Everything you need to know about Chainlink and LINK tokens
LINK tokens have performed well since May 2019, although its bullish trend actually dates back to July 2018. At that point, LINK was worth just over 20 cents. At over $3.50 and with a market capitalisation of $1.2 billion, it’s fair to wonder whether this is a realistic valuation.
In this article, we analyse the benefits of Chainlink, its relevance within the ecosystem and everything you need to know before deciding whether or not to invest in this token.
1. What’s Chainlink for?
Chainlink isn’t a cryptocurrency, it’s a decentralised system of oracles. It’s actually the oldest project which aims to provide an oracle-like service. Since the creation of Ethereum in 2015 and the increasing use of decentralised applications in 2017, smart contracts have gradually proved their worth. This has had wide-ranging consequences on finance, insurance, governance methods, etc.
A new type of application is emerging, hosted on public blockchain networks, mostly on Ethereum. These applications are open to all, auditable, censorship-proof, operate around the clock and can hold and transfer value in the form of cryptocurrencies or digital assets (tokens).
While the execution of these smart contracts is predictable and inevitable, there are areas of weakness which affect functions requiring data external to the blockchain.
2. How was the LINK token created?
SmartContract.com was founded in 2014. The objective was to create a link between the blockchain and external data. In this way, it intended to solve the blockchain’s inability to access off-chain data (outside the network). However, this interesting idea faced a major challenge: the centralisation of oracles.
Given the unique nature of the sources of information, this posed a problem if the sources were unreliable. The benefits of smart contracts were limited, as they only managed the data already on the blockchain. They were not able to find information directly off-chain or to ascertain its credibility. A solution was found by the company: creating a system of decentralised oracles. This makes it possible to retrieve off-chain data and, most importantly, to cross-check information from several sources to verify its reliability.
The company changed its name to SmartContract Chainlink Ltd. The operating team, named Chainlink Labs, is led by Sergey Nazarov. Eric Schmidt, the former CEO of Google, joined the team as a strategic advisor.
In September 2017, Chainlink successfully raised $32 million to develop its decentralised oracle project. At the same time, LINK tokens became tradable. During the fundraising, the tokens were distributed as follows:
- 35% were sold to the public;
- 35% were used to reward the node managers;
- 30% were retained by the company to finance the ongoing project.
The LINK cryptocurrency is used to pay for the running costs of the network. This includes:
- Nodes looking for off-chain information and the necessary calculations;
- Changing the format of the data to make it understandable in the blockchain;
- The smart contracts of a network like Ethereum which wants to use a node to get data.
LINK tokens were initially trading for about 20 cents on the dollar. The price rose to $1 in January 2018 before declining continuously until June 2019. This date marks the release of Chainlink’s first mainnet; this led to the LINK token rising in value to $5 by 2020. By 2021, over 1,000 projects were using Chainlink: LINK tokens were then trading as high as $52.70 but their value has fallen since then. Like all cryptocurrencies, LINK’s price changes regularly. Coinhouse has more information about the price and the price trends of Chainlink crypto.
Chainlink Labs is now one of the leading providers of open-source oracle blockchain solutions. The company improves oracles by connecting them to a multitude of data sources (asset prices, payment solutions, web APIs, IoT devices and more).
3. The oracle system to power smart contracts
Let’s look at an example: a contract to manage bets on the outcome of a France-Argentina football match. Each participant sends an Ether and the name of the winning team to the contract address, which will hold them until the match has been played.
France wins and one of the participants must receive his or her Ethers, minus any commission from the company which managed the system. Unfortunately, a smart contract is unable to open a web page to determine the winning team.
It therefore needs a source of data which is searchable from within the blockchain, which it can query at any time and which is reliable. These entities are called oracles; the name is inspired by the prophetic nature of oracles in ancient Greece.
The idea behind Chainlink is to create a decentralised oracle system which is always available and secure and which provides accurate information even if some oracles are incorrect.
Possible applications are wide-ranging: information about the price of a share on the stock exchange, the weather in a particular city or the winner of the latest reality TV show. Any decentralised application requiring a high degree of reliability on external data imported into its contracts will benefit from the services provided by Chainlink’s oracles.
Furthermore, a contract can combine several queries to make complex decisions; this is particularly interesting when it comes to insurance or financial products. Our Coinhouse Premium service teams review crypto asset projects on a daily basis and will be able to provide more information about the potential value of the Chainlink project and purchase LINK tokens for interested investors.
4. How does Chainlink work?
Chainlink’s main objective is to link on-chain and off-chain data. This involves two infrastructures, both on-chain and off-chain. The Chainlink crypto project offers real advantages. It facilitates the acquisition and integration of off-chain data, it’s a real time saver and is also more efficient. Information can be cross-checked to verify its accuracy. When selecting the relevant oracles, users can choose criteria which reflect their needs. These oracles are rated based on their reliability. If they do not provide correct data, their reputation is directly affected. This discourages them from providing erroneous information: they would be rated poorly and would therefore be rejected by users. They would no longer receive LINK tokens as payment.
Users need to install software called Chainlink Core which communicates with the Ethereum blockchain and distributes and schedules tasks between oracles.
Companies offer amounts in LINK, Chainlink’s token, so that the oracles can provide the necessary data to make the smart contracts work.
Several oracles will be consulted for a single query. Each of these oracles will use different data sources to arrive at a result which will be written to the blockchain.
To avoid problems of collusion or dishonesty, users of the Chainlink oracle system can ask for their request to be processed only by oracles which have LINK tokens in escrow.
The oracles choose the price of the data they provide; the more queries they process, the more LINK tokens they will earn.
However, if the data they provide does not match the majority of other oracles, not only do they not get paid, they also lose the LINK tokens they have in escrow.
What’s more, as we explained previously, a reputational system is in place; it enables smart contract clients to rate the quality of data provided by the oracles. These different systems should result in reliable data sources which are very difficult to falsify.
The LINK token therefore provides the necessary economic incentive for each party to perform its tasks correctly.
5. LINK tokens
Tokens have a purpose: they are actively used in the decentralised oracle economy which has been created by Chainlink’s teams. However, it is currently difficult to anticipate Chainlink’s potential role within the ecosystem in the medium or long term, whether this architecture will prove effective and what the demand will be. Like many other projects currently on the market, it seems that the tokens would be quite easy to replace with Ether.
The team behind the project is serious, the project is supported by a very active community on social media and there is active development on GitHub: these are positive signs for a crypto project. Its list of partners can be found here.
Recently, Google’s announcement that it believes it can use the technology behind Chainlink to serve as a bridge between its BigQuery cloud service and Ethereum contracts and a listing on Coinbase fuelled the hype and sent the token’s price soaring to over $4.
If you are interested in this asset, you should know that the current outstanding quantity of 350 million LINKs represents just one third of the total of 1 billion tokens, which brings Chainlink’s theoretical market capitalisation to $3.5 billion. These 350 million LINKs will be used as an economic incentive for Chainlink’s nodes to do their oracle work. The remaining 300 million are held by the development team, which can use them freely at any time. Would you like to buy Chainlink? Coinhouse makes it easy to invest via its secure platform. As with other cryptocurrencies, a hardware wallet is required to store your Chainlink tokens.
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