What is Chainlink ($LINK) and why does it matter?: Introducing Decentralized Oracles
Chainlink is a truly innovative project that connects the blockchain world to the outside world. Using what is called decentralized oracles, Chainlink creates a bridge between blockchain networks and all sorts of traditional services.
Right now, the latest cryptocurrency market rally is being led by a project called Chainlink. Yesterday, it rocketed 39.5% up to a new all-time high of $8.48 and though it’s settled at just above $7, this does not mean that the project’s overall growth has stalled.
Over the past year, Chainlink has inked partnerships with Google, Oracle, Microsoft, IBM, and many, many others, inside and outside of the cryptocurrency sphere.
If you know anything about cryptocurrencies, then you know the sheer power that market sentiment can have on a particular crypto’s price. Typically, the more positive events (like partnerships and technical updates) that occur in a period of time, the more bullish the market becomes on the project involved. Over the short history of the crypto market, countless projects have shown the effect this can bring and Chainlink is only the latest.
Still, because of its unique value proposition, Chainlink stands out.
Therefore, if you aren’t familiar with the project yet, now is the time to make it so.
What is Chainlink?
In the simplest possible sense, Chainlink is a blockchain network, just like Bitcoin, and just like any other cryptocurrency that doesn’t simply live in smart contracts is.
More specifically, as described by its team and other reputable sources like Gemini, it’s a “a decentralized oracle network that provides real-world data to smart contracts on the blockchain.” If you find yourself scratching your head at this sentence, then don’t worry, you’re not alone.
This sentence is far easier to understand once you’re familiar with the problem that Chainlink is trying to solve.
What is the oracle problem?
Chainlink was created to solve for the oracle problem.
Generally, the oracle problem refers to the fact that before Chainlink was created, blockchain networks could not reliably enable communication with services outside of their sphere.
Think price feeds like the Nasdaq and Bloomberg stock tickers. Without a trustworthy connection to these services, it’s truly difficult to put traditional stocks, commodities, and other assets on the blockchain and thus, further the movement of “tokenizing everything.”
If you’re not familiar with what this means, stay tuned for a future post, in which I dig into the idea, which is the driving force behind my work in crypto.
For now, however, it’s enough to think of Chainlink as a bridge between blockchain networks and all sorts of traditional services like stock tickers (but not limited to them).
How does Chainlink act as a bridge?: Decentralized Oracles
To be this bridge, Chainlink uses a technology called decentralized oracles. To put it as simply as possible, these are nothing more than middleware between a blockchain network and an outside service like those mentioned above.
If you are familiar with the software world, then you already know that middleware is software that allows a device’s operating system to talk to and therefore, run applications that it has. Shifting this to a blockchain context, we can then say that middleware is software that allows smart contracts (software on a blockchain network) to securely talk to services outside of its walls.
In this case, middleware is also equal to decentralized oracles, which you can also consider as translators for real-world info that touches the blockchain.
Below, you can see a community-generated image from Link Finland of how the Chainlink network of oracles works.
As shown above, oracles , as represented by the cubes in the middle, take in data from all sorts of sources like the outcomes of events, stock market tickets, retail payment services, and banks.
It then sends that data to a blockchain network, like, for example, Ethereum, to trigger an action or series of actions in a smart contract.
If you don’t know what a smart contract is, check out this excellent explainer here. If you do, then read on!
Circling back to Chainlink’s oracles, consider this situation:
Last year, the Synthetix cryptocurrency exchange announced that it would be using Chainlink to facilitate “decentralized price feeds.” Overall, this was excellent news for Synthetix since they were aiming to be an exchange where anyone can create any sort of cryptocurrency that’s based on a real-world asset (crypto derivative).
Generally, this sort of cryptocurrency is called a crypto-derivative because it gets or “derives” its price from the price of a traditional asset that exists outside of the blockchain.
Investing in derivatives allows traders to experience the possible gains from assets like foreign currencies, gold, or a few shares of Tesla stock, without actually having to hold them at all.
As previously mentioned, before Chainlink it was nearly impossible for blockchain networks to talk to the outside world, which means that blockchain-based derivatives were also nearly impossible to create.
Yes, cryptocurrency exchanges like BitMex say that they are derivatives-focused, but what that means is that they offer purely crypto derivatives like exposure to Bitcoin without holding Bitcoin.
Synthetix, with the help of Chainlink, changed the game in this respect.
With Chainlink’s oracles (middleware), it enables anyone to create any sort of cryptocurrency based on the price of traditional assets for the first time in history. Since 2019, this partnership has resulted in Synthetix rising to more than $358 million in locked value that’s used to facilitate the creation and trading of these hybrid derivatives, called “synths.”
Without decentralized oracles, Synthetix’s smart contracts would have no way to translate real-world price feeds into terms that they can understand and use. Therefore, “synths,” which are a revolutionary, new asset class would not be possible.
Is Synthetix the only example of Chainlink’s active partnerships?
No, not by a long shot.
Chainlink’s oracles are being used across a wide variety of crypto and non-crypto services, including Google (as a Cloud Partner), which you can find a full list of here.
Why Chainlink Matters (From the LINK Community)
The Chainlink community is truly welcoming to anyone who is interested in learning more about the project. During the research process for this post, various Chainlink enthusiasts reached out to me on Twitter to offer their opinions on what the project is and why it matters.
Below, I’ve compiled some of them for you to see the general community sentiment.
These two examples represent merely a small cross-section of the optimism that drives Chainlink’s community. For many more, reach out to any $LINK member on Twitter.
Where does all of this leave us?
This post is meant to serve as a short intro to Chainlink and its potential.
After reading it, perhaps you’ll choose to go down the rabbit hole and eventually share an opinion of your own. Whatever the case, in my next posts on the project, I plan to big deeper into both its advantages and major roadblocks as well as how oracles really work on a technical level.
Until then, special thanks to all of the community members who suggested resources for me to learn more about the Chainlink project. Overall, we are all students here in what is perhaps the world’s fastest-growing industry and I aim to continue to share my journey through it with everyone who’s interested! If you like my content, please let me know here or via Twitter!
For Further Research on Chainlink:
Disclaimer: None of this is meant to be financial advice. I’ve researched and worked in crypto since 2016 and I aim to merely educate people on the upsides and downsides of all sorts of projects. Additionally, I’m a student just as all of us are. Therefore, my thoughts on projects evolve naturally over time as I learn more about them.
Finally, most of my free time is now being taken up with my newsletter, which is completely free and focused on how the rise of the Metaverse improves things for everyone. Sub here.
