Understanding Chainlink: A Cryptocurrency Analysis


Chainlink (LINK-USD) is a decentralized network that operates on the Ethereum blockchain. Chainlink provides off-chain data/information to the blockchain, making it on-chain data that can be used for smart contracts via their Decentralized Oracle Networks (DON’s).

The History of Chainlink:

The Chainlink protocol was created in 2017, they were able to do this through a $32M round of funding. Chainlink’s main goal is to solve the Oracle problem so that the power of the blockchain can be unlocked and adapted quicker. Chainlink aims to do this through their DON’s.

General Information:

Chainlink is a fixed supply coin and has a supply cap of 1B coins (currently there is only 435.51M coins in supply).

  • Community Holders: 350M of their tokens are reserved for their holders, investors, and community. This number being so high is good for Chainlink because it gives them the potential to have big returns.
  • Node Operators: The other 350M tokens are reserved for Chainlink’s node operators. This is also good to see such a large allocation of tokens to them.

Chainlink’s Decentralized Oracle Network (DON):

Chainlink is able to bring real world data to the Chainlink network and blockchain, through their DON’s. This is especially important when looking at the application of Chainlink’s smart contracts because DON’s were made specifically to enhance and extend the capabilities of these contracts. By utilizing a DON, Chainlink is able to improve upon existing smart contracts because they can now be connected to the real world.

  • Adapters: Adapters (when working in DON’s) can send and retrieve data from off-DON systems, operate bidirectionally, and leverage joint computation to achieve more features (ie. Encryption for privacy)

Hybrid Smart Contracts:

Chainlink refers to their “hybrid smart contracts” as combining on-chain and off-chain components securely. These hybrid contracts are what differentiates Chainlink from the thousands of other cryptocurrencies out there.

  • Person B provides their data
  • Chainlink assesses this data by taking random cross-sections of this data and internally assesses the quality and potential match based on Person A’s criteria.
  • Chainlink determines the fair price of the data for both parties.
  • If both parties agree upon the price, then the contract is executed and the transaction is approved.


Blockchains by their nature are very transparent. However, many people value confidentiality and would like to see some sort of confidentiality on the blockchain where it makes sense. This inherent transparency clashes with peoples desires for confidentiality and needs to be addressed in a way that makes sense for the users and for the blockchains.

  • Confidential Computation: DON’s can conceal their computations from blockchains to a certain extent.
  • Supported Confidential Layer-2 Systems: Many layer-2 systems use zero-knowledge proofs to provide various forms of transaction confidentiality.

Trust Minimization:

Chainlink’s goal is to create a trustworthy layer of support for smart contracts through decentralization and crypto economic guarantees. This is because users favour a trust model for smart contracts made possible through Chainlink’s DON’s. Chainlink is always working on ways to improve their trustworthiness and security, and already have the following measures in place to ensure this right now.

  • DON Minority Reports: Flags can be issued and examined when there is malfeasance in the DON.
  • Guard Rails: Detects anomalous conditions and halts the execution of the contract if it is suspicious.
  • Trust-Minimized Governance: Gradual-release updates facilitate inspection and intervention in the case of a system failure.

Chainlink Staking:

Staking in Chainlink is very different from staking in other cryptocurrencies. Staking in Chainlink is aimed to ensure the timely delivery of correct oracle reports. Chainlink’s approach to staking is as follows:

  1. Super-Linear Staking Impact: An adversary must have a budget greater than the combined deposits in all of the oracle nodes (which is large due to staking in these nodes)
  2. Implicit-Incentive Framework (IIF): Chainlink’s incentive model that stretches beyond explicit, deposited, staking funds.

Transaction Execution Framework (TEF):

A TEF is an approach to the efficient execution of a Smart Contract across a mainchain and a DON. A TEF can support any layer-2 execution techniques, allowing it to process smart contract transactions. The TEF allows Chainlink to do so confidentially, with lower fees, and with higher performance. The TEF can do this because of the following functions:

  • Fast Execution: Processes transactions locally (on the DON)
  • Low-cost Oracle & Adapter Access: Reduced cost through off-chain oracle access (on-chain storage is expensive).
  • Syncing: Periodically updates their smart contracts.

Node Reputation and Performance History:

Chainlink documents the performance histories of their nodes on the chain. Users can reference the past operations/performances of these nodes to make informed decisions. This decentralized compilation of accurate performing histories allows both users and operators to build their reputations to distinguish themselves on Chainlink’s network. Something like this can be very important in the future for insurance companies or any other companies adopt Chainlink’s technology, this is because users will be able to see the satisfaction scores and previous performances of these companies before they decide to do business.

Exciting News:

Augur is launching a new platform to capture the quickly growing sports betting market. This new platform is called “Augur Turbo”. Augur has decided to use a combination of Polygon Matic $MATIC and Chainlink $LINK in order to decentralize their sports betting, reduce their fees, and improve their services.

Key Definitions:

  • Oracle: An oracle sends data from off-chain sources (ie. Temperature information) to a blockchain, namely Ethereum, which then transforms it to on-chain data. This data is then used in applications like smart contracts.
  • Decentralized Oracle Networks (DON’s): DON’s are formed by committees of oracle nodes that cooperate in order to fulfill a specific task to provide persistent services to clients. DON’s are a powerful tool that helps developers create off-chain support for smart contracts.
  • Verifiable Randomness: Several types of developer applications require a verifiably correct source of randomness to enable verification. An example of this is a PoolTogether, where a promotion promises to give 5 lucky winners $50 in $LINK. This randomness will select these winners and automatically pay them out (via smart contracts) ensuring that their contest is legitimate and truly random.
  • Off-Chain: Transactions, and/or data that takes place in the real world and can be put into a blockchain via Chainlink.
  • On-Chain: This consists of transaction and/or data that is registered/recorded on some blockchain technology.
  • Smart Contract: A Smart contract is a self-executing contract with terms that must be met by both sides for the contract to be executed. These contracts are traceable but irreversible. An example of this would be the sending me an automatic release of $50 in $LINK on my birthday. This smart contract would have to know my birth date, however once it does, a smart contract will execute every year on my birthday sending me this money.
  • Fixed Supply: This means that there is a limit to the amount of supply, and that more supply of a coin cannot be created.
  • Fully Diluted Market Cap: This refers to the market cap of a coin, given their maximum supply at current prices.
  • Node: A node is a computer that connects and supports a given cryptocurrency network. The computer works on validating and relaying transactions onto the blockchain.
  • Oracle Node: A committee of nodes with the goal of supporting/working alongside existing blockchains, rather than providing its own separate functionality.
  • Proof of Reserve: Chainlinks Proof of Reserve (PoR) is the solution for maintaining end-to-end transparency for any platform utilizing backed/wrapped assets.
  • Keeper Network: The Keeper Network is a decentralized network for projects that need software development and IT operations (DevOps) and eternal teams to find keeper networks (jobs).
  • Node Operators: Chainlinks node operators are the backbone of their network. These operators participate in DON’s, allowing engineers to fetch external data securely/reliably via API’s. These operators are crucial for smart contracts and the real world data they need to use to run properly.
  • API’s (Application Programming Interface): API’s provide real time data, by letting one software application to interact with another. Chainlink uses API’s to take real-time, and real-world data and transfer the into the blockchain through their DON’s.
  • Staking: Actively participating in validating transactions, anyone who meets the minimum staking (balance) requirements can participate and earn rewards. Staking locks up your holdings and earns interest.

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