If you have followed our series of articles on investing in cryptocurrencies, you will already know how smart contracts Ethereum They can process complex transactions on the blockchain without an intermediary, such as a bank. Well, smart contracts need data from two sources: the blockchain (“on-chain”) and the real world (“off-chain”), and Chainlink forms the bridge between the two. Let's learn more about it and analyze why it could be a good cryptocurrency investment.
What is the story behind Chainlink?
Its origin story is pretty simple: In 2017, entrepreneurs Sergey Nazarov, Steve Ellis, and Cornell Tech professor Ari Juels published the whitepaper from Chainlink.
The document solved a problem that many in the cryptocurrency investment ecosystem were dealing with: How could smart contracts obtain reliable data from the outside world?
Why do smart contracts need external data?
Smart contracts, those programmable rules that developers can build on top of certain blockchains, are actually the backbone of thousands of decentralized applications (DApps) that run on them. Let's say a sports betting DApp wants to use a smart contract to pay its users based on the results of a football match. But there is a problem: the result of the match is not stored on the blockchain.
Conceptual diagram explaining how Oracle links the blockchain to the Internet.
To do its job, the smart contract needs data from the outside world. This may come from an “oracle,” which is software that links the blockchain to the Internet. Here, the oracle uses an API (application programming interface) to retrieve online data (the results) and convert it into code that the blockchain smart contract can read. This is similar to how a news app on our smartphone uses an API to get the latest articles from the web.
Of course, oracles are more reliable when they are decentralized. This way, no person or entity controls the data source and the smart contract knows that the oracle is telling the truth.
So how does Chainlink work?️
Chainlink is a decentralized oracle network that connects data between the outside world (off-chain) and different blockchains (on-chain). It formats this data so that smart contracts can easily understand it and uses blockchain technology to ensure that your oracle information is accurate and reliable.
Each oracle is run by a node operator, a person or entity that handles all the technical aspects of bringing real-world data to the blockchain. Chainlink's own blockchain works to incentivize node operators to do what is best for the network, i.e. provide the best quality data.
Operation of Chainlink nodes. Source: Chainlink Documentation
If a smart contract on another blockchain needs data, it sends a “data request” to Chainlink. Chainlink's algorithm then does three things: 1. First, it scans your oracle network and ignores node operators that are untrustworthy or have a questionable reputation. 2. It then matches the data request with the remaining trusted node operators, which go out and find the answer. 3. Finally, it analyzes all the responses from each oracle to get the most accurate response, which it then sends back to the smart contract that requested it.
What are LINK tokens?⚙️
LINK is the currency that works to keep Chainlink safe and running. Chainlink is a proof-of-stake (PoS) blockchain, meaning there is no mining or miners. Instead, node operators “lock” their cryptocurrency investment (i.e. deposit) LINK tokens as collateral for Chainlink to function smoothly. In exchange, they can generate more LINK. Of course, there is a catch: if the node operators disrupt the normal operation, they can lose their entire stake.
Improvements introduced to LINK staking: Source: blog.chain.link
The token is important for another reason. If we want to consult Chainlink data, we have to pay with LINK. As the Chainlink network grows, there will be more demand for the token (all things being equal).
How big is the Chainlink network?
According to the latest report of chainlink, the blockchain has data sources with over 1.372 cryptocurrency projects in the DeFi, gaming, and NFT sectors. What's even more interesting is that these projects are spread across most major smart contract blockchains, including Ethereum, Binance Smart Chain, Polygon, Solana, Fantom, Avalanche, Polkadot, and Cardano. So if we are long-term optimistic about the growth and interest in cryptocurrency investing, it might make sense to invest in LINK.
LINK is considered an interesting investment in cryptocurrencies. Source: Chainlink Blog
Chainlink also connects to exchanges like Binance and price providers like Coinmarketcap to obtain price data for DeFi smart contracts. It is also linked to Google Cloud, Amazon Web Services, SWIFT, Oracle, and a variety of other off-blockchain data providers. Chainlink really is the bridge between the blockchain and the off-chain world.
Does investing in cryptocurrencies like LINK have risks?
As with any cryptocurrency investment, Chainlink has its risks:
– LINK could suffer in the future. LINK's maximum supply is 1 billion tokens. Right now, only half of them are in circulation. If more of that supply is released to the market, it could hurt the price of the token.
Information about Chainlink. Source: Coinmarketcap
– The top 1% of Chainlink addresses own more than 90% of the total token supply, according to Glassnode data. It has been on a steady upward trend since 2017 when it was only 30%. When just a few large investors have too much supply, they can have an outsized influence on the price if they decide to dump their holdings, better known as a shock supply.
1% of Chainlink addresses own more than 90% of the total token supply. Source: Glassnode
– There is a risk of regulations. For investors who believe in the future of decentralized finance (DeFi), LINK tokens will shape the future of this revolution, because Chainlink is essential for DeFi protocols that need true price data. But DeFi could run into some major regulatory hurdles in the coming years, which could slow the sector's growth for a while.