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I am planning to get a few raspberry pi zero for an embedded project at home, however it needs network capabilities(to communicate with other pis). I need WiFi for this project as I wont be able to get Ethernet in all the places I plan to use the Pi. I would also prefer the option that would take the least space.

I have looked into using a ESP8266 chip for the WiFi, they seem to be one of the cheaper options but I am not sure if I can get the WiFi working through that chip. I have seen some guides online but they don't say if they can get the Raspberry Pi zero to connect to the internet or not. Some guides also use it for some other purposes so now I am confused. Can this chip be used to get WiFi on the Pi zero and if it can are there any guides I can follow to do it myself or should I resort to getting a USB adapter?

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Yes, the ESP8266 will work, there is even a hat (add-on board) designed to connect the ESP8266 to the Pi Zero; but a USB WiFi dongle will be the better choice especially if speed is an issue. The product page even includes this quote:

Note: This module is not a replacement for a WiFi dongle! It is designed for people who wish to experiment with the ESP8266 platform - if you just want WiFi connectivity you'd be better off using the Official Raspberry Pi WiFi Dongle instead.

If you are still looking for a tutorial this one seems fairly complete.

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    Thanks a lot, I think I would just go for the usb adapter, the esp8266 seems too much of an effort that may not even work for me in the end – Rumesh Apr 23 '16 at 12:21

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