Blockchains are all the rage nowadays, but until recently, they suffered from a fundamental limitation, in that they had no native support for off-chain data. This severely limited the ways in which they could be used.
This is the problem Chainlink addresses, and it does this through a system of Chainlink oracles.
Though oracles are just a technology, they can be intimidating to outsiders not steeped in the inner workings of blockchains.
In this piece, we’ll discuss Chainlink oracles, why they matter, and what they’re making possible.
What Is Chainlink?
The Chainlink network is an open-source blockchain project that operates on top of Ethereum. The project is overseen by Chainlink Labs, comprised of a team of developers, founders, executives, and academics with extensive experience building cutting-edge technologies.
Chainlink was created by Sergey Nazarov and Steve Ellis in 2017. It is part of the broader “Web3” paradigm that encourages decentralization and ownership of assets such as non-fungible tokens (NFTs).
Chainlink also has its own cryptocurrency, the link token (LINK). It’s similar to other blockchain-native tokens like Bitcoin (BTC) and Ethereum (ETH), in that it’s meant to help support Chainlink’s growth while simultaneously facilitating certain kinds of on-chain behavior (more on this below).
What Are the Use Cases of Chainlink?
There are a number of Chainlink use cases. These include:
- Decentralized money markets: A money market is more or less what it sounds like — it’s a market where different parties can lend and borrow with each other. On a blockchain like Chainlink, this is generally handled through smart contracts, and provisioning money markets is a crucial bit of financial infrastructure that decentralized finance (DeFi) must accommodate if it wants to seriously contend with traditional finance (TradFi).
- Decentralized stablecoins: Stablecoins are coins whose price is meant to be pegged to some other asset, such as the U.S. dollar (USD), gold, etc. Stablecoins are an important crypto application, as they act as a non-volatile means by which to hold on-chain assets.
- A source of randomness: Chainlink’s verifiable random function (Chainlink VRF), is a tamper-proof random number generator that collaborates with smart contracts and other applications. Random numbers play a crucial role in many domains, including security and gaming, so this is a valuable service offered by Chainlink.
- Prediction markets: A prediction market is a place where entities can bet on the outcomes of some event in the real world, such as an election. In order to function, prediction markets need external data sources, including news, price feeds, etc. Chainlink is able to offer this data, and that makes blockchain-based prediction markets possible.
- Tracking parts of the supply chain: From the very beginning of Bitcoin, blockchain enthusiasts have suggested that distributed ledgers might be a revolutionary way of tracking the provenance and status of complex supply chains. Here, too, is a place where Chainlink adds value. One demonstration of this is the Open Library Project, which leveraged oracles in Chainlink’s decentralized network in order to track the RFID chips in their books. The result is a decentralized platform for borrowing books.
Chainlink has even been utilized by major organizations like AccuWeather and FedEx to verify data.
What Problem Is the Chainlink Oracle Network Solving?
Chainlink is one of many blockchain networks, but it’s aimed at a specific problem: allowing smart contracts to interact with sources of real-world data and off-chain computation. This integration would mean that smart contracts can be better utilized within the DeFi ecosystem that’s flourishing on the blockchain and would also act to promote cross-chain interoperability.
This is accomplished through “oracles.” Chainlink oracle services essentially function as a kind of middleware between Chainlink and the real world or between Chainlink and other blockchains. Let’s spend a little bit more time getting into the specifics of how this works in the next section.
What Is a Chainlink Oracle?
Chainlink operates a decentralized oracle network that allows entities on the blockchain to connect to off-chain data feeds, including APIs.
Why is this important? Until recently, the status quo was to rely on centralized oracles, meaning there would be a single point of contact through which off-chain data could be utilized by a blockchain application.
The challenge is that it’s hard to get this information into the decentralized applications (dapps) created by smart contract developers. This is called the blockchain oracle problem, which is an umbrella term referring to the general fact that entities on the blockchain ecosystem aren’t able to access data from off-chain data providers.
Of particular note is the fact that, while centralized oracles are generally secure, there are substantial risks that come from relying on a singular entity. Their data could be corrupted, for example, or deliberately manipulated.
How Does Chainlink Solve the Oracle Problem?
The decentralized nature of Chainlink oracles eliminates the reliance on a middleman, along with many of the concomitant risks. As a decentralized oracle network, Chainlink aggregates a wide variety of data from different sources that enter into hybrid smart contracts and hit Chainlink’s independent node operators. Tiingo is a major contributor of market data to Chainlink Node Operators, as well as running our own Tiingo node.
We’ve been speaking about Chainlink oracles as if there is just one kind, but there are different kinds. One of the most important types is the input oracle — which, as you may have guessed from its name, is the main interface between on-chain smart contracts and external data sources.
When they require data, they create a service-level agreement, and this kicks off a search for a qualified Chainlink node operator. A bidding process ensues, in which different node operators will compete to offer the requested data by staking LINK. When a node operator is found that can meet the parameters laid out by the requesting smart contract, the process is completed.
Answers to FAQs About Chainlink Oracles
No doubt you still have questions about the mechanics of Chainlink oracles. In the next few sections, we’ll address some common sources of confusion.
How Can I Get Involved With Chainlink?
To take advantage of all that Chainlink has to offer, you can become a part of the Chainlink Network by operating a Chainlink node. There are several options for setting up your Chainlink node, including with Docker (by installing Docker Desktop) as well as on the Ganache testnet.
Once you’ve set up your Chainlink node, you’ll be considered a “node operator” — a person who runs the underlying oracle platform and monitors and secures the blockchain.
The reason that node operators are critical to the success of Chainlink is that they function as a filtering mechanism prior to the data hitting the smart contract. Chainlink encourages its service users to send requests for data to multiple nodes on the broader decentralized oracle network (as opposed to a single node) to best ensure the validity and security of the data received.
What Is Chainlink 2.0?
Chainlink 2.0 contains a number of major technical advances that make the decentralized oracle network (DON) even better. These include better support for DON scaling, hybrid smart contracts, more abstract layers that make development easier, fairer sequences of transactions, cryptographic guarantees that reduce the need for trust, and more fine-tuned incentive structures.
Another new addition is Chainlink VRF, which is a random number generator that makes it possible for smart contracts to utilize randomness.
With the launch of Chainlink 2.0, Chainlink also introduced “explicit staking.” This new incentive system requires that Chainlink node operators offer their LINK balance as collateral; if they are found to be trafficking in bad data or otherwise behaving in a way that damages the decentralized oracle network, they are penalized.
How Is Chainlink Different From Bitcoin?
We often hear the word “Bitcoin” in the same context as “blockchain,” and it’s understandable that these two buzzwords might get confused with one another. However, Bitcoin is powered by and operates on the bitcoin blockchain, whereas Chainlink operates on top of the Ethereum blockchain.
How Is a Hybrid Smart Contract Different From a Smart Contract?
Hybrid smart contracts combine a typical smart contract with the power of Chainlink’s decentralized oracle network, which adds an additional layer of verification and extends what smart contracts can do.
To see how, let’s draw a sharp distinction between what occurs via the blockchain and what occurs off-chain. The advantage of a blockchain is that it affords the ability for entities to exchange value, and it maintains a permanent record of these transactions. As we’ve noted, however, the liability of this approach is that there’s historically been no way for a given blockchain to access external data.
Hybrid smart contracts are a promising solution to this problem. Chainlink’s decentralized oracle network is able to fetch and validate external data, feeding them to smart contracts. Armed with this data, hybrid smart contracts are able to do many things that ordinary smart contracts can’t, such as pay out a bet based on the outcome of a boxing match.
What Kinds of Data Are Being Used by Chainlink Smart Contracts?
There are myriad use cases for Chainlink, ranging from numerical data, such as price feeds for different stocks, any external APIs, and even one-to-one money exchanges. The validity and security of these data is assured by the fact that they’re compiled from numerous sources, by nodes that are strongly incentivized to provide quality information.
What Is Chainlink Automation?
Once upon a time, a team building smart contracts had to perform a lot of manual steps in order to get smart contracts to work correctly. Chainlink Automation obviates the need for this tedium by offering interconnected systems of nodes that make substantial automation possible.
A developer can create a job and submit it to Chainlink Automation, after which point the service monitors conditions to trigger contract functionality whenever the time is right.
What Is Cross-Chain Interoperability?
Cross-chain interoperability refers to the ability to communicate or send data across multiple blockchain networks. By default, blockchains are not able to communicate with one another — they require some sort of bridging mechanism.
By having a universal standard, such as Chainlink’s Cross-Chain Interoperability Protocol (CCIP), developers are able to more efficiently build applications that leverage the functionality available across different blockchains.
The Future of Chainlink Oracles
Chainlink oracles are a promising way to bridge the gap between conventional institutions — such as financial institutions and weather forecasting services — with the ever-growing blockchain infrastructure.
There needs to be a reliable way to connect on-chain and off-chain entities and make them compatible with one another without fear of relying on a single centralized entity to perform flawlessly. Chainlink offers a secure way and diversified way to facilitate this in a decentralized manner, and its use cases are expanding all the time.
Better data is a crucial part of unlocking the full power of the blockchain, but from machine learning to planning your long-term strategy, data is also crucial in many other applications.
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