Chainlink is one of the most popular cryptocurrencies of the year 2019. LINK token has multiplied its market value and made the whole project one of the biggest talking points. Why is everyone talking about Chainlink so much? Keep reading and you’ll find out!
What is Chainlink? It’s a token on the Ethereum platform
First, let’s place Chainlink to the correct category of cryptocurrencies. This isn’t so simple, because Chainlink has few (if any) direct competitors in the world of cryptos.
Bitcoin, Litecoin, and Dash are examples of cryptocurrencies designed to be P2P digital money. Ethereum, EOS, and Tron are on the other hand examples of platforms, which are frameworks for smart contracts. They are operating systems, like Android, iOS, or Windows.
Then we have a third category called tokens. These are cryptocurrencies created on one of the previously mentioned platforms and provide utility inside a certain application. Chainlink should be placed here.
One major difference between a token and a cryptocurrency/platform is the fact that tokens have no blockchain of their own. Chainlink is also built on the Ethereum platform, so it’s depending on Ethereum network and nodes to operate.
The name Chainlink can refer to the whole project or its native token, which has the short name LINK in cryptocurrency exchanges.
LINK token is created on the Ethereum platform, but it’s not an ERC20 token, like hundreds of other Ethereum tokens. LINK is based on Ethereum’s ERC667 standard.
You can study the differences between ERC20 and ERC667 tokens from this article.
Chainlink is an American project
The company behind Chainlink is called SmartContract Ltd. It has offices in New York and San Francisco, which makes Chainlink an American project.
The CEO of SmartContract Ltd is Sergey Nazarov. He’s a seasoned cryptocurrency expert, who has been in the scene since 2011. Another important team member is Steve Ellis, who is currently the CTO of SmartContract. You can find the entire team from this page.
Chainlink has been in development for years, but it didn’t gain popularity until its ICO in October 2017. The project raised 32 million USD, which is a relatively small number compared to the biggest ICOs in the market. Chainlink’s white paper was also published in October 2017.
The project was laying low during the 2018 bear market. Almost nobody was talking about Chainlink. The LINK token didn’t crash that much in 2018 since it never took off either like more popular altcoins.
Chainlink finally exploded in the summer of 2019, when LINK token moved from 0.5$ to over 4$ in just two months.
This price rise was boosted by major partnerships and the launch of Chainlink MainNet in May. LINK token was also boosted significantly by the fact that Coinbase accepted it as part of their offering.
The year 2020 has been a massive success for the project due to the DeFi boom. Almost every major DeFi project is using Chainlink oracles for price feeds.
As the name suggests, Chainlink wants to create a link between smart contracts and data outside the blockchain. Chainlink has branded itself as “middleware”. It can be seen as a utility program or a collection of tools available for software developers.
Let’s see what problems this middleware can solve.
Chainlink, smart contracts, and oracles
Chainlink is all about smart contracts, which many people have learned via Ethereum. Note, that other platforms (EOS, Tron, NEO, etc.) support smart contracts too, not just Ethereum.
A smart contract is a digital and programmable agreement of a certain event. In practice, it’s a piece of code in a blockchain, which can have both inputs and outputs. What makes a smart contract so special is the fact it’s immutable. It processes all tasks given to it exactly based on the parameters.
The difference between a traditional contract and a smart contract is often highlighted by using a bank or an insurance company as an example. A bank might promise you a certain interest rate on your deposit, but what if there’s a banking crisis and people lose their money? There are also countless examples of insurance companies not paying for victims for various reasons.
There are always bad actors or other events, which might lead to the canceling of agreements you thought you had. But there is no room for manipulation when it comes to smart contracts. They are immutable and process the given parameters the same way every single time.
We could use betting as an example of a smart contract. Two people can make a bet on a football match result where the winner takes all. Both lock their stakes into a smart contract, where it stays in an escrow.
The smart contract rewards the winner after the match has been settled. It would also have certain rules, such as the match must be played for 90 mins, it has to be played on a certain date, etc.
You can read more about smart contracts from our in-depth guide.
But, smart contracts lack one critical feature. They cannot read data outside their blockchain.
For us to settle this betting example, the smart contract would need external data from the football match in question. This is where an oracle comes into the picture.
Ancient oracles were insightful counselors or prophets. In the world of blockchain, they are data providers.
An oracle could be an application, which reads football match results and sends this information to a smart contract. Internet of Things, IoT, will provide thousands of examples of oracles shortly.
For example, a sensor in a self-driving car sending data to the blockchain would be called a hardware oracle.
Chainlink is solving oracle problems
Chainlink is developed to solve some critical issues between smart contracts and oracles. First of all, you should understand that Chainlink has developed neither of them. Both smart contracts and oracles have existed long before Chainlink.
The problem is that your smart contract is often depending on one data source. Even if you’d design a fancy distributed application, it can be corrupted by a third-party data provider. Your smart contract might get false information by accident or even on purpose. This will create a single point of failure.
There are also other technical issues one should consider. What if the oracle goes offline or gets under a DDOS attack? The whole smart contract would become nonoperating.
Chainlink has a solution to this problem: a distributed network of oracles. In this case, oracles are called chainlinks, which might be a little bit confusing at first.
When a smart contract is using distributed oracles, it can maintain its integrity. Chainlink is building a network of oracles, where each oracle has also an incentive to produce the highest quality information. The network will rank each oracle based on its actions and it will reward the best ones with LINK tokens.
Some people might think of the AION project right now, which tries to build interoperability between blockchains. That is not the case with Chainlink, which doesn’t even have its own blockchain. There is also no mining of the LINK token.
You should see Chainlink as a bundle of applications and services, which can be implemented into different blockchains. Chainlink is almost like a collection of API connections.
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At first, Chainlink will be operational in the Ethereum blockchain. The software was launched in the Ethereum MainNet in May 2019, which was a big milestone for Chainlink.
Check the video below, where Chainlink founder Sergey Nazarov is talking about the project at the time of the MainNet launch.
The Ethereum integration will also make Chainlink compatible with EOS and Tron, which are also using the Ethereum’s EVM processor. We’d see further implementations in the future, and this has been the case since 2019.
Chainlink has already built partnerships with Zilliqa, Matic, Hedera Hashgraph, Synthetix, Wanchain, Harmony, and Ocean Protocol. Chainlink is predicted to have a significant role in the ever-growing DeFi sector.
LINK token and chainlinks explained
Normally, we’d go through things like mining and the consensus algorithm next, but this cannot be done with Chainlink. As mentioned earlier, Chainlink doesn’t have a blockchain of its own. It is simply an application running in the Ethereum blockchain.
The Chainlink concept is a bit difficult to understand at first. The following picture might help you to figure it out:
We’d also clear out the terms oracle, chainlink, and a node because they can be quite confusing at first.
The whole project is called Chainlink, which is in practice a distributed network of oracles. These oracles are also called chainlinks. One oracle (= chainlink) consists of two key parts:
- The on-chain part, which is a contract of the transfer between the oracle and a smart contract.
- The off-chain part, which is the data-retrieving component. In the Chainlink concept, this is called a node.
It seems like the term “Chainlink node” is more and more used these days, which refers to a data provider consisting of both of these parts = oracle + node.
As mentioned earlier, the LINK token is used inside the Chainlink system. It has two major functions in the network.
Each node must stake a certain amount of LINK tokens as collateral when they start to provide data to the Chainlink network. If the information is poor quality, the node will be penalized, and the staked tokens are lost.
LINK tokens are also used to reward nodes providing high-quality information. Hence, there is always an incentive to produce correct data to the network.
Let’s go back to our football betting example and let’s say that 9 out of 10 oracles in the network would provide a result of 2-1 FT. But, one oracle would say the match ends 2-2 FT. The Chainlink network would then assume that the 2-2 FT result is wrong, and it might also penalize the node.
It’s important to understand that the Chainlink network is permissionless, just like Bitcoin’s network is. Anyone can set up their service and start to provide information.
Chainlink staking and service agreements
You can think of setting up your own Chainlink node like starting a virtual company. You are the service provider and your clients are distributed apps needing quality information.
This is a significant difference to other cryptocurrencies. When we normally talk about nodes we refer to serves, which help to secure the network. Since Chainlink is running on Ethereum, it’s the Ethereum nodes who take care of the LINK token transactions and securing the blockchain.
LINK tokens have multiple uses. One of them is to function as currency inside the Chainlink system. The data provider gets paid with LINK tokens. The process goes as follows (Image source: a screenshot of this video):
Requester is typically a DeFi service or application. It sends a data request to the Chainlink marketplace of any information available on the internet. Typically, this could be price information of certain cryptocurrencies. After this, a network of Chainlink nodes gets to work.
Node operators have an API connection to the external data, which the DeFi app cannot access since its smart contract can only read information from its blockchain. Information won’t be provided by a single entity but a distributed network of nodes, which will also validate the information before it’s delivered to the client.
At the moment (June 2020), there is still an important piece missing from this puzzle. It’s called a service agreement. As the name suggests, it’s an agreement between the service provider and the client recorded on the blockchain. It’s very important that a) the agreement is on the blockchain and b) it exists, so there are some sanctions defined.
See the video below for more information.
With service agreements, Chainlink staking is also introduced. Again, this doesn’t work like on traditional Proof of Stake blockchains, where staking refers to blockchain maintenance and reaching consensus.
Chainlink staking refers to the stake the data provider has to place on the table before a service agreement is made. If a node operator is providing some critical financial data, it must also have a stake in the game to provide some guarantees to the buyer. The risk of losing your stake will guarantee you’ll have an incentive to provide top quality data.
If a node operator is committing a breach to the contract, it could lose the stake and also future employment possibilities in the Chainlink marketplace.
There are two types of staking methods: implicit staking and explicit staking. Implicit staking means that the value of your stake can increase or decrease based on the quality of your data. The explicit staking means you could lose the stake if your data would differ a lot from other operators.
Services requesting data will demand a certain stake from the node operator. More money is involved (for example in a DeFi service), more stake (= collateral) is needed from the data provider. This means that the growth of the Chainlink network will automatically increase the demand for LINK tokens, which will be also locked to staking, which will then decrease supply.
It’s important to understand that service agreements and staking are not yet implemented yet. It’s impossible to say when exactly, but this could be in the end of 2020 or in the beginning of 2021.
You can check out the Chainlink marketplace at market.link. This is not a test, but there are dozens of node operators running and providing data already.
One of the driving factors behind the Chainlink buzz is partnership agreements. There are quite a few important ones, which we should mention here. Many analysts like the fact that Chainlink has partnered up with SWIFT.
The SWIFT partnership means that Chainlink could provide transaction outputs from smart contracts to legacy systems. Let’s go back to our football betting example. What if the winner of the bet could decide that the payment is done in euros instead of Bitcoins?
This partnership will also open doors to the financial sector, which is very interesting.
Google is another major partner. The technology giant has built a test environment, where Chainlink works as a link between Google’s big data and the Ethereum blockchain.
When this partnership was announced in June 2019, the LINK token went up 50% in one day. You can read more about the Google + Chainlink partnership from this article.
Chainlink has also partnered up with Hedera Hashgraph, Microsoft, and Oracle. The whole list is available in this Reddit post.
As mentioned earlier, Chainlink has already been integrated into many existing blockchains. Zilliqa, Matic, Hedera Hashgraph, Synthetix, Wanchain, Harmony, and Ocean Protocol are just the beginning. Recently we’ve also seen partnerships with Aave and Kyber Network – the list is growing almost every week.
Investing in Chainlink
Chainlink gained a lot of popularity in 2019. Its success is a combination of many things, but one important factor is the status Chainlink has in its niche. There isn’t any serious competition in the market. It’s interesting to see how much the Band Protocol can threaten Chainlink.
Chainlink isn’t tied to any particular blockchain either. As mentioned earlier, it’s been integrated with many other blockchains already. It is important for investors that Chainlink’s future isn’t tied to Ethereum or any other blockchain.
Data Dash is a very popular and high-quality crypto channel on Youtube. It published a list of top ten most potential altcoins for 2020 and Chainlink was number one. See the video below, the Chainlink presentation starts at 33:40.
The high-quality partnerships have brought a lot of credibility and new investors for Chainlink. One of the major boosts has been the Coinbase listing.
The price of the LINK token is tied to the success of Chainlink. Its price will go up if there is more demand for the services of the Chainlink network. All LINK tokens are pre-mined, so there won’t be any new ones coming to the market.
Chainlink is confident that the smart contract market will grow a lot in the future. In theory, they could replace almost every traditional contract. The possibilities are almost endless: the financial world, insurances, supply chain management, betting, and so on.
Chainlink wants to build a wide network of oracles, which provide services for dApp developers. The project has a very good position in its niche right now.
One should remember, that the Chainlink project is still in the early stages. Many key features are still words on the white paper. The success of Chainlink will be measured in the upcoming millennium.
Chainlink price and how to buy LINK
If you want to invest in Chainlink, Binance is your best choice. It is the leading cryptocurrency exchange in the market. Binance supports credit/debit card deposits and bank wire transfers. If you already own bitcoin, you can transfer some coins to Binance and purchase LINK tokens with them.
Coinbase is another reliable and popular option. It is a very newbie-friendly exchange with credit card deposits and bank wire support. Kraken is our third recommended crypto exchange for LINK purchases with a fiat on-ramp.
There is also solid wallet support for Chainlink. Popular desktop wallets Exodus and Atomic Wallet support the LINK token. There is also a mobile version of both. Trust Wallet is also a great mobile wallet, which supports LINK.
It’s recommended to start your Chainlink studies by listening to the following podcast, where Anthony Pompliano is interviewing Sergey Nazarov.
Images: Chain.link, Google