Chainlink (LINK) is a cryptocurrency project with the vision to foster a global, decentralized oracle network among countless computers to provide reliable, real data to smart contracts running on various blockchains.

 

These actual data points that can be connected to blockchain-based smart contracts are known as “oracles”. Every oracle in the Chainlink decentralized oracle network is encouraged to provide accurate data by assigning a reputation score to each. When Oracle follows the rules of the software and provides useful (correct) data, the Chainlink network is rewarded with the native ERC-20 cryptocurrency token LINK. 

 

Interested in Chainlink but don't know what it is or where to start? No worries. This guide has been designed to give you everything you need to know about Chainlink and prepare you for the most user-friendly trading experience on the market.

 

What is Chainlink?

 

Chainlink is a decentralized oracle network. External data providers that share work on the network are called "oracles". These oracles allow Chainlink smart contracts to get accurate data from external (non-blockchain) sources such as all kinds of APIs and some other external data feeds. LINK is an ERC-20 token used to pay for and ensure the authenticity of this oracle service on the Chainlink network.

 

Chainlink takes the capabilities of smart contracts to the next level by providing access to real data, events, payments and more without compromising the security and reliability inherent in blockchain technology.

 

First created in 2017, the Chainlink team has been able to achieve its vision of providing external data to blockchains so far. Although Chainlink is based on Ethereum (ETH), it is also designed to work on any blockchain with smart contract functionality. Chainlink does not have its own blockchain – instead, it can interoperate with chains and run on many different blockchains simultaneously.

 

How Does Chainlink Work?

 

Chainlink follows an innovative three-step process to enable communication between the blockchain-based smart contracts it serves and external data sources:

 

Oracle Choice: a Chainlink user draws up a Service Level Agreement (SLA) that specifies a specific set of data requirements. Chainlink software then uses this SLA to match the user with the most suitable oracles that can provide the data. Once the parameters are set, the user submits the SLA and deposits the Chainlink (LINK) coin into an Order Matching contract that accepts offers from oracles.

 

Data Reporting: this step is where oracles truly connect with external data sources to get the actual data requested in the Chainlink SLA. The data is then processed by oracles and sent back to contracts using the Chainlink service.

 

Results Collection: the final step of the process is to calculate the results of the data collected by oracles and pass it back to a Collection contract. The aggregation contract takes the data points, evaluates the validity of each, and assigns a weighted score to the user (smart contract) using the sum of all the data received.

 

LINK is the ERC-20 token used to pay for services on the Chainlink oracle network. It powers the architecture of Chainlink.

 

Requesting Contract holders use LINK to pay node operators for their work providing required data. Prices are set by the Chainlink node operator based on the demand for data they can provide and the current market for that data.

 

Chainlink node operators also use LINK as their stake in the network – node operators deposit LINK to demonstrate their loyalty to the network and promote good service, while at the same time penalizing malicious or false services by losing the LINK they stake.

 

The Chainlink Reputation Contract uses the size of a node's LINK stake (and other factors) when exchanging data to fulfil a contract. Nodes with larger stakes are more likely to be selected to fulfil requests (earning LINK tokens for their service).

 

Chainlink Features

 

Chainlink's main focus is on working with smart contracts. Chainlink provides access to any external API you want to connect to the smart contract. Thus, it is possible to make payments to any payment system or banking network through a contract.

 

ChainLink smart contracts serve three functions:

 

Reputation assessment: Users can use smart contracts with a certain range of parameters, which includes an oracle reputation called a service level agreement. Oracles who violate the rules of the network and provide false data will be penalized and also demoted. If the smart contract receives a sufficient number of applications, a service contract with ChainLink begins.

Working with external data: When off-line oracles are selected, they make a programmatic agreement and provide the requested data.

Aggregation: As a third step, the aggregation contract collects all data transmitted by off-chain oracles and then averages them to create a weighted aggregate response.

In simple terms, Chainlink can be defined as a decentralized oracle network that provides data.

 

ChainLink Oracle

 

Oracle are the servers that will provide the data. They are data providers of what is going on in the real world. Thanks to them, the data goes to the blockchain and the smart contract understands what is happening, draws conclusions and makes transactions. For the process to be effective, you need to know that oracles operate honestly and that vendors do not cheat or provide accurate information.

 

ChainLink oracles can use datasets, APIs, and other, almost any outside world resources. This will be useful for projects that need external data to work. ChainLink aims to be a bridge between traditional knowledge and the technology of the future, blockchain.

 

Chainlink Advantages

 

The Chainlink project provides compatibility between Bitcoin, Ethereum, and also allows banks and payment services to be included in the system.

One of Chainlink's goals is to decentralize smart contracts. This is a step that will greatly improve the security and accuracy of information.

SmartContract company, which forms the backbone of Chainlink developers, has been engaged in contract automation since 2014.

Collaboration with the biggest companies – Google Cloud, Oracle and SWIFT – gives confidence

LINK tokens are seen as an important investment tool by users, given the technological capabilities and goals of the Chainlink project.

Disadvantages of Chainlink

There is a little guarantee for investors that the partnership will be long and fruitful. Low development speed is cited as one of the major problems. It is unknown how long it will take for Chainlink to implement a real working solution that affects the execution of financial transactions. Moreover, there is no officially published roadmap to guide.

 

DeFi and Chainlink

 

Blockchains are basically designed as a closed system. They only rely on on-chain data that already exists on the blockchain. This ensures that decentralized consensus is maintained and cannot be manipulated. However, the use cases of blockchain are extremely limited with this premise.

 

For example, price and interest datasets created outside of a blockchain (off-chain) and differing in value and format from different sources are inaccessible. Additionally, the diversity of data makes it difficult for blockchains to obtain reliable data without sacrificing consensus reliability. In this regard, the Chainlink team states:

 

“Given the realities of modern data and blockchain consensus, there is an urgent need for a standardized bridge between DeFi applications and off-chain data of all kinds. As discussed below, Chainlink is a standard, yet customizable protocol for enabling DeFi to connect securely and reliably with off-chain resources.”

 

Using Chainlink, DeFi projects can increase the variety of products offered and make the market more attractive to players. Altogether, Chainlink lists four tangible benefits that Chainlink Oracle technology offers: connectivity, data protection as well as confidential and cost-effective data.

 

Decentralized Stable Coins

 

Stablecoins are on-chain tokens pegged 1:1 to fiat currency, usually US dollars. They provide users with the ability to hold a non-volatile cryptocurrency. While centralized stablecoins are backed by fiat in an off-chain bank account, decentralized stablecoins are often over-collateralized by on-chain cryptocurrencies and need price data to maintain full collateralization.

 

DeFiDollar is an example of a decentralized meta-stable coin (a stablecoin backed by multiple stablecoins) that uses Chainlink Price Feeds to monitor the price of underlying assets, including sUSD, USDT, DAI, and USDC. Should one or more of these tokens deviate from the 1:1 USD peg, causing DUSD to lose its peg, a rebalancing is triggered between the four reserves to maintain DUSD's dollar parity.

 

 

Synthetic Assets

 

Synthetic assets are a category of financial instruments that provide price exposure to certain assets, such as indices or commodities, without requiring traders to own the physical asset itself. Smart contract-based synthetic assets allow traders to create advanced non-custodial trading strategies and gain exposure to traditional assets not available on the blockchain.

 

Synthetix is an example of a protocol that uses Chainlink Price Feeds to print various “synths” that provide traders with on-chain exposure to assets such as cryptocurrencies, fiat currencies, commodities, indices, stocks and more. Via a peer-to-peer contract trading model, users can switch between these synthetic tokens with zero slippage using Chainlink Price Feeds to access the current value of the underlying assets.

 

Tokenized Portfolio Management

 

A unique use case for smart contracts is non-custodial "smart portfolios" that automatically rebalance user portfolios by executing transactions on their behalf based on predetermined conditions. This provides users with advanced financial products that programmatically manage investments based on the current market-wide price of certain assets and tokens. These trading strategies can be specified and allow users to transfer and use these tokens in other smart contract applications.

 

Tokensets, various "Sets" that trade on behalf of users, is an example of a protocol that uses Chainlink Price Feeds to create tokenized positions. These Sets are based on Technical Analysis (TA) metrics such as RSI or moving averages, designed to capture key price action trends. Additionally, users can use Set tokens as collateral on other protocols such as the Aave money market to gain additional capital efficiency.

 

On-chain Proof of Reserve

 

Wrapped cross-chain assets, which are blockchain-specific cryptocurrencies/tokens that are locked into a contract and then "unlocked" on another blockchain, are becoming increasingly popular due to their ability to augment the types of collateral available in the DeFi ecosystem. However, to ensure the integrity of DeFi applications supporting wrapped asset deposits, Proof of Reserve reference contracts can be used to provide data on the actual collateralization of these on-chain assets.

 

Two protocols that use Chainlink to power Proof-of-Reserve reference feeds include BitGo's WBTC and Ren Protocol's renBTC, representing the vast majority of Bitcoin wrapped in Ethereum and representing billions of USD worth. These Proof of Reserve reference feeds provide DeFi protocols with the data they need to autonomously verify collateral reserves and rapidly protect user funds during an under collateralization event. Proof of Reserve reference feeds can also be used to monitor collateralization of assets beyond cross-chain tokens, including stable coins and real-world commodities, further increasing the collateral available within DeFi.

 

Conclusion 

 

Chainlink, in other words, LINK cryptocurrency developers, although smart contracts have been able to change significantly in many industries by changing the need for traditional legal agreements, they believe that the main consensus protocols related to blockchain technology cannot be communicated effectively with other traditional systems of smart contracts through non-blockchain systems. states that they want to act as a bridge.

 

The Chainlink ecosystem is shaped around the LINK network and the LINK token. With the release of APIs and other platforms, developers aim to increase the applicability and usability of smart contracts in the business world. The Chainlink network will allow individuals with a data feed or other API to offer directly to smart contracts in exchange for Chainlink tokens. Such parties integrate their API-based services directly into a smart contract and blockchain system in exchange for LINK tokens.

 

 

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