Chainlink is a blockchain-based protocol used to transfer data and execute smart contracts on the blockchain. It is a decentralised oracle network that has been built on Ethereum. 

Developed in 2017 by Steve Ellis and Sergey Nazarov, the software hit the markets in 2019. In this article, we try to understand how Chainlink works. 

1

The Chainlink Network

The Chainlink network uses a three-step process to provide information from the outside world in a matter of seconds.

  • Selection of appropriate oracles: Chainlink caters to multiple blockchains. So when users ask for certain information by drawing up a service level agreement, the network finds the most appropriate oracles for the job.
  • Processing the data: The oracles bring in the information and process then according to the requirements stated by the users.
  • Aggregating the results: The results are then sent to an aggregate contract. Aggregate contracts deliver the most accurate results to the smart contract.
2

Maintaining the Blockchain

Chainlink is an oracle blockchain. The blockchain is maintained the same way as other cryptocurrencies. There are validating nodes within the network which verify the information before it is added to the ledger.

Chainlink uses a system similar to Proof of Stake. The nodes have to stake a part of their LINK tokens to be able to update the information that was to be verified. The node that succeeds in doing so receives rewards in the form of LINK tokens.

What sets Chainlink apart from other networks is a decentralised oracle. An oracle blockchain is a network that brings information from the outside world to the blockchain.

Smart contracts exist on blockchains as automated functions. These functions are executed as soon as certain conditions are met. Most of the time, the information regarding the fulfilment of the condition is available on the blockchain. But when the data is off-chain, the blockchain requires oracles to bring that information.

Usually, the Oracle is a centralised network, defeating the purpose of a decentralised blockchain. But Chainlink offered a decentralised blockchain alternative, meaning that any central authority does not censor information from the outside world.

This provides a great deal of freedom to the Chainlink network. Moreover, Chainlink allows numerous other blockchains to access this information.

3

Mining Chainlink

Chainlink cannot be mined like other cryptocurrencies. The reason is that there is a cap on the LINK supply. There are only 100 billion LINK tokens, and no more will be created.

Only 35% of them are with the public, while 32% were assigned to the node operators. The rest, about 30%, remained with the network developers for future development.

Chainlink works on a system similar to Proof of Stake. Node operators have to stake their tokens to receive information. In return, they receive rewards in the form of LINK tokens.

The price varies from node to node, depending on the demand for the information it brings from the outside world.

But, node operators cannot sell their tokens to the public. So the supply of tokens remains constant for the people. If the supply increases, the developers can let some tokens trickle into the network. There is no fixed system for that in Chainlink.

4

Chainlink Value

Chainlink has a limited supply, with only one billion LINK tokens created. Since their number will not increase, Chainlink has a deflationary nature. This means that as time passes, its buying power keeps increasing. If we break it down, it becomes obvious.

The number of tokens is limited. But as more tokens enter the supply chain and the cap limit looms nearer, the tokens become unique. Finally, people will realise that there will be no more tokens, so the value increases.

The highly volatile nature of cryptocurrencies is also a factor when deciding the value. LINK reached an all-time high of $52.70 in May 2021.

FAQ

What is blockchain?

Blockchain is a ledger system where information is stored in the form of blocks. Peer nodes verify these blocks before being updated on the ledger.

What is an oracle network?

An oracle network brings outside information to the blockchain, like data for smart contracts.

What are smart contracts?

Smart contracts are agreements that automate specific processes. This means functions are automatically executed when a particular condition is met.

What is the highest value that LINK has attained?

LINK reached $52.70 in May 2021, which was the highest value that the cryptocurrency attained. 

Is Chainlink secure?

Chainlink uses the blockchain protocol, which provides a secure platform for conducting transactions.

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