What is Chainlink?

Source: https://chain.link/brand-assets

Every blockchain smart contract requires data to run. This data could be from external data sources, other blockchains, or other dApps in the blockchain world. Regardless of the type of data, blockchain smart contracts cannot run without them, and thus a program or system, based on blockchain technology, needs to be used to retrieve data and combining it into something that is usable for other blockchain applications.

The data source, called an oracle in the blockchain world, provides a source of information to a program or decentralized app (dApp) that might need it. For example, an oracle could be the New York Stock Exchange, which would provide accurate information about trades to the blockchain that needs the information. Or an oracle might be Visa, which provides transaction data via an application programming interface (API).

The challenge is a dApp might need multiple sources of data to run. Furthermore, sourcing data,  ensuring you’ve got validated data, and then feeding that real-world data into the decentralized network is a challenging process.

This is where Chainlink oracles come into play.

What is Chainlink (LINK)?

Chainlink is an Ethereum-based infrastructure of data providers. It enables smart contracts on blockchains to interact with real-world data provided by external data sources. Sounds complex, but in essence, Chainlink acts as a connection between blockchain applications and off-chain everyday information. Off-chain sources refer to value data that is accessed from sources other than the network/blockchain itself.

The Chainlink native currency is called LINK, and it is used to incentivize the upkeep of the Chainlink network. In addition, it is used to reward the parties involved in upholding the functionality of the platform.

What is the Aim of Chainlink?

Today, the lion’s share of traditional contractual agreements, which have been digitized and automated, use external data to prove contractual fulfillment. So, for example, if I am buying an iPhone from you, once I send you money via e-transfer, this e-transfer record would be considered “evidence of contractual fulfillment,” and you’d then hand me the iPhone.

When smart contracts replace these contract mechanisms, theу need highly reliable versions of these types of data inputs and outputs, to verify all aspects of the smart contract are met, and the smart contract is executed.

The Chainlink team believes that the main problem with modern smart contracts is insufficient interaction with the outside world. To successfully execute smart contracts, real-world data from off-chain (or non-blockchain) sources is usually needed.

As a quick example, if BlockCo1 is using a smart contract with CryptoCo2 to purchase the iPhone, both companies would still need off-chain data (in the form of that e-transfer record from the bank) to execute or complete the smart contract. Thus the smart contact needs to talk to our banks to get that information. Only a few solutions exist for this to happen.

Chainlink believes that a secure and decentralized network of verifiable data providers (a decentralized oracle network) can solve this problem.

What Are Oracles on Chainlink?

Source: https://chain.link/use-cases/defi

One of the primary restrictions on how broadly smart contracts can be used is the difficulty of linking outside information sources to blockchain smart contracts in a language that both parties understand.

Unfortunately, almost all existing oracles are centralized (data is provided through one source), which invalidates the benefits of having a decentralized blockchain. Again, using our previous example, if BlockCo 1 and CryptoCo 2 require our banks to provide data and an outage occurs, the smart contract for our iPhone transfer cannot be completed. This is the problem with centralization.

However, Chainlink offers a different approach for a more decentralized oracle network.

Chainlink’s Decentralization

Chainlink decentralizes the data feeds into smart contracts by using many data sources, or ‘oracles’, so that ‘bad guys’ can’t manipulate the blockchain with inaccurate data. Again, in our example, if a ‘bad guy’ wanted to send a fake e-transfer record saying he had already sent you the money for your iPhone, you might hand over the iPhone without really having any money transferred to your bank.

Node operators, the individual parties that run the oracle infrastructures for Chainlink’s on-chain network, both individually and collectively, provide information for Chainlink’s operations. Thousands of node operators around the world provide this info, helping add to Chainlink’s decentralization.

Chainlink then takes the data sourcing a step further, using an Integrity Contract to verify if an oracle is authentic and accurate, before evaluating that oracle’s data. If the oracle (or node) is not authentic and their data or performance isn’t up to par, Chainlink will discard the untrustworthy or unreliable node data.

Let’s look at our example again.

Say seven nodes produce one answer from your bank saying “yes, the e-transfer went through,”  and two other nodes provide a different response saying, “no, the e-transfer did not go through.”  When that happens, Chainlink will recognize that those two nodes are malfunctioning (or ‘dishonest’), and their answers will be discarded. Using multiple nodes in this way allows Chainlink to verify data from a single source.

The LINK Token 

Chainlink uses the LINK token (or cryptocurrency) to paу for off-chain services. The token is required to perform off-chain functions, and thus the demand for LINK depends directly on the number of users using the platform.

Using our example again, the more iPhone transactions that happen in the world, the more demand for LINK will be created, and the higher the price is likely to be for the token.

Data producers and node operators who run the oracles earn LINK tokens to play their parts in the Chainlink network.

Data producers earn LINK for providing data, while node operators earn LINK for confirming them. As a result, node operators maintain the network and may be considered the backbone of the Chainlink system, while LINK is the fuel that powers it.

LINK – Penalty Payment (or Staking)

As the Chainlink network evolves, smart contract creators will soon be able to ask node operators to put up collateral before taking on the job of verifying their data.

To ensure that node operators supply the necessary and accurate data, LINK tokens will be utilized for data query penalty payments (for dishonest or inaccurate data).

When this function is eventually implemented,  Chainlink node operators will be required to deposit LINK with Chainlink to indicate their commitment to the network and their commitment to providing accurate data. These stakes will be held in escrow and paid to the smart contract creator if node operators fail to fulfill the needed data requests or provide dishonest data.

This incentivizes smart contract creators and users to trust node operators (and the data sources) by providing financial insurance (the penalty payment). Thus, every party can trust that a node (or nodes) will not provide false data or try to be dishonest because doing so will cost them their stake in the escrow account.

Chainlink’s Future

Source: https://coinmarketcap.com/currencies/chainlink/

As cryptocurrencies develop, Chainlink may play a significant role in allowing smart contracts to use on-chain and off-chain data. Having an oracle network in place, such as Chainlink could be critical to the long-term stability and survival of many cryptocurrency and blockchain projects. Only time will tell if this future plays out.

Chainlink (LINK) References

If you’re interested in learning more about Chainlink, you can visit the links below.

Chainlink Website

What is Chainlink?

Chainlink Whitepaper

Whitepaper for Chainlink Protocol

Chainlink Blog

Featured Chainlink Blog Posts