If you’re newer to the world of cryptocurrency, the Chainlink network may seem like a confusing concept, but at its core, its function is quite simple. Chainlink works to connect blockchains and real-world data.
Chainlink itself is a decentralised oracle network that provides external data from a range of services to apply to smart contracts.
Talk of oracles may evoke thoughts of Greek mythology, but Chainlink is well and truly rooted in the real world.
Need to know
The first step in understanding Chainlink is understanding some of its core components.
Specifically, in this instance, we’re talking about blockchains and smart contracts.
So what are blockchains?
The most simple definition is that blockchain is a type of database, and most commonly its purpose is to store cryptocurrency transaction history.
Blockchains are digital ledgers, usually public, that record transactions of ‘blocks’ across computers linked in a peer to peer network.
What are smart contracts?
Some say smart contracts will eventually replace lawyers. How much validity is in that statement is subject, but the concept is relatively accurate?
These contracts are computer protocols. Their entire purpose is to facilitate the negotiation of a contract and ensure it is verified and enforced. They work to ensure third parties aren’t needed to complete credible transactions.
When smart contracts aren’t enough
Agreements on the blockchain are made when smart contracts evaluate information to ensure it meets certain conditions and then executes an order.
However, smart contracts can miss a vital piece of the puzzle: off-chain or external data. They don’t typically have the means to connect what you may call “real world” information with what is immediately available ‘on-chain’.
Chainlink network connects off-chain and on-chain data
While Chainlink operates off the basis of smart contracts, it is able to extend its automation further.
Chainlink is a decentralised oracle network that also allows connection to external data sources, ranging from external data feeds to APIs.
It’s important to note: Chainlink is decentralised. Why is this important? Instead of a single provider giving information to a smart contract, Chainlink utilises a broader network in an attempt to provide information from multiple external sources.
How does Chainlink work?
The data in reference is sourced from a network of nodes. When a smart contract seeks further information or data, the Chainlink protocol sends the request to various Chainlink nodes for their request “bids”, and then validates that information.
Chainlink is built with an internal reputation system that allows it to determine with a reasonably high degree of accuracy the trustworthiness of sources.
Why Chainlink is important
As off-chain transactions are becoming more common, the importance of projects like Chainlink only grows.
Unlike on-chain transactions, which require the consensus of a defined number of miners for the transaction to be considered valid, off-chain transactions are conducted a little differently.
For one, they are conducted outside the blockchain itself: this could be via, say, two parties having a transfer agreement. They may also include the exchange of private keys and unlike on-chain transactions, off-chain transactions happen instantaneously. The blockchain itself isn’t altered despite the transfer of ownership.
Blockchain Smart contracts alone would not have access to this previously ‘unseen’ but important information.
Chainlink and LINK
In your research on Chainlink, there’s every chance you came across the LINK token, the cryptocurrency that powers the Chainlink network.
LINK is an ERC-20 token and the sole currency that can not be used for key network operations. Instead, it is used to pay for this oracle service.
LINK would not exist without Chainlink. It is built into the network itself, and its value comes from how it is able to ensure smart contracts are successfully executed within the Chainlink network.
Looking to the future with Chainlink
Cryptocurrency has behaved in an extremely bullish fashion over 2021 and shows no signs of slowing down.
With that said, in this age of data we’ve been increasingly shown that missing even a piece of the puzzle can have dramatic repercussions.
This is where projects like Chainlink fit in.
It offers benefits to the end-user through more efficient security systems, access to authentic (and multiple sources of) data, and the potential for scalability.
As digital processes continue to become more advanced, the cryptocurrency world becomes an even more interesting space to watch.
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