Understanding Chainlink: A Beginner’s Guide

Chainlink (LINK) is a decentralized protocol that allows non-blockchain entities to securely connect with multiple blockchain platforms. It’s middleware that links blockchain-based smart contracts with extrinsic data to provide dependable, real-world data.

Smart contracts are an important aspect of decentralized networks, as they simplify transactions without the need for an intermediary. They also reduce the costs and formalities linked with traditional methods while maintaining authenticity, credibility, and security.

Chainlink also has its own native cryptocurrency, known as LINK. LINK is used to incentivize Chainlink’s network of operators and collateralize the blockchain’s smart contract agreements. Remember, you can securely buy, store, and swap your LINK tokens in Trust Wallet. Trust Wallet is a simple-to-use, self-custody crypto wallet and gateway to Web3 for people who want to fully leverage the power of their digital assets while retaining complete control over their assets.

In this beginner’s guide, we’ll discuss what Chainlink is, the solution it provides, how it works, its real-world applications, and the team behind it. Read on for more.

What is Chainlink?

Chainlink is a decentralized blockchain oracle network launched in June 2017 by SmartContract and runs on the Ethereum blockchain.

An oracle refers to an external data provider that links a blockchain to an external network. These oracles are responsible for ensuring that the smart contracts on Chainlink receive and execute correct data from external sources. These sources include but are not limited to different external data feeds or APIs.

Although orthodox oracles tend to be centralized, Chainlink uses hybrid smart contracts to decentralize the process of moving data both on and off the different blockchains. Chainlink then uses its LINK tokens to reward its network operators for fetching data from the off-chain feeds, formatting the same data into comprehensible formats, and carrying out off-chain computations.

Chainlink’s decentralized oracle nexus is essentially a network of nodes that comply with set contracts. Node operators are essentially required to lock a certain number of their LINK tokens - a process called staking. In addition, they set their own fees depending on the off-chain resources they offer.

To simpler terms, Chainlink takes the power of smart contracts to a higher level by providing access to real-world events, data, and payments without compromising the reliability and security of a blockchain.

The Problem Chainlink Solves

Smart contracts are agreements programmed to self-execute when certain conditions are met. While smart contracts have been utilized for almost everything, one major issue that has continued to linger on is that they depend on external data sources to accurately carry out their terms.

For instance, if a smart contract wants to recreate an insurance agreement, it may require access to Internet of Things (IoT) data or an application programming interface (API) that reports on market prices. Enter Chainlink.

Chainlink solves this issue by rewarding oracles (aka data providers) who act as a liaison between external data sources and blockchain smart contracts. Each oracle in the Chainlink system is assigned a reputation score in order to offer accurate data, for which they get incentivized using LINK.

Although Chainlink runs on Ethereum, it can work across any blockchain as long as it has smart contract functionality. Its interoperable design allows it to run simultaneously on multiple blockchains.

How Does Chainlink Work?

Now that we know what Chainlink is and the problem it aims to solve, let’s discuss how Chainlink works. The process starts on the blockchain. When a smart contract requests data, a request for information, known as a requesting contract, is sent out by the specific smart contract. The Chainlink protocol records the request as an ‘event’ and creates a matching smart contract known as a service-level agreement contract on the blockchain to get the off-chain data.

Chainlink then follows a three-step process to allow communication between external data sources and blockchain-based smart contracts - oracle selection, data reporting, and result aggregation. Let’s take a look at each of the three steps below.

Oracle Selection

In this step, a Chainlink user will start by drafting a service level agreement (SLA) that clearly specifies the desired data set. Chainlink’s software will then use the drafted SLA to match the person with oracles that can offer the required data. Once the criterion is set, the user will submit the SLA and deposit LINK tokens in an Order-Matching contract that will be used to accept bids from oracles.

Data Reporting

In this step, the oracles now connect to external sources to get the real-world data requested in the service level agreement. The oracles then process the data and send it back to the contracts operating on the Chainlink blockchain.

Result Aggregation

The last step of the three-step process is result aggregation. The results of the data obtained by the oracles are tallied and returned to a contract. The Aggregation contract then takes all the responses, evaluates the validity, and, using the sum of all the responses, returns a weighted score to the user who created the SLA.

The Chainlink blockchain depends on three kinds of smart contracts to make the above happen:

• Aggregating contracts gather data from oracles and pair the most accurate data findings with the smart contract that needs them.

• Order-matching contracts pair a smart contract’s SLA with the oracle offering the best bid.

• Reputation contracts confirm the integrity of an oracle by checking their track record. It considers factors like the average response time, the total number of requests completed, and the amount of LINK staked by the oracle.

So, what role does the LINK token have in all of this?

LINK tokens are primarily used to incentivize the data providers to encourage them to act in a trustworthy way. As such, the LINK token is used to pay the Chainlink node operators who receive data requests from smart contracts and work on them. The node operators are at liberty to set their prices based on the demand for data and market conditions.

In addition, LINK is also used by node operators as a staking token. That means that every Chainlink node operator has to stake some LINK tokens to show their long-term commitment.

Real-world Applications of Chainlink

Chainlink’s data validation process is powerful as it can gather data from different external sources and accurately verify the same. As a result, the Chainlink blockchain can, with a high level of accuracy, establish which external data sources are truthful, thus protecting smart contracts from different types of malicious attacks while increasing the reliability of the results.

Given Chainlink’s prowess, the blockchain has some real-world use cases in various sectors. For instance, decentralized finance (DeFi) applications have been using Chainlink to integrate decentralized price feeds to get access to high-quality financial sources to obtain market data on a wide array of assets.

In addition, Chainlink also helps to secure billions of dollars by linking hybrid smart contracts with off-chain computation and high-quality data within the DeFi ecosystem. Using the Chainlink protocol, developers are also able to quickly build, test, and deploy DeFi applications that depend on several external resources using reliable and pre-built decentralized services.

When it comes to non-fungible tokens (NFTs) and on-chain gaming, applications have used Chainlink’s verifiably random numbers to guarantee fair outcomes.

And that’s not all!

Insurance companies are also leveraging Chainlink to access real-world data, which enables them to automate the processing of insurance claims, thus lowering their operating costs. This allows insurance companies to provide wider coverage for crop, flight, travel, and weather insurance use cases to global markets.

Of course, Chainlink has a lot more use cases than what we have mentioned. You can read more of its use cases here.

The Team Behind Chainlink

The Chainlink blockchain was launched in 2017 by SmartContract, a for-profit company. SmartContract is a blockchain-focused tech company that was established in 2014 to leverage blockchain smart contracts to create contractual agreements that can be used by just about anyone, regardless of their expertise or skill level.

Chainlink was co-founded by its CEO, Sergey Nazarov, and CTO, Steve Ellis, who, together with Ari Jules, an advisor to Chainlink, went ahead to publish Chainlink’s whitepaper in September 2017. In the same month, Chainlink held an initial coin offering (ICO) where it sold 35% of its total supply of one billion LINK tokens to raise $32 million.

Following the successful ICO, 35% of the remaining LINK tokens were used to reward node operators, while the other 30% remained with SmartContract to fund the future development of Chainlink. According to data on CoinMarketCap, LINK has a circulating supply of 556,849,970 tokens and a market cap of over $4 billion as at the time of writing.

Chainlink also has a great community that anyone can join to participate in open discussions. In addition, one can also apply to be a Chainlink advocate. Chainlink advocates are people who bring the Chainlink community together to build, discuss, and learn about the power of the blockchain.

Besides the communities, Chainlink also has a grant program that funds both individuals and teams that are building a more accessible, functional, and impactful smart contract economy. The program commits significant resources toward the formation of critical developer tooling, incorporation of high-quality data, and the launch of central services around the Chainlink protocol.

Conclusion

Chainlink has had a massive impact in the crypto space as it has been able to solve the ‘oracle problem’ issue. The ‘oracle problem’ is an issue faced by smart contracts on different blockchain networks where they remained completely isolated from the external world until Chainlink was launched.

Smart contracts are programmed by human beings to self-execute as they rely on the information given to them by the oracles. That means that if a malicious actor provides inaccurate data or a malicious code, the smart contract will still execute it. However, with Chainlink, smart contracts can obtain and share correct data without putting the blockchain on which the smart contract is operating at risk.

Therefore, the Chainlink blockchain has become an important blockchain for any developer looking to develop blockchain-based products that rely on accurate external data sources. Moreover, given the expansive use of the Chainlink protocol, many crypto investors have taken interest in the protocol’s token.

Should you consider buying it, you can buy, hold, sell, and swap your LINK, Trust Wallet allows you to do that in a secure manner thanks to features like the Trust Wallet Security Scanner. Remember, you can also use the Trust Wallet Chrome extension to manage your assets on desktop computers.

Get the Trust Wallet today to manage your crypto assets including LINK.

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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.