Chainlink: linking blockchain data with the real world

As the name of this cryptocurrency project might suggest, Chainlink is a network of oracles linking internal blockchain data with external data. This might sound like a no-brainer thing to do, but actually, blockchain smart contracts are known for the challenges of bringing together the off-chain data and on-chain data. And this is precisely where Chainlink steps into the game to merge the external data to Ethereum-based smart contracts. Furthermore, this link is crucial for the applicability of blockchain in “real world” use cases. After all, what is a refined blockchain’s value without real-world adaptability?

Chainlink was born in 2017 and created by Sergey Nazarov and Steve Ellis to operate as a bridge between blockchain and off-blockchain data. After publishing its white paper, the world of crypto was introduced with the Chainlink network in 2019. The second white paper of Chainlink, Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle Networks, was published in 2021.

Chainlink’s blockchain linking software is based on its decentralized oracle service. In essence, each oracle is based on software that translates external (off-chain) data to a language compatible with (on-chain) smart contracts and the other way around. This enables the blockchain to function in conjunction with different kinds of off-chain data solutions such as APIs (Application Programming Interface) or other types of external data feeds.

However, blockchain oracles are no invention of Chainlink. This might raise the question; why is Chainlink’s blockchain oracle network superior to the rest? While a centralized oracle is based on a single provider of off-blockchain information in a smart contract, this possesses a risk of false data being executed by all systems relying on this single source. This problem, known as the ‘oracle problem,’ was the ignition for Chainlink, a network that aims to solve the reliability issue recognized among blockchain oracles. This is done by data validation; Chainlink can verify the data from multiple sources thanks to its internal reputation system. This way, Chainlink’s blockchain oracles increase the result accuracy and protection of smart contracts from attacks targeted to them.

Chainlink comes with a token attached known by the name LINK. LINK does not have its native blockchain as the token exists on the Ethereum blockchain. This ERC-20 token is designed to pay for the oracle service of the network. The node operators set the pricing for this, who can also stake on the network. Chainlink’s crypto-economic model has many crucial similarities with Bitcoin as Chainlink node operators are in a similar way incentivized to act reliably in the network. If a node operator were to break the rules, their tokens would be removed.

The maximum supply of the token is capped at 1 billion LINK tokens. Approximately 300 million of it belongs to the founders of the project. The circulating supply of LINK isn’t affected by mining or staking.

By providing a helpful oracle service, Chainlink has exciting prospects in different kinds of projects combining blockchain with “real world” solutions. For example, the rapidly growing Defi (Decentralized Finance) sector has been recognized as an interesting area for oracle services. Defi requires smart contracts to be executed properly, with external data forming an essential part of the process.

Chainlink does stand out in a relatively positive way within the oracle service market for Defi and other solutions. The project offers higher security crucial to any blockchain project linking in- and off-blockchain data. However, the constantly developing oracle service sector is by no means ready as it still possesses risks that have to be solved with or without Chainlink.

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