Chainlink, a decentralized oracle network, has emerged as a blockchain game-changer. This article provides a comprehensive exploration of Chainlink, tracing its history, delving into its cutting-edge technology, examining the concept of Chainlink staking, and shedding light on the promising prospects of this groundbreaking project. Discover how Chainlink is reshaping how smart contracts interact with real-world data and unlocking new possibilities for blockchain applications.
Table of Contents
What is Chainlink (LINK)?
Chainlink is a decentralized oracle network and cryptocurrency that leverages blockchain technology. Chainlink’s main purpose is to provide reliable and secure external data to smart contracts, which typically operate within a closed ecosystem and lack access to real-time information.
This is achieved through decentralized oracles, which act as middleware between the blockchain and external data sources.
The native cryptocurrency of Chainlink is also called Chainlink. It has the ticker LINK on crypto exchanges. LINK is used to incentivize node operators to provide accurate data and maintain the integrity of the network. Additionally, LINK can be staked or used as collateral for various purposes within the Chainlink ecosystem.
Basic information about Chainlink:
|Max supply||1 billion LINK|
|Circulating supply||0.5 billion LINK|
|All-time high (date)||$52.88 (May 10, 2021)|
|All-time low (date)||$0.1263 (Sep 23, 2017)|
You can follow the price of the LINK token from this page: LINK price.
Chainlink started as an oracle network for price feeds and similar data. The project has grown much bigger since its inception. Not only are Chainlink feeds used by thousands of decentralized apps, but the project also aims to become the de facto bridge between all blockchains. Chainlink aims to achieve this with its Cross-Chain Interoperability Protocol, CCIP, launched in the summer of 2023.
Next, we’ll explore the project’s history and explain the technology behind Chainlink.
SmartContract Ltd operates Chainlink. The company was founded in 2014 and is headquartered in San Francisco. SmartContract’s CEO is the cryptocurrency expert Sergey Nazarov (see the photo below). He has been involved in the industry since 2011.
Another key figure is Steve Ellis. He is currently the CTO of SmartContract Ltd. Nazarov and Ellis are often named as founders of Chainlink.
Chainlink has been developed for years. It caught the attention of the crypto world when its ICO was held in September 2017. The project raised a fairly moderate pot of $32 million when compared to the entire ICO market. Chainlink’s white paper was published in September 2017 as well.
The project stayed out of the limelight for the first year. LINK token’s price dropped in 2018 with the whole market. At the time, Chainlink was an unknown project, but 2019 changed everything.
Chainlink’s MainNet was launched in May 2019 on Ethereum. It was a result of six years of work. At the same time, Chainlink started to gain publicity, which accelerated LINK to hundreds of percent price increase during the summer of 2019. Chainlink’s listing on Coinbase also helped. Many active investors found the project around this time.
The year 2020 was an excellent one for Chainlink. LINK token jumped from about $1.8 to $12 within that period. The price rise continued in the spring of 2021, and LINK peaked in May 2021, as did many other cryptocurrencies. Chainlink’s price development went hand in hand with the DeFi market. This makes sense because Chainlink is integrated into every major DeFi protocol.
In 2021, however, there was a significant change. The total liquidity of the DeFi sector continued to grow after the bear market of May-July 2021. DeFi has also expanded to more platforms; Chainlink is an important part of this puzzle. LINK token’s price development has been disappointing in this respect. Investors put their money into smart contract platforms instead, such as Terra, Avalanche, and Solana.
Chainlink also released a 2.0 version of its white paper in 2021. The biggest topic of 2022 is staking. We’ll get back to this later in the article.
Basic information about smart contracts
Chainlink’s whole purpose revolves around smart contracts. Ethereum brought smart contracts to the mainstream, but all competing platforms also support them.
The term smart contract has risen to even wider awareness since 2020 – thanks to the rise of the DeFi sector. Smart contracts are the components that all decentralized applications are built of.
The term smart contract is a bit misleading. It is not necessarily a contract or a particularly smart one. A smart contract is just a code that carries out predetermined orders. You can read our in-depth guide for more information.
Smart contracts are stored in the blockchain. Transactions directed to them are always processed when creating new blocks.
In the Ethereum platform, smart contracts are programmed using the Solidity language. Smart contracts are processed by the Ethereum Virtual Machine (EVM), which runs on each node on the network.
Many of Ethereum’s competitors have built their platforms to be EVM-compatible. This means Dapps built on Ethereum can be easily cloned and transferred to competing platforms.
Smart contracts and oracles
Smart contracts have one fundamental limitation: they cannot read data outside the blockchain. For example, a smart contract stored in the Ethereum blockchain can only use information from the Ethereum blockchain. The same logic applies to other blockchains. This limits the potential of smart contracts significantly.
However, there is a solution. An external source of information can be connected to a smart contract with an oracle. Ancient oracles were thought to be the portals through which gods spoke to people. In the world of blockchains, oracles have a bit different role.
An oracle is a program that reads, for example, cryptocurrency price data and transfers this information to a smart contract. There can be unlimited examples of data an oracle could provide. If you’re considering the DeFi market, every Dapp needs 100% reliable price feeds from different blockchains.
The Internet of Things (IoT) brings a new use for oracles. Think of a self-driving car, for example. It can send huge amounts of information to the blockchain about traffic volumes and different components of the car. Such sensors are called hardware oracles.
What does Chainlink have to do with oracles? Let’s look at it next.
The decentralization problem Chainlink solves
First, you should note that Chainlink has not invented oracles or smart contracts. Both have been around for a long time. Chainlink has been developed to solve decentralization issues between smart contracts and oracles.
Even if a developer creates a decentralized application (Dapp), the data feed might still depend on a centralized source. A service provider could send incorrect information to the Dapp intentionally. Other technical problems must be considered. If a data feed breaks or the project is subjected to a cyberattack, the Dapp will be compromised.
Chainlink was created to solve these problems. The solution is to create a decentralized network of oracles.
Chainlink founder Sergey Nazarov has used the term middleware when referring to the project. Chainlink is an application between smart contracts and external information. It makes it possible for smart contracts to keep the decentralization and integrity they are built for.
Here’s an example of Bitcoin’s price data. The image below is from Chainlink’s data page of the Ethereumin network. Currently, Bitcoin’s dollar price is provided by 31 different oracles.
Trusted answer refers to the price delivered by Chainlink’s oracles. Each oracle gives a slightly different answer, after which Chainlink forms an average of them. The more oracles there are, the more reliable the data.
This is where it’s important to differentiate Chainlink from Cosmos and Polkadot, which want to link blockchains to each other. These are called interoperability projects or the Internet of Blockchains. That is not the case with Chainlink.
Although Chainlink launched on Ethereum, it is no longer just an Ethereum application. Chainlink is now integrated into dozens of different blockchains and hundreds of applications. It can be seen as a large decentralized application or collection of API connections that developers can take advantage of.
Chainlink has also launched the term hybrid smart contract. This means a combination of a traditional smart contract and an oracle network linked to it.
LINK token, VRF, and Proof of Reserves
Chainlink has become famous for its oracle network. An important part of this is the LINK token. The entities that order Chainlink’s services pay for data feeds using LINK. This creates a constant demand for the token since the need for data feeds will likely increase.
Providing external data is not the only feature of Chainlink. Another popular data feed is called the Verifiable Randomness Function (VRF). This means a random number generator. One might think that picking up a random number is an easy job. However, this is not the case. Ensuring randomness is not that simple.
The need for VRF has increased with the NFT sector. The video below shows an example of the Aavegotchi NFT drawn randomly using VRF.
An application that needs randomness sends a seed to Chainlink’s oracle network, and the random number is generated based on this.
As its name suggests, Proof of Reserves refers to a certificate of reserves. For example, DeFi applications, lending services, and stablecoin issuers need this. Users can verify through PoR that the service has the required collateral and reserves. The certificate produced by the decentralized oracle network is much more convincing than a certificate written by the service itself.
Everyone who has followed the project has come across staking. This has been discussed since 2019, but staking is still not launched. The year 2022 will finally make a difference. According to Sergey Nazarov, staking will soon become a reality. However, no exact date has been set yet.
Staking in the #Chainlink Network is set to be released within this coming year 👀
This comes as multiple Chainlink oracle networks have reached profitablity based on user fees alone
— ChainLinkGod.eth (@ChainLinkGod) January 1, 2022
The lack of staking has become a problem for Chainlink, mainly for investors for the time being. Since Chainlink is not a smart contract platform and does not have its own blockchain, no natural staking is available for the LINK token.
Staking significantly impacts the price of smart contract platform native tokens. Between 65% and 75% of the tokens in circulation are staked. These tokens will therefore be out of the market, which will reduce supply and give a boost to the price.
Chainlink’s staking means a slightly different thing than for smart contract platforms. The nodes of the Chainlink network perform staking. LINK tokens can be staked to increase revenues and motivate the node operator to provide valid data. A hostile node could lose its staked tokens.
Please note that Chainlink’s staking is called explicit staking and super-linear staking. They mean the same thing. Staking is explained in the video below in a beginner-friendly way.
The purpose of the staking is to prevent attacks on the oracle network. The more the operators stake LINK, the harder it is for the attacker to bribe oracles to send inaccurate data.
At this point, a new second tier is also brought into the system.
Second-level operators make sure that the data generated by the oracle network is valid. If any of the oracles suspect that other operators are sending inaccurate data, it can report them to second-tier “cops.” These second-tier operators reward the declarant by providing LINK tokens owned by fraudsters.
This creates a strong incentive to do the right thing. If someone wanted to bribe oracle operators to produce misinformation, the reward should be higher than the combined value of staked LINK by other operators. The larger the oracle network grows, and the more LINK tokens are staked, the safer the system becomes.
Security will become increasingly important as the combined liquidity of the Dapps using Chainlink grows from hundreds of billions of dollars to trillions of dollars. The incentive to manipulate data also grows.
In conclusion, staking is much more complex for Chainlink than traditional smart contract platforms. You can find comprehensive information on Chainlink’s website. You might want to get familiar with it.
What about investors who don’t run their oracle node? LINK token delegation is likely to become available. There will be more information about this in 2022.
Chainlink’s Cross-Chain Interoperability Protocol (CCIP)
Cross-Chain Interoperability Protocol (CCIP) is a standard for communication between blockchains. It was launched by Chainlink in 2013. CCIP facilitates a connecting link between public and private blockchains. The CCIP technology enables users to retrieve data that was previously concealed within blockchain silos and enables token transfers from one blockchain to another.
There are currently big problems in communication between blockchains. Data is fragmented, and there is inconsistency in communication protocols, which has led to numerous hacks on token bridges in recent years. In addition to security, current solutions lack transparency and are expensive for the end user.
Chainlink implements token bridges with the help of Chainlink Programmable Token Bridge technology. This bridge uses separate routing contracts that enable universal compatibility between blockchains. Chainlink’s bridge supports existing token standards. Users of a DeFi application on the Ethereum platform can soon access the liquidity of the same application running on the Avalanche or BNB Chain blockchain.
Below is Sergey Nazarov’s presentation from the CCIP launch event:
CCIP uses an Active Risk Management (ARM) system. ARM is a risk management system that constantly monitors CCIP’s operations. ARM can immediately stop the operation of token bridges and the processing of transactions if it detects a vulnerability or hack in the system.
CCIP consists of three different levels of technology.
- At the top level are the user interfaces that allow the end user to connect to, for example, token bridges.
- The second level is CCIP, which performs cross-chain operations and transfers data from one blockchain to another.
- The lowest level is the network infrastructure and Chainlink’s node operators that run the decentralized oracle network.
CCIP enables a completely new way of creating Web3 applications. In the future, application developers can take advantage of other blockchains’ resources, tokens, and liquidity. Until now, blockchains have been like closed silos, but in the future, a truly compatible Web3 environment can be created in cryptocurrencies.
So how does the LINK token fit into this equation? The LINK token is used to pay CCIP transactions. The good thing about these transactions is that they will be cheap because the transaction fees of an individual blockchain will not directly affect the operation of the CCIP. Chainlink’s node operators, i.e., the oracle network entities, also receive LINK tokens as a reward.
The possible popularity of CCIP is guaranteed to increase the demand for the LINK token.
Chainlink has grown enormously in the last couple of years. The popularity has been significantly influenced by the growth of the DeFi market. Two years ago, the total value locked in the DeFi sector was about $300 million, and a year ago about $700 million. Today’s figure is about $250 billion!
Check defillama.com for up-to-date information.
At the same time, the number of DeFi applications has exploded. The entire ecosystem has also expanded from Ethereum to other smart contract platforms.
It is easier to pick up significant blockchains not yet integrated into Chainlink’s oracle net. When writing this article (1/2022), Chainlink has over 1,000 partners! Of these, 724 have come in 2021. Chainlink’s oracle network is integrated into 89 different blockchains, and the service is used by over 500 different DeFi applications.
You can explore partners from chainlinkecosystem.com/ecosystem/.
Chainlink collaboration agreements are not limited to DeFi apps. Internet giants Google and Amazon are also partnering up. Chainlink has also integrated an increasing number of data providers. Examples include Accuweather (weather data) and The Associated Press (news).
Chainlink makes an average of 20 partnerships every day.
The future of Chainlink
Chainlink’s future looks better than ever. Chainlink staking, launched in 2022, and CCIP, launched in 2023, have significantly strengthened Chalink’s fundamentals. In a couple of years, Chainlink has become a bigger player than just a supplier of data feeds.
Chainlink’s fundamentals are solid, but why has LINK been such a weak investment in recent years? The explosive growth of the DeFi sector and 1000+ cooperation agreements support the growth of Chainlink – at least in theory. In practice, this is not reflected in the price of the LINK token, as the demand for oracle services is not yet high enough. The parties operating the oracles receive their reward in LINK tokens and often sell them for dollars.
Investing in LINK staking can completely transform the game. The lack of staking has been a big handicap for the LINK token, which is why it has fallen behind many smart contract platforms. The income from staking also attracts institutions, and it can significantly affect the price development of the LINK token.
So far, the effects of staking have been smaller than expected. Next, the focus is on the Cross-Chain Interoperability Protocol technology. Will Chainlink’s future become brighter with CCIP?
In theory, yes, because CCIP solves many practical problems in the world of blockchains. In addition, the LINK token is an important piece of CCIP’s infrastructure, as LINK is needed for transaction payment and oracle network incentives.
The biggest question mark is the implementation of CCIP. Many blockchains have already built bridges, and there are other cross-chain protocols on the market. Will Chainlink’s good reputation help push it past competing options? More than a thousand applications already use Chainlink’s services.
Investors should also remember that Chainlink is not the only oracle network on the market. However, its position is really strong compared to its competitors. Band Protocol was featured a lot in early 2021, but now its ranking has already fallen to the weaker side of 300. Other challengers are WINKLink and API3.
Chainlink is a critical piece of the infrastructure of the entire crypto universe already. Its popularity shows no signs of fading either. More partners will probably be added at an ever-increasing pace. There is always more and more need for data outside of blockchains.
If you want to buy Chainlink, read this article: how to buy Chainlink (LINK). It gives you step-by-step instructions on how to acquire LINK tokens safely and easily.