Key takeaways
- Chainlink provides DApps with reliable real-world data for secure and accurate smart contract execution.
- The LINK token powers the network and rewards node operators for providing data and facilitating transactions.
- Decentralized oracles and Chainlink cross-chain interoperability allow DeFi projects to build more complex solutions.
- Its wide adoption and innovative technology make it a foundation of the blockchain ecosystem.
The name “Chainlink” is one that most people will encounter when exploring crypto. Chainlink works a little differently than other blockchain projects, and if you’re still finding your feet in the industry, the jargon can be hard to understand.
Chainlink founders Sergey Nazarov and Steve Ellis aim to solve the blockchain “oracle” problem by allowing data from outside a blockchain to be imported into a blockchain. It sounds simple, but there’s a lot more to it than that, so stick around! This article is a Chainlink beginner’s guide, where you’ll discover how Chainlink works, the Chainlink (LINK) cryptocurrency, and future outlooks for the project.
What is Chainlink (LINK)?
Chainlink provides decentralized applications (DApps) and blockchains with access to reliable offchain, real-world data. It’s important that DApp smart contracts are able to securely access real-world information that exists outside the blockchain.
Chainlink is considered a “decentralized oracle network.” An “oracle” is a third-party service used to query, verify and authenticate external data sources before relaying the information to smart contracts.
The native cryptocurrency on the Chainlink network is LINK. The Chainlink tokenomics structure powers the architecture and includes transaction fees, payments and rewards. On Chainlink, staking is also available to help secure the oracles and earn rewards.
Chainlink is a key player in enabling information and assets to move between blockchains, a function known as cross-chain interoperability.
What is cross-chain interoperability?
Cross-chain interoperability is the process of blockchains interacting with one another. Chainlink enables this through smart contracts on one blockchain that securely interact with data and events on another.
It’s important in the development of DApps and decentralized finance (DeFi), which run on data from multiple blockchains.
So, Chainlink has become a fundamental layer across the ecosystem, but how does it all function?
How Chainlink (LINK) works
There are four primary elements that make Chainlink function:
- Oracles: An oracle is similar to an API in traditional software. It’s a connection or bridge between a blockchain and a data source. It is also responsible for fetching, verifying and sending data.
- Nodes: Independent node operators provide this data to the network. They help developers build smart contracts for DApps by giving them access to data or services.
- Data aggregation: The network has a data aggregation process to enable the gathering and organization of data from multiple sources.
- LINK: The LINK token is used to power everything. For example, node operators are paid in LINK for providing data.
Did you know? There are over 90 Chainlink node operators, including some familiar names such as Vodafone, Coinbase, Kraken and Binance.
Key features of Chainlink (LINK)
Data feeds, interoperability and cryptocurrency are just the start of Chainlink’s use cases, making it a powerful blockchain. Several other key features improve the development of DApps.
- Source of randomness: DApps such as games that need cryptographically secured randomness can use Chainlink Verifiable Random Function (VRF) — a provably fair and verifiable random number generator particularly useful for crypto casinos.
- Hybrid smart contracts: Chainlink’s ability to combine code on the blockchain and data from outside the blockchain enables developers to build “hybrid smart contracts,” which are Ideal for executing smart contract actions based on real-world events.
- Proof of reserve: Chainlink Proof of Reserve (PoR) automates the auditing of collateral assets held by organizations in real time. DeFi investors can get transparency on the digital asset collateral held by a crypto business.
It all makes for an impressive range of features, so how does Chainlink fit into the broader blockchain ecosystem?
Did you know? Chainlink VRF allows smart contracts to generate random numbers with cryptographic proof of how the values were determined. It ensures results can’t be tampered with.
Chainlink’s role in the blockchain ecosystem
Chainlink has a wide-ranging role across the blockchain and DeFi world. In fact, over 2,600 projects use the Chainlink ecosystem in some form. Here are some examples:
- DeFi platforms such as Bedrock and Silo Labs use Chainlink data feeds to integrate price feeds for their products.
- Non-fungible token projects such as Kreepy Kritters and MadSkullz use Chainlink to offer cross-chain NFT transfers.
- Decentralized gaming platforms such as Nifty League and FairBet use the VRF feature to ensure the randomness of game results, bets and raffles.
Did you know? Many of the largest Web3 protocols and even traditional finance institutions have adopted Chainlink, enabling over $15 trillion in transaction value.
How to use Chainlink in DeFi projects
The flexibility in how Chainlink can be used might have you wondering how exactly DeFi projects are utilizing it beyond providing data.
Chainlink’s decentralized price oracles are commonly used to fetch accurate live crypto market prices, which are essential for trading and precise smart contract execution. Lending and borrowing platforms also use Chainlink to establish fair collateralization rates.
Additionally, hybrid smart contracts can be used for tasks such as automatic yield farming strategies and optimizing yield. Plus, DeFi insurance companies use the technology to trigger insurance payouts based on real-world events.
Did you know? SWIFT, a backbone of the traditional financial system, has a notable Chainlink partnership that aims to securely connect financial infrastructure to the blockchain economy
Chainlink vs. other oracle networks
There’s no question that Chainlink is an impressive operation, but it’s not the only oracle network out there. So, how does it stack up against its competition?
Chainlink vs. Band Protocol
Brand Protocol is a similar decentralized network that runs on validators to deliver secure data for smart contracts. It’s not as feature-rich, but it does allow for cross-chain interoperability for multiple blockchains and includes a staking mechanism to incentivize validators for accurate data.
Chainlink vs. API3
API3 is another decentralized oracle network, but it operates a little differently. Rather than relying on independent node validators for data, it uses an API network with customizable data input and timing. Plus, its governance model enables tokenholders to vote on network upgrades and decisions.
Overall, the Chainlink oracle network remains the market leader with a market cap of over $6 billion. It is the most widely used, has strong security, and includes wide-ranging features.
How to buy Chainlink (LINK)
You can use a trusted exchange like Kraken or Coinbase to buy LINK. These exchanges let you deposit funds using a bank transfer, credit or debit card. They also offer live market exchange rates.
Here’s a step-by-step process:
If you’re considering buying LINK as an investment, you may wonder what the future holds for Chainlink.
Future prospects of Chainlink
DeFi is a booming industry. The total value locked (TVL) across the sector has reached over $100 billion several times since 2021. That is stunning growth, considering it stood at around $500 million in 2020.
Chainlink plays a significant part in this growth. As the most prominent oracle provider, it helps secure $20 billion of this value across 404 chains as of September 2024 — a 46.6% market share.
In the same period, the price of the LINK token has soared from under $2 to over $10 as it capitalizes on a growing industry and increasing use within the ecosystem. While you can’t rely on LINK’s price history as a guarantee to come up with future Chainlink price predictions, its continual adoption, growth and technological advancements have kept it firmly at the top of the oracle chain.
Chainlink in 2024 acts as a foundation for a huge range of blockchain and DeFi projects. It bridges gaps and brings real-world relevance to smart contracts. DApps can run ever more complex protocols based on reliable data feeds, while decentralized oracles reduce data manipulation risks and single points of failure with data. The Chainlink DeFi integration use cases offer insurance to trading exchanges, and continued Chainlink adoption is driving innovation in the industry.
The project is poised to further revolutionize DeFi by enabling seamless, secure integrations between blockchain ecosystems and real-world data, paving the way for even more innovative applications in Web3.
Written by Marcel Deer