What is Chainlink (LINK)?

If you have been following banking, investing, or cryptocurrency over the last few years, you may have heard the term “blockchain,” the record-keeping technology behind Bitcoin network and many other cryptocurrencies. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Blockchain has seen a staggering rise in popularity since Bitcoin, the first cryptocurrency, launched in 2010. Blockchain has several advantages, including decentralisation and security. The demand for a decentralised currency has catapulted Bitcoin and other cryptocurrencies to worldwide popularity; however, blockchain has its limitations. These systems are inherently closed off from the rest of the world, which is good for security and integrity but also limits the data they can accept. Hence, the need for a sort of bridge that can help these systems see what is happening in the outside world. But for the system to work, the input cannot come from a single source, since that would then rely on a centralised source of data, which goes against the very nature of blockchain.

This is the very problem Chainlink helps solve.

Chainlink is a decentralised oracle network that is poised to play an important role in the real-world implementation of blockchain technologies. Although blockchain is great at what it does, which is providing a decentralised, secure ledger for digital transactions, it isn’t so great at taking input for things happening outside the blockchain. Many “off-chain” forces influence markets, including fiat currencies, credit cards, and even the weather and sports scores. As a decentralised oracle, Chainlink can provide input to what’s known as smart contracts. Chainlink functions as a network of nodes that provide data and information from off-blockchain sources to on-blockchain smart contracts via oracles.

Chainlink also provides real-world data to smart contracts on the blockchain. Smart contracts are pre-specified agreements on the blockchain that evaluate information and automatically execute when certain conditions are met. LINK tokens are the digital asset token used to pay for services on the network. The purpose of this network is to provide input on a variety of external sources of data.

Chainlink was launched on the Ethereum blockchain in 2019, but it is meant to be blockchain agnostic, which means it can also work on other blockchains. To understand the benefits of Chainlink and how it functions, you need to understand some fundamental, interconnected concepts. We will look at smart contracts here.

Smart contracts

Smart contracts are pre-specified agreements on the blockchain that evaluate information and automatically execute when certain conditions are met. These smart contracts help the system respond to a wide range of input. The first cryptocurrency, Bitcoin, and its corresponding blockchain can only process a small range of this input. But newer blockchains, such as Ethereum, have a wider range, which includes support for programmable smart contracts.

Crowdfunding is a good example: if a certain amount of ether is deposited into a smart contract by a certain date, then payment will be released to the fundraiser - if it is not, then payment will be returned to the donors. Because smart contracts exist on a blockchain, they are immutable (can’t be changed) and verifiable (everyone can see them), guaranteeing a high level of trust among parties that they accurately reflect the stated parameters of the agreement and will execute if, and only if, those parameters are met.

For smart contracts to craft agreements beyond those that pertain to data found on the blockchain, they require off-chain data in an on-chain format. The difficulty in connecting outside information sources to blockchain smart contracts in a language that they both understand is one of the main limitations in how widely smart contracts can be used.

This is where oracles come into play. An oracle is a type of software known as ‘middleware’ that acts as an intermediary (middle man),  translating data from the real world to smart contracts on the blockchain and back again.

LINK is Chainlink’s native token. The token is meant to help finance the growth of the project and is similar to Bitcoin (BTC) and Ethereum (ETH). Both of these cryptocurrencies work on their respective blockchains. Just like BTC and ETH act as an incentive for users to mine, LINK does the same. Requesting contract holders use LINK to pay Chainlink node operators for their work. Prices are set by the Chainlink node operator based on demand for the data they can provide and the current market for that data.

Chainlink node operators also use LINK to stake in the network — node operators must deposit LINK with Chainlink to demonstrate their commitment to the network and incentivise good service. LINK is built on Ethereum under the ERC-20 standard for tokens. It can be bought and sold for fiat currency or other digital currencies.

Chainlink has created a way to reliably, and efficiently, provide accurate data to smart contracts on smart-contract-enabled blockchains. Chainlink looks to be an important technology as cryptocurrencies continue to evolve. Having an oracle such as Chainlink in place will be key to the long-term stability and viability of cryptocurrency in general. Thus, LINK may be a sound investment if you believe Chainlink will become the industry standard as the most widely-used, decentralised oracle network.