Chainlink (LINK)

What is Chainlink (LINK) and where did it start?

Blockchains are designed to be deterministic: every node must reach the same result. ethereum.org explains that if blockchains pulled in outside information directly, that determinism would break.^[6] An oracle solves this by publishing off-chain data on-chain, where smart contracts can read it. Our explainer on blockchain oracles covers the idea in depth.

Chainlink is a network of such oracles. Its first whitepaper, Chainlink 1.0: A decentralized oracle network, is dated 4 September 2017. A second paper, Chainlink 2.0: Next steps in the evolution of decentralized oracle networks, is dated 15 April 2021.^[3] The project's documentation and economics pages describe the network and its token; this profile relies on those primary pages.

LINK is the token that ties the network together. According to the Chainlink docs, developers and organisations use LINK to pay fees for Chainlink services, and it is the standard unit of compensation for service providers such as node operators.^[1]

How does Chainlink work?

One Chainlink product is Data Feeds. The docs say these deliver asset prices, proof-of-reserve data, net asset values and interest rates, aggregated from many sources by decentralized oracle networks and published on-chain on dozens of networks.^[4] For price feeds, a decentralized set of independent node operators gathers and aggregates the data.^[4]

ethereum.org describes why this design matters: a single oracle operator is a single point of failure, while decentralized oracles compare data from multiple sources and so reduce the risk of passing invalid information to contracts.^[6] It also notes that continuously updated, publish-subscribe feeds suit price data.^[6]

Table sources: Chainlink docs and staking page.^[1][2]

How is LINK used, and how does staking work?

LINK changes hands when applications pay for services and when node operators are compensated.^[1] Since December 2022, holders can also stake it. Chainlink defines staking as committing LINK in smart contracts to back performance guarantees around oracle services.^[2] Staking v0.2 secures the ETH/USD Data Feed on Ethereum.^[2]

1. Stake. Community stakers can commit 1 to 15,000 LINK per address; node operators 1,000 to 75,000 LINK.^[2]

2. Back the service. If a valid alerting condition is met, each node operator serving the ETH/USD feed is slashed 700 LINK. Community stakers are not at risk of slashing in v0.2.^[2]

3. Unstake. Unstaking starts a 28-day cooldown, followed by a seven-day window to claim the LINK.^[2]

Staking in general is explained in what is staking.

What is Chainlink used for?

One use is supplying prices to DeFi applications. A lending protocol needs a price to decide when a loan is under-collateralised; an exchange contract needs one to settle trades. ethereum.org lists price feeds for lending and trading, verifiable randomness, event outcomes and automation as typical oracle uses.^[6]

Chainlink's Data Feeds also cover proof of reserves, net asset values and interest rates.^[4] How reserve data is checked off-chain is covered in reserves and attestations.

What are the key dates in Chainlink's history?

The dates below come from Chainlink's whitepaper and staking pages.^[3][2]

What are the specific risks of holding LINK?

Price risk. LINK is not pegged to anything. Its market price moves with demand for the token and for crypto-assets in general.

Oracle concentration. The Financial Stability Board warns that oracles could be critical in starting or spreading a shock, especially when a dominant protocol or many protocols rely on a single oracle.^[7] The FBI has reported criminals manipulating a platform's single price oracle to steal about $35 million, one of several DeFi attack methods it described.^[8]

Manipulation of thin markets. Chainlink's own docs say assets with high market risk, such as those with low liquidity, are the most vulnerable to market manipulation, and that developers are solely responsible for safeguards such as data checks and circuit breakers.^[5]

Staking risk. Node operators can be slashed, and every staker faces a 28-day cooldown before LINK can be claimed.^[2]

What mistakes do beginners make with LINK?

• Confusing the network with the token. How useful the feeds are says nothing about what LINK will be worth.
• Expecting instant exit from staking. Unstaking takes a 28-day cooldown, then a seven-day claim window.^[2]
• Assuming community stakers carry no risk. They are not slashed in v0.2, but their LINK is locked and keeps its price risk.^[2]
• Ignoring which network a token is on. LINK exists on several networks; the docs list a separate address for each.^[1] Check addresses with a block explorer.