What is Chainlink (Link), Who Created it & How Does It Work? (2024)

Chainlink is the product of a blockchain technology startup called SmartContract, which was founded in 2014. Chainlink itself started with a white paper, published by Steve Ellis, Ari Juels und Sergey Nazarov in September of 2017. The paper outlined their vision for a decentralized oracle network. Chainlink’s technology was designed to solve one of the core challenges with smart contracts running on blockchains – providing blockchains with reliable real-word data. The project first started offering their services for smart contracts on Ethereum but has now expanded its offering to other smart contract capable blockchains.

To manage Chainlink’s technology, another for-profit fintech company by the name of SmartContract Chainlink Ltd. with Sergey Nazarov as CEO was founded. The company is based in the Cayman Islands. A worldwide developer and research team united under ChainlinkLabs is further developing the Chainlink technology.

Smart Contracts automate contracts and agreements on blockchains. They are programmed to evaluate information, and if specific conditions are met, they automatically execute. Like a typical IF/THEN condition.

However, smart contracts are not without challenges. Many need real-world information, such as financial data, to evaluate if the necessary conditions for execution have been met. This poses a problem, because even though a smart contract is immutably written on a blockchain, input data from the outside world can be incorrect or manipulated and thereby lead to undesired results. The exact problem smart contracts are trying to solve – making the middleman obsolete and eliminating counter- and third-party risk – has now moved to the data provider as a centralized, error-prone source of information, a new central point of weakness.

Chainlink has set out to solve this “oracle problem” by building a decentralized oracle service providing on-chain and off-chain data to smart contracts. An oracle is a software that serves as a bridge between blockchains and the outside world. As blockchains and smart contracts cannot obtain information from outside their network, they are dependent on sources to provide this information to them. To fill this gap, Chainlink has built a technology that gathers and translates real-world information in a language that is processable for blockchains and smart contracts. This widens the otherwise very limited use of smart contracts to a sheer endless number of applications. Examples are flight or weather data for automated smart contracts that insure delays (travel insurance) or bad weather (crop insurance).

Watch the video: Sergey Nazarov – Oracles and the expansion of blockchain utility

Watch the video: Sergey Nazarov – Chainlink 2.0 Expanding the meta-layer

So, how does Chainlink solve the centralized oracle problem? Chainlink uses a network of decentralized nodes (oracles) that provide off-blockchain information and data to the Chainlink network. The network structure serves to eliminate reliability issues and attempts to collect data as trustworthy and accurate as possible.

The process starts with a smart contract requesting data from the Chainlink network (Requesting Contract). The Chainlink protocol in response creates a Service Level Agreement (SLA), which consists of three separate contracts.

Reputation Contract: Each node is given a reputation score. The reputation contract checks the nodes’ track records to verify their authenticity and performance history. Any disreputable and unreliable node is sorted out and is not eligible for the data request.

Order Matching Contract: It delivers the data request to Chainlink nodes. These nodes then place their ‘bids’ for providing the requested data. Subsequently, the contract selects the right number of nodes among the ‘bidders’ who are reliable and capable of providing the requested data. Alternatively, users can also request specific nodes to provide the data.

Aggregating Contract: Once the selected nodes have collected the requested data through external sources, the Chainlink software translates the information to on-blockchain language. Here is where the powerful aggregating contract comes into play. It now validates the data from each single source and compares the data from the multiple sources. It can sort out false answers (if 7 out of 9 nodes provide the same but 2 differing data) and return a weighted score, using the sum of all data received.

Through this process, Chainlink has created a way to efficiently provide reliable and accurate off-chain data to smart contracts.

Yes, the Chainlink network has its own cryptocurrency called LINK. LINK has a total supply of 1 billion tokens. 35% of these were sold during the ICO in 2017 and about 55% of the tokens are still in the hands of the founding company. LINK does neither have a mining process, nor does it mint new tokens to reward staking. Consequently, its supply is fixed and unchangeable (no inflation).

LINK is a vital part of the Chainlink network and the only currency that can be used for interacting with the network. Smart Contracts that want to obtain data from the Chainlink network use LINK to pay node operators for their services. The Chainlink node operators determine prices for their services based on the demand and the current market for the requested data.

Further, to participate as a data provider in the network, node operators must stake LINK. The deposited LINK demonstrates their commitment to the network and incentivizes good service. The size of a node’s stake serves, among other criteria, is an important factor for its reputation score. Therefore, the greater a node’s stake, the more likely it is to be chosen to fulfill data requests, which in return earn it additional LINK tokens. The Chainlink network also punishes faulty or dishonest nodes by deducting their stake to compensate the counterparty for poor service.

LINK is an ERC-667 token running on Ethereum with similar functionality as an ERC-20 token. You can store it on most Ethereum wallets, such as MetaMask or TrustWallet.

Read the guide: How to Buy Chainlink