What Is Chainlink (LINK) and How Does It Work?

The purpose of this article is to give you a simple but thorough overview of what Chainlink (LINK) is and how it works.

When Ethereum launched in 2015, it introduced a new innovation called “smart contracts.” Smart contracts are an important concept in blockchain technology used to create different “apps” or services on the blockchain. For these to function, they must have access to various types of external information (data). And thats the problem Chainlink was creates to solve.

What Is Chainlink?

Chainlink is a leading cryptocurrency and a decentralized oracle network. Chainlink’s token, LINK, is currently among the 25 largest cryptocurrencies by market capitalization.

Chainlink was founded with the vision of solving a central problem for smart contracts — trust in external data. Chainlink acts as a bridge between the blockchain world and the real world by linking smart contracts (for example on Ethereum) with reliable, verified data sources outside the blockchain. This enables a wide range of exciting blockchain and crypto applications and has supported the development of decentralized applications (dApps).

Firi Explains: What Are Smart Contracts, Really?

Smart contracts are “digital agreements” that execute themselves when certain predefined conditions are met. They are programs, or code, stored on a blockchain platform such as Ethereum, and they operate automatically without involvement from a third party.

Consider a traditional contract between two parties, for example an agreement to purchase a property. Traditionally, the parties would involve a lawyer or another intermediary to ensure that both sides fulfill their obligations. With a smart contract, however, the same agreement can be automated by programming it directly into code on a blockchain platform.

When the predefined conditions are met, the smart contract is executed automatically. For example, if the purchase price is paid and legal documents are verified, the smart contract can automatically transfer ownership of the property to the buyer.

Smart contracts can be used for much more than buying and selling real estate. They can be applied to insurance agreements, financial transactions, voting systems, and supply chain management. They enable automation of processes and eliminate the need for traditional intermediaries, while ensuring that agreements are executed in a reliable, transparent, and secure manner. This has the potential to revolutionize various industries by streamlining processes and reducing costs.

However, smart contracts are limited to operating within the blockchain’s closed environment and usually do not have direct access to external data sources or systems. For smart contracts to function properly, they need access to information that exists outside the blockchain. This requires a way to bring in that information and verify that it is trustworthy — and this is where the concept of Chainlink’s “oracles” comes into play.

How Chainlink Works

Chainlink is a decentralized oracle network that acts as an intermediary between blockchain platforms and the real world. The oracles in the network are nodes that retrieve external data from various sources.

Chainlink uses a combination of cryptographic protocols and security mechanisms to verify and validate the information that the oracles deliver to smart contracts. By having multiple independent oracles — hence an “oracle network” — verify the same data, Chainlink reduces the risk of errors or manipulation.

Image from Chainlinks website: https://blog.chain.link/what-is-chainlink/

Chainlink also uses cryptographic protocols and security mechanisms to verify the integrity of the data, so that smart contracts can trust the information they receive. By combining data aggregation with a robust verification process, Chainlink ensures that smart contracts can make informed decisions. This approach eliminates the need to rely on a single data source and reduces the risk of manipulated or incorrect data.

What Is the LINK Cryptocurrency and What Is It Used For?

LINK is the cryptocurrency of the Chainlink platform. It plays a central role in the governance of Chainlink’s oracle network and the ecosystem as a whole. Below are some important aspects of LINK and its role in managing Chainlink’s oracle network:

1. Use in the Oracle Network

LINK is used as a means of payment within Chainlink’s oracle network. Oracle solutions that deliver external data to smart contracts are compensated in LINK tokens as a reward for their services. This creates incentives for participation and helps maintain a reliable and decentralized oracle network.

2. Node Operators and Data Providers

Node operators who run oracle nodes and contribute to data delivery within the Chainlink network may be required to provide LINK tokens as collateral.

3. Governance Functions

LINK tokens also grant holders the right to participate in governance decisions related to the Chainlink platform. LINK holders can vote and submit proposals that influence protocol development, upgrades, pricing, and other important decisions.

4. Decentralized Finance (DeFi)

LINK tokens are also used in DeFi applications that offer services such as lending, borrowing, and yield farming. LINK can function as underlying value and collateral for DeFi protocols that rely on Chainlink data and oracle solutions.

5. Broad Adoption

LINK has achieved significant adoption and is actively traded on several cryptocurrency exchanges. This gives users and investors flexibility to buy, sell, and trade LINK according to their needs.

6. LINK Staking

By staking LINK, participants can earn rewards in the form of additional LINK tokens. Rewards are distributed based on factors such as participation level, quality of service, and contribution to the network. Staking LINK involves locking a certain amount of LINK tokens in a smart contract to participate in the network, which helps ensure economic security and accountability.

If a participant behaves unethically or provides incorrect data, they may lose part or all of their staked LINK. As a result, cheating or sabotage is not economically beneficial.

Chainlink has implemented a system of staking and economic incentives where the LINK token plays a crucial role. Oracles that deliver accurate and reliable data are rewarded with LINK tokens, while also being required to put up collateral to ensure they follow proper protocols and guidelines.

Chainlink uses a decentralized architecture in which oracles are independent and distributed across multiple nodes. Consensus among multiple oracles is required to validate information. Data transmitted between oracles and smart contracts is encrypted, and Chainlink implements security mechanisms such as signing and verification to ensure data has not been altered in transit.

Chainlink also uses a reputation-based evaluation system for oracles in the network. Each oracle node is ranked based on its reliability and accuracy in previous data deliveries.

Whats the price of LINK?

You can find the LINK price here.

Who Created Chainlink, and What Is the History of LINK?

The history of Chainlink began in 2014, when Sergey Nazarov and Steve Ellis founded “SmartContract,” now known as Chainlink. Both founders had previously worked on other, lesser-known crypto projects and specialized in smart contract concepts.

Chainlink began as a project on the Ethereum platform and was officially launched in 2017 through an initial coin offering (ICO), during which LINK tokens were sold. The goal of Chainlink was to build an oracle solution capable of delivering external data to smart contracts in a secure, reliable, and decentralized manner.

Following its launch, Chainlink quickly gained attention and grew in popularity. The platform was recognized for its innovative concept, and the price of LINK rose significantly throughout 2019 and 2020. This popularity was further fueled by enthusiastic LINK investors who humorously referred to themselves as the “Link Marines.” They actively discussed the project on social media and created memes, helping to spread awareness. Chainlink founder Sergey Nazarov quickly became one of the most recognizable figures among crypto founders and was frequently portrayed in memes wearing his signature plaid shirt.

Chainlink is an important example of how so-called “meme marketing” can significantly increase awareness and interest in a cryptocurrency. The marketing strategy relied on three distinct approaches: developing a strong and easily understood narrative with clear archetypes, building a highly engaged and loyal community of supporters, and using “guerrilla marketing” tactics such as distributing memes and sparking discussions on crypto forums and platforms like Twitter, Reddit, and 4chan.

The type of meme marketing that Chainlink became known for has since been adopted by many other projects.

During this period, Chainlink climbed into the top 10 list of the largest cryptocurrencies by market capitalization, although price momentum has slowed somewhat in recent years. However, many LINK supporters and crypto traders believe there is strong potential for a “comeback” in the LINK price.

Chainlink has expanded its ecosystem by establishing partnerships with a wide range of blockchain projects, companies, and data providers. These partnerships have helped broaden its use cases and increase adoption of Chainlink’s technology.

Today, Chainlink is used across a wide range of applications, particularly within decentralized finance (DeFi), insurance, supply chains, and gaming and NFT markets. The platform continues to evolve and innovate to meet the needs of the growing crypto community.

Chainlink’s history is characterized by continuous development, strategic partnerships, and technological progress. The project is widely recognized as one of the pioneers in oracle solutions and plays a key role in the ongoing development of decentralized finance and smart contract–based applications.

Chainlink Has Entered into a Close Collaboration with SWIFT

SWIFT is used by the international banking system to transfer money between banks in different countries. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Chainlink are collaborating with more than 12 major banks — including Citibank, BNP Paribas, and others — to test the use of existing SWIFT infrastructure for transferring tokenized assets across public and private blockchain networks.

What Is the Cross-Chain Interoperability Protocol (CCIP)?

“Build secure applications quickly, across multiple blockchains.” This is how Chainlink describes its open standard for developers, which enables the creation of secure services and applications that can send messages, transfer tokens, and trigger actions across multiple networks.

The Cross-Chain Interoperability Protocol (CCIP) makes it possible for smart contracts to work together across all public and private blockchain networks.

Why Is “Cross-Chain” Important?

The crypto ecosystem is growing rapidly, and there are already numerous blockchains, each with their own cryptocurrencies, solutions, and decentralized applications built on top of them. However, there are two major challenges that must be solved for this ecosystem to achieve mass adoption: services must be able to scale to support a growing number of users, and just as importantly, they must be able to communicate with one another across different blockchains.

Ethereum is the most well-known and widely used ecosystem, and it already hosts a wide range of services such as games, NFT marketplaces, decentralized exchanges, lending platforms, insurance services, and more. Several other blockchains — including Cardano, Solana, Avalanche, and BNB Chain — offer their own versions of similar services. However, these services are largely confined to operating within their own blockchains and have limited ability to interact with services on other chains.

If crypto and blockchain-based services are to become practical and user-friendly — and thereby drive broader adoption of this new technology — solutions must be built that can operate seamlessly across multiple blockchains. From an end-user perspective, it should be possible to interact with services regardless of which blockchain they are built on.

What Are the Use Cases for CCIP?

There are already important use cases where CCIP makes it easier to access decentralized finance (DeFi) services across different blockchains. For example, a user may rely on various DeFi services on Ethereum to borrow funds or earn interest, while at the same time finding it cumbersome to interact with services built on Cardano’s blockchain. In practice, this often prevents users from easily taking advantage of DeFi opportunities across multiple ecosystems.

With cross-chain capabilities, users can interact more seamlessly with services across different blockchains. This opens up far more opportunities for both users and developers of DeFi products, enabling greater flexibility, efficiency, and innovation across the decentralized finance landscape.

What Are the Use Cases for Chainlink?

Chainlink has several real-world use cases. Examples include DeFi price feed aggregation, insurance claims processing, supply chain management for traceability, and real-time data for gaming and NFT markets.

These use cases demonstrate how Chainlink connects blockchain technology with external data sources to create more dynamic and reliable decentralized solutions.

Why Is Chainlink a Popular Solution for Smart Contract Developers?

Developers benefit from easy integration, a wide range of data sources, and a high level of security. Businesses gain increased trust and transparency, process automation, and expanded use cases. For the broader crypto ecosystem, Chainlink enables ecosystem growth, greater interoperability, and the establishment of a market standard for oracle solutions.

Below are some key aspects that make developers choose to use Chainlink:

Integration with blockchain projects:
Chainlink works closely with a variety of blockchain platforms, including Ethereum, Polkadot, Binance Smart Chain, and several others.

Oracle Services Partners (OSP):
Chainlink operates a program through which it collaborates with and provides support to oracle solution providers and technology companies that wish to use Chainlink’s technology.

Data providers and API partnerships:
Chainlink has established partnerships with a range of data providers and API services, including companies specializing in financial data, weather data, sports results, and more.

User support and community engagement:
Chainlink has an active and highly engaged user base and fan community, often referred to as the “LINK Marines.”

Hvilke potensielle utfordringer og begrensninger har Chainlink?

While Chainlink has achieved significant success, it is also important to be aware of potential challenges and limitations the project may face:

Centralization of Oracle Node Operators
Although Chainlink is designed to be decentralized, it is possible that a limited group of oracle node operators controls a significant portion of the network. This could potentially lead to centralization and challenge the platform’s security and reliability. However, the Chainlink team actively works to encourage broad participation and diversification of oracle node operators.
Dependence on External Data Sources
Chainlink relies on external data sources to deliver accurate and reliable information to smart contracts. If these data sources are inaccurate or subject to manipulation, it could affect the integrity of Chainlink’s oracle solutions. Implementing mechanisms to verify data sources is therefore crucial to addressing this challenge.
Competition and Market Position
Chainlink operates in an increasingly competitive market where other oracle solutions are emerging. Competition may affect Chainlink’s market position and its ability to maintain its current standing.
Regulatory Compliance
As with any crypto project, Chainlink may face challenges related to regulation and legal frameworks. Regulations surrounding cryptocurrencies and blockchain technology vary by country, and changes in regulatory environments could impact Chainlink’s operations and use cases.

Åsmund Holtan

Written 15/06/2023

Should not be considered financial advice. Crypto may involve high risk.