Over the past couple of years, blockchain technologies, such as those that underlie Bitcoin and Ethereum, have exploded into the public conversation. Driven partly by the staggering heights achieved by Bitcoin’s price, as well as interest from governments, investment firms, and private individuals, more attention than ever is being paid to the promise of solutions based on decentralization.
There are now blockchain networks aimed at a wide variety of different use cases, from basic money transfers to the Internet of Things to logistics to healthcare.
One consequence of this proliferation in blockchain-based apps is that interoperability can suffer. Different blockchains work on different protocols, serve different markets, and host different distributed applications (dApps). Data sharing between different projects — as well as between blockchains and the outside world — is incredibly difficult. This has hampered the pace at which blockchain is adopted and put to work solving real problems.
Chainlink, a decentralized oracle network that allows smart contracts to leverage external data sources, is one proposed solution. But that still leaves the question, “What is Chainlink?”
In this piece, we’ll cover Chainlink’s overall mission, how its technology stack works, and how it’s changing the broader blockchain ecosystem.
What Is Chainlink?
The chainlink network is a decentralized, open-source system of oracles that makes it possible for smart contracts on the Ethereum blockchain to interact with external data sources.
It’s worth unpacking a few definitions here before we proceed. In ancient Greek mythology, an oracle was a human being that had a connection to the gods and was thereby able to provide prophecy or information to those who sought their wisdom.
On their own, blockchains generally don’t have a native ability to access data from the outside world over an application programming interface (API). This is known as the oracle problem, and it is exactly what is being solved by blockchain oracles.
Through an oracle, data transfers can occur between smart contracts and banking information or other kinds of real-world data.
What oracles allow, in other words, is a bridging of the gap between on-chain applications and off-chain computation. Just as their mythological counterparts stood at the intersection between the secular and the divine, blockchain oracles stand at the intersection between the distributed ledger and all the rest of the world’s data.
For our part, bridging data gaps is something of a Tiingo specialty. We provide Chainlink Node Operators a variety of different data feeds: from equity data, crypto data, low latency price feeds, and new feeds on yield and volatility that are launching soon.And not only do we provide data, Tiingo runs its own Chainlink Node.
How Does Chainlink Work?
Excerpt from the Chainlink white paper — Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle Networks
Now that we’ve got some valuable context established, we can now turn to a discussion of the nuts and bolts of how Chainlink works.
The best place to start is with a discussion of smart contracts, as they figure prominently into the value-add of the chainlink network.
What Are Smart Contracts?
A contract is essentially an agreement between two or more parties that stipulates how some process should unfold. If Jackie signs a contract to write software for Joe, it will almost certainly lay out Jackie’s deliverables, what she’ll be paid in return, and what happens if either Jackie or Joe fails to adequately handle their end of the bargain.
A smart contract is a program that lives on a blockchain and does the same thing. They’re pieces of code that say, “If these conditions are met, do that,” and they’re used in blockchain games, various decentralized finance (DeFi) applications, and a number of other places.
Smart contracts are immutable, meaning that once they’ve been created and deployed on the blockchain, they cannot be changed afterward.
On the one hand, this lends them a certain amount of power. Assuming a smart contract has been written correctly, you can enter into an agreement with full confidence that it will execute as expected.
On the other, this immutability carries with it a certain amount of risk. Even tiny errors in smart contract design can leave individuals or even entire protocols open to exploitation.
For this reason, smart contract auditing and security are emerging areas of research in blockchain technologies.
Smart Contracts on Chainlink
Smart contracts undergird the Chainlink oracle network, and there are two basic processes involved in connecting on- and off-chain data feeds.
The first is offering reference data. Reference data contracts are smart contracts that pull in external data and offer it for use by on-chain entities. These contracts are frequently updated to reflect the latest information and can be queried in a single transaction.
The second is actually requesting data. A client contract will connect with an oracle contract through a callback function. As long as the client contract has a sufficient number of LINK tokens (more on this below), the oracle contract will hit an API and deliver the requested data.
To fully understand how smart contracts work on Chainlink, we must acquaint ourselves with three other smart contract variants:
- Reputation contracts: Chainlink reputation contracts are there to verify that a given oracle can be trusted. It checks the oracle’s integrity by looking at metrics like how many requests the oracle has completed, how long it takes on average to complete a request, and how much LINK the oracle stakes (or has staked in the past).
- Order-matching contracts: The purpose of Chainlink order-matching contracts is to examine the service level agreement of a client contract and match it to the oracle with the most competitive bid.
- Aggregating contracts: Aggregating contracts do more or less what their name suggests. They collate data from many different oracles so that client smart contracts can utilize it.
What Exactly Does Chainlink Do?
We’ve said that the purpose of Chainlink is to provide a bridge between on-chain applications and off-chain computation, we’ve talked about smart contracts, and we’ve introduced some relevant high-level concepts. Now, let’s get into the details.
There are four basic types of oracles in the oracle network: input oracles, output oracles, cross-chain oracles, and compute-enabled oracles.
Input oracles are the entry point for real-world data, such as information on price movements from financial markets or the results of a football game. When an input oracle needs data from a data provider, it creates a requesting contract. This, in turn, creates a service-level agreement contract, and that process spawns the reputation, order-matching, and aggregating contracts we discussed in the previous section.
The requesting contract can be structured so as to include various parameters, which must be met in order to satisfy the request, and the order-matching contract will begin the hunt for Chainlink node operators that will bid to fill the request.
This bidding process involves a mechanism called staking that requires the bidding contracts to put a certain amount of capital on the line. If they provide bad information or behave inappropriately, this stake can be taxed.
Validating data is a tricky job, especially with decentralized oracles, so staking is one way of incentivizing integrity on the network.
Once one or more bidding nodes have been found that can meet the contract parameters, those bids are selected and the data is provided to the requesting contract.
What Is the LINK Token?
Most blockchain projects have an associated cryptocurrency. The Bitcoin blockchain has bitcoin (BTC), the Ethereum blockchain has Ethereum (ETH), and so on.
For Chainlink, the associated token is called LINK. It’s an ERC-667 token,but for simplicity’s sake, can be treated very similar to an ERC-20 token. ERC-20 tokens are fungible (unlike NFTs) and can be traded with other similarly compliant tokens.
LINK can be purchased directly for dollars (USD) through most major crypto exchanges, including Binance and Coinbase, or swapped for other crypto assets.
The LINK Token is a utility token used to provide payment to Node Operators for performing services related to securing data on chain.By incentivizing Node Operators in LINK, it incentivizes Node Operators to act appropriately and secure the network.
How Is Chainlink Different From Ethereum?
Chainlink is deployed on the Ethereum network, but it’s not the same thing. Whereas Ethereum was founded by Vitalik Buterin in order to create a global computational substrate, Chainlink is aimed at using oracles to offer data to smart contracts.
Who Are the Co-Founders and Leaders of Chainlink?
Chainlink is a startup that was founded in 2017 by several highly experienced engineers and entrepreneurs.
Sergey Nazarov had previously founded a peer-to-peer marketplace, ExistLocal, in 2009, and a decentralized clearing platform, Secure Asset Exchange, in 2014. Combined with his background in management, these entrepreneurial endeavors prepared him to create Chainlink a few years later, around the time of the legendary 2017 Bitcoin bull run.
For his part, the other co-founder, Steve Ellis, also brought considerable expertise to the table. He had previously led Pivotal Labs’ software engineering team and had worked with Nazarov as co-founder of Secure Asset Exchange.
These two are not the only powerhouses in senior roles at Chainlink. Their chief scientist is Ari Juels, who has been a professor at Cornell for nearly a decade and has co-authored several groundbreaking papers and whitepapers during his tenure at Chainlink.
What Is Chainlink’s Story?
Chainlink actually grew out of an earlier 2014 project, but its name was changed to Chainlink in 2017, and — following a successful 2017 ICO worth over $30 million — it has been known as Chainlink ever since.
Why Is Chainlink So Popular?
There are a few things for which Chainlink is particularly useful, including providing data feeds, verifiable randomness for blockchain games, and proof of off-chain reserves.
We’ve already spent a fair bit of time discussing the first use case, but the other two are worth touching upon here.
Randomness might seem like a strange thing to provide as a service — after all, how hard could it be to produce random numbers, and who would want them anyway? But randomness is actually a very important part of many types of gaming applications, and as blockchain gaming becomes more popular, it’s likely that this Chainlink functionality will be utilized more often.
There are also more and more situations in which it’s worth tracking off-chain assets on a distributed ledger. In order for parties to trust one another in transactions involving these assets, however, it’s necessary to have some way of verifying their existence and who owns them. This, too, is something the Chainlink network offers.
Why Is Chainlink So Valuable?
Chainlink is one of the biggest networks providing oracles, and these oracles are an important part of bringing the on-chain and off-chain worlds together.
For this reason, Chainlink is a popular blockchain project, and it’s also why Tiingo has invested so much in providing data on it. As this post has made clear, cleaning and validating data is a major undertaking. The quality of our crypto data (and our incredible support team) is our claim to fame, and all of it can be accessed through our crypto API.
The Future of DeFi and Blockchain Gaming
As blockchain applications become a more important part of the financial industry and the broader economy it becomes more important for blockchains to be able to interact with off-chain data.
The Chainlink network aims to solve this problem through its system of decentralized oracles, which can utilize smart contracts to get external data and offer it for use in on-chain contexts.If this project intrigues you, learn more about it through one of our industry-leading data feeds (which we’ll be expanding in the coming months).