From its arrival in the cryptocurrency scene, Chainlink has made waves in crypto markets attracting the attention of DeFi companies, crypto investors, blockchains, and big tech and financial players such as Google.
Chainlink’s technology claims to solve one of the biggest challenges for the practical implementation of smart contracts, connecting blockchains to real world data, such as price feeds or delivery confirmations, through so-called oracles blockchain connectivity.
To understand the benefits of this decentralized oracle network and how it works, you need to understand some fundamental, interconnected concepts.
First of all: Smart Contracts.
Smart Contract is nothing more than a tamper-proof, deterministic program written on the Blockchain, executed automatically when all the conditions of the contract are satisfied. They are the future of all digital and many non-digital agreements, they are resistant to tampering, irreversible and unstoppable and in principle almost always very effective.
For smart contracts to craft agreements beyond those that are related to data found on the blockchain, they require off-chain data in an on-chain format. The difficulty in connecting outside information sources to blockchain smart contracts in a language that they both understand is one of the main limitations in how widely smart contracts can be used.
Image source: www.bitpanda.com
For this reason we have oracles.
Oracles are like "agents", links between the blockchain and the real world, which have the only goal of passing information to smart contracts, at the exact moment in which some conditions of the real world occur. These agents are used to transmit data but are in effect centralized "entities" and therefore to be considered possible points of failure (due to tampering and more).
But we will delve deeper into this topic next week, with the second dedicated post on Chainlink.
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ChainLink is a network of nodes, which obtain data directly from the APIs (Application Programming Interfaces) of applications. The security of the data provided is guaranteed because Smart Contracts can choose which and how many nodes they can point to. Every node has a reputation, which serves to ensure that they are working properly.
Image source: https://link.smartcontract.com/whitepaper
Then we have the ChainLink token.
The token acts as a guarantee when nodes transmit data. The disincentive to provide fraudulent or misleading data lies in the fact that if the data is wrong, the guarantee (of the token) is lost. This fact, together with the reputation system, ensures that the nodes act correctly and that is why this fact makes ChainLink a decentralized, safe and reliable oracle.
With its rapid growth, DeFi is definitely one of the top priorities for Chainlink at the moment.
I am sure that ChainLink has made you very curious about its potential and more technical characteristics of operation.
We know that Chainlink is a decentralized oracle network built on the Ethereum network, founded by CEO Sergey Nazarov.
The Chainlink network has made a name for itself by providing reliable tamper-proof data for complex smart contracts on any blockchain.
Chainlink was born, enabling smart contracts to connect to data feeds from any data source or API. This was a game-changer for the blockchain industry.
After raising $32 million in an ICO, the Chainlink mainnet went live in June 2019. The Chainlink project has become a pillar in the oracle space, and a must-have for all credible DeFi projects.
One of the core features are Chainlink Smart Contracts.
Any blockchain that is smart-contract-enabled can request data using the Chainlink Requesting Contract. Known as an event, this is then registered by the Chainlink network and creates a Chainlink Service Level Agreement Contract (SLA), which allows users to access off-chain data.
Image source: Chainlink
The SLA contract has three sub-contracts:
Chainlink Reputation Contract that tracks the performance of a node and authenticity of data, looking for suspicious actors or suspicious nodes.
Chainlink Order-Matching Contract that sends data requests to nodes to be used in smart contracts and allocates appropriate nodes for different tasks.
Chainlink Aggregating Contract that collates, validates, and reconciles any data requests, and translates data for communication between parties using the Chainlink Core software. This data can then be sent to an API and sent back to the Chainlink Aggregating Smart Contract.
Then I want to focus a little bit on the Validation System.
The ChainLink Validation System monitors on-chain oracle behavior, providing an objective performance metric that can guide user selection of oracles. It will seek to monitor oracles for:
Availability: Validation System should record failures by an oracle to respond in a timely way to queries. It will compile ongoing uptime statistics.
Correctness: The Validation System should record apparent erroneous responses by an oracle as measured by deviations from responses provided by peers.
In our initial, on-chain aggregation system in ChainLink, such monitoring is straightforward, as all oracle activity is visible to CHAINLINK-SC. Recall, however, that in the off-chain aggregation system envisaged for ChainLink, it’s the oracles themselves that perform aggregation. Consequently, CHAINLINK-SC does not have direct visibility into oracle responses and cannot itself monitor availability and correctness.
Fortunately, oracles digitally sign their responses, and thus, as a side effect, generate non-repudiable evidence of their answers. The proposed approach will therefore be to realize the validation service as a smart contract that would reward oracles for submitting evidence of deviating responses. In other words, oracles would be incentivized to report apparently erroneous behavior. Availability is somewhat trickier to monitor, as oracles of course don’t sign their failures to respond.
Instead, a proposed protocol enhancement would require oracles to digitally sign attestations to the set of responses they have received from other oracles. The validation contract would then accept (and again reward) submission of sets of attestations that demonstrate consistent non-responsiveness by an underperforming oracle to its peers. In both the on-chain and off-chain cases, availability and correctness statistics for oracles will be visible on-chain. Users / developers will thus be able to view them in real time through an appropriate front end, such as a Dapp in Ethereum or an equivalent application for a permissioned blockchain.
There has been a steady stream of Chainlink integrations this year, including partnerships with the biggest names in DeFi, as well as integrations with Microsoft and IBM.
Chainlink is changing the financial landscape by reimagining how financial contracts work, with a decentralized oracle network pushing towards the fourth industrial revolution.