What is Chainlink? (LINK)
The Beginner’s Guide
Chainlink is a cryptocurrency aiming to incentivize a global network of computers to provide reliable, real-world data to smart contracts running on top of blockchains.
If you’re unfamiliar, smart contracts are agreements programmed to execute if and when certain conditions are met. To date, smart contracts have been used for everything from creating novel crypto-financial products to developing new crypto assets.
However, an issue that has persisted is that most smart contracts need to rely on some kind of external data source to properly execute their terms.
For example, smart contracts seeking to replicate bonds or insurance agreements may need access to APIs reporting on market prices or Internet of Things data.
Chainlink was created to address this issue by incentivizing data providers (called “oracles”) to act as a bridge between blockchain smart contracts and external data sources.
Every oracle within the Chainlink network is incentivized to provide accurate data since a reputation score is assigned to each. Further, when nodes follow the software’s rules and provide useful data, they are rewarded in Chainlink’s cryptocurrency, LINK.
Arriving amid a crowded field of projects in 2017, the Chainlink team has so far been able to deliver on its vision, expanding efforts beyond Ethereum (ETH) amid a surge in market activity.
As of 2020, Chainlink is seeking to support all blockchain-based smart contract networks.
Users seeking to stay connected on the current development status of Chainlink can follow its official project tracker for up-to-date details.
Who created Chainlink?
The Chainlink network was launched in June 2017 by the for-profit company SmartContract, and the first version was launched the same month.
Company co-founders, Steve Ellis and Sergey Nazarov, later published Chainlink’s white paper in September 2017 with Ari Juels, an advisor to the company.
The Chainlink team next held an initial coin offering (ICO), raising the equivalent of $32 million by selling 35% of the 1 billion unit supply of its LINK cryptocurrency.
As for the remainder of the tokens, 30% were distributed to SmartContract to be used for the development of the Chainlink blockchain and 35% went to incentivize node operators.
How does Chainlink work?
To facilitate communication between its users and external data sources, Chainlink divides its execution process into three distinct steps.
- Oracle Selection – First, Chainlink users draft a service-level agreement (SLA) that specifies a set of desired data requirements. The software then uses the SLA to match the user with oracles that can provide the data. Once the parameters are set, the user submits the SLA and deposits their LINK cryptocurrency in an Order-Matching contract, which accepts bids from oracles.
- Data Reporting – This is where the oracles connect with external sources and obtain the real-world data requested in the SLA. The data is then processed by the oracles and sent back to contracts running on the Chainlink blockchain.
- Result Aggregation – The last step involves tallying the results of the data oracles collect and returning it to an Aggregation contract. The Aggregation contract takes the responses, assesses the validity of each and returns a weighted score, using the sum of all the data received, to the user.
The Chainlink blockchain is powered by three types of smart contracts.
- Aggregating Contracts – Collect data from oracles and match the most accurate results with the smart contract that needs them.
- Order-Matching Contract – Matches a smart contract’s service level agreement (SLA) with the best bidding oracles.
- Reputation Contract – Verifies an oracle’s integrity by checking its track record. This includes factors such as the total number of completed requests, average response time and amount of LINK cryptocurrency the oracle has staked.
However, Chainlink also interacts with oracles that do not operate on its blockchain, and that are independently responsible for collecting the real world data requested by the contracts.
The nodes are made up of two components:
- Chainlink Core – Chainlink Core is responsible for reading newly filed SLAs and routing assignments to the Chainlink Adapter.
- Chainlink Adapter – Acts as the bridge between the node and the external data. The adapter can read and process the data and write it to the blockchain.
Why does LINK have value?
The LINK cryptocurrency derives its value from its ability to ensure the successful execution of smart contracts that depend on the Chainlink network.
Most notably, LINK is built into the network itself and is the only currency that can be used for key network operations. For example, LINK is used to pay node operators that retrieve data.
In this way, it also plays a necessary role in moderating interactions between Chainlink users.
LINK is used as a deposit required by the smart contract creators and paid by the oracles. This fee is refunded if their services are not accepted or as soon as they complete the task. The smart contract creators keep the fee if an oracle fails to complete their end of the contract.
Lastly, the amount of LINK an oracle holds is one of the factors determining its reputation.
Like many other cryptocurrencies, the supply of LINK tokens is also limited, meaning that according to the software’s rules there will only ever be 1 billion LINK.
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Why use LINK?
Chainlink may be of interest to developers seeking to create blockchain-based financial products that need to access and vet external data sources.
Further, investors may want to add LINK to their portfolio should they believe the number of users for blockchain-based smart contracts will increase in the future.
Should Chainlink prove to solve key problems for smart contract users, it could become an essential tool in merging blockchain technology with real-world applications.
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