Introduction
Chainlink is a decentralized oracle network that connects smart contracts on blockchains with the real world. Using a system of nodes and operators, Chainlink is able to answer data requests from smart contracts by collecting data from multiple sources and reconciling it to provide a single reliable piece of information.
As an example, if a smart contract needs the current price of Bitcoin, it can request that data from Chainlink, which will look at several different reliable sources and provide an answer based on them.
In order for Chainlink to function, it is supported by LINK, its native token, which is used as compensation for the work Chainlink network operators do in providing smart contracts with requested data.
How does Chainlink work?
The Chainlink platform is able to connect cryptocurrencies and the banking segment. With Chainlink’s help, it is now possible to use smart contracts in the traditional financial system. From a technical point of view, Chainlink presents software using an API for cryptocurrency contracts.
With a decentralized network of oracles, Chainlink connects DApps with real-world data. Oracles help to upload data to the blockchain, allowing smart contracts to interact with the external environment.
Chainlink’s goal is to create reliable oracles with access to data that can be used by different blockchains. The platform’s team is developing a decentralized network of oracles, more reliable than centralized networks which provide similar services.
LINK tokens are used to pay node operators for their services when delivering data from external sources. Operators define the fees, depending on the demand for external resources.
Chainlink and DeFi
Ever since Decentralized Finance (DeFi) has become more popular, there has been a growing interest in high-quality oracle services. After all, most of these projects use smart contracts in one way or the other, and they also require external data to run properly.
With centralized oracle services, DeFi platforms can leave themselves vulnerable to a wide range of attacks, including flash loan attacks through oracle manipulation. Multiple incidents like this have already occurred, and they’ll likely keep happening if centralized oracles are still common.
Many people may be inclined to think that Chainlink can solve all of these problems – that may not be correct. Despite projects such as Synthetix, Aave, and others all relying on Chainlink’s technology, new types of risks are also introduced. If too many platforms rely on the same oracle service, they will all face outages if Chainlink suddenly stops working as intended.
This may seem unlikely. After all, Chainlink is a decentralized oracle service that supposedly has no single point of failure. Even so, in September 2020, Chainlink nodes suffered a “spam attack” where an attacker drained potentially up to 700 ETH from node operator wallets. The attack was quickly solved, but it’s a reminder that not all systems are completely resilient to malicious activity.
What’s the role of LINK?
Chainlink doesn’t just function by itself. As a decentralized network, it requires independent nodes, so-called operators, to perform the tasks associated with fulfilling requesting contracts. And in order to perform their job, Chainlink operators require payment. This is where LINK comes in. If you want your smart contract to access data from the Chainlink network of nodes, you must pay a fee in LINK to the Chainlink operator who picks up your contract. Operators set their price in advance based on the demand for the data they are providing and the current market for that data.
LINK supply and issuance
LINK has a maximum supply of 1 billion tokens. 35% of those were sold during the ICO in 2017. About 300 million are in the hands of the company that founded the project.
In contrast to many other cryptoassets, LINK has no mining or staking process that increases its circulating supply.
How Does Chainlink Interact with Oracles?
There are two main processes involved which allow blockchain-based smart contracts to interact with one another.
To Employ Reference Data
Reference data contracts represent on-chain reference points for accessing off-chain data. They are often updated. The retrieval of supported data from them is performed quickly and efficiently within a single transaction.
To Request and Receive Data
This involves retrieving data from any external API. To enable its availability in a single transaction, data should first be requested by a smart contract from the oracle to initiate a callback function that responds to the request.
Here’s what the process looks like under the hood, from the technical perspective. The client contract makes an initial request call to the LINK token contract. With the help of a callback function, it ensures the client contract has sufficient tokens to fulfill the request. Then it connects with the oracle, which makes an external API request and sends the retrieved data back to the client contract.
The Chainlink architecture consists of three types of smart contracts:
Chainlink Reputation Contract
A Chainlink reputation contract verifies oracle integrity, checking the track record of the oracle. It includes such parameters as the total number of completed requests, average response time, and LINK amount staked by the oracles.
Chainlink Order Matching Contract
This contract matches a smart contract’s service level agreement (SLA) with the best-bidding oracles.
Chainlink Aggregating Contract
The purpose of this type of contract is primarily to collect data from oracles, in order to match the most accurate results with the smart contract that requires them.
Analyzing the Results
An aggregator contract finds the most accurate results. Then, users can pay a fee using LINK to access the data.
Chainlink vs. Bitcoin vs. Ethereum: The Differences
Compared to Bitcoin and Ethereum, two key blockchain projects that are undisputable leaders of the market, Chainlink has a few additional perks contributing to its long-term success.
Bitcoin, as the first cryptocurrency ever created, offers nothing more than the transfer of value. Ethereum’s value lies in its platform, Ethereum Virtual Machine (EVM), which allows the creation of smart contracts to automate transactions on the blockchain.
Chainlink combines these two ideas and adds the possibility of the blockchain interacting with real-world data. With Chainlink’s help, smart contracts can operate with data available on the blockchain, managing information from external reality and thus enhancing the use cases of the underlying technology.
Conclusion
The incredible technology behind Chainlink gives tech companies the possibility of integrating blockchain into their technology stack. Of course, oracles can play an essential role in the evolution of blockchain technology. Connecting real-world data with blockchain technology, Chainlink can create a self-sufficient, well-protected global ecosystem.
However, it’s worth understanding what crypto chainlink is all about, as well as its potential to resolve the problems of connecting blockchains with real-world data. Regardless, it’s still too early to estimate Chainlink’s formidable potential to contribute to its further adoption in our everyday lives.