To date, Chainlink is one of the most popular platforms. However, unlike many other cryptocurrencies, Chainlink does not seek to compete but is a kind of intermediary between the real world and the blockchain. In this review, we suggest you dig deeper into the Chainlink project and discover its features, capabilities, and prospects.
What Is Chainlink?
Chainlink is a decentralized network of oracles built based on the Ethereum blockchain. The project solves the problem of communication between blockchain and smart contracts, providing the latter with access to various off-chain resources. With its help, developers can connect smart contracts with off-chain data and services. Chainlink allows developers to connect smart contracts with any API and on any blockchains. The platform enables users to get various types of reliable data: market rates, weather, and much more.
Oracles function in a transparent environment. Network users can publicly view and check their reputations. Oracles cryptographically sign all data before transmitting it to the network for aggregation.
To date, Chainlink cooperates with more than 1300 companies from various fields. Platform cooperates with leading blockchains such as Cardano, BNB Chain, and hundreds of others. In addition, Chainlink feeds leading DeFi projects such as Aave, Lido, Celsius, etc. But the most exciting thing is that global enterprises also use Chainlink technologies, such as Google Cloud, AWS (Amazon), AccuWeather, and others.
Why Do We Need Chainlink?
In 2015, with the launch of Ethereum, the crypto community realized that blockchain technology could be used not only for financial transactions. The developers of Ethereum introduced a new concept of “smart contracts”, which significantly expanded the capabilities and usefulness of blockchain technology. Smart contract technology allows people to enter into agreements that are automatically executed if certain conditions are met. However, the benefit of smart contracts is reduced because they function only within the blockchain and cannot collect data from outside. Another problem is inaccurate information from third-party APIs.
Chainlink offers a technological solution through a network of nodes called oracles. Moreover, a Chainlink is very different from other oracles because it is decentralized and does not depend on any particular data source. The problem with oracles is that if they suddenly transmit incorrect data, the entire system running on the blockchain may suffer. Chainlink solves this problem. It uses a network of nodes that provide maximum data reliability. The Chainlink network allows data providers to sell high-quality data, and node operators maintain oracle infrastructure and provide secure communication of smart contracts and off-chain data.
How Does Chainlink Work?
The project offers a decentralized oracle network (DON), allowing users to work with external data sources outside the chain. Oracle networks imply the absence of a single point of failure in case of compromise of 1 of the nodes. The most helpful feature is the connection of blockchain smart contracts with data in the real world. Oracles are crucial in the cryptocurrency sector. Decentralized exchanges (DEXs) and Decentralized Finance (DeFi) use them. By providing access to off-chain data for smart contracts, the network also helps to increase the security of information and its accuracy. Transactions and communications can be carried out without the trust and participation of a central authority. The technology works like this:
- When a smart contract needs to connect to real-world data, it sends a request for a service level agreement (SLA) via the Chainlink protocol.
- Chainlink then uses the information in the request to select oracles (matching orders) to provide the necessary information. Moreover, the system compares data from various sources and provides the most accurate and reliable information.
- Then comes the processing of data. Oracles report data to the blockchain. After that, the system checks the accuracy of the sources. This last step is carried out through an aggregating contract, where the most accurate result is entered into the blockchain.
Of course, all actions must be paid for. Nodes receive payment in LINK tokens for data collection and processing.
The LINK token complies with the ERC677 standard but inherits the functionality of the ERC20 token standard. Thus, the token can be stored on wallets that support the ERC20 standard, for example, SimpleHold. The token has a maximum supply of 1 billion. The main purpose of LINK is to pay node operators to obtain data for smart contracts. For a smart contract to receive data from the external environment, it is necessary to pay a certain amount to the node operator.
Considering the risk of attacks, the developers have introduced a Proof of Reserve (PoR) mechanism, which is the key to ensuring the integrity of information. In the DeFi sector, where users depend on real-time data, the PoR algorithm protects against potentially fraudulent activities.
Holders can stake LINK. By staking LINK tokens, users earn a portion of the amount collected by the node operator. However, the rewards are different. Those nodes that are in greater demand receive greater remuneration. On the other hand, if a node provides incorrect information, it is penalized and loses its coins.
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Chainlink is one of the essential players in the crypto space, as its software is specifically designed to improve the quality of data on which other blockchains can base their smart contracts. In addition, the cryptocurrency market can rely on more accurate and reliable external information, which further improves quality and security. The ecosystem does not compete with specific large projects in the cryptocurrency space. The company has the advantage of becoming the first in the oracle services niche.