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What Is Chainlink and How Does It Work?

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Chainlink is a blockchain-based framework that has been designed to create decentralized oracle networks which connect your smart contracts with secure sources of outside data inputs and outputs.

Every oracle includes a group of separate node operators which is a procedure for data accumulation and pre-built Chainlinks, that play the role of middleware to give your smart contract access to any API.

Similar to Bitcoin and Ethereum, Chainlink is also a decentralized blockchain which means no central authority can exercise control over its matters. The coin associated with Chainlink is denoted as LINK. In the last 12 months, LINK has demonstrated exceptional promise which is evident by its exponential price surge.

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Why Was Chainlink Invented?

We all know smart contracts are pre-defined agreements created on a blockchain that analyze conditions prior to automated execution. They rely on certain conditions and data to evaluate their final decision. Since smart contracts are blockchain-based, they are both verifiable and immutable which means nobody can modify them ensuring a high level of trust amidst all stakeholders.

However, smart contracts' application witnesses a limitation where they have to rely on data that is present beyond blockchain. That's the point where that off-blockchain data needs to be translated into an on-chain format. That's why it becomes difficult to link external data sources to smart contracts since they both are in different languages. That's why Chainlink was invented to bridge that gap through a decentralized network of oracles which act as middleware and translate data from external sources into a format that on-chain smart contracts can understand.

How Does Chainlink Work and What Technology is Behind It?

As mentioned above, it is a decentralized network that gathers and provides data from off-chain external sources to on-chain smart contracts through oracles. When a smart contract needs data, it sends a requesting contract asking for that data. The Chainlink protocol considers the data request as an event and subsequently builds another on-chain smart contract known as Chainlink Service Level Agreement or SLA to collect the data from off-chain sources.

This SLA contract further creates three sub-contracts:

  • Chainlink Reputation Contract - Evaluates and verifies the track record of the oracle node ensuring it's authentic and performs well. It gets rid of unreliable and dysfunctional nodes during the process.

  • Chainlink Order-Matching Contract - Provides the request contract's ask to the nodes and receives their bids. Then it goes on to choose the correct number and kind of nodes to meet the request.

  • Chainlink Aggregating Contract - Gathers all the information collected by selected oracles and evaluates and reconciles it to finalize the end result that is accurate.

Later on, Chainlink Core translates the data request from on-chain language to the off-chain language that external API sources can understand. This translated request is then routed to the API that accumulates data from the external source. Once the data has been accumulated, it is once again retranslated into on-chain language and sent to the CAC.

Smart contract operators have to use LINK to pay node operators of Chainlink for the work they perform. Prices are determined on the basis of the data demand and current market for such type of data.

Is Chainlink Real Money?

It is relatively a newcomer in the sphere of cryptocurrencies and it is difficult to predict its applications at this point in time. However, we need to keep in mind that LINK primarily does not aim to be a currency, instead, it's a token designed to incentivize data node operators who can provide smart contract holders with accurate and secure data on-demand. This is why it is unlikely that LINK can be classified as real money in its current state.

Having said that, LINK's price has seen a massive incline in the last few months and you can definitely exchange it for Bitcoin and other altcoins like XRP and ETH which can be used as currency at real-world retail outlets and e-commerce stores.

Fees & Expenses

When it comes to the network fee, the average transaction charges are negligible and generally amount to a fraction of a cent. This may change as the price of the currency goes up and the demand for off-chain data for executing smart contracts witnesses an upsurge.

However, if you are trading LINK on an exchange, different cryptocurrency exchanges have a different fee structure. The lowest trading fee you will pay is 0.1% of the trade and it can go as high as 0.2%. Similarly, withdrawal fees vary from exchange to exchange with some charging on 0.7 LINK per withdrawal and some exchanges going as high 10.0 LINK for every withdrawal you make.

If you are looking to invest in LINK, always study the trading fees, commissions, withdrawal charges, and other expenses before picking a trading platform. These expenses can really eat into your profits.

What Are the Benefits of Chainlink?

As it is designed to help gather off-chain data for smart contracts, there are a variety of benefits of the blockchain including the following:

Connect to any API - Since the Chainlink Core is designed to translate data requests from an on-chain programming language into off-chain language, smart contracts now have the ability to request data from any external source while ensuring security, decentralized access, and accuracy.

Send Payments Globally - Now that smart contracts have access to outside data sources, more robust and versatile contracts can be built with the capacity to send payments anywhere in the world through decentralized oracle networks.

Decentralized – It has been built on a decentralized blockchain which means there is no central authority including governments and large enterprises that can exercise undue and unfair control over the matters of the service.

End-to-End Security – As the entire Chainlink system is designed to work within the realm of blockchain-based safe procedures, the oracle networks gather accurate data ensuring end-to-end security is maintained and the smart contract is never directly exposed to the external source.

Increased Smart Contract Viability – With the limitation of not being able to access external information sources securely, smart contract applications were quite limited. Now that we have the ability to connect infinite external data input and output sources with smart contracts securely, their viability and potential have never been greater and the possibilities are endless.

Constantly Improving Project – The team behind the project is constantly working to add more features and make it more viable for different companies and businesses to rely on smart contracts.

Can It Be Used Anonymously?

If we are talking in absolute terms, then no. Whatever you do on the internet, even when you are using a VPN, can be vulnerable depending on a number of factors. You may buy LINK from certain trading platforms or exchanges where they don't ask for your personal identity but it's difficult to rely on those websites. And the ones that have reputable businesses comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations which mandates them to verify and validate your identity before you can start trading LINK.

You have to keep in mind that the more anonymity you want, the more responsible you are to keep your investment in LINK safe. Many of these regulations are in place for consumer protection and to prevent cyberattacks and theft of your funds from your account.

How Safe Is It?

Chainlink is built on a secure blockchain which is created for high immutability. In simple terms, it means that once a transaction has happened or a record has been altered on the blockchain, it cannot be changed by any means. The only way to change it is through consensus of all the nodes. 

Apart from that, it features cryptographic encryption which makes LINK well defended against cyber attackers and hackers that attempt a blockchain breach.

If you have LINK in your possession, it is recommended that you use a software or hardware wallet to keep it more secure. This way your digital assets will remain safe without getting compromised. Most of the wallets also offer 2FA which is an effective way to prevent hacks.

What Teams Are Working on Development

The project is led by a team of industry experts who have immense experience in their domains and include business leaders, academics, and developers who are collaborating to build a next-generation data infrastructure. The team of technical advisors includes names like Ari Juels, Andrew Miller, Evan Cheng, and Hudson Jameson. While other researchers and advisors include Brian Lio, Jake Brukhman, and Tom Gonser.

Oracle has also announced the names of twenty companies who will assist Chainlink in different areas in terms of providing data and other services. These companies include:

  • Agropacking Solutions for supply chain management related to agriculture

  • AtCash for providing trust networks

  • bluField for providing IoT beacon networks

  • CashPundit for managing cash flow

  • Constellation Group which is a Web 3 venture studio

  • Credits which will create a blockchain for dApps

  • Crowdz for handling payments platform

  • CyNation for a risk assessment platform

  • DriveOn for auto insurance platform

  • Gravel Coin for supply chain management related to gravel

  • Insolar for solutions related to blockchain

  • Ld8a for solutions related to database

  • LotsApp for agricultural certification

  • MaxCentive which is an incentive platform

  • MonoChain which is a clothes reseller

  • North East will provide data automation infrastructure

  • Quant Network has been trusted with network interoperability

  • Retraced with its supply chain management

  • Snapper Future Tech for blockchain solutions

  • World Law for court evidence management.

Which Financial Institutions Are Invested in Chainlink?

As Chainlink is trying to act as a middleware between smart contracts and external data input and output sources, banks currently do not see high value in terms of investing in the Chainlink project. That being said, if the banking and financial institutions' reliance on smart contracts increases in the future, which is likely to happen, we are sure that many banks would take a harder look at what Chainlink is doing and what it is capable of.

On the other hand, it has struck partnerships with a number of organizations to leverage its operations even further. The names include Synthetix, Loopring, Offchain Labs, AAVE, Ampleforth, Google, Gartner, Binance, Enterprise Ethereum Alliance, and more. Due to its exceptional reputation, it has also been featured on Gartner, MIT Technology Review, Forbes, The Wall Street Journal, ZD Net, Coindesk, and American Banker.

Chainlink Mining

LINK cannot be mined in the conventional sense, however, you can acquire it by selling off-chain data and services through an API linked with Chainlink Network. You can also purchase LINK on a number of cryptocurrency exchanges of your choice.

Chainlink Wallet

LINK is an ERC-677 token which can be held in any wallet that can store an ERC-20 token. You can choose between software and hardware wallets depending on the level of security and type of features you are looking for. Some of the top LINK wallets include the following:

  • Atomic Wallet (Mobile, Desktop)

  • Ledger Nano S or X (Hardware)

  • MyEtherWallet (web wallet)

  • Trezor (Hardware)

  • Coinbase (Mobile)

  • MetaMask (Browser Extension)

  • Coinomi (Mobile)

  • Trust (Mobile)

  • Exodus (Software Wallet)

  • KeepKey (Hardware Wallet)

Is Chainlink Worth The Investment?

When it comes to investing in any cryptocurrency, there is no direct answer. Cryptocurrency trading is quite similar to forex trading - they are both highly volatile and you never know which way they are going to go. There are a number of factors that can affect the price and even when you have taken a majority of variables into account, it is impossible for you to consider everything in your investment decision.

This is why you need to take a cautious approach and be conservative about investing in LINK or any other cryptocurrency. Although the price of the currency has seen a massive growth of 450% in the last twelve months, it is recommended that you diversify your portfolio across different digital assets and cryptocurrencies to manage your risk.

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Frequently asked questions

  1. You cannot mine LINK in the traditional manner. You have to become an oracle node on the Chainlink network to give smart contract holders secure access to external data to earn LINK.

  2. For robust security, you can use cold or hardware wallets like Ledger Nano S or X, KeepKey or Trezor.

  3. You can buy LINK on a crypto trading platform or exchange with traditional payment modes like bank cards or e-payments.

  4. LINK has seen 450% price growth in the last twelve months but given the volatility of cryptocurrencies, it is difficult to predict whether it would be a good investment for the future.

  5. On the network, the fee is negligible. However, if you are buying or trading on crypto exchanges the trading fee can range between 0.1% and 0.2% depending on the platform.

  6. It empowers smart contracts to gather data that is present beyond the blockchain through decentralized oracle networks.

  7. There are few countries that have outright banned cryptocurrencies. You will have to find out if your country allows you to buy or trade cryptocurrencies.

  8. In its current situation, it is more of a token and asset than a currency.