Why Blockchain Needs Chainlink (LINK)

What is Chainlink (LINK)?

Cryptocurrencies and Blockchain technology in general, are on the way to disrupt several industries in the global market. Arguably one of the most important aspects of Blockchain technology has been the role of smart contracts.

Smart Contracts can be referred to as a type of self-executing contract, containing terms of agreement, among two parties, such as a buyer and seller. In layman’s terms, smart contracts are applications designed to execute and work with a decentralised infrastructure, in this case, the Blockchain network. Generally, they are tamper proof, eliminating the threat of outside interference or influence. Besides cryptocurrencies, the technological potential that smart contracts offer has found its way to several different use cases in several industries.

Thus, these self-verifying and self-executing smart contracts offer a superior way to legitimise digital agreements. The problem occurs when it comes to the technical challenge of connectivity. As it stands, the Blockchain cannot directly access such critical data, relying on data from key resources, specific data feeds and even APIs. There have been a number of Blockchain based projects that have proposed a solution for this problem, but none are as promising as ChainLink, which is the focus of this article.

ChainLink: Company and Project Overview

ChainLink can be described as a decentralized Blockchain oracle service and includes a network which aids in the connectivity of smart contracts with the real world. As mentioned before smart contracts rely on data, bank payments and access to APIs to function properly. ChainLink solves this by introducing a number of features to eliminate this limiting factor for smart contract usability. The company is based in San Francisco, California, United States.

Goal and Vision

The main aim of the ChainLink team is to facilitate smart contracts to easily use external adapters, which can connect any oracle to any API endpoint.  The connections which are available with Chain Link include market data, event data, Web APIs, back-end systems, retail payments, bank payments as well as data from other Blockchain networks. The fruition of this endeavor allows us to open into a whole new world of functionality, where the full-potential of smart contract usage can be realized.

Why is ChainLink Needed?

The ChainLink Network provides reliable and protected inputs and outputs for executing complex smart contracts on any Blockchain. The output can easily be calculated if the data comes solely from the Blockchain and not any other external source.

For instance, in case of a trader placing a buy order on a decentralized exchange for any ERC20 token which costs 0.001 Ether per token, two input points can be found. Both the physical Ethereum and the price per token that the trader must pay can be considered inputs for the buy order. Since the smart contract in this case, can easily get all the information about the Ethereum and the buy order price, the output can be calculated easily.

The Problem

The problem occurs with using FIAT currencies to directly procure tokens on any decentralized exchange. Let’s say that instead of Ethereum, a trader places a buy order with $300 for the same ERC20 token, priced at 50 cents/token. In this case, the two points of input are the amount of USD involved, as well as the price per token.  When processing this order, Smart Contracts can generally encounter two problematic scenarios. Here are the two scenarios, discussed briefly:

Problematic Scenario 1: The Smart Contract has zero visibility on whether the trader actually possesses $300, after they receive the buy order. This is because USD or any other fiat currency cannot be directly sent to a Smart Contract with Ethereum.  Now, after the buy order gets filled, the seller needs to be compensated with $300.

Problematic Scenario 2: Smart Contracts cannot execute any typical wire transfers using a bank. Thus, it cannot transfer existing FIAT currencies.

Both the above problems deal with Smart Contract connectivity, which does not allow them to deal with existing FIAT currencies due to the lack of important data. ChainLink serves as a solution to both above problems, which is explained below.

How ChainLink Solves the Oracle Problem

Both the above problems are broadly classified as the “oracle problem” in the crypto-world, which is a plaguing issue. Thus, the oracle problem can best be described as the inability of smart contracts to interact with the real world, due to the sheer difficulty of making oracles completely trust-less. Existing Issues such as contracts ceasing to function once the oracle goes down, lack of practicality, no notation for the user’s own reputation etc. is easily addressed by ChainLink as described below.

  • In the case of the failure of the ChainLink oracle, smart contracts will not be affected as they run on different oracles.
  • Each ChainLink oracle has an on-chain identity and reputation, both of which are verifiable by end users as well as auditors
  • Each ChainLink Oracle has financial incentives to conduct processes honestly.
  • ChainLink oracles support any connection with developer support, rendering it to be a practical application within any contract
  • The data provided comes from multiple oracles.

Challenges Faced by ChainLink

Despite the major advantages and solutions that ChainLink provides to the smart contract problem, it faces certain challenges in other areas. These are:

  1. Lackluster marketing efforts at the time of launch and its first year.
  2. Failure to attract more partnerships, and over dependence on its partnership with SWIFT which can lead to stagnation.
  3. No conventional mining possible. ChainLink can be mined by selling off-chain services and data.

Summary

ChainLink appears to be a project which has very few competitors when it comes to the functionality offered. As of 20/05/2019, ChainLink is valued at $1.00 with a market cap of $350,970,247 USD. It is ranked 30th, according to Coinmarketcap as per market capitalization.  With almost 50 markets trading across exchanges on a global level, ChainLink is well on its way to revolutionise the smart contract concept. Despite its shortcomings, ChainLink with its solutions for the Oracle problem can certainly pave the way for future on-chain mechanisms to be deployed.

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