In this episode of the BeInCrypto video news show, host Jessica Walker explains Chainlink. Because blockchains are designed to interact in an enclosed system, they can become isolated. To facilitate interconnection, Chainlink is an oracle service that securely bridges blockchains and helps decentralized systems.
How Does Chainlink Work?
Chainlink provides blockchains with trustless access to off-chain data, as well as cross-chain data. What does this mean? By bridging information, the input cannot come from a single source because it would then rely on a centralized source of data. This goes against the very nature of blockchain.
Chainlink uses APIs (API is the acronym for Application Programming Interface) to plug into anything. Pulling off-chain data to feed smart contracts platforms. These sources of data could include banking systems, payment processors, even weather or private satellite information.
Applications will request information to Chainlink, and they create a demand for information. This demand is then provided by oracles. These oracles plug into the Chainlink network and compete to be the most reliable source of information.
Something that makes Chainlink a very powerful tool is precisely these oracle contracts. These give economic incentives to those running them and the responsibility to be accurate and reliable. This is because the reputation of each oracle is stored on a public blockchain. This potentially attracts high-quality node operators to the network, and their incentives will motivate them to build a reputation on the Chainlink network.
Chainlink was founded by Sergey Nazarov, an early pioneer in smart contracts and external middleware connectivity. Sergey launched the Chainlink token in an ICO in 2017, and it took 2 years more to launch the mainnet in 2019. During that time, the team managed to stay on top of the competition. Among the oracle services available right now, Chainlink is 7 times larger than its direct competitor, UMA.
While blockchain technology is great at providing a decentralized, secure ledger for digital transactions, it isn’t so great at taking input for things happening outside the blockchain. Chainlink’s potential is to enable smart contract access to data in the most secure, permissionless, tamperproof manner.
When it comes to creating value for its token $LINK, the protocol has some interesting features. With the total token supply of one billion tokens, data requesters pay oracles for fetching data in LINK. Meanwhile, the data oracles we mentioned earlier have to put down LINK as collateral to guarantee uptime and data reliability.
Oracles want to participate, and use LINK, while data requesters who want to use oracles’ services use LINK, creating a natural demand for the token. This also creates a deflationary effect. Since LINK oracles have to lock up LINK tokens, this reduces the available supply for a while. This then causes the price to go up as the demand increases.
What is next?
Chainlink seems to be an important technology as the cryptocurrency industry continues to evolve. Having an oracle such as Chainlink in place will be key to the long-term stability and viability of cryptocurrency in general.
Many well-known protocols are using or will need the services Chainlink offers. As the industry grows, everything with smart contract capabilities is an opportunity for Chainlink. Think of Polkadot, Solana, Binance Smart Chain, Cardano, and even protocols built on Ethereum.
The industries it serves are wide, too. Chainlink has many use cases, such as providing data feeds to smart contracts. It also creates a communication standard between protocols and allows them to integrate with each other. Chainlink provides price feeds and public datasets that any service can connect to, no matter if the data comes off-chain. It can also play an important role in the gaming and gambling industry, as it is able to randomize and un-bias data securely.