While the cryptocurrency space in general is quite abstract and difficult to understand for a lot of people — especially what with all the tech jargon involved — I have found that a lot of people struggle to understand especially the function of oracles, such as Chainlink. I thought I’d take some time to explain in simple terms why LINK exists — and why a large portion of my portfolio is dedicated towards it. You can do whatever you want of course, none of the below is financial advice.
To explain what LINK does, we must start from the beginning. Cryptocurrencies exist as a way to subvert centralization — it is an attempt to remove the middleman from the equation. Two people should be able to interact with each other without a 3rd person needing to over see a transaction (think banks, insurance, bets, etc.). Middlemen are an unnecessary part of such transactions, and often they can complicate things or be quite costly. We want to empower the individuals, and remove the middle men.
So smart contracts are created. Smart contracts are essentially immutable (unchangeable) lines of code on the blockchain that self-execute when the conditions of the contract are met.
Lets say I own a $100K in my crypto wallet and I pass away. Because of my due diligence, I wrote a smart contract on the blockchain that would activate upon my death (i.e. the condition of the contract is that I am dead), and would send that money according to Islamic Inheritance Laws to my wife, descendants, relatives, etc.
This would be great — no lawyers, no bankers, no shady relatives, no extra fees, no nothing — the money would get distributed immediately.
However, there is something called ‘the oracle problem’. Basically the blockchain itself is not capable of pulling in data from the outside. So how does the smart contract know that I have actually died or not if it isn’t capable of pulling in that data? Mielad==dead is a condition that is FALSE until it becomes TRUE at some point. The blockchain can’t bring that data input itself.
Another problem would be: How does the contract know whether the data input is accurate or not? A relative of mine could manipulate the contract into thinking that Mielad == dead is TRUE and therefore, the contract would execute on a false condition and my money would be gone whilst I’m still alive. Because the blockchain is decentralized & unchangeable, and there are no middle man bankers, there is no way to reverse the transaction and get my money back. So we need input of data and we need to make sure it is reliable data for our smart contract.
These are the sorts of things oracles (like LINK) do. They’re capable of fetching data from external data sources (solving problem 1) and verifying the data (solving problem 2) and applying it to the smart contract to allow for the execution of the contract. It’s important that the process throughout all this is decentralized and stays decentralized. This is because the smart contract is unchangeable when it’s deployed to the blockchain, so we must ensure we have high quality data for it.
As an example, lets say we make such contracts like this en masse for everybody in Muslim countries and it pulls the data from a centralized database www.ishumandeadornot.com. Here is a fictional website where are listed all the people alive or dead and it’s updated constantly.
This centralized database will be under the control of an individual person or company. Whoever controls the website is capable of manipulating the data, thereby making different smart contracts self execute based on false conditions, etc. Businesses, companies, etc. all could completely go to ruin if the wrong data is provided. Billions of dollars can be lost. For this reason, and many more — as oracles do more than just what I have listed above — we need oracles like LINK.
They are fundamental to blockchain technology. What’s even better is that LINK is blockchain agnostic — it’s designed to function on the Ethereum blockchain, it’s designed to function on Polkadot, it’s designed to function on Avax — it doesn’t matter what blockchain you make or how good, no blockchain can do without oracles because all of them suffer from the oracle problem — and LINK is fundamental to solving it.
It does have few competitors (BAND protocol is one), which is something to take note of. Everyone should do their own due diligence on what they believe is a better answer for the Oracle problem. Personally I look at Chainlink and I see a token that is fundamental to blockchain tech, it has a first mover advantage by several years, it has a really strong team — its founder has been involved in blockchain tech since 2011 — and well…
For me, LINK is the type of token I want to hold for a few years.