully pulled off-chain interest rate data from five different banks and then automatically generated an ISO20022 SWIFT message to complete the transaction.
Out of all the active Chainlink partnerships, their well-established collaboration and integration with SWIFT has to be the most bullish.
Integrating its crypto token into the international banking system would massively aid in gaining legitimacy, both with traditional financial institutions and the mainstream public.
In addition, with speculation that ISO20022 compliance will be the next buzzword in crypto, any system capable of automating that system looks sure to benefit, providing that speculation comes true.
Conclusion
In conclusion, Chainlink is a solution to a genuine blockchain problem. Consequently, it would seem like the potential upside is still massive.
Of course, nothing is guaranteed in crypto. No matter how promising a project may seem today, the future landscape is near impossible to predict with any absolute accuracy.
That said, with a first-mover advantage and full integration with the largest layer-one blockchain going, Chainlink presently appears well-positioned for the future.
Providing management can navigate any unforeseen turbulence diligently, we expect Chainlink only to become more relevant and more valuable as time progresses.
We hope you have found this article informative, and you are leaving with a better understanding of what Chainlink is and its role within the crypto ecosystem. If you have, perhaps you will enjoy some of the other articles we have published too.
For further information regarding Chainlink go to their official website.
Elbaite is the cryptocurrency exchange designed for Australian traders seeking safety, security and simplicity. Make an account today to start your Chainlink investment journey!
Disclaimer: The information on this website is purely for information. Elbaite is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.
You might also be interested in:
