Want to learn more about Chainlink cryptocurrency before investing? This beginner’s guide is for you. You will learn what Chainlink is, its history and how it works.
Chainlink is a distributed program built on the Ethereum network. Chainlink displays all high-quality data for smart contracts.
What is a smart contract in cryptocurrencies?
Smart contracts are “programmed programs” in a blockchain that automatically perform their assigned functions, eliminating the need for third parties and other cumbersome trust processes. It is also impossible to manipulate or modify the smart contracts afterwards.
Nevertheless, smart contracts also have their limitations. The great weakness of smart contracts is that they cannot independently access data outside of the blockchain . If a smart contract wants to access data outside of the blockchain, it must be connected to an oracle , the source of information.
If a smart contract only uses information from a centralized oracle, this directly reflects on the reliability of the data. The reliability of a smart contract is significantly compromised if it only uses a single centralized oracle as its source of information.
Chainlink is a project that aims to address the challenges posed by centralized oracles used by smart contracts. Chainlink solved the problem of smart contract oracles by creating a distributed pool of oracles, in each of which the oracles all strive to produce high-quality information. Smart contracts that take advantage of a decentralized pool of oracles improve their reliability.
Chainlink has developed a system whose algorithm ranks oracles based on the reliability of their data. In a system developed by Chainlink, oracles are rewarded with Chainlink’s LINK tokens . Oracles that produce high quality information earn LINK tokens for themselves, while oracles that produce low quality information lose their tokens. The system developed by Chainlink encourages oracles to produce high-quality information for smart contracts.
The history of Chainlink dates back to 2014 when the non-profit organization called SmartContract Ltd was founded. SmartContract Ltd is the organization behind Chainlink. The CEO of SmartContract Ltd is Sergey Nazarov , one of the most well-known people in the cryptocurrency world. The Chainlink project was developed quietly for several years, until in 2017 it organized a crowdfunding, i.e. ICO, raising $32 million in funding for the project.
Chainlink started its operations on the Ethereum blockchain in 2019. In that year, Chainlink obtained many important partnerships (Google, Oracle and Microsoft), and it was also listed on the largest cryptocurrency exchanges in the world.
2020 was also a compelling year for Chainlink. Chainlink has established itself as the world’s leading oracle solution and one of the largest cryptocurrencies in the world by market value.
Principle of operation of Chainlink
Chainlink is an oracle network built on top of Ethereum. Chainlink has its own token called LINK. The LINK token is the cornerstone of the entire Chainlink ecosystem and plays a crucial role in its operation. The maximum number of LINK tokens is predetermined.
In practice, Chainlink acts as a link between smart contracts and the off-chain data they need. Chainlink provides a fully decentralized platform for oracles that play an important role in the reliability of smart contracts. In the system developed by Chainlink, oracles must provide the best possible information for smart contracts, as high-performing oracles earn LINK tokens for their performance, while low-performing oracles lose their tokens. LINK is the currency integrated into the Chainlink network, and it is also the only currency used by the essential functions of the network.
Technically, the Chainlink oracle consists of two different parts, one inside the blockchain and the other outside the blockchain. The part inside the blockchain can be seen as a contract for data transfer between the oracle and the smart contract. The outer part of the blockchain is called a node, i.e. an operator. Nodes receive a reward for their work in the form of LINK tokens.
The Chainlink network includes many nodes that provide off-chain data to smart contracts via oracles. The process is completely decentralized, eliminating security issues that might arise when using a single centralized oracle. Additionally, Chainlink’s software checks the quality of data previously produced by the oracle and discards nodes that produce unreliable and low-quality data.
Although Chainlink runs on the Ethereum blockchain, its operation is not limited to Ethereum only. In practice, Chainlink is a distributed program whose services can be deployed in any blockchain. Since 2019, more and more blockchain projects have integrated Chainlink’s oracles into their network. Today, Chainlink technology serves as the backbone of many different cryptocurrency projects. For example, almost all major decentralized finance (DeFi) applications use Chainlink’s oracles.
Chainlink as an investment
Over the years, Chainlink has gained massive popularity among cryptocurrency investors. Its growing popularity is due to several different factors like its unique technology and many well-known cooperation agreements. The oracle problem means that before Chainlink, information produced by oracles could often be inaccurate.
The solution offered by Chainlink is used in almost all cryptocurrency projects that require information produced by oracles. It can be said that without Chainlink’s oracle solution, the development of the cryptocurrency market would have been slower, and many of the most important innovations in the market would not have been technically possible.
Currently, Chainlink’s position in the cryptocurrency market is strong. Going forward, the success of Chainlink will depend on the development of the project and the growing popularity of smart contracts. In theory, in the future, smart contracts can replace all contracts concluded in digital form. The potential of smart contracts is enormous and smart contracts can change the way people enter into contracts forever. Unleashing the full potential of smart contracts would be very difficult without Chainlink’s oracle solution.
The success of Chainlink’s LINK token is directly comparable to the usefulness of Chainlink’s solution. If the demand for smart contracts increases in the future, the usage of the LINK token also increases. An increase in the use of Chainlink naturally also affects the price development of the LINK. Chainlink offers a viable solution to the smart contract oracle problem, and it also has no significant competitors at the moment. It is therefore no wonder that Chainlink has become one of the most popular cryptocurrencies on the market.