Smart contracts cannot see anything outside their own blockchain. They cannot check a stock price, confirm a sports result or read the current ETH/USD rate on their own. Chainlink is a network of oracles, services that bring outside data onto a blockchain so contracts can use it. Its token is LINK.
The Oracle Problem
A blockchain is a closed system. Every node must reach the same result from the same inputs, so a contract cannot simply call a website. Data has to be delivered to the chain by someone.
If that someone is a single server, the whole contract depends on one point of failure. A wrong or manipulated price can trigger liquidations or let an attacker drain a lending pool. This is called the oracle problem, and ethereum.org covers it in its oracle documentation.
Chainlink's answer is to use many independent node operators and many data sources, and to combine their answers before anything is written on-chain.
A Short History
Sergey Nazarov and Steve Ellis founded the project, and the Chainlink whitepaper, written with Cornell professor Ari Juels, was published in September 2017. A token sale that month raised $32 million. The network went live on Ethereum mainnet in 2019.
The company behind most of the development was originally called SmartContract.com and now operates as Chainlink Labs. The Cross-Chain Interoperability Protocol (CCIP) launched on mainnet in 2023.
How a Price Feed Works
Price feeds are the most used Chainlink service. A feed such as ETH/USD works roughly like this.
- Each node operator in the feed fetches the price from several professional data aggregators, which in turn collect prices from many exchanges.
- The nodes compare answers off-chain and agree on a single value, usually the median, which limits the effect of any one bad answer.
- The agreed value is written to a contract on-chain, signed by the participating nodes.
- The on-chain price updates when it moves by more than a set percentage, or after a set amount of time passes, whichever comes first.
An application then reads the latest value from the feed contract. Because feeds do not update every second, well-built applications also check how old the last update is.
Other Chainlink Services
The Chainlink documentation lists the full set of services. The main ones are:
- Data Feeds: prices and other reference data delivered on-chain.
- VRF: a Verifiable Random Function that gives contracts random numbers with a cryptographic proof that they were not tampered with. It is used in games and NFT mints.
- Automation: nodes that trigger contract functions when a condition is met, so nobody has to do it by hand.
- CCIP: a protocol for sending messages and tokens between different blockchains.
- Proof of Reserve: feeds that report the reserves backing an asset, such as a wrapped token.
What LINK Does
LINK has a fixed total supply of 1 billion tokens. It was issued on Ethereum and works like an ERC-20 token in wallets and exchanges. It has two main roles.
- Payment: Chainlink services are paid for in LINK, or in other assets that are converted as part of the payment process, and node operators are compensated for their work.
- Staking: Chainlink introduced staking in December 2022 and expanded it in a later version. Stakers lock LINK to back the performance of certain services, and node operators in the program can lose part of their stake if they fail to meet defined conditions.
Staking is limited in scope. The staking pool has a capped size, and it secures specific services, not every feed on every chain. It is not accurate to say that all node operators must post LINK collateral for all work.
Not all of the 1 billion LINK is in circulation. A large share was reserved for node operator incentives and for the company, and those tokens have been released into circulation over time.
Chainlink in DeFi
Lending protocols such as Aave use Chainlink price feeds to value collateral and decide when a position can be liquidated. Derivatives platforms use them to settle trades. Stablecoin and tokenized asset projects use them to report prices and reserves.
Chainlink runs on many chains, including Ethereum, Arbitrum, Base, Polygon, Avalanche and BNB Chain.
Risks to Consider
- Operator concentration: each feed is served by a limited set of node operators. If enough of them colluded or failed together, the feed could report a wrong value.
- Source errors: if the underlying market data is wrong or a thinly traded asset is manipulated across exchanges, aggregation may not catch it.
- Upgrade controls: feed contracts can be changed by a multi-signature group. This allows fast fixes, but it is also a point of trust.
- Integration mistakes: many oracle-related losses in DeFi came from applications using a feed incorrectly, such as ignoring stale prices or using a feed for an illiquid token.
- Token value: heavy use of Chainlink services does not translate directly into demand for LINK. The price also moves with the wider crypto market.
- Competition: other oracle networks, including Pyth, compete for the same customers.
Common Mistakes
- Assuming a protocol is safe because it uses Chainlink. The oracle is one component, and the rest of the contract can still fail.
- Confusing LINK on Ethereum with bridged versions on other chains when depositing to an exchange. Check the network first.
- Reading partnership headlines as proof of revenue or token demand.
Nothing in this article is financial advice.
Key Chainlink Facts
- Whitepaper: September 2017
- Founders: Sergey Nazarov and Steve Ellis
- Mainnet launch: 2019, on Ethereum
- Token: LINK, total supply 1 billion
- Staking: introduced December 2022
- Developer: Chainlink Labs
Track on CoinMarketGuy
The Chainlink price page shows the live LINK price, market cap, circulating supply and chart. The DEX page lists active liquidity pools with volume, including pools on the chains where LINK trades.