Chainlink is a decentralized oracle provider and one of the most significant projects in the crypto space. Chainlink is rightfully known as the backbone of the DeFi ecosystem due to the dependence that many apps have on its network for accurate data. The native token of the Chainlink ecosystem is LINK. Chainlink has since been integrated by over 650 entities, including the Associated Press, Google, AccuWeather, Deutsche Telekom, and a host of high-profile DeFi protocols.
The History Of Chainlink
Chainlink was created in 2017 as a “bridge” between the blockchain and off-chain worlds by Sergey Nazarov, Steve Ellis, and Ari Juels. Chainlink has since made two important integrations in 2018 and 2020. First, in 2018, Chainlink integrated Town Crier – an execution environment-based blockchain oracle. Then, in 2020, Chainlink integrated DECO – a protocol that leverages zero-knowledge proofs (a privacy protocol) to allow users to prove the validity of their information without revealing sensitive data. Juels was instrumental in the creation of both Town Crier and DECO.
Before we go any further, it is essential to understand two things – smart contracts and oracles.
How Do Smart Contracts Work?
Smart contracts are self-executing, automated agreements that are based on the blockchain. Think of smart contracts like an elaborate vending machine wherein an action (you getting the item) gets triggered only when you complete the previous actions (choosing an item and paying for it). Another interesting thing to keep in mind is that all the actions defined in the contract are getting triggered automatically by code. Therefore, it doesn’t require the intervention of a third party.
What Are Oracles?
We have already touched up on this topic initially, but let’s go a little deeper. Any blockchain-based application is completely isolated from the real world by design. This is fine when you want to ensure security, but what about the accuracy of the data itself.
Let’s take an example.
Suppose you are running a market prediction app that takes bets on NBA matches. How does it know the actual result of the games to distribute the rewards accordingly?
In this case, it is necessary to have an oracle that continually checks match results and updates the dApp with the latest scores. Think of an oracle as an API to the outside world. However, the problem now lies in the legitimacy of the oracle. Having a decentralized oracle network ensures the quality and accuracy of the data while removing a single point of failure.
Whenever someone requests some data from the Chainlink network, it creates a service level agreement (SLA) contract. This SLA is includes the following three smart contracts:
- Chainlink Reputation Contract: As the name suggests, the contract continually checks the track record of every oracle data provider. It checks their reputation and history and automatically discards unreliable nodes.
- Chainlink Order-Matching Contract: This contact matches the request with the right node(s) to get the most optimal result.
- Chainlink Aggregating Contract: Aggregates the required data from the selected oracles.
LINK Token Utility
- Anyone can request data from the Chainlink network and pay with LINK. The Chainlink node operator sets the prices for the data.
- Chainlink node operators must stake LINK in the network to participate in network governance.
- The more LINK a node stakes the more likely they will be called up the network to provide data and earn rewards.
Let’s bring everything together. How does Chainlink actually work?
- First, the user drafts an SLA that fully details the data requirements. The user also deposits the LINK token to incentivize the oracle nodes.
- The software parses the SLA and matches the user with its network’s best oracle data providers.
- The oracles now collate data from their external sources to best match the requested SLA.
- The Aggregating Contract now collects the data collated by the oracle nodes -> assesses the validity of each -> returns a weighted-average score to the user.
Chainlink’s main objective is to provide real-world, real-time data to blockchain-based smart contracts. . If you are interested in getting your hands on some LINK, click here.