Chainlink 101: The Crypto That Brings Real-World Data Into The Blockchain

Important terms:

Before getting into the nuts and bolts of Chainlink, there are some important terms that need to be understood.

Web3: the “read/write/own” phase of the Internet. Rather than just using free tech platforms in exchange for our data, users can participate in the governance and operation of the protocols themselves.

Decentralised oracle networks (DONs): enable the creation of hybrid smart contracts, where onchain code and offchain infrastructure are combined to support advanced decentralised applications (dApps) that react to real-world events and interoperate with traditional systems.

Smart contracts: pre-specified agreements on the blockchain that evaluate information and automatically execute when certain conditions are met.

What is Chainlink?

As one of the leading decentralised oracle networks, Chainlink aims to enable developers to build feature-rich Web3 applications with access to real-world data and off-chain computation across any blockchain and provides global enterprises with a universal gateway to all blockchains.

A Brief History of Chainlink

The Chainlink network was launched in June 2017 by the for-profit company SmartContract. Its first version was released the same month.

The co-founders of the company, Steve Ellis and Sergey Nazarov, along with Ari Juels, an advisor to the company, subsequently published the Chainlink white paper in September 2017.

Following the white paper publication, the Chainlink team conducted an initial coin offering (ICO), during which they raised approximately $32 million by selling 35% of the total supply of 1 billion LINK tokens.

Of the remaining tokens, 30% were allocated to SmartContract for the development of the Chainlink blockchain, while 35% were designated to incentivize node operators.

Understanding Chainlink

To understand the advantages of Chainlink and its operational mechanics, it's crucial to grasp the in-depth concept of smart contracts.

Smart contracts are predefined agreements stored on the blockchain that assess data and execute automatically upon meeting specific conditions. As they reside on the blockchain, smart contracts are immutable (unchangeable) and verifiable (visible to all), ensuring a high level of trust among involved parties. They accurately reflect the terms of the agreement and execute only if the specified conditions are satisfied.

Types of Chainlink Smart Contracts

To execute, a smart contract not only takes data within the blockchain, but it also asks for real-world information. The process begins on a blockchain enabled with smart contracts when a smart contract necessitates external data. The smart contract issues a request for information (Requesting Contract), initiating the Chainlink protocol.

Upon receiving this request, the Chainlink protocol records it as an 'event' and creates a corresponding smart contract known as the Chainlink Service Level Agreement (SLA) Contract on the blockchain. This SLA Contract then generates three sub-contracts: the Chainlink Reputation Contract, the Chainlink Order-Matching Contract, and the Chainlink Aggregating Contract.

The Chainlink Reputation Contract is responsible for scrutinising the track record of oracle providers to assess their authenticity and performance history. It evaluates and eliminates disreputable or unreliable nodes from consideration.

The Chainlink Order-Matching Contract facilitates the transmission of the request from the Requesting Contract to Chainlink nodes. It also collects bids from these nodes when the Requesting Contract does not specify a particular set of nodes. Subsequently, it selects the appropriate number and type of nodes to fulfil the request.

The Chainlink Aggregating Contract consolidates the data retrieved from the chosen oracles and validates or reconciles it to produce an accurate result. This contract ensures the integrity and reliability of the aggregated data before delivering it to the smart contract for further execution.

However, for smart contracts to facilitate agreements beyond those based solely on blockchain data, they require off-chain data presented in an on-chain format. Bridging external information sources with blockchain-based smart contracts in a mutually understandable language poses a significant challenge and limits the widespread utility of smart contracts.

Chainlink Oracles

The core issue arises from the fact that while smart contracts require real-world data to execute commands, most of this data isn't stored on blockchains. Blockchains operate as closed systems, lacking inherent connectivity with external sources. Consequently, essential data such as asset prices, sports scores, IoT sensor readings, web data, and enterprise system information are unavailable on the blockchain. This limitation severely restricts the range of smart contracts developers can create—for instance, developing a flight insurance agreement without access to flight data is practically impossible.

The most efficient method to integrate external data into the blockchain is to utilise an "oracle" to input the data. However, designing an oracle mechanism that maintains the security and reliability attributes of the underlying blockchain is challenging. It's essential to preserve the core value proposition of smart contracts, namely extreme reliability without the involvement of intermediaries. If a single centralised oracle is entrusted with providing the data used to trigger the smart contract, it gains complete control over the contract's outcome. This scenario introduces a significant vulnerability known as the oracle problem, jeopardising the integrity of the entire smart contract system.

Chainlink operates as a decentralised network of nodes tasked with sourcing data and information from off-blockchain origins and delivering them to on-blockchain smart contracts through oracles.

By leveraging this decentralised approach, coupled with additional secure hardware, Chainlink effectively mitigates reliability concerns that may arise when relying solely on a single centralised source. This decentralised model enhances the robustness and security of data delivery to smart contracts, ensuring the integrity of the overall system.

Chainlink also offers several layers of security measures that extend beyond decentralisation, to gain users' trust in the oracle network:

1. Generalised architecture: Chainlink provides a flexible framework for constructing and operating oracle networks, enabling users to create or connect to tailored oracle networks without relying on other networks.
2. Data signing: Chainlink oracles digitally sign the data they submit on-chain with a unique cryptographic signature. This feature allows users to verify the origin of the data, confirming it as sourced from a specific oracle node.
3. High-quality data: Chainlink supplies smart contracts with data from various external systems, including premium data providers. Moreover, smart contracts can issue commands to external systems, such as executing payments on traditional payment rails.
4. Blockchain agnostic: Chainlink is compatible with any blockchain, operating independently without dependencies on other blockchains. This flexibility enables Chainlink to support public blockchains, enterprise blockchains, and more.
5. Service-level agreements (SLAs): Chainlink aims to enable users to define the terms of oracle jobs requested in on-chain smart contracts. These terms may include requiring oracle nodes to stake a security deposit, refundable only if they fulfil pre-agreed-upon conditions, such as timely data delivery.
6. Reputation systems: Chainlink oracles' historical performance data is stored on-chain via signed data, allowing users to assess oracle reliability based on metrics like average response time, completion ratio, security deposit average, and more. Node operators can also provide additional information such as identity, location, and certifications.
7. Optional features: Chainlink is continuously developing additional security measures for features like oracle and data privacy, advanced oracle computations, and more, enhancing the overall security and functionality of the platform.

How Chainlink nodes validate data?

After receiving the request for data from the Requesting Contract, Chainlink nodes utilise the "Chainlink Core" software to translate this request from the on-blockchain programming language into an off-blockchain programming language that can be understood by real-world data sources. This translated request is then directed to an external Application Programming Interface (API) responsible for gathering data from the specified source. Once the data has been collected, it is translated back into the on-blockchain language through Chainlink Core and transmitted back to the Chainlink Aggregating Contract.

The Chainlink Aggregating Contract can validate data from both single and multiple sources, as well as reconcile data from multiple sources. For instance, if five nodes provide one answer from a weather sensor while two other nodes offer a different answer, the Chainlink Aggregating Contract identifies the faulty or dishonest nodes and disregards their answers. In this manner, Chainlink nodes can verify data from a single source.

Moreover, the Chainlink Aggregating Contract can repeat this validation process for multiple sources and reconcile all validated data by averaging it into a single data point. Although there are situations where not all answers can be averaged, for the sake of simplicity, we won't delve deeper into those circumstances here.

In summary, irrespective of the data source, Chainlink has devised a reliable and efficient method to deliver accurate data to smart contracts on blockchain platforms enabled with smart contracts.

How does Chainlink work?

The primary goal of Chainlink is to establish a connection between on-chain and off-chain ecosystems. To enhance communication between smart contracts and blockchains, Chainlink operates through a structured three-step process:

1. Oracle Selection: Users of the service define their data requirements in a Service Level Agreement (SLA). Chainlink's software matches these requirements with suitable oracles. To initiate this process, users must deposit LINK tokens into an order-matching contract, which accepts bids from oracle providers.
2. Data Reporting: Oracles interface with real-world external data sources specified in the SLA. Chainlink's oracles retrieve and process this data, then transmit it back to the smart contracts.
3. Result Aggregation: The final stage involves aggregating the results obtained from various input data sources collected by the oracles. This aggregated data is then returned to the smart contracts as a weighted score, representing the sum of all the received data.

Additionally, Chainlink incorporates off-chain oracle nodes that are interconnected with the Ethereum network. These off-chain nodes retrieve data from off-chain resources upon user request. Subsequently, this data is processed through Chainlink Core before being transmitted to the on-chain oracles for further utilisation.

Requesting Contract holders utilise LINK tokens to compensate Chainlink node operators for their services. The pricing is determined by the node operators based on the demand for the data they can provide and the prevailing market conditions.

Additionally, Chainlink node operators employ LINK tokens to stake in the network. By depositing LINK with Chainlink, node operators demonstrate their dedication to the network and incentivize the delivery of high-quality services.

When matching nodes with requests for data, the Chainlink Reputation Contract takes into account various factors, including the size of a node's stake. Nodes with larger stakes are more likely to be selected to fulfil requests, thus earning LINK tokens for their services. Furthermore, the Chainlink network penalises faulty or dishonest nodes by imposing a tax on their LINK stake for providing subpar service.

LINK operates on the Ethereum blockchain in compliance with the ERC-20 token standard. It can be purchased and sold for fiat currency or other digital currencies on various cryptocurrency exchanges.

What is Chainlink staking and how to stake Chainlink crypto?

Chainlink staking involves participating in the Chainlink network as a node operator and committing LINK tokens to demonstrate dedication to the network's operations. Node operators perform various tasks, including providing data to smart contracts, in exchange for rewards in LINK tokens. Staking helps ensure the timely and accurate delivery of data to smart contracts, thereby maintaining the reliability and integrity of decentralised applications (DApps) relying on Chainlink's services.

However, it's important to note that staking in Chainlink differs from traditional blockchain staking mechanisms, which are primarily aimed at securing the network through consensus mechanisms. Instead, Chainlink staking focuses on incentivising node operators to provide accurate and timely oracle reports, essential for the functioning of smart contracts.

Use Cases of Chainlink

Chainlink's robust security and reliability measures are fostering the development of increasingly sophisticated smart contracts integrated with Chainlink oracles. Among the 60+ use cases enabled by Chainlink, prominent ones include:

decentralised Finance (DeFi):

A multitude of traditional financial products such as loans, payments, derivatives, and asset equity are transitioning to blockchain platforms via smart contracts to enhance security, transparency, and accessibility. Chainlink facilitates these DeFi applications by providing asset pricing, interest rate access, collateralization verification, and more, thereby enabling functionalities like fair market value loan issuance, automated dividend distribution, and options contract settlement.

Insurance:

Parametric insurance contracts are emerging on the blockchain, leveraging smart contracts. Chainlink is currently employed to supply weather data to the Arbol crop insurance market, enabling global farmers to access parametric crop insurance seamlessly through the Internet. Settlements are based on predefined parameters such as rainfall or temperature, ensuring fairness and timeliness.

Gaming:

Blockchain-based gaming applications, often incorporating non-fungible tokens (NFTs) as digital collectibles, are gaining traction. Key to these games is a reliable source of randomness for in-game scenarios or prize distribution. Chainlink's Verifiable Random Function (VRF) delivers unbiased randomness to smart contracts, safeguarding against tampering by players, creators, or external entities.

Traditional Systems:

Chainlink serves as a vital bridge, allowing traditional systems like data providers, IoT networks, and enterprises to integrate their data and services with blockchain networks. With blockchain-agnostic Chainlink oracles, a standardised interoperability framework enables seamless connectivity between existing digital infrastructure and diverse blockchain networks, as outlined in the World Economic Forum report co-authored by Chainlink Co-founder Sergey Nazarov.

These capabilities illustrate Chainlink's role in facilitating smart contracts' interaction with external data and systems with high security and reliability. Consequently, blockchain-based smart contract applications can cater to a wider array of use cases across diverse markets.

If blockchains represent decentralised computers and smart contracts are decentralised applications, Chainlink can be likened to a decentralised Internet, enabling smart contracts to interface with the outside world while upholding blockchain's core tenets of security, transparency, and trust.

Supply chain

In the supply chain sector, smart contract systems have been adopted early on to record the movement of goods on immutable decentralised ledgers, ensuring transparency and real-time updates. As goods progress through various stages and locations, smart contracts require interaction with external data sources such as APIs, IoT sensors, and data feeds. Chainlink oracles facilitate this interaction in a decentralised and tamper-proof manner, connecting smart contracts with external data sources to maintain the integrity and transparency of the supply chain process.

Prospects of Chainlink

Chainlink's trajectory in the realm of decentralised oracle services points towards a promising future, fueled by its unique features and continuous evolution. The platform stands as a cornerstone in smart contract development, offering high levels of security and reliability akin to blockchain technologies. The ongoing enhancement of the oracle service without compromising its decentralised nature further solidifies its position as the go-to solution for advanced smart contract applications.

Looking ahead, Chainlink is poised to continue its ascent, driven by its widespread adoption and diverse range of applications in the real world. Some key areas where Chainlink is making significant strides include:

1. DeFi Applications: Chainlink's decentralised oracle is instrumental in verifying collateralisation, determining asset prices, and accessing interest rates in decentralised finance (DeFi) applications. Its reliability and security make it a trusted choice for critical functions within the DeFi ecosystem.
2. Insurance Contracts: Chainlink's oracle service plays a vital role in the development of blockchain-based insurance contracts. A notable example is the Arbol crop insurance market, where the oracle provides crucial weather data, enabling better decision-making and risk management in the insurance industry.
3. Blockchain Gaming: Chainlink's decentralised oracle serves as an essential source of randomness for blockchain games featuring non-fungible tokens (NFTs). This capability enhances the gaming experience by enabling the creation of random in-game scenarios, contributing to the growth of the blockchain gaming sector.

With its demonstrated utility and versatility across various industries, Chainlink is well-positioned to continue its expansion and play a pivotal role in the ongoing evolution of decentralised technologies. As the demand for secure and reliable oracle services grows, Chainlink is poised to remain at the forefront, driving innovation and facilitating the seamless integration of real-world data into blockchain-based applications.

FAQs

What is Chainlink?

Chainlink is the industry standard for building, accessing, and selling oracle services needed to power hybrid smart contracts on any blockchain. Chainlink oracle networks provide smart contracts with a way to reliably connect to any external API and leverage secure offchain computations for enabling feature-rich applications. Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.

What is a blockchain oracle?

A blockchain oracle is any system that services a smart contract by providing it with data from an offchain source or connecting it with an offchain system. Oracles enable connectivity between blockchains and real-world data by interfacing with external APIs and data feeds, allowing them to pull data for or push data from a smart contract.

Why do blockchains need oracles?

Oracles enable smart contracts to interact with offchain resources. Without oracles, smart contracts can only access data within a blockchain, severely limiting their potential applications. The majority of industry-changing real-world use cases for smart contracts require offchain data and computation for proper execution and often an integration with existing payment rails to settle a contract. For example, a smart contract may require high-quality weather data from a reputable source like AccuWeather to trigger a transaction. It may also require the ability to pay out escrowed fiat currency through existing financial infrastructure, such as a bank checking account.

What is a decentralised oracle network

A decentralised oracle network consists of multiple blockchain oracles run by independent node operators that are chosen to retrieve and validate data from several different offchain sources. Each of the oracles’ responses within a decentralised oracle network are aggregated together to form a single trusted data point, which can be used to trigger smart contracts on any blockchain and really any system that needs highly reliable data that’s provably accurate. The data delivered onchain can be hosted in a Reference Contract (pull model), and/or delivered directly to consuming smart contracts (push model).

The Chainlink Network is made up of multiple decentralised oracle networks running simultaneously and independently of one another. For example, if a smart contract requires data about the price of ETH/USD, instead of relying on one individual blockchain oracle to pull price data from one API source, the smart contract can use a decentralised oracle network to have multiple oracle nodes pull data from several different API sources and then aggregate the result.

Through decentralised computation, Chainlink-powered decentralised oracle networks provide users superior security and reliability guarantees on the inputs and outputs of their smart contract, ensuring that both onchain and offchain components of a decentralised application are tamper-proof end-to-end.

What is 'real-world data'?

Real-world data, also known as offchain data or external data, refers to the current global data infrastructure that exists outside of the blockchain that must be brought onchain via oracles to be used by smart contract applications. Like a computer without the Internet, blockchain-based smart contracts have inherent value on their own, such as creating and swapping tokens. However, they become exponentially more powerful when externally connected to the vast and accelerating data and API economy taking root outside the blockchain ecosystem.

How decentralised is the Chainlink Network?

The Chainlink Network consists of hundreds of professionally-operated and community-run nodes, allowing for the creation of numerous Sybil-resistant and tamper-proof oracle networks that can scale up in decentralisation as the value being secured rises. Chainlink nodes are operated by professional DevOps and security teams with decades of experience operating mission-critical infrastructure and are already securing tens of billions of dollars of value across multiple blockchain networks. The performance data about each Chainlink node can be found onchain or on independent sites such as market.link.