What is Chainlink? A beginner's guide to LINK



Chainlink is a decentralized oracle network that looks to bridge the gap between blockchain-based smart contracts and real-world data.
Chainlink aims to tackle what’s been dubbed the “oracle problem'' by incentivizing a global network of computers to securely provide trustworthy and reliable data from external non-blockchain sources onto smart contracts. Chainlink has a native token (LINK) which is used to pay node operators for retrieving data from off-chain data feeds, formatting it into blockchain-readable formats, and ensuring data integrity.
The oracle problem refers to the challenge of securely integrating external data onto the blockchain for use by smart contracts. Blockchains are designed to be self-contained, meaning they cannot directly access data from outside their network. This isolation, while enhancing security and integrity, creates a significant challenge when smart contracts require real-world data to execute functions, such as financial market prices, weather data, or event outcomes.
Traditional oracles, which act as intermediaries to fetch and relay this external data to the blockchain, introduce certain risks, chief among them being centralization: relying on a single source or entity for data introduces a single point of failure and increases the vulnerability to data manipulation, outages, or corruption. Ensuring the accuracy and timeliness of the data provided by oracles is crucial, as any incorrect or tampered data can lead to erroneous or fraudulent smart contract implementation.
This begs the question: Why go through the trouble of setting up a decentralized, trustless blockchain network if it can all be manipulated, tampered with, or simply make honest mistakes at a single point of failure?
So how does Chainlink solve the ‘oracle problem’?
Chainlink addresses the oracle problem by employing a decentralized network of oracles to ensure the secure and reliable integration of external data into blockchain environments. Unlike traditional, centralized oracles that create single points of failure, Chainlink emulates the blockchain model by using multiple independent nodes to fetch and verify data from various off-chain sources. To ensure data accuracy, Chainlink aggregates inputs from multiple sources and cross-references them, filtering out discrepancies and potential errors and reducing overall risk of data manipulation.
Additionally, Chainlink uses a reputation system to maintain high standards among its nodes. Nodes are incentivized with LINK tokens to provide accurate and timely data, while those that supply incorrect or malicious data face penalties, a feedback mechanism that helps to maintain the integrity of the network.
What are the use cases of Chainlink?
Chainlink's decentralized oracle network supports various use cases across multiple industries:
- Decentralized Finance (DeFi): Provides reliable price feeds for activities like lending, borrowing, and trading. Platforms like Aave and Compound use Chainlink for collateralization ratios and interest rates.
- Gaming and NFTs: Supplies verifiable randomness for generating in-game items and NFTs, ensuring fair play through Chainlink VRF (Verifiable Random Function).
- Prediction Markets: Provides accurate data for betting on future events, ensuring correct outcomes in markets for elections, sports, and economic indicators.
- Stablecoins: Offers price feeds to maintain the value peg of stablecoins to fiat currencies or other assets.
- Cross-Chain Interoperability: Facilitates communication between different blockchains, enabling smart contracts on various platforms to interact.
- Tokenized Assets: Supports the creation and management of tokenized assets like real estate and stocks by providing accurate price data.
How has Chainlink developed over the years?
Chainlink was founded by Sergey Nazarov and Steve Ellis in 2017. The project raised $32 million through an initial coin offering in September 2017, following the release of its whitepaper that detailed its vision for a decentralized oracle network.
In June 2019, Chainlink launched its mainnet on the Ethereum blockchain, allowing developers to integrate Chainlink oracles into their smart contracts. Since then, Chainlink has worked with a large number of blockchain projects, enterprises and data providers, establishing itself as a critical component in the decentralized applications ecosystem.
Chainlink's oracles have been widely adopted in decentralized finance, insurance, gaming, and more. In 2021, Chainlink announced it had expanded beyond Ethereum to integrate with other blockchains including Polkadot, BNB Chain, Polygon, Arbitrum, Optimism, Solana and Avalanche, enhancing cross-chain interoperability. Also in 2021, Chainlink announced its collaboration with Associated Press to bring its journalistic information to the blockchain, highlighting its integration with companies and projects beyond just the cryptocurrency space.
In July 2023, Chainlink launched its cross-chain interoperability protocol (CCIP), designed to link applications across public and private blockchains and It allows smart contracts on various blockchains to interact and exchange data. The development of Chainlink’s CCIP saw the company connect with interbank messaging service Swift for testing, which Swift dubbed successful.
Who are Chainlink’s competitors?
While Chainlink is the largest and most well-known decentralized oracle project, numerous competitors are also present in the space. Some of Chainlink's top competitors include Pyth Network, Band Protocol, API3.
Pyth Network specializes in high-fidelity financial market data, aggregating real-time information from trusted leading financial institutions for DeFi applications.
Band Protocol offers a decentralized oracle network compatible with multiple blockchains, similar to Chainlink's multi-chain approach. Band Protocol offers advantages in terms of scalability and lower costs, making it a strong contender in the decentralized oracle space.
API3 focuses on creating decentralized APIs that allow direct data access from providers to smart contracts, emphasizing first-party oracles. This means data providers directly provide information to the blockchain by running their own nodes without intermediaries.
Chainlink’s competitors each offer unique features and approaches to providing reliable, secure, and decentralized data solutions for blockchain applications. However, Chainlink's extensive adoption and established reputation has allowed it to remain the more dominant and trusted oracle provider, particularly in the DeFi ecosystem.
Disclaimer: This article was produced with the assistance of OpenAI’s ChatGPT 3.5/4 and reviewed and edited by our editorial team.
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