What is Chainlink?
Chainlink is a decentralized oracle network and it is hosted on the Ethereum network. The main use case for this protocol is to enable secure connections with other blockchains. In this manner, Chainlink works as a middleman that brings external data resources to the smart contracts operating on a blockchain network.
Chainlink leverages blockchain infrastructure to perform data calculations at on-chain and off-chain scale. Therefore, this network supports the hybrid smart contract system.
Meanwhile, companies can also use Chainlink network to access data from any major blockchain networks such as Bitcoin or Ethereum. The native currency of Chainlink is called LINK token.
How does Chainlink Work?
Chainlink is also referred as an abstraction layer meaning that it enables single smart contract code foro collecting and running on multiple blockchain networks. It is an open-sourced project allowing everyone to view and reuse the code.
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This network was introduced in 2017 as an oracle network. Oracles are blockchain that connect blockchain ecosystem with the external data resources. In this manner, developers on the network are able to execute blockchain inputs and outputs via smart contracts.
Oracles on Chainlink exist in the form of nodes network that are based on predefined protocols. Node operators have to stake a set amount of LINK tokens and they can set their fees based on demand for off-chain resources.
Data sources on the system are incentivized with LINK token for providing authentic and useful information. Chainlink ensures verified and tamper-free data for various users that is hosted in a decentralized manner.
Use Cases of Chainlink
Here are some of the most important utilities of the Chainlink network:
Chainlink enables collection and management of data from various resources using smart contracts. The platform works for both on-chain and off-chain data processing therefore it enables hybrid smart contract network allowing users to both send and receive data.
Chainlink uses randomness via cryptography that ensures unbiased governance of data for various protocols such as games and bidding etc. This feature makes the protocol leveraging it more transparent and trustworthy.
At the same time, the randomness feature is secured against hackers since it uses cryptography.
The smart contracts on Chainlink bring automation as an intrinsic feature. It further ensures the transparency for the blockchain governance.
Chainlink is used as an oracle that connects various blockchain and decentralized protocols to enable transfer of messages, virtual currencies, and data resources.
Chainlink ensures fair distribution of NFTs based on its off-chain data resources. At the same time,
Chainlink is also utilized for gamification of personal investments and cryptocurrency holdings.
Another important use case of Chainlink is the recalibration of cryptocurrency distribution and supply within a given protocol.
Automated Market Maker
Automated Market Makers are liquidity pools within a decentralized protocol that offer different types of trading pair at alternative prices. The prices of cryptocurrencies present within an AMM can fluctuate from its spot prices on account of its internal supply.
Therefore, many AMMs leverage Chainlink data sources to track the market prices of token pairs within the liquidity pool.
Risks Associated with Chainlink
Here are some risks associated with Chainlink network:
The danger of unauthorized access or attack vector increases for blockchain and decentralized protocols with the addition of new sources each year.
The node limit on Chainlink is limited to 332 nodes in comparison to major blockchain networks such as Ethereum with thousands of nodes. Developers are working on increasing redundancy and security by increasing the nodes and making it more decentralized.
LINK token has remained undervalued regardless of its visible and practical utility. To access Chainlink services on a layer-2 solution, investors must transfer their LINK tokens from Ethereum to target chain via cross-chain bridges. This process can expose the LINK tokens to attacks and exploits.
Chainlink has also contributed towards growth and development of the blockchain industry and introducing new use cases for hybrid smart contracts and oracle networks. The platform was created by Oracle Corporation but now it operates as an independent decentralized protocol.
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