There are dozens of blockchains and cryptocurrencies to choose from in the crypto market. Therefore, investors may get overwhelmed when it comes to creating a suitable and well-balanced crypto portfolio.
It is best to take a look at some of the most popular cryptocurrencies and break them down into their smallest components to understand their inner workings. In this article, the reader will learn about all aspects related to a popular blockchain project called Chainlink.
What is Chainlink?
Chainlink is a unique blockchain project that does what its name suggests. The main function of Chainlink is to operate as a connecting bridge between hosts of smart contracts. It is a decentralized oracle that connects one independent smart contract with another.
In this manner, the users of one smart contract can leverage the functions and benefits of the other smart contract. Using Chainlink Smart Contracts may share or gain access to some important data resources such as APIs, payments, feeds, and other useful statistics present on the blockchain.
Blockchain and Smart Contract Operations
It is important to note that smart contracts are a technology that was present before the invention of blockchains. It was added to the blockchain ecosystem for the first time by Ethereum co-founders.
To understand how Chainlink works, the crypto investors must understand how smart contract work and how they function within the blockchain ecosystems.
A smart contract is a type of computer program that can carry out specified functions if certain conditions are met. Therefore, adding smart contracts to the blockchain improved their decentralization.
At its core, a blockchain is a distributed ledger. It means that it can send, receive, verify, and record digital transactions without needing any intervention from manual checkers or centralized supervisors.
However, with the addition of smart contracts, a blockchain may perform more functions in a decentralized manner without needing the intervention of any centralized supervisory committee. However, smart contracts may increase the security vulnerability of a blockchain.
How does Chainlink Work?
It has been already established that Chainlink acts like a decentralized oracle for connecting smart contracts. A good question to ask here is what is an oracle? An Oracle is a type of computer program that is used to study decision-making problems for computations as per computability and complexity theories.
It is like a black box that contains several problems related to a single computation operation. All of these problems may be of one or different complexity levels.
Today Oracles are used as relational database management systems of RDBMS to store and retrieve information by businesses. As Chainlink is a decentralized oracle it may store data for smart contract bridge activities.
Chainlink can also act as the middlemen between on-chain and off-chain systems. In this manner, some blockchains can collect data from external resources and make their internal computations more accurate. Using Chainlink smart contracts can gain access to the off-chain resources and make precise calculations in real-time.
Chainlink also allows developers to create decentralized smart contracts and saves from the issues of working with centralized smart contracts. In layman’s terms, Chainlink is a tool for blockchain users to collect information from external sources.
Which Blockchains are Compatible with Chainlink?
Chainlink uses the ERC-20 token standard to secure new oracle networks. However, it was designed to be a PoS blockchain at its core. In this manner, the PoS mechanism of Chainlink allows it to determine which nodes are responsible for validating transactions in advance. The criteria for picking the validators depend on the highest number of LINK tokens staking.
What are Chainlink Nodes?
Nodes are the network stakeholders and devices that are authorized to record the blockchain as independent servers. In this manner, the blockchain can remain decentralized.
Since Chainlink is an open-sourced and permissioned network, anyone can run a node provided that they have the right equipment available at their disposal. At their base, Chainlink nodes can be divided into two types:
The Core Nodes of Chainlink contain all the information about the Service-level Agreements or SLAs. These nodes may also stream all the latest assignments and pairs that are related to the Chainlink adapter.
These nodes contain all the information that comes from the connecting nodes and external data sources. At the same time, the adapter may also read and write new info about blockchain smart contracts.
What is LINK and How does it Work?
LINK is the core crypto coin issued by Chainlink. It is at its base a utility token and can be used for several functions within the Chainlink ecosystem. Some important use cases of LINK are to incentivize the accuracy of data feeds, to make contracts stable, and to incentivize the nodes that are working on validating the transactions on Chainlink.
To make it more compliant, LINK is an ERC-20 token and it has also ingrained the ERC-223 functionality. The ERC-20 token standard ensures that all LINK tokens are perfectly fungible while ERC-223 mandates that LINK can perform the “transfer and call” function.
This later ERC standard allows a link to interact with various smart contracts. Meanwhile, the nodes can increase their credibility on account of their increasing reserves of LINK tokens. In addition to operating as a utility token, LINK is also a tradable cryptocurrency.
It is listed on all major cryptocurrency exchanges such as Coinbase, Binance, Kraken, OKEx, Huobi, and Gemini among others. The more LINK tokens a node holds, the greater its influence grows within the PoS Chainlink ecosystem. Therefore, LINK retains its demand outside of the spot market trades.
In technical terms, LINK is an ERC-677 token that is an extension of the ERC-20 token. It can work as a data container and carry the intended data from off-chain resources to the specified smart contracts. In the next step, the smart contract may use the data sent by LINK to make calculations and perfect their output.
The node operators must make deposits in the form of LINK to be able to retrieve data from different smart contracts. LINK can be stored in ERC-20 digital wallets and despite upgrading to the ERC-677 token standard; it retains all its functions as an ERC-20 token.
Origin of Chainlink
Chainlink is the brainchild of two blockchain developers namely Sergey Nazarov and Steve Ellis. The Chainlink blockchain made its public debut in 2019 for the first time. On the other hand, its co-founders published the Chainlink White Paper by cooperating with Professor Ari Juels of Cornell University in the same year of its introduction.
In 2018, Chainlink devs added a Town Crier update on Chainlink by integrating the Trusted Execution Environment or TEE.
TEE was used to connect Ethereum blockchain with external web resources present on the HTTPS. In 2019, the Chainlink patent was filed in the Cayman Islands under the corporate entity Sezc Ltd. In 2020, Chainlink onboarded the DECO update.
It was a Cornell University project and it allowed Chainlink to enable Zero-Knowledge Proof protocols and secure the private information of its users.
In 2021, Chainlink published a second White Paper titled Chainlink 2.0. The second installment of the White Paper shed light on upgrading to work with hybrid smart contracts and activate on-chain/off-chain services ensured by the oracle network.
Basic Composition of Chainlink
Chainlink is composed of different nodes that are used to retrieve data from various smart contracts. However, all nodes must reach a required consensus before permitting the transmission of data between any smart contracts.
Therefore, the smart contracts working with Chainlink do not have to depend on centralized oracle networks. Furthermore, a single smart contract bridge created by Chainlink is capable of using it multiple times. To understand how Chainlink ensures the decentralization of its oracle, investors must learn about its on-chain and off-chain components.
On-Chain Components are oracle contracts that are related to the Ethereum Blockchain. These on-chain contracts allow users to monitor and process data requests. They may also transfer the user requests for off-chain data requirements to the Chainlink ecosystem and process them within its native blockchain contracts.
In turn, these native contracts can connect with suitable oracle services. The operations within the decentralized oracle are supported by three types of Chainlink contracts or smart contract oracles as under:
The reputation contract is responsible for documenting the performance metrics generated by the oracle service providers. They may also monitor the track record of all of these oracle enactors.
The aggregating contracts collect all the oracle responses. After collecting these responses, aggregators compute the final output of the original query.
The order-matching contracts log the proposals from users on Chainlink and collect different bids generated by oracle providers. Additionally, order-matching contracts may also delegate oracle service providers based on carrying out an analysis of the reputation contracts.
Off-Chain components are the most touted a feature of Chainlink. The off-chain oracle nodes can help the users to react to different queries from external resources. These queries are available for individual users but they are aggregated using a consensus mechanism before transmission into a singular response.
The core of Chainlink allows blockchains to connect with off-chain data sources. It is essentially like a data bridge that enables on-chain and off-chain sharing. The off-chain nodes are incentivized by LINK rewards.
At the same time, these nodes can also import external adapters for refining data collection. It is important to note that Chainlink Adapters connect off-chain and external data sources. These adapters may also read or process new data on the blockchain.
Why Use Chainlink?
The important question to ask here is why cryptocurrency and blockchain space needs Chainlink when there are other oracle options. To answer this important question here are some of the most important reasons that justify the requirement and invention of Chainlink as a viable blockchain project:
Unlike other oracles the universal architecture of Chainlink allows it to operate as a flexible framework for generating various types of oracles. In this manner, Chainlink devs can create a vast variety of smart contracts to connect with different oracle networks without depending on a centralized source.
Data signing is a unique feature that is provided by Chainlink oracles. The oracles may add a signature for the data that they are facilitating for on-chain components. These data signs can work as a cryptographic proof for verification of the data sources and specific oracle nodes.
With Chainlink, all data providers are under obligation to provide the most accurate feed due to the accountability with data signatures. Furthermore, it allows DeFi applications to refine their calculations by getting data inputs from external sources and thus improves the quality of their computations and final outputs.
Chainlink is essentially blockchain-agnostic. It means that it can operate on any blockchain as a native protocol without suffering from any technical restrictions. With this feature, the scope and adoption of Chainlink become more universal.
Chainlink has plans to enable Service-Level Agreements or SLAs. With SLAs, the users would be able to define the terms of requested jobs for on-chain smart contracts. In this manner, SLAs can improve the quality of data posted by Chainlink contracts.
Reputation system document the performance of oracle services providers and it is unique to Chainlink. In this manner, Chainlink users can choose to work with the best-performing oracle service providers on account of their historical metrics.
Furthermore, it can also be used by node operators for collecting additional information such as identity, third-party clearance, and other reconciliation information.
Chainlink is often praised for its multi-layered data protection that is ensured by the decentralized blockchain oracle.
The issue with incorporating oracle systems with blockchains is making them decentralized. This issue has been resolved by the usage of Chainlink. On account of its decentralized nature, Chainlink can establish solid and trusted foundations within the oracle network web.
Important Features of Chainlink
Chainlink can generate new off-chain data feeds for smart contracts without requiring any changes in their structure. Some of the most important blockchain projects such as Huobi, Brave New Coin, and Alpha Vintage are already selling their data to Chainlink.
On the other hand, it is a decentralized and open-sourced blockchain and oracle network. Since the process of data submission is incentivized by Chainlink, therefore a considerable amount of individual and enterprise node operators participate.
The massive participation creates a group of operators as data feeders that are providing crucial information like crypto prices and other metrics to the blockchains. The feed from a collection of data feeders enables communication with the outside world for a blockchain protocol.
On the other hand, it may also allow smart contracts to work out the most accurate outputs by finding the mean from all the available resources. The Chainlink Aggregating Contract performs the task of comparing all available responses.
In this manner, the Chainlink nodes can ensure the safety of DeFi users by preventing the loss of billions of dollars’ worth of cryptocurrencies through data validation. Some important DeFi protocols such as AAVE and Synthetic utilize Chainlink Oracle services to ensure accurate transaction value.
DeFi protocols can filter the miscalculation margin on account of the internal AMM composition by outsourcing external and real-time data import plugs from Chainlink.
Chainlink has also partnered with Google, which means that the devs working on new dApps for the Ethereum ecosystem can perfect their projects by accessing the treasure trove of data through the Chainlink feed.
Future of Chainlink
Here are some important factors that may keep Chainlink a relevant and in-demand project in the future:
It plays an important role in developing smart contracts. At the same time, it can also enhance the functionality of an existing smart contract working as an extension.
The decentralization of oracle services is made possible and popular by Chainlink. It adds new features to oracles and makes them functional within the DeFi ecosystem.
Chainlink Oracles are one of the most used alternatives for creating advanced smart contracts. They upgrade the existing smart contracts without compromising on security and reliability.
DeFi applications can adopt Chainlink contracts to verify collaterals, ascertain the correct price of a cryptocurrency, and streamline interest rates.
Chainlink smart contracts have created insurance contracts for DeFi protocols such as Arbol Corp Insurance Market. These smart contract feed weather updates to insurance enterprises and in this manner they allow them to make neutral, unbiased, and fact-checked decisions.
Chainlink users can also work with DeFi games and NFT projects. With Chainlink, the process of randomized selection is made more accurate and it can improve the in-game dynamics for the players.
Chainlink is one of the most talked about and popular blockchain projects in the crypto market. Despite all its utility, it may suffer from a lack of enterprise adoption on account of privatized features that mimic it. Furthermore, the delay of the staking feature has made LINK a predominantly speculative token.
However, there is still considerable traction available for Chainlink within the DeFi sector. The investors must ensure that they weigh all the relevant factors impacting the prices of LINK before adding them to their crypto portfolios.