Cryptocurrencies
20
Jun
chainlink guide

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What is Chainlink (LINK)?

Chainlink is a cryptocurrency and decentralized oracle network. Chainlink was developed by Chainlink Labs, a company founded in 2014 and headquartered in San Francisco. Chainlink’s core function is to provide off-chain data for smart contracts. Chainlink was developed to solve the problems associated with a centralized oracle.

VRF, Proof of Reserves, and CCIP are important services for Chainlink in addition to data feeds. Chainlink is also an essential operator in the RWA sector. Chainlink’s native token is LINK. Chainlink’s staking differs from that of smart contract platforms because it does not have a blockchain. The future of Chainlink looks good!

Chainlink has been the leading provider of oracle solutions for several years.

What is Chainlink (LINK)?

Chainlink is a cryptocurrency and decentralized oracle network. It provides data from external sources for smart contracts and decentralized apps. Chainlink’s most well-known use is providing price feeds for DeFi applications.

In recent years, Chainlink has expanded far beyond price feeds. It is also known for its VRF, Proof of Reserves, and CCIP protocol. We’ll explore these services further later in this article.

Chainlink does not have a blockchain. It is a protocol that can be used on different platforms. Although Chainlink was initially launched on Ethereum, it runs on dozens of other blockchains today. More than a thousand different DeFi applications use Chainlink’s price feeds.

Chainlink’s native token is LINK. It is used for staking and paying for Chainlink’s services.

Basic information about Chainlink:

FeatureInfo
Founder Sergey Nazarov
Category Decentralized oracle network
Ticker LINK
Max supply 1 billion LINK
Circulating supply 0.6 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.

The Chainlink project started as a small oracle network that provided data for smart contracts. Today, Chainlink is an essential part of the global infrastructure of blockchains. It offers a wide range of services used by all major blockchains and decentralized applications.

Chainlink also aims to serve as a bridge between blockchains. The Cross-Chain Interoperability Protocol (CCIP), launched in the summer of 2023, makes this possible. CCIP provides secure and reliable communication between blockchains.

This article is a beginner’s guide to Chainlink. It introduces Chainlink’s history and technological innovations and discusses its potential as an investment.

Chainlink’s history

Chainlink was developed by Chainlink Labs, a company founded in 2014 and headquartered in San Francisco. The company was previously known as SmartContract Ltd. Its CEO is long-time crypto expert Sergey Nazarov. He has been involved in the crypto industry since 2011.

sergey nazarov

Chainlink entered the market through an ICO in September 2017. The project raised a relatively moderate sum, just 32 million dollars, compared to the entire ICO market. Chainlink came to the general public’s attention in May 2019 when the production version of the software was launched on Ethereum. Initially, Chainlink only offered the ETH/USD price as a data feed.

In 2020, the “DeFi summer” took place. It was the moment when DeFi applications became popular for the first time. This development also fueled the popularity of Chainlink, whose data feeds enabled DeFi apps to operate. It’s no wonder that the LINK price increased tenfold during 2020.

Chainlink’s services began to expand in 2020 to offer more than just price feeds. In 2020, Chainlink launched Proof of Reserves and VRF. Proof of Reserves is a service for crypto exchanges that enables them to prove they possess customer funds. VRF stands for Verifiable Random Function. It has become a popular service in the blockchain gaming industry.

Chainlink has also continuously increased its data feeds on cryptocurrency prices. Below is an update from 2024 regarding meme coins.

Version 2.0 of Chainlink’s white paper was published in the spring of 2021. This document described Chainlink’s vision of its oracle network and the CCIP protocol, launched in the summer of 2023.

It is also good to mention Chainlink staking, which LINK investors had been waiting for years. Staking version 0.1 was launched in December 2022, and version 0.2 in December 2023. However, the impact of staking on the LINK token’s price has been much smaller than expected.

Smart contracts and oracles

Chainlink’s core function is to provide off-chain data for smart contracts. Before we discuss the topic in more detail, let’s briefly review the term smart contract.

A smart contract is a program stored in a blockchain that automatically executes the commands given to it. The term smart contract is misleading, though, as it is neither a contract nor a super-smart program. It’s a normal program code that’s only as smart as its developer.

Ethereum introduced smart contracts to the general public. They enable the development of decentralized applications (dapps). Smart contracts make it possible to create dapps that are open for everyone to use and whose code can be reviewed by anyone. Read more about the topic from our beginner’s guide to smart contracts.

Smart contracts have one fundamental limitation: they cannot read data outside their blockchain. For example, a smart contract on Ethereum can only use information on the Ethereum blockchain. This enormously limits the potential of smart contracts.

chainlink smart contracts

However, there is a solution to the problem. An external data source can be connected to a smart contract with the help of an oracle.

An oracle is a program that reads, for example, cryptocurrency price data and transmits the information to a smart contract. If we only consider the DeFi market, every financial app needs real-time and 100% reliable price data from several blockchains.

The Internet of Things (IoT) is one example of external data feeds. Consider, for example, a self-driving car. It could send much information to the blockchain, starting with traffic volumes and car components. These types of sensors are called hardware oracles.

How Chainlink solves the oracle problems

Chainlink was developed to solve the problems associated with a centralized oracle. Even if a developer designs a decentralized app, corrupt data can water down its reliability. A service provider can even intentionally send incorrect information.

Other technical problems must also be considered. If the data feed is interrupted or becomes the victim of a network attack, the operation of the entire smart contract is compromised. Chainlink solves these problems with a decentralized network of oracles.

chainlink oracles

Chainlink founder Sergey Nazarov has used the term middleware for the project, which is very descriptive. Chainlink is an application layer between smart contracts and external information. It enables smart contracts to have integrity and independence from centralized data providers.

The image below is from Chainlink’s data feeds page of the Ethereum network. The Bitcoin dollar price is available from 31 sources, i.e., produced by 31 oracles.

btc oracle

The trusted answer is the price produced by Chainlink’s oracle network. Each oracle gives a slightly different price, after which Chainlink averages them. The more oracles, the more reliable data you get.

Although Chainlink was launched on the Ethereum platform, it is no longer just an Ethereum application. Chainlink is integrated into dozens of blockchains and used by thousands of decentralized apps. The project can be seen as one large distributed application or a collection of API connections application developers can use.

VRF, Proof of Reserves, and CCIP

VRF, Proof of Reserves, and CCIP are important services for Chainlink in addition to data feeds. Let’s examine them in more detail, one at a time.

VRF

VRF stands for Verifiable Random Function. Chainlink developed VRF to bring fair and verifiable randomness to smart contracts. Before VRF, generating randomness in smart contracts was difficult and unreliable. In practice, randomness means often generating a random number.

VRF works as follows:

  • Smart contract requests a random number
  • VRF generates a random number and creates a cryptographic proof
  • The proof and the random number are stored in the blockchain, where it is possible to verify its authenticity and fairness

In the case of blockchain games, VRF can be used to ensure that all players have a level playing field and that winnings are shared fairly. VRF removes the possibility of mistrust and manipulation, making the gaming experience fairer and more transparent for all parties.

VRF is also utilized to determine the rarity and characteristics of NFTs. This, in turn, increases the uniqueness and collectability of NFTs. VRF can be used to ensure that the properties are genuinely random. The image shows NFTs from the well-known Bored Apes collection.

opensea bayc

Chainlink VRF can also be used to build better DeFi applications. It can ensure that lenders and borrowers face equal conditions and that loans are allocated fairly. It is also possible to use it, for example, in project administration and selecting the members participating in the administration of blockchain projects.

Proof of Reserves

The cryptocurrency market has grown explosively in recent years. With growth, concerns about transparency and security have also emerged. One of the most significant challenges is ensuring that cryptocurrency exchanges hold the amount of cryptocurrency they declare.

The crypto exchange can theoretically loan customer funds and operate secretly with a minimum reserve principle. Chainlink Proof of Reserves (PoR) is a tool that can solve this trust issue. Below is an image from the PoR page of the Gemini exchange. Gemini is one of Chainlink’s customers.

gemini por

PoR utilizes Chainlink’s decentralized oracle network, which regularly checks the exchange’s reserves. After the check, the PoR system creates a cryptographic proof containing detailed information about the time, the amount of funds checked, and the methods used. The certificate is signed either with the independent verifier’s private key or with the PoR system’s key.

Finally, the proof is published on the blockchain. This allows anyone to check the evidence and verify its validity.

CCIP

The strong growth of the crypto sector has led to the birth of numerous blockchains and decentralized applications. This development has brought a significant challenge to data accessibility, as each blockchain is a separate silo. How can blockchains be interconnected securely?

The Cross-Chain Interoperability Protocol (CCIP) is a solution that aims to solve this challenge. CCIP provides a standardized and secure way to communicate between blockchains. With CCIP, decentralized applications can transfer information and value between blockchains, which opens up new possibilities for app developers.

Below is a picture from Chainlink’s website. You can read more about the CCIP protocol at chain.link/cross.chain.

ccip

CCIP utilizes Chainlink’s decentralized oracle network, which consists of independent nodes. These nodes are responsible for monitoring the state of the various blockchains and creating proofs that validate transactions and ensure data authenticity. The oracle network ensures that communication through CCIP is secure.

The gaming industry also gains new features from the CCIP protocol, which enables building blockchain games that run simultaneously on different blockchains. Players can trade game items on multiple networks, and games can use the strengths and features of each blockchain.

Chainlink’s LINK token is also essentially related to the CCIP protocol. LINK tokens are used to pay for CCIP transactions, including data transfers and tokens between blockchains. Nodes running Chainlink’s oracle network are rewarded with LINK tokens for their tasks.

The large-scale implementation of CCIP can lead to a significant increase in demand for the LINK token.

Chainlink and RWA

Chainlink is also an essential operator in the RWA sector. RWA (Real World Assets) refers to assets outside blockchains, such as equities, real estate, commodities, and currencies.

Tokenization of RWA, or conversion into digital assets, is one of the hottest trends in blockchain technology and one of the biggest opportunities for the future. With Chainlink, smart contracts can use real-time data versatilely and implement complex functions efficiently and safely.

Chainlink has many potential roles when it comes to tokenization.

  • Chainlink collects real-world data, such as stock prices and real estate rental income, and provides it to smart contracts in real time.
  • Chainlink’s decentralized network ensures data reliability and reduces the risk of manipulation.
  • Chainlink supports numerous different data sources, enabling versatile utilization of smart contracts.
  • Chainlink is compatible with dozens of blockchains, offering a wide variety of options for asset tokenization.

The tokenization of RWA assets, smart contracts, and the technology offered by Chainlink can, at best, revolutionize how we own and invest in real-world wealth. Together, they provide an efficient, secure, and transparent infrastructure that helps open new investment opportunities.

Read more: What is RWA and tokenization?

The LINK token

Chainlink’s native token is LINK. It is a utility token that is needed to use Chainlink’s services. In addition, node operators stake LINK tokens. Chainlink does not have a blockchain, so the LINK token lacks the primary use case of many other cryptos, i.e., paying transaction fees. However, the situation may change with the CCIP protocol.

The LINK token entered the market after its ICO was organized in September 2017. One billion LINK tokens were created in the ICO with the following allocation:

  • 35% for public sale
  • 35% for the development company
  • 35% reserved for node operators and ecosystem

The share reserved for public sale (350 million LINK) has been on the market since 2017. The share reserved for the development company and node operators has been unlocked since 2020.

chainlink supply

The number of LINK tokens in circulation has increased from 350 million to almost 600 million in the previous four years, contributing significantly to Chainlink’s poor price performance.

Chainlink staking

Chainlink’s staking differs from that of smart contract platforms because it does not have a blockchain. Chainlink staking aims to prevent hostile attacks on the network and ensure the accuracy of the data produced by oracles.

The nodes performing the staking earn a profit and are incentivized to deliver as valid data as possible. An operator providing low-quality data may lose its staked tokens. The more LINK tokens the operators stake, the better security Chainlink’s network achieves.

In staking, an extra layer is brought into the system, called the second tier. The operators of the second level ensure that the data produced by the oracle network is valid. If one of the oracle operators suspects other operators are sending incorrect data, it can report them to the “second-tier police.” Second-tier operators reward informants by giving them LINK tokens owned by the fraudsters.

chainlink tiers

Chainlink’s stake took a technical leap during 2023. The first staking platform of Chainlink’s network was called staking v0.1. It included a pool of 25 million LINK tokens into which LINK token investors could lock their LINK tokens.

The latest version of Steikkausalusta (v0.2) was released in November 2023. Its main difference from the previous version was the expansion of the staking pool to 45 million LINK tokens. Read more on Chainlink’s website at staking.chain.link.

Chainlink vs. competitors

Chainlink has been the leading provider of oracle solutions for several years. Its position is solid, especially in the Ethereum ecosystem. Although Chainlink offers compatibility with the most popular blockchains, its position on other platforms is not as strong as Ethereum.

For example, in the case of Solana, Pyth must be highlighted. Pyth offers oracle solutions similar to Chainlink and has a solid position in the Solana ecosystem. Pyth differs from Chainlink by using DAO-based management and more real-time data input. Pyth has recently begun expanding its operations to other blockchains as well.

The emergence of new oracle solutions shows that Chainlink is not immune to competition. As blockchain technology becomes more common, there is room for several oracle solutions in the market. The market situation has also developed in recent years in the direction that Chainlink has more and more worthy competitors.

The list below has the five largest oracle networks and their market share. The data is from Defillama.

  1. Chainlink: 49%
  2. WINkLink: 15%
  3. Chronicle: 12%
  4. Pyth: 9%
  5. Redstone: 3%

Chainlink’s position is still stable; it controls almost half of the market. In addition, its biggest competitor, WINkLink, only focuses on the Tron platform. There is no indication that Chainlink will be losing its market share in the near future. The smaller oracle networks appear to be eating into each other’s market share.

The future of Chainlink

The future of Chainlink looks good! The project has recently taken significant development steps and maintained its market leader position in the oracle sector. However, the question remains: is Chainlink a good investment?

Many Chainlink investors would say that the price development of LINK has been disappointing in recent years. When writing the article, Chainlink’s price was still lower than the peaks of summer 2020. For example, the Bitcoin price is more than six times higher than the summer 2020 peak.

news

The main reason for Chainlink’s lack of success can be seen in the chapter explaining LINK tokenomics. Too many LINK tokens have been released to the market in recent years compared to demand. Chainlink’s price skyrocketed in 2019-2020 when its circulating supply did not grow at all.

On paper, everything looks great. Chainlink is arguably one of the most important infrastructure elements in the crypto industry, and most popular applications use it. The LINK token has clear use cases, too, and more demand drivers are being added with staking and CCIP.

Are the new uses and potential of the RWA sector enough to increase demand and cover the unlocked LINK tokens This is for every investor to evaluate. About 590 million of the billion LINK tokens are in circulation. If the current trend continues, there will be ~50 million new LINK tokens unlocked per year.

If you want to invest in Chainlink, you can do so quickly and safely on Binance. Check out our beginner’s guide on How to Buy Chainlink, which follows the step-by-step buying process.

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