Chainlink is one of the most popular crypto projects that has a large community and more than 100 partners behind it. Moreover, many traders believe that its native coin LINK will experience a significant increase in the future. But what makes Chainlink so popular? When was it created, how does it work, and what are its main benefits and drawbacks?

You’ll find the answers to these questions and much more in our comprehensive Chainlink guide.

Learn in This Article

  • What is Chainlink
  • What does it do
  • How does Chainlink work
  • The popularity of Chainlink
  • Pros and cons of Chainlink

Chainlink is a decentralized platform that connects off-chain and on-chain sources using smart contracts or oracles. These oracles act as middleware between external data and smart contracts based on the blockchain.

Oracles are a key component of the Chainlink project. Without them, connecting real-world data to the blockchain wouldn’t be possible. Their goal is to solve the so-called oracle problem — the blockchain’s inability to access off-chain data.

The Chainlink blockchain runs on Ethereum. It also has an open-source infrastructure, which means that anyone can see its code and contribute to its improvement. After Ethereum merged, Chainlink changed its consensus mechanism from PoW to PoS. As such, it enables network users to stake their digital coins and tokens and gain rewards.

Chainlink has its native token called LINK. LINK is used to execute transactions within the network and to pay validators.

Chainlink can operate on multiple blockchain platforms, which is why many blockchains, such as Cardano, Solana, and Polkadot use it. It’s also partnered with moguls like Google, which uses it for its Google Cloud services, and Binance.

Chainlink is a company that was founded in 2017 by Sergey Nazarov, Steve Ellis, and Ari Juels. Their idea was to create a safe and reliable way to connect off-chain information with smart contracts within the blockchain. On that note, the first version of Chainlink was released in 2019.

Chainlink can be used in the following sectors:

  • Financial Services
  • DeFi
  • Gaming
  • NFT Collectibles
  • Climate Markets
  • Enterprise
  • Insurance

Besides connecting off-chan and on-chain data, Chainlink also supports collecting data from multiple sources via hybrid smart contracts, i.e., oracles.

Its other use cases include providing a source of randomness. This feature can be applied in gaming. For example, gaming oracles can be used to create random loot boxes and random tournament matches.

Oracles are also used within the DeFi ecosystem. Namely, they can increase the security, efficiency, and scalability of DeFi apps. And finally, Chainlink can enable the automation of smart contracts. This allows developers to reduce costs, save time, and use fewer resources.

Chainlink divides its working method into three steps:

The first step is oracle selection. This means that Chainlink users must first create a service-level agreement. In it, they must state their requirements. After that, the software will connect them with the corresponding oracles. Users will then have to submit their service-level agreements. And finally, they will need to deposit their LINK in the order-matching contract.

The next step refers to data reporting. In this step, the oracles connect the off-chain data specified in the service-level agreement to the Chainlink blockchain.

The third step, or result aggregation, refers to summing up the results collected by the oracles and returning them to the aggregating contract.

That said, Chainlink uses three types of smart contracts:

  • Aggregating contracts
  • Order-matching contracts
  • Reputation contracts

Here’s how they work:

Aggregating contracts gather information from oracles and match them with appropriate smart contracts. On the other hand, order-matching contracts collect bids from Chainlink nodes. After collecting the bids, they select the appropriate number of nodes.

The role of reputation contracts is to check oracles’ track record and integrity. These can include response time and number of completed requests.

As you can see, Chainlink uses multiple sources to validate off-chain data. This allows it to determine with more precision which sources are reliable and which are not. Its working method also makes smart contracts less prone to hacks and cyber attacks.

Chainlink is very popular within the crypto community. Why? Because it allows connecting smart contracts with real-world data. It also enables accurate and secure transfers. Due to this, Chainlink is used by many companies, such as Google, Ethereum, Avalanche, Binance, and Arbitrum.

In addition to that, Chainlink has multiple use cases. For example, it can connect public data to the blockchain, such as sports scores and weather statistics. Furthermore, it can simplify connections with dApps and cloud servers, support Web3 gaming, and upgrade NTFs.

Another thing that makes Chainlink popular among crypto enthusiasts is its blockchain-agnostic design. This makes Chainlink compatible with multiple blockchains — it enables access to the entire Web3 ecosystem. It also helps developers create apps with more features and better performance.

That said, many whales started buying LINK after its developers introduced a new upgrade. Namely, in July 2023 Chainlink introduced the Cross-Chain Interoperable Protocol or CCIP. CCIP enabled finance companies to connect to the blockchain. This has led to an increase in its value in the crypto market.

At the time of writing, LINK has a market cap of $8.32 billion, while its price is $14.95.

Like all other crypto projects, Chainlink comes with certain advantages and disadvantages. On that note, the main benefits of Chainlink are:

  • Possibility of connecting off-chain and on-chain data through smart contracts
  • Multiple use cases
  • Roadmap with realistic goals
  • Partnerships with more than 100 prominent companies
  • Ability to run on multiple blockchains

That said, if blockchain technology becomes dominant in the world of finance, Chainlink could play a key role in this integration.

On the other hand, Chainlink also has its flaws, such as:

  • Limited number of nodes
  • Possibility of data manipulation
  • LINK’s dependence on Ethereum
  • Using Chainlink can be expensive for developers with a limited budget 
  • Integrating Chainlink into smart contracts can be complicated

Conclusion

Chainlink is a unique crypto project that found a way to connect off-chain and on-chain data, thus solving the oracle problem. Chainlink is popular among crypto enthusiasts due to its versatility and adaptability. On that note, its use cases include gaming, DeFi, climate markets, NTFs, insurance, and enterprise.

Likewise, this project is attractive to crypto traders as it has the potential to bring high returns. Chainlink also allows node operators to earn rewards by staking LINK. Chainlink’s main disadvantages are its limited number of nodes and dependency on Ethereum.

FAQs

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