Chainlink Explained: Bridging Blockchains with Real-World Data!

Chainlink, also known as the market ticker LINK, aims to be the link between off-blockchain data providers and the blockchains themselves.

Chainlink is a crypto oracle hub on the Ethereum network and can be thought of as the link that connects blockchain-based smart contracts with data not found naturally on the blockchain.

The data Chainlink sources and provides is often required for the execution and completion of smart contracts on the network.

An example of this would be a smart contract wagering on the outcome of a sports match.

The blockchain needs to know who won the match to determine the outcome of the smart contract.

Although it doesn’t have to be sports betting, it could just as easily be any other event outcome you can imagine, such as the weather, the price paid for an item, or maybe something random like calculating your chess ELO rating.

Either way, it gets that data through oracles, or oracle providers, such as Chainlink.

But, how does it all work?

Today we find out!

Chainlink was founded in 2017 by Sergey Nazarov and Steve Ellis, who co-authored a whitepaper introducing the Chainlink protocol with Cornell University professor Ari Juels.

In short, Chainlink’s purpose is to verify the outcome of data which completes smart contracts on the network. The need for Chainlink has been created due to a uniquely 21st century problem: How do smart contracts authenticate the data they are using?

Though just so we’re all on the same page, smart contracts are pre-agreed contracts that execute automatically once the pre-determined criteria have been agreed.

They allow for trustless trades between individuals without the need for additional human oversight.

But what if your smart contract is built depending on an event’s outcome? How would a blockchain discover and authenticate that outcome was authentic?

Chainlink is often described as an ‘oracle,’ which is crypto lingo for an application that sources external data and connects it with the blockchain.

Although that’s not quite accurate, as technically, Chainlink is the hub through which many thousands of potential decentralized oracle networks all connect and sell their data to the blockchains that require them.

But how does it work?

Chainlink lives on the Ethereum network, which means it uses a Proof-of-Stake consensus mechanism and also a token standard to ensure compatibility with the Ethereum network at all times.

Typically, this would be an ERC-20, which we’ve talked about previously, however, Chainlink is actually an ERC-677 token.

But let’s break that down quickly.

An ERC-20 token is a token standardization blueprint which ensures all apps on the Ethereum network are compatible with each other.

An ERC-677 token inherits the functionality of an ERC-20 token but implements additional functionality, such as, in this case, containing a payload of data that can be transferred within their tokens.

To very quickly summarize, Proof-of-Stake is a consensus algorithm in blockchain networks where participants can validate and create new blocks based on the number of coins they hold and “stake,” meaning deposit, to the network.

This is different from the more famous Proof-of-Work which relies on computational power to solve a complex puzzle, known as mining, and is typically far more energy intensive and more challenging to scale.

But that leads us to the more interesting question, what makes Chainlink unique?

Simply put, connecting off-chain data with on-chain smart contracts is the unique selling point.

But what makes Chainlink unique isn’t that Chainlink is an oracle, of which there are others. What makes Chainlink unique is it acts as the hub for other oracles rather than being the oracle itself directly.

This means it is through Chainlink that many other oracles connect with individuals or organizations looking to purchase off-chain data.

For the buyer, this makes it simpler to find the data they are looking for and ensures it is the most reliable without having to shop around between thousands of different providers individually.

The clever part is smart contracts that utilize Chainlink’s services receive data from tens of thousands of oracles rather than just one provider.

Chainlink then aggregates the data so the buyer doesn’t have to rely on the data provided by one individual company, as this may be incorrect, but can instead ensure a more accurate, averaged answer due to the size of the oracle networks providing data.

As if not impressive enough, some other potential use cases for Chainlink can include helping to support decentralized data feeds, enabling automation within its smart contracts, and providing verifiable sources of randomness for video games.

Although, as we all know, projects live and die by their tokenomics. So, how does LINK compare?

There will only ever be 1 billion LINK tokens, all of which were pre-mined, meaning created before launch, as is customary for most Proof-of-Stake projects.

LINK can be used for all the classics such as staking, governance, and rewarding node operators for their data. Though, its main purpose is to pay data providers for their service.

Of the 1 billion LINK tokens, 35% was allocated to the Public Token Sale, and a further 35% was allocated to the node operators and ecosystem, with the final 30% being allocated to the company that runs Chainlink.

If you’re looking for off-chain data, then Chainlink is likely to be a service that you have already utilized. While other oracles exist, Chainlink is likely the largest name in the arena, and will probably continue to be for the foreseeable future.

Of course, nothing is ever guaranteed in crypto, and this could all change with time.

However, should Chainlink continue growing as it has done previously, then it has certainly set itself up well for the future, and it seems plausible that as long as Ethereum is successful, Chainlink will continue to be as well.