What is Chainlink?

Chainlink was one of the most popular tokens of 2020. Seemingly out of nowhere, it ripped through the market at a startling clip, ending the year as one of the largest coins by market cap. But what is it, how can you buy it, and how is it different from Bitcoin? This article is here to provide all of the answers.

What is the Chainlink protocol?

Chainlink is a decentralized oracle network. This means that it’s a protocol that helps blockchain smart contracts (bits of code that execute once a certain condition is satisfied) work out if a data input is legitimate.

Smart contracts can do this by themselves, but Chainlink’s creators think that the way smart contracts verify data is insufficient; they believe that you need a specific tool geared to verify information that’s used by smart contracts. For instance, if a smart contract that, say, controls the temperature in your fridge operates on some bogus data, it could ruin your dinner. You can apply the same thinking to vaccines, military drones, and stock markets.

Chainlink is best known for functioning as a decentralized price oracle, meaning that it searches around for price information about various cryptocurrencies from lots of different sources, then provides that information to blockchain smart contracts. Because it’s decentralized, smart contracts can be sure that Chainlink is collecting that data in a trustless and transparent way, and that the data can be counted on.

Chainlink collects this data by having a group of decentralized (but hand-picked) nodes to help smart contracts verify the legitimacy of data that comes from an external source. The data sourcing work often happens outside of a blockchain—like a thermometer that takes temperature, for instance—while the validation work occurs on the blockchain.

These nodes are rewarded for their efforts in Chainlink’s eponymous currency, better known as LINK, which the protocol mints upon the successful validation of some information. The protocol also rates these validators; if one node has a great reputation, the protocol could pay it larger sums of LINK.

In the cryptocurrency industry, decentralized oracles are frequently used by decentralized finance protocols to verify that they are pricing cryptocurrencies in accordance with the values of said cryptocurrencies on crypto exchanges.

A lot of decentralized finance protocols that didn’t use Chainlink suffered last year (as Chainlink was quick to point out), since they were hacked for tens of millions of dollars when they tried to create their own price oracles. Cheese Bank lost $3.3 million; Harvest Finance lost $34 million, Akropolis lost $2 million and Value DeFi lost $6 million, to name a few. (Of course, just because they now use Chainlink, doesn’t mean that all their problems are solved).

There are 1 billion Chainlink tokens in existence. Chainlink sold 35% of these for $32 million in a token sale in 2017. An additional 35% are earmarked for those node operators that do the verification work and 30% is kept by the Chainlink company to pay staff and develop the protocol. As of January 2021, 40% of all the tokens are in public circulation.

You can buy them on cryptocurrency exchanges such as Coinbase, Binance and Wealthsimple Crypto. As of January 2021, LINK trades for $20, $3 billion of the coin trades each day, and its market cap is $8 billion. This makes it the 7th largest cryptocurrency by market cap after Cardano, XRP, Polkadot, Tether, Ethereum, and Bitcoin.

That said, critics of the ‘market cap’ term say that this metric is deceitful, since it simply takes the last-known valuation of the token and multiples it by circulating supply; in reality, the price is based on speculation. Many of these tokens could be held in wallets to which their owners have lost the keys, for instance, making the term ‘market cap’ a little misleading.

LINK became popular in 2020. At the start of the year, it was worth about $2. Then the price went crazy in August 2020, when the price shot up to $19 in the midst of the decentralized finance boom, in which billions of dollars were pumped into other Ethereum-based decentralized finance smart contracts. That industry, better known as DeFi, is a $25 billion industry today, a 25-fold increase from the $1 billion industry it was at the start of 2020. Then Chainlink performed even better as Bitcoin’s bull run kicked into full swing toward the end of 2020. As of January 2021, its all-time high is $25.65.

LINK was so immensely successful that it spawned its own subculture. Its die-hard fans are called the LINK Marines, with Chainlink CEO Sergey Nazarov as their leader. The sole purpose of the LINK Marines is to spread word about the coin; their hope is that promoting the coin will drive up demand of the coin and thus inflate the price. Some of these people have invested a lot of their savings in the coin, which in part explains their passion.

How is LINK Different to Bitcoin

LINK greatly differs from Bitcoin.

Bitcoin is based on the Bitcoin blockchain, which only interacts with Bitcoin-related things. And the only way to create new Bitcoin is to mine it through a computationally intensive process (known as Proof of Work Bitcoin mining).

By comparison, LINK is a token based on the Ethereum blockchain. Specifically, it is a modified version of the generic Ethereum “ERC-20” token. You can’t mine it, and only those hand-picked by the Chainlink team themselves are able to validate information (in this sense, Chainlink isn’t as decentralized as Bitcoin, which is not run by a centralized company and did not hold a token sale).

LINK’s market is also far smaller than Bitcoin. It is what is known as an “alt-coin,” which essentially means an “alternative” to Bitcoin. Although LINK has had an incredibly successful 2020, its market cap of $8 billion puts it at a fraction of Bitcoin’s market cap, which is $639 billion as of January 2021.

LINK’s success is also dependent on other factors than Bitcoin. For starters, It is a far more centralized project. Chainlink is a company based out of New York that uses hand-picked validators to verify data that courses through its veins. By contrast, Bitcoin is a more decentralized blockchain run by a network of thousands of mostly anonymous miners and developed by the pseudonymous Satoshi Nakamoto And while Bitcoin has been out on the market for a decade and its size means that it has been stress-tested by millions, Chainlink is far newer.

LINK also solves different problems than Bitcoin. Bitcoin is a peer-to-peer payments network, designed for just that. And although you can use LINK as a currency, its design is around its use as a decentralized oracle network. And the success of that project could determine the fate of the coin. Investors must ask entirely different questions: What happens if Chainlink gets hacked? If a node validator goes rogue? If Nazarov goes on a weekend bender and tweets profanities? Bitcoiners may instead ask different questions.

How to Buy and Earn LINK

Theory is nice and all, but how about the practice? How to trade LINK?

The easiest way to buy LINK is on a good ol’ cryptocurrency exchange. You can buy LINK on most of them; you can trade it on all the big ones, such as Coinbase, Krake, and Binance, for a variety of different currencies. The most popular is Binance’s USDT market, which accounts for about 7% of its daily trading volume. Coinbase Pro’s US dollar pairing is the next biggest market, which accounts for 2.5% of daily trading volume.

You can also trade LINK on brokerages, such as Wealthsimple and Coinbase, which means that you may have to pay platform-specific fees. In addition, you can also buy LINK from Ethereum-based decentralized exchanges such as Uniswap. Unlike centralized exchanges, decentralized exchanges are those without a centralized authority, for example a government or financial institution, behind them. The idea is that they are censorship-resistant and do not require traders to hand personal information to regulators. The flipside is that they are not regulated.

It’s also possible to take out loans of LINK from lending protocols such as Aave or Compound. Often, these loans require little to no collateral; so long as you can pay the loans back, you’re good.

You can also earn LINK. Short of becoming a validator, a privilege reserved for a few large organisations, you can also lend out your LINK to other people to earn yields. Rates differ across protocols and over time; given LINK’s volatility, it’s impossible to determine how much you can earn from the currency.