Chainlink is a platform for Smart Contracts, dedicated to connecting applications from the real world to the Blockchain through APIs. In this beginner's guide, we explain its basics.
Smart contracts and their problems
According to Chainlink developers, there are several drawbacks to the current structure of Smart Contracts on the Blockchain. For example, because Smart Contracts information is secured on a Blockchain and that miners reach consensus around blockchain-based transaction data, Smart Contracts cannot interact with external resources, such as data sources, APIs, or traditional banking systems.
As a solution to the problems mentioned above, a decentralized Oracle service called ChainLink appears. With ChainLink, Smart Contract users can use oracles to retrieve data from off-chain application program interfaces (APIs), data groups, and other resources and integrate them into the Blockchain. In other words, ChainLink takes information external to the applications to the Blockchain and incorporates it into it.
Oracles are necessary to access data that many existing protocols need to operate. As its name indicates, ChainLink serves as a link between the Blockchain and the existing infrastructure.
What are oracles?
Oracles function as a bridge between the real world and the Blockchain by providing data to smart contracts. It is an "agent" that verifies the real-world occurrences and sends this information back to a blockchain to activate the execution of smart contracts when predefined conditions are reached (such as, for example, a payment received or a price change).
These oracles are centralized third-party services and as they are not part of the blockchain consensus mechanism raise questions about whether the data they provide is reliable. For example, if a Smart Contract depends on the price of some shares and it arrives manipulated, the Smart Contract could execute the wrong function based on this erroneous data.
The ChainLink network
ChainLink is a decentralized network of nodes selling specific data sources, many offered as APIs, and many payment options directly to a Smart Contract. It has two separate parts, in-chain and off-chain, that interact to deliver the service.
Chainlink's main objective is to link blockchains with the real world. For this, it has two main architectural components: on-chain infrastructure and off-chain infrastructure.
This component is composed of on-chain contracts deployed on the Ethereum blockchain. These Oracle contracts are responsible for processing data requests from users seeking to take advantage of Oracle services on the network. If any user or entity wants to access data outside the chain, they can send a user contract or request a Contract to the ChainLink network. The Blockchain will process these requests in its contracts.
These Contracts have a great function as they are in charge of making the requested Contract match the appropriate oracles. The Contracts include a reputation contract, an order matching contract, and an aggregation contract.
As its name implies, the reputation contract checks the history of an Oracle vendor to verify its integrity. The order matching contract records the SLA (Service-level agreement) of the user's Contract on the network and collects the bids from the responsible Oracle vendors. And finally, the aggregation contract accumulates the collective data of the chosen oracles and balances them to find the most accurate result. The ChainLink network goes through a three-stage process to achieve this:
Oracle selection. When submitting a request contract, the user specifies an SLA or the set of parameters and requirements for his data search. These can be Oracle's reputation, data specifications, amount of data resources/oracles required, etc. Subsequently, users can manually search for Oracles using Chainlink. However, when manual searching is not optimal, an automated matching engine is available. For this option, oracles can bid based on a contract's SLA. Once the Contract has received enough quality offers, these oracles are selected, and the service agreement starts.
Data report. When the oracles have been chosen, off-chain, they make the service agreement and transmit the requested data to the Blockchain for the nodes to process.
Result Aggregation. An aggregation contract collects the data submitted by each of the oracles associated with a requesting Contract to ensure data integrity. The aggregation contract weights and averages all the information to provide the requester with an accurate answer. Sometimes some of the responses cannot be averaged.
The second component of ChainLink consists of a network of oracle nodes connected to the Ethereum network. Although currently limited to Ethereum Blockchain, it will support all of the leading Smart Contract networks over time (probably the Cardano blockchain).
These off-chain nodes collect the requested data from off-chain sources as requested by user contracts. They also have to process the relevant data through ChainLink Core, the central node software that enables interaction between the off-chain infrastructure and the ChainLink Blockchain.
When the network process the data, Chainlink Core transmits it to the Oracle contract on-chain for result aggregation. In compensation for this work, Oracle off-chain operators get paid in LINK, ChainLink's native token, for collecting and sending data.
Off-chain nodes also allow developers to integrate plugins that operators use to accommodate other programs to streamline data collection. ChainLink uses multiple oracles to collect data for a single application contract. Oracles must use various resources for their data collection to ensure the distributed nature of the platform and the accuracy of the data collected.
Sources and Distributed Oracles
These two concepts discussed above help to understand how ChainLink differs from other Oracle protocols. ChainLink is fully decentralized. As we have already discussed, centralized oracles are risky because they can offer fraudulent data.
To overcome these security concerns, ChainLink implements what it calls Oracle distribution and origin. Oracles should extract their data from multiple sources to get a trustworthy reputation. When a user Contract places a request within the network, that request gets contracted to multiple Oracle nodes out of the chain. These oracles may have drawn the information from similar or different sources.
This two-tier distribution system keeps the oracles respectable, as each data set is aggregated and compared to one another. The network punishes those Oracles that act and manipulate the data, make them lose reputation on the ChainLink network.
The ChainLink Token
The platform uses the LINK token to pay node operators to reward them for the off-chain needs of the Chainlink system. LINK tokens are the native tokens inside the chainlink ecosystem. Therefore, the more use the ChainLink platform has, the more tokens there should be.
The LINK token is described as "an ERC20 token, with additional ERC223 call and transfer functionality (address, uint256, bytes), allowing tokens to be received and processed for contracts within a single transaction."
The Chainlink cryptocurrency has a hard cap of $ 32 million. According to the developers, 35% of the total tokens will go to node operators to serve as an incentive. Another 35% was sold in the initial coin offering (ICO). The remaining 30% of the total LINK tokens will stay with continued development and staff payments. Some people criticized this distribution, saying that the percentage is too high and could reduce the overall demand for the tokens. There are currently 419 million LINK tokens in circulation out of the total supply of 1 billion dollars.
The cryptocurrency stayed safe and sound despite the chaos in the traditional financial space. At this moment ranks 12th in the cryptocurrency market. It's a historical precedent that teaches investors a lesson: you can not ignore cryptocurrencies and DLT technologies when making an investment plan. It means that not only will cryptocurrencies be used in the coming years (both as a means of payment and for storage of value), but Smart Contracts will also have greater use than today. That's when Chainlink can become a critical platform for many investors. Always keep in mind that trying to predict cryptocurrency prices is tricky. Because the crypto market will benefit from a lack of trust in fiat money and all the pros of the Chainlink platform, some traders assume that the Chainlink price will exceed the $50 mark very soon.
Their authors released the first Chainlink whitepaper in September 2017. Since then, Chainlink has become the most widely used decentralized Oracle network for Smart Contracts, including those from DeFi, the insurance industry, video games, and NFTs.
In April 2021, Chainlink published a new white paper with all the innovations to come.
The new whitepaper outlines how "Chainlink Decentralized Oracle Networks can go on to create a decentralized meta-layer that enhances Smart Contracts with highly scalable, confidential, and secure forms of off-chain computation, in addition to the external data that Chainlink already provides today."
The platform announcement introduces a new architecture for the creation of hybrid Smart Contracts. Thanks to this new architecture, decentralized Oracle networks will offer key tools that blockchains cannot offer.
For example, Chainlink will offer improved data sources that will provide more frequent updates, preserve privacy, and deliver the data to multiple blockchains. All of this will reduce costs and provide DeFi applications with an even more secure and reliable external data source.
As the Chainlink ecosystem continues to expand, the team believes that its appeal to users and its importance as an infrastructure for the blockchain economy will accelerate.
The technology behind ChainLink has significant potential to improve Smart Contracts. Currently, ChainLink operates with smart contracts issued on the Ethereum network, although they indicate that they may incorporate their tech into more blockchain networks in the future.