Crypto analyst Lark Davis posted a series of tweets outlining the fundamentals behind Chainlink and its native token, LINK. He believes Chainlink is “about to melt your face off” in the coming years thanks to the platform’s vital role in connecting real-world data to smart contracts.
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The Problem Chainlink Solves
To understand Chainlink, you first need to understand the problem it solves. Blockchains like Ethereum enable smart contracts, which are self-executing agreements between two or more parties. However, smart contracts often rely on external data to execute properly. As Davis explains:
“However, blockchains are self-contained networks siloed off from the rest of the world and from other blockchains. So for a SC-enabled blockchain to work, it needs a communication bridge that connects it to real-world data or to other blockchains.”
This is where Chainlink comes in. As Davis puts it, “Chainlink is that communication bridge.”
How Chainlink Works
Chainlink serves as a decentralized network of “oracles” – programs that relay information between external data sources and smart contracts. For example, a decentralized exchange (DEX) may use a smart contract to allow trading of tokenized gold. Chainlink feeds the real-time gold price into that smart contract so the DEX can properly calculate users’ profits and losses.
Davis gave a simple example:
“Alice leverage longs tokenized gold on an Ethereum DEX. This all happens with an SC behind the scenes. The DEX is able to update Alice’s profit or loss because Chainlink is continually feeding that DEX with the real-time price of gold. That’s Chainlink.”
By pulling data from many sources and having the oracles cross-check each other’s work, Chainlink provides reliable data to blockchain applications. According to the developers, Chainlink has enabled over $9.3 trillion in value to be settled across smart contracts so far.
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Show more +The Role of the LINK Token
One of Chainlink’s strongest aspects is that its LINK token is essential to the network’s functionality. Davis explains:
“To receive data services, users (DEXs, dApps, etc) deposit $LINK into contracts with oracles. If the oracles provide accurate data to their users, they get paid the deposited $LINK. If they fail, they don’t. Because the oracles have operational expenses, they act accordingly.”
In other words, holding and staking LINK allows the oracles to be compensated for their services. This built-in economic incentive helps ensure network reliability.
As Davis concludes, “This is one of my favorite projects because the oracle network and the token are vital to tons of DeFi protocols and other dApps within the crypto ecosystem.” With smart contracts becoming more prevalent across blockchains, Chainlink’s bridge to external data should only increase in utility going forward.
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