What is Chainlink ($LINK)?
The Chainlink token ($LINK) is an ERC-677 token used as the payment for all services the Chainlink Network provides, which aims to provide tamper-proof inputs and outputs of data for smart contracts on any blockchain. Chainlink is a blockchain-based middleware, acting as a bridge between cryptocurrency smart contracts and off-chain resources like data feeds, various web APIs, and traditional bank account payments. This way, Chainlink allows Smart Contracts to communicate with external resources on their own.
Chainlink aims to solve the oracle problem, an inherent limitation of blockchain networks that prevents them from connecting to external data resources that exist off-chain. Through a decentralized network of independent oracle node operators, Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.
The Chainlink protocol was created in September 2017 and officially launched on mainnet in May 2019. The $LINK token is used to pay Chainlink Node operators for the retrieval of data from off-chain data feeds, formatting of data into blockchain readable formats, off-chain computation, and uptime guarantees they provide as operators. The Chainlink token is also used as collateral for node operators, which prevents bad actors.
Chainlink allows blockchains to securely interact with external data feeds, events, and payment methods, providing the critical off-chain information needed by smart contracts through a decentralized oracle network. Chainlink is one of the first networks to connect off-chain data with smart contracts. As a decentralized network, Chainlink allows users to become node operators and earn revenue by running the critical data infrastructure required for blockchains’ success. Chainlink uses a large collection of node operators to collectively power a wide range of decentralized Price Feed oracle networks live in-production, which inculding many DeFi applications like Synthetix, Aave, Compound , and more.
A brief history of Chainlink
Chainlink is an open-source protocol developed by Chainlink Labs (formerly Smart Contract Ltd.), founded in 2014 by Sergey Nazarov and Steve Ellis.
The Chainlink Network went live on the Ethereum mainnet on June 1st, 2019 and has since expanded to support additional blockchains and layer 2 networks such as Polygon, BSC, Avalanche, and more.
The recently released Chainlink 2.0 whitepaper also broadens the capabilities of Decentralized Oracle Networks (DONs) and describes how the Chainlink Network is evolving to provide both tamper-proof data delivery and secure off-chain computation. Chainlink oracle networks enable the creation of highly scalable and privacy-preserving hybrid smart contracts that combine on-chain and off-chain infrastructure. Off-Chain Reporting, a recent scalability upgrade of the Chainlink Network that lowered the gas costs of oracle updates by 90%, represents the first move towards achieving the goals laid out in the whitepaper.
What is Chainlink’s economic model?
Chainlink’s economic model revolves around the use of the LINK token to pay for the operation of a wide variety of oracle services in demand by smart contract developers and Web2 systems, as well as around using $LINK as a cryptoeconomic mechanism for incentivizing the correct performance of oracle services and providing user assurances.
The supply side of Chainlink economics involves launching new oracle services and continually optimizing existing ones to further the adoption of Chainlinked smart contracts and trust-minimized Web2 systems with the aim of capturing new fee opportunities. It also includes continually provisioning higher security guarantees on oracle services through staking and other security assurances to enable more advanced and higher-value smart contracts to exist.
On the demand side, users pay node operators in LINK to access oracle services. Node operators and community members will also be able to stake $LINK in the future as a form of service-level guarantee around oracle node performance, providing a powerful incentive and penalty mechanism for Chainlink nodes to generate accurate and timely oracle reports. Continued Chainlink adoption incentivizes oracle nodes to compete for growing user fees from Chainlinked dApps. This competition encourages oracle nodes to strengthen their reputation and increase their LINK stake, showcasing their commitment to honest behavior and maximizing the cost of attack for malicious actors. Increased stake can also drive increased opportunities for nodes to earn user fees from Chainlinked dApps since they are viewed as having greater incentive to perform jobs in a timely and accurate manner.
Within Chainlink’s economic model, the increased availability and adoption of oracle services cultivates more fee opportunities for node operators who support the protocol. This creates a virtuous cycle in which oracle networks can sustain themselves on user fees alone by providing new trust-minimized services, increasing security guarantees, and capturing new fee opportunities from growing adoption.
How is Chainlink's oracle solution unique?
High-quality data with premium APIs - The Chainlink Network has credential management capabilities, meaning it can fetch and deliver data to smart contracts from premium, password-protected data sources. While free data APIs are useful, most inputs that trigger transactions related to secure user funds will likely need to come from premium APIs.
Flexibility - The Chainlink Network is a highly flexible and blockchain-agnostic oracle framework utilized by DeFi applications, web services, and traditional enterprises alike. By acting as a universal blockchain abstraction layer, users can leverage Chainlink to transmit any kind of data to and from any blockchain environment as desired.
Highly secure and transparent nodes - Chainlink oracle networks consist of security-reviewed and tamper-resistant nodes, such as Deutsche Telekom’s T-Systems. These nodes are highly transparent, and their performance data are publicly available to all users (market.link and oracle.reputation.link).
Decentralized and Sybil-resistant networks - Chainlink is the most decentralized oracle network, consisting of security-reviewed nodes that are backed by professional teams, allowing for the creation of numerous Sybil-resistant and tamper-proof oracle networks that can scale up as the value being secured rises.
Defense in depth - Chainlink employs a defense in depth approach where multiple security solutions are used in combination to increase oracle network robustness and reliability. This includes privacy-preserving cryptography like DECO, trusted hardware such as Town Crier, cryptoeconomic security through implicit/explicit staking, reputation systems, and much more. This multi-layered approach to security increases Chainlink’s end-to-end reliability.
Solid security foundation and world-class research - Chainlink is supported by a multitude of leading engineers and academics, such as Chainlink Labs Chief Scientist Ari Juels, Chainlink Labs Chief Research Officer Dahlia Malkhi, and Chainlink Labs Chief Product Officer Kemal El Moujahid. The researchers working on the Chainlink protocol are industry experts in blockchain oracles and are responsible for some of the most innovative developments in the space, such as DECO, VRF, Mixicles, Town Crier, and more.