8 min readChainlink: a Decentralized Oracle Network
Chainlink connects blockchains to external data, allowing smart contracts to operate “in the real world.”
Its token, LINK, is used to compensate node operators for retrieving this valuable data.
- Launch date: 2019
- US$ 6.6 trillion: Transaction volume enabled by the Chainlink Network
Chainlink At a Glance
Connected & Decentralised
Chainlink’s technology enables smart contracts to access off-chain data. Its decentralised architecture is a safety guarantee, as no single actor can manipulate the system.
Always accurate
To ensure data quality, Chainlink has put a reputation system in place, rewarding nodes that provide accurate data to contracts.
Highly flexible
Developers can use Chainlink for a variety of use cases, across APIs, payment systems, and IoT devices.
Widely adopted
Chainlink can count on a strong ecosystem of users, creators and partners - including Google, Oracle, and SWIFT.
Key Figures
Use cases: Virtually Unlimited
Chainlink is currently the n°1 platform for building decentralised applications. That’s because its four main products (Data Feeds, Verifiable Random Function, Automation and Cross-chain bridging) provide valuable services for a wide variety of industries:
Decentralised Finance (DeFi). Chainlink delivers trusted price feeds to some of the world’s biggest decentralised exchanges. It can also be used for other financial purposes such as creating automatic indexes.
Linking Traditional Finance (TradFi) to Defi. Chainlink has partnered with SWIFT (the messaging network banks use) to enable banks to instruct token transfers across most major blockchain environments.
NFTs & Gaming. Chainlink generates cryptographically truthful, tamperproof and fair random numbers - essential for virtual economies and collectibles.
Protocol Mechanism: Bringing off-chain and on-chain together
Native smart contracts operate “on-chain”: they document transactions in a public distributed ledger. This ensures security and unforgeability for data that is entirely stored on the blockchain. But what if contracts want to automatically react to “off-chain” events? Should they rely on a single point of entry (or exit), then all the benefits of decentralisation are lost, and the entire system becomes prone to failure, manipulation, or simply poor data quality.
Chainlink bridges this gap through its Decentralised Oracle Networks (DONs, also referred to as oracle nodes). Simply put, the nodes receive data from real-world events via data providers and backend systems to inject secure, decentralised and aggregated data into smart contracts that have requested such information.
Thanks to this architecture, the entire interaction remains decentralised, reliable and secure.
Another interesting point is that Chainlink relies on a Proof-of-Stake Protocol. As of December 2022, holders and node operators can earn staking rewards for helping increase the cryptoeconomic security of oracle services.
History
Chainlink was created in 2017 by Sergey Nazarov and Steve Ellis, two entrepreneurs with an extensive track record in crypto. They have since been joined by Eric Schmidt, former Google CEO and Chairman, who acts as a strategic advisor for Chainlink Labs.
Key milestones:
2017: Partnership with SWIFT, a messaging service in every major bank, paving the way for performant interoperability between traditional finance institutions (TradFi) and blockchains.
2019: Chainlink launches its mainnet, enabling developers to use its decentralised oracle network on the Ethereum blockchain.
2021: Launch of the Verifiable Random Function (VRF) feature, a generator for secure and fair random numbers for blockchain applications.
December 2022: beta of Chainlink Staking (v0.1) goes live on Ethereum mainnet.
July 2023: Chainlink Cross-Chain Interoperability Protocol (CCIP) enters the Mainnet Early Access phase.
What's next?
Sergey Nazarov, Chainlink’s co-founder, announced in January 2023 that “Chainlink Economics 2.0 is the beginning of a new era in increased oracle security, sustainable value capture, and long-term adoption for the Chainlink Network.”
Economics 2.0 is composed of an array of initiatives: Chainlink BUILD, Chainlink SCALE and Chainlink Staking. Through these initiatives, Chainlink affirms its ambition to expand its suite of services to off-chain data computation, strengthening its focus on hybrid smart contracts.
CoinShares’ Analysis
Chainlink is a leader in the Oracle sector, and twice as big as its closest competitor, Maker. Its services add flexibility and functionality to many projects, without compromising on security and decentralisation. It is therefore uniquely positioned to be a major player in the Decentralised Finance (DeFi) ecosystem.
Strengths
Blockchain agnostic. Chainlink can connect to all public and private blockchain environments, providing a universal layer of settlement between the off-chain and on-chain worlds.
Efficiency and scalability. Chainlink provides secure, decentralised, tamperproof and aggregated data.
Weaknesses
Token volatility. LINK’s annualised volatility stands at 138% based on our latest estimates, potentially deterring investors.
Delays in enabling staking.
Opportunities
Colossal value creation potential. Chainlink solves a major problem faced by all blockchains: connecting securely to the outside world.
Use-cases across all industries. Chainlink services can be used to power projects across finance, insurance, identification and gaming.
Threats
Competitive and well researched field. Not all of Chainlink’s features are well identified by potential users, which could hurt adoption rates.
Security issues. LINK’s high volatility rate may affect the security of the network as users withdraw and sell.