Chainlink (LINK) Explained: What It Is and How It Works

The popularity of cryptocurrencies is growing at an extraordinary rate. However, with so many smaller cryptocurrencies being created, they’re becoming their own little societies that are isolated from each other as well as the centralised world.

Chainlink was created to bridge the gaps between the different cryptocurrencies and between the crypto and sovereign worlds.

Why is Chainlink necessary?

Cryptocurrencies work well if you’re sending or receiving that particular cryptocurrency. However, there is all sorts of data in the real world that cannot be recorded on a blockchain. This is where Chainlink steps in to act as a broker or middleman for these transactions.

There’s a famous idiom you are likely to have heard before: ‘Don’t shoot the messenger’. This saying exists because being a mediator or an intermediary is very tricky ground to tread. However, Chainlink’s decentralised, smart contract-based service ensures it can be a trusted, reliable and accurate intermediary.

What is a Smart Contract?

Smart contracts have been adopted by many cryptocurrencies like Ethereum, Cardano, Tezos and Stellar to name but a few.

However, the concept behind smart Contracts is not reserved just for cryptocurrencies. Smart contracts are fundamentally a financial protocol that ensures transactions are trustworthy, confidential and accurate. In the simplest of terms, it involves ensuring that an action is performed before goods are received.

For the crypto-newbies, this may sound like any other contract, like the ones you might sign to purchase a house, agree to a new job, buy a car. However, smart contracts are controlled by computer code that monitors and fulfils a contract automatically. This removes the risk of not having a contract at all but also removes the centralisation of a written contract or middle man. Some real-life examples include a vending machine or a Kickstarter scheme. Smart contracts are beneficial because they are immutable but also easy to verify.

How Does Chainlink Work?

Of course, this explains how smart contracts work on a particular blockchain, however, people want to utilise the reliability of smart contracts even when they are using data that their blockchain is not familiar with.

Chainlink ensures smart contracts can still occur when transactions involve multiple cryptocurrencies and data that cannot be stored on a blockchain.

Data that can be stored on the blockchain is called on-chain data. There are no prizes for guessing what data that cannot be stored on the blockchain is called… off-chain data, genius, right?

Chainlink formats off-chain data as on-chain data for the purpose of the transaction. This is frequently referred to as an oracle. Oracle’s are fairly common in the cryptocurrency world. However, oracles are stereotypically a real-life data feed run by an entity. These data feeds are often described as ‘trusted’, but calling something trusted does not mean it is infallible. Chainlink still utilises oracles but ensures only the most accurate, reliable oracles are used. By Chainlink surveying the various oracles on offer and monitoring its usage and results, it can maintain a comforting degree of decentralisation. Decentralisation ensures transactions are safe and reliable and is perhaps the most fundamental philosophy of cryptocurrency.

The first step of the smart contract process that Chainlink implements is called the ‘requesting contract’ stage. This stage involves a blockchain that supports smart contracts creating a smart contract that requests information.

Chainlink then registers this smart contract as an event and creates their own smart contract in order to access the off-chain data. This stage is called the Chainlink service level agreement.

(Strap yourself in, this is where it gets really complicated) The Chainlink service level agreement generates three further contracts: a Chainlink Reputation Contract, a Chainlink Order-Matching Contract, and a Chainlink Aggregating Contract.

The Chainlink reputation contract finds reputable, successful oracle providers. The Chainlink order-matching contract takes the original requesting contract to Chainlink nodes where nodes bid so the right number and type of nodes can be chosen. And the aggregating contract validates the data.

The Chainlink nodes then uses Chainlink core software to translate the request so it can be understood by real-life data sources rather than just on-chain computer language (informally known as gobbledygook). That data is then collected by something called an external application programming interface. It then begins its cumbersome journey back to where we started: it is translated back in to the on-chain language by Chainlink core software, and returned to the aggregating contract that you’ve probably forgotten about already – I told you to pay attention!

If you’ve gotten to here and you haven’t broken out in to a cold sweat- congratulations! If you’ve reread the last paragraph twelve times and you’re still totally lost then all you really need to know is that this excessive number of contracts ensures transactions are tamper-resistant.

The importance of Chainlink’s hybrid smart contracts should not be neglected. They could revolutionise the most important transactions. It could avoid the need for estate agents when buying a house. It could even stop political votes from being falsified or rigged.

What is Link?

Link is the name given to the coin that enables Chainlink to run. Link is required by requesting contract holders and is also used by those who operate Chainlink nodes for them to stake in the network while mining. If you’re familiar with other cryptocurrencies like Cardano and Tezos, you will also be familiar with the idea of miners staking their commitment in a cryptocurrency. A stake helps to ensure the miners have good intentions and are incentivised to operate their nodes accurately.

What are The Benefits of Chainlink?

While the crypto-purists may sincerely believe that their favourite cryptocurrency will one day be used by everyone, every day, this is incredibly unlikely. Large-scale cryptocurrencies become harder to remain decentralised and, presently, there are too many smaller cryptocurrencies offering different services for one to truly take over. This necessitates Chainlink’s offering as it allows cryptocurrencies to work cohesively with the real world.

From an investor’s perspective, the fact that Chainlnk is an intermediary means that it is a more stable and less volatile cryptocurrency to invest in. Chainlink can continue to operate for as long as there are smart contract-enabled cryptocurrencies. This makes Chainlink’s potential scale massive.

Some of the world’s biggest corporations recognise Chainlink’s scalability. For example, the most popular international financial transaction providor, SWIFT has been collaborating with Chainlink to offer speedier and more reliable international transactions. With SWIFT being used by a vast majority of the major banks across the world, Chainlink’s partnership with has effectively dissipated the gap between cryptocurrencies and traditional banking.

Most impressively, even Google has been partnering with Chainlink, proving that cryptocurrency has a part to play in the mainstream.

The fact that Chainlink is an intermediary is also promising because it is not up against the many cryptocurrencies that also dominate the market. Chainlink aims to work with the most popular cryptocurrencies rather than work against them.

How to Buy Chainlink

All of this makes Chainlink one of the more obvious choices for a long-term investment. But before you go ahead and buy Link from the next best exchange, you should do your due dilligence – and include the following factors in your selection process:

• Fees and rates: cryptocurrency exchanges charge fees or markups on every trade – starting from as low as 0.1% per transaction, and going up to 10% or more per transaction. Be sure to choose a cryptocurrency exchange that doesn't overcharge you, but keep in mind that low-fee exchanges often come with some trade-offs like a user interfaces that's not suitable for beginners, or a limited number of payment options.
• User experience: an easy-to-use, beginner-friendly user experience not only helps you feel at home with your trading platform, but also helps you make better-informed investment decisions.
• Payment methods: many payment methods such as credit cards or Skrill come with increased costs and risks for merchants (e.g. because of the payment providers' refund policies). Therefore, not all exchanges might support your preferred payment method.
• Trust & Security: Always make sure that the cryptocurrency exchange of your choice is trustworthy and secure – after all, you delegate the safeguarding of your investment to them. Read reviews to get experiences from other users and make sure that security best-practices like cold storage, multisig wallets and two-factor authentication are employed.

Cryptoradar helps you cut through the clutter by providing you a compact overview of marketplaces that let you invest in Chainlink.

Creating an account

Just like with banks, you need to open an account at a cryptocurrency exchange when you want to invest in Chainlink. Fortunately, this process is usually quite simple and only requires you to enter your personal details on their website, upload your identity documents (or video chat with a service agent) – and you're good to go.

Buying & Storing Chainlink

At last, you can go ahead and buy Chainlink using your preferred payment method. Keep in mind that bank transfers usually take a couple of days to settle, which means that you can purchase only after the payment was credited to the cryptocurrency exchanges' account.

After finalising the purchase, Chainlink will be credited to your wallet on the exchange. The exchange will safeguard your investment on behalf of you. However, you can also choose to send Chainlink to a wallet that you manage. To learn more about this, make sure to check out our cryptocurrency wallet guide.

Conclusion

There’s a lot of noise and opinions when it comes to choosing a cryptocurrency to invest in. In regards to many of these cryptocurrencies, the differences and unique selling points are fairly minor. Investing in Chainlink offers an opportunity to support a cryptocurrency with mainstream appeal that promises to work with other cryptocurrencies, rather than against them.

Cryptocurrency is an incredibly reactive industry, with investors responding rashly to piques and troughs in the industry. Chainlink will not enthuse the cryptocurrency thrill seekers, but instead it hopes to be a wise long-term investment.