What Is Chainlink (LINK)? | A Simple Explanation?

What Is Chainlink (LINK)?

Chainlink is a network of oracle services. Simply put: it helps smart contracts use information and systems outside a blockchain.

A smart contract is a program on a blockchain that automatically carries out rules. A contract like that can't just look on the internet by itself to check a price, a reserve balance, or the status of another network. That's where Chainlink comes in: it brings that external information onto the blockchain so a smart contract can use it.

So Chainlink is not its own Layer 1 blockchain, like a standalone blockchain where transactions are processed. It's infrastructure that applications on different blockchains can use.

Its native token is called LINK. This token was originally issued on Ethereum and is an ERC-677 token, an extension of the well-known ERC-20 standard. LINK can be used to pay network service providers, such as node operators. For some services, payment can also happen in another cryptoasset or be handled behind the scenes. So you don't always have to pay directly with LINK yourself.

The Chainlink mainnet on Ethereum went live on May 30, 2019.

Key Takeaways

• Chainlink connects smart contracts with data and systems outside the blockchain.
• LINK is the token that can be used, among other things, to pay for Chainlink services and for staking.
• Multiple independent nodes can collect and process data together.
• CCIP is meant for messages and tokens between supported blockchains.
• Oracles still depend on external data, settings, and the way an application uses them.

How Does Chainlink Work?

Chainlink works with so-called Decentralized Oracle Networks, often shortened to DONs. Such a network consists of multiple independent nodes. A node here is a computer or service that can collect data, track events on a blockchain, and pass them on to the network.

Say a smart contract needs a price. Instead of trusting one website or one server, multiple node operators can collect data. Then they reach agreement on a result off the blockchain. That result is then published on the blockchain so the smart contract can use it.

With Chainlink Data Feeds, multiple nodes process data from different sources. An aggregator contract collects their answers and turns them into one value on the blockchain. A smart contract can then read and use that published value in the same transaction.

An important part of this is Offchain Reporting, or OCR. With this, the nodes first bundle their observations and digital signatures off the blockchain. Then one shared report is placed onchain. The blockchain checks whether enough signatures are included. This means fewer onchain transactions are needed than if each node sent an update separately.

A Data Feed usually is not updated for every small change. An update can be triggered if the value moves enough from the previous value, or if a set period has passed. That period is called a heartbeat. The number of nodes, the data sources used, the deviation threshold, and the heartbeat can differ by feed and blockchain.

Chainlink (LINK) Overview

What Are Chainlink Oracles?

An oracle is infrastructure that lets a smart contract work with information or actions outside its own blockchain. That's necessary because a smart contract normally only sees what happens on its own blockchain.

Chainlink oracles can, for example, make price data, reserve balances, and the status of Layer 2 sequencers available. A sequencer helps order transactions on a Layer 2 network. Its status can be important for an application that wants to know whether such a network is working normally.

The idea behind a Chainlink oracle is not that one party provides all the information. A DON uses multiple independent nodes. Data Feeds can also combine data from multiple sources before one aggregated value is put onchain.

That can reduce the risk of a single point of failure. But it does not mean the outcome is always perfect. If external data sources are incorrect, unavailable, or not on time, an oracle network cannot fully rule that out.

That's why applications that use Data Feeds need to build in their own checks. Think of checking whether a value is recent enough, plus backup measures for delays, outages, and extreme market moves.

What Is Chainlink CCIP?

CCIP stands for Cross-Chain Interoperability Protocol. It's a protocol that lets applications send messages, tokens, or a combination of both between supported blockchains.

You can think of it as a way to move an instruction from one blockchain to another blockchain. A CCIP message roughly goes through four steps: it is sent on the source chain, checked off the blockchain, given collected attestations, and then executed on the destination chain. Attestations here are confirmations that the needed checks were completed.

CCIP first waits for finality on the source chain. Finality means a transaction counts as final within that network. Only after that can the message be executed on the destination chain. That means a cross-chain transfer is not immediate. The total wait time depends, among other things, on the source chain, the destination chain, and the conditions on both networks.

For a token transfer, so-called token pools can lock or burn tokens on the source chain. On the destination chain, tokens can then be released or minted. Which version is used depends on the token and the chosen route.

Applications use onchain routers as the entry point for CCIP. DONs handle the offchain validation of cross-chain messages. Costs are calculated when the message is sent. Depending on the supported route, payment can be made with LINK, a native gas token, or another supported token.

Not every combination of blockchains and tokens is supported. Cross-chain infrastructure also adds extra technical and security risks compared with doing something within a single blockchain.

Who Founded Chainlink?

Chainlink was co-founded by Sergey Nazarov and Steve Ellis. Sergey Nazarov is CEO of Chainlink Labs and Steve Ellis is CTO of Chainlink Labs.

The original Chainlink white paper was published on September 4, 2017, and was written by Steve Ellis, Ari Juels, and Sergey Nazarov. So Ari Juels is a coauthor of that white paper, but not a co-founder.

That distinction is worth making: helping write a technical document is not automatically the same as having a formal founder role.

What Are the Benefits of Chainlink?

Chainlink has a number of features that can be useful for applications that need external data or communication between blockchains:

• Multiple nodes and data sources. By processing data through multiple independent nodes and sources, dependence on one server or provider can be reduced.
• Fewer onchain transactions with OCR. Nodes bundle their observations offchain into one signed report. That means not every node has to place a separate transaction on the blockchain.
• Different kinds of data. Data Feeds can make prices, reserves, interest data, volatility data, and the status of Layer 2 sequencers available to smart contracts.
• One interface for supported cross-chain routes. CCIP gives applications a uniform way to send messages and tokens between supported blockchains.
• Feed addresses can stay the same. A Data Feed can use a proxy contract that points to a new aggregator. That means applications using the feed address do not always have to change their own contract.

These benefits do depend on the specific setup. The feed, nodes, data sources, blockchain, and application used can make a big difference in practice.

What Are the Downsides of Chainlink?

Chainlink does not solve every risk around external data and cross-chain communication. These are important points to keep in mind:

• Dependence on external data. The quality of an oracle result still depends on the accuracy, availability, and variety of the data sources used.
• No continuous data stream. Data Feeds are updated based on heartbeats and deviation thresholds. So a value on the blockchain can be outdated.
• Configuration and management matter. The owner of a Data Feed proxy or aggregator can change certain functions and variables. This includes processes that use a multisig, where multiple parties are needed to approve an action.
• Applications remain responsible. An application has to check whether feed data is recent enough and take its own measures for delays, outages, and extreme market conditions.
• CCIP adds waiting time and complexity. Cross-chain messages wait for finality, are verified offchain, and then are executed on another blockchain.
• Staking coverage is limited. Chainlink Staking v0.2 runs as a beta on Ethereum. LINK can be staked there by community stakers and node-operator stakers. Only node-operator stakers of services covered by staking can be slashed in the current version. Slashing means part of the staked tokens can be taken away. Community stakers cannot be slashed in v0.2. At launch, the ETH/USD Data Feed on Ethereum was the covered service.

Staking LINK does not make you a validator of Ethereum or any other base blockchain. Also, the terms, capacity, rewards, and covered services of Staking v0.2 may change in future upgrades.

Conclusion

Chainlink is infrastructure for smart contracts that want to use data, computation, and systems outside a blockchain. It is not a standalone Layer 1 blockchain. LINK is the related token and can be used, among other things, to pay for services and for staking.

The core of Chainlink is DONs: multiple independent nodes collect and process information, after which a result can be published on the blockchain. With OCR, much of that process happens offchain, so not every node has to place a separate onchain update.

In addition to Data Feeds, Chainlink offers CCIP as a way to send messages and tokens between supported blockchains. That does add extra steps, waiting time, and risks.

The main thing to remember: multiple nodes and data sources can reduce a single point of failure, but they do not automatically make external data always correct, current, or available. How reliable an application is in practice also depends on the chosen feed, settings, and the application using it.