What is Chainlink? How this platform works

Author: Connor Sephton

Is Chainlink a good investment – and what does it do exactly? In this article, we explore how this platform works and what the tokens are for

Chainlink’s hexagonal logo on black background
Chainlink was launched in 2017 – Photo: Shutterstock
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The cryptocurrency has managed to establish itself as a firm favourite in the top 10 digital assets – despite the fact that it launched in September 2017, years after many of its competitors.

In this article, we’re going to explain how Chainlink works and examine the unique role that it plays in the diverse crypto landscape.

What is Chainlink?

What is Chainlink

If you want Chainlink explained simply, here goes: this project is designed to ensure that smart contracts can access real-world data in an accurate, timely fashion. Smart contract functionality has blossomed in recent years – with the likes of Cardano, Polkadot and the Binance Smart Chain following in Ethereum’s footsteps by offering this feature.

By design, smart contracts are unable to obtain external data for themselves. Chainlink uses secure oracles in order to deliver information in a tamperproof and dependable way. It’s popular among decentralised finance protocols that require the latest data on the price of altcoins – but the project argues that the potential applications extend far beyond this. Blockchain platforms can end up using oracles to obtain up-to-the-minute shipping data for supply chains, sports statistics, weather forecasts and even medical records.

When it comes to the question of whether Chainlink is a good investment, many are drawn to how this technology is blockchain agnostic and interoperable. Whereas certain decentralised apps can only run on the Ethereum network, Chainlink says that its infrastructure is compatible with “all leading public and private blockchain environments” – paving the way for cross-chain connectivity. Many commentators in this space believe that eliminating silos that exist in blockchain is crucial for achieving mainstream adoption.

What is Chainlink’s role in DeFi?

One of the biggest threats facing DeFi users concerns smart contract risk – associated with vulnerabilities that can arise in agreements that are automatically activated when certain terms are met. Chainlink argues that its infrastructure helps to provide an assurance that the data underpinning these smart contracts is reliable – with multiple checks for accuracy. This can prevent crypto enthusiasts from losing money by trying to complete transactions that are based on old pricing information.

LINK’s role in the DeFi sector, and the fact that it’s used by several major protocols, might help answer the question of is Chainlink a good investment in 2021. Even though this sector was relatively unknown in 2019, it exploded in popularity during 2020 – and the enduring success of these services has been good news for the cryptocurrency, which has managed to hit a series of record highs.

Chainlink’s ability to deliver real-world pricing data to smart contracts can be especially useful for lending and borrowing platforms – enabling interest payments to be calculated speedily, and the correct amounts of collateral to be acquired. The project says that it can also be used to create stablecoins that are pegged to the value of another asset, such as the dollar.

All of this can prove rather useful in a world where the value of Bitcoin and a plethora of other altcoins can fluctuate from one exchange to another, delivering greater levels of clarity to crypto enthusiasts and enabling platforms to breed confidence in their offerings. The reputation of Chainlink’s nodes is regularly monitored to ensure that it’s authentic and has a strong track record of delivering reliable data – with undependable nodes rejected.

The platform also enables data to be verified from a multitude of oracles for one piece of information. Let’s say that a smart contract requires the price that Bitcoin closed at yesterday. If Chainlink’s oracles come back by offering five potential answers – each a dollar or two apart – an aggregating contract can average them out.

What is Chainlink’s token used for?

What is Chainlink’s token used for

LINK enables people to buy services on the Chainlink network – rewarding the node operators who provide real-world data. It can also be used for staking. LINK tokens have also proven popular as a tool for speculation. Prices started 2020 at just $1.80, but increased by a staggering 543% over the course of the year – ending December at $11.58. In the first two months of 2021, Chainlink has managed to more than double in value once again, reaching $25 as of March 1. (It also hit a record high of $36.83 on 20 February.)

Is Chainlink a good investment, and what are the prospects for this token going forward?

Is Chainlink a good investment

Well, upbeat news stories and promising announcements can help LINK surge. Given how this altcoin has been built using the ERC-20 standard, a major concern in recent months has centred on the high gas fees that are currently seen on the Ethereum network, with some warning that these costs could prove unsustainable for everyday use. A new upgrade called Off-Chain Reporting recently helped to alleviate the strain on the blockchain network, making the transmission of data far less expensive than it is now.

Trade LINK to USD – LINK/USD chart

ChainLink / USD
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