Chainlink: What It Is and How It Works

By
Nathan Reiff
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Nathan Reiff has been writing expert articles and news about financial topics such as investing and trading, cryptocurrency, ETFs, and alternative investments on Investopedia since 2016.
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Updated August 28, 2024
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Khadija Khartit
Khadija Khartit
Reviewed by Khadija Khartit
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Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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What Is Chainlink?

Chainlink is a decentralized oracle network or blockchain abstraction layer that communicates off-chain data to a blockchain. Its oracles securely enable computations on- and off-chain, supporting what it calls hybrid smart contracts and its cross-chain interoperability protocol.

The Chainlink blockchain is hosted on the Ethereum platform, which uses the proof-of-stake operating protocol. In addition, Chainlink is an open-source blockchain project, meaning anyone can view the project's code and contribute.

Key Takeaways

  • Chainlink is a decentralized oracle network that connects blockchains with off-chain data.
  • Chainlink uses hybrid smart contracts to integrate on-chain code and off-chain data infrastructure.
  • Chainlink tokens—called LINK—serve as currency to pay Chainlink network operators for retrieving and preparing off-chain data and performing computations.

History of Chainlink

Chainlink was proposed in 2017 and launched in 2019 by Steve Ellis, Ari Juels, and Sergey Nazarov to address an issue known as "the blockchain oracle problem." Oracles are network entities that handle traffic for two non-compatible systems. The blockchain oracle problem affects all blockchains because they are essentially closed systems that cannot push or pull data to or from outside systems.

Blockchain protocols cannot allow this ability because it would reduce the security blockchains are known for. Also, oracles allow data from external sources to act as triggers for smart contracts, something blockchains are not designed to do.

Chainlink has thousands of projects built using it as a source. In 2024, the Chainlink network grew by more than 215 projects increasing it to more than 2,100.

Chainlink has a maximum supply of 1 billion tokens, of which more than 608 million have been issued (as of August 2024).

How Chainlink Works

The Chainlink blockchain can support the secure sharing of inputs, outputs, and computations. Some features of Chainlink include:

  • Supporting decentralized data feeds: Data from many sources can be securely collected and processed for hybrid smart contracts.
  • Providing verifiable sources of randomness: Applications such as games that require cryptographically secured randomness can use Chainlink.
  • Enabling automation: Chainlink smart contracts can automate critical functions and event-driven tasks for enterprises.
  • Supporting cross-blockchain interoperability: Chainlink can connect blockchain platforms to support the exchange of messages, tokens, and specific actions.

Though traditional oracles are centralized, Chainlink decentralizes the process of moving data on and off blockchains through "hybrid smart contracts." LINK tokens are used to reward Chainlink network operators for retrieving data from off-chain feeds, formatting data into accessible formats, and performing off-chain computations.

The Chainlink decentralized oracle network is a system of nodes that adhere to set protocols. Node operators are required to stake—lock a specific number of—their LINK tokens. Node operators set their own fees based on demand for the off-chain resource they provide.

Chainlink node operators with the largest stakes are the best positioned to earn LINK rewards. LINK is an ERC-20 token, meaning that it is compatible with other currencies and smart contracts supported by the Ethereum platform.

Because Chainlink allows blockchains to exchange data with off-chain systems in a decentralized and tamper-resistant way, the Chainlink oracle network has many use cases. Chainlink has been used to fairly distribute non-fungible tokens (NFTs), gamify personal savings, and facilitate recalibrations of cryptocurrency token supplies, among other applications.

Chainlink vs. Ethereum

The Chainlink network is, in some ways, a complement to the Ethereum network and other blockchains. Chainlink can facilitate secure communications between Ethereum projects and various off-chain data sources. Because Chainlink's LINK token is built on the Ethereum platform, LINK is compliant with the Ethereum platform's protocols.

Ethereum tokens can be used to spend on purchases, facilitate smart contracts, and pay validators for operating the Ethereum network. Chainlink tokens have only a single use case, which is to pay node operators in the Chainlink network.

The proof-of-stake mechanism rewards network participants for placing a freeze on the ETH they "stake" or put up as collateral for the chance to earn rewards.

Future of Chainlink

Chainlink aims to continue to grow by expanding its support for blockchain environments and facilitating new use cases for hybrid smart contracts. Because significant stores of data and records are not yet maintained within blockchains, Chainlink may have countless opportunities to connect blockchain networks with off-chain information.

Is Chainlink a Good Investment?

Chainlink has the potential to be useful as it is designed to address an issue many blockchains suffer from. Whether it is a good investment depends on your market outlet, investing strategy, and whether it fits into your portfolio.

Does Chainlink Have a Future?

Chainlink addresses an issue many blockchains face: connecting to outside data sources so that smart contracts can execute real-world agreements. It is possible that it will become the one solution most networks use, but it is just as likely to fail. It all depends on the demand for the services it provides.

What Does Chainlink Do?

Chainlink is a network of oracles that connect external data sources to blockchains.

The Bottom Line

Chainlink is a blockchain project designed to connect different networks and protocols together through oracles. Oracles are networking tools that allow cross-network communication. The project's goal is to provide support for all blockchains, facilitating data movement globally between blockchains.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and XRP.

Article Sources
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  2. Chainlink. "Ecosystem."

  3. Chainlink. "Decentralized Oracle Networks for Any Smart Contract."

  4. Chainlink. "What Is a Blockchain Oracle?"

  5. Chainlink. "Whitepaper: ChainLink, A Decentralized Oracle Network," Pages 11, 21.

  6. Chainlink. "LINK Token Contracts."

  7. Chainlink. "Whitepaper: Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle Networks," Pages 78-79.

  8. Chainlink. "The Industry Standard Oracle Network for NFTs and Blockchain Games."

  9. Ethereum. "What Is Ether (ETH)?"

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