Chainlink (LINK) addresses a problem that has long existed in the area of smart contracts. Digital contracts are often needed to rely on independent and trusted data sources to fulfill certain executions. Chainlink now leverages blockchain technology with so-called oracles to build an ecosystem of verified data providers.
Securely connect smart contracts with off-chain data and services: Chainlink decentralized oracle networks provide tamper-proof inputs, outputs, and computations to support advanced smart contracts on any blockchain. — chain.link
Even though Chainlink is a relatively young project, it already provides important data for a variety of other blockchain projects. Many data providers use Chainlink’s technology to supply relevant data and information for smart contracts.
Overview
Chainlink is an interface between data suppliers and data recipients.
So-called oracles provide data that is used to fulfill smart contracts. For providing the data, the Oracles receive LINK tokens as a reward. In doing so, Chainlink contributes significantly to smart contracts on all major blockchains.
Why?
Smart contracts are probably one of the most important functions of blockchain technology. They allow digital contracts to be set up and linked to certain conditions.
Smart contracts can be set up for all kinds of scenarios. In addition to classic purchase, insurance, or rental contracts, event-based contracts can also be executed. For example, on the outcome of soccer matches, when certain air temperatures are reached, or when a specific event occurs.
This variety poses a major challenge for developers of smart contracts. Not only is the programming of the contracts complex, but the obtaining of the required data, which — as in the examples — can be an essential part of the contract, is particularly difficult. This is exactly where Chainlink comes in.
Chainlink works with data providers and offers a huge marketplace for all kinds of information. Smart contract developers can use Chainlink’s marketplace to design their digital contracts and purchase the data they need. The data suppliers are called Oracles in Chainlink’s ecosystem. This data can eventually be accessed via standardized APIs and can thus be used in a wide variety of systems.
What Are “Oracles”?
Just like the oracles in mythology, which promised knowledge and divination to those seeking help by invoking a higher authority, the oracles in smart contracts also serve as a reliable, external source of information relating to the contract. Using weather data as an example, this could be a website that offers weather data in machine-readable form. A smart contract can read this information and start further actions depending on it. Typically, the operator of the Oracle will charge a small fee for providing the information.
Oracles generally have to meet three important criteria:
- Accuracy of the data provided (Integrity)
- Availability of the service (Availability)
- Discretion regarding the contents of the contract (Confidentiality)
The fulfillment of these requirements is important for smart contracts between unknown parties in the first place. If it is only a matter of implementing a single contract, the effort of selecting and agreeing on oracles by hand is still justifiable. However, when scaling projects or for example when smart contracts are automatically executed, for example, to connect IoT devices, this is no longer an option.
Chainlink was published in 2017 by Ari Juels, Steve Ellis, and Sergey Nazarov. The three also wrote the associated whitepaper entitled “Chainlink — A decentral Oracle Network”. On 15 April 2021, the Chainlink team also published version 2 of the whitepaper “Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle Networks”
The developers have been working on the project since 2015. They realized early on that there are virtually no reliable data sources for smart contracts. At the same time, the use of smart contracts was growing rapidly, but there was a lack of access to external data and information. The company behind the project is SmartContract Chainlink ltd. with Sergey Nazarov as CEO.
Chainlink operates its research and technology company under the name Chainlink Labs. Since its founding in 2017, the developers have already achieved several milestones on the official roadmap. These include the $32 million ICO and partnerships with well-known companies such as Google, T-Systems, and SWIFT. Even more important, however, are collaborations with other blockchains that use the technology. In 2019, Chainlink’s mainnet was finally successfully implemented on the Ethereum Blockchain.
Chainlink acts as an interface between the smart contract community and large-scale data sources. It provides relevant data that is mandatory as part of smart contracts. Meanwhile, Chainlink has numerous connections to other smart contract platforms and is considered one of the most important technologies in the development of smart contracts. The high-speed network provides data of all kinds in near real-time, which is particularly relevant for short-term price forecasts.
The Ethereum-based project pays data providers (Oracles) for their work via its network. In the long term, the plan is to also operate its own data marketplaces off the Ethereum Blockchain. An important component of Chainlink is also the reputation of the transmitted data. Since it can never be guaranteed with complete certainty that the oracles’ data is correct, multiple, independent oracles usually supply the data for the smart contracts. Chainlink nonetheless continuously checks the reputation of the data providers and removes unreliable or insecure oracles from the network.
There are three important mechanisms on-chain to select suitable Oracle services. The first is reputation management for the Oracle providers.
As part of this, the three criteria defined for a reliable Oracle are evaluated: Integrity, Availability, and Confidentiality. Secondly, Chainlink enables matchmaking between smart contract partners and Oracle providers.
Reputation
The Chainlink team highlights that the 100% reliability of an Oracle will never be achievable. Therefore, for most smart contracts, it is important to rely on multiple oracles, in the best case, from different sources. Chainlink tracks the time it takes for each oracle to publish particular information. The longer it takes a provider to notify an event, the worse its availability score.
Data integrity assessment works similarly. If there is more than one Oracle for an event, it is quick and easy to see if one of the sources differs from the majority of the others. In this way, each Oracle yields a score that informs about the reliability of the provider. In the medium term, this should mean that less reliable Oracle also costs less and can thus be used for low-value contracts.
Matchmaking
In addition to reputation management, the aggregation of contract information and matchmaking between Oracle and contract partners are central functions in the Chainlink system. Matchmaking works like a stock exchange. Whoever wants to set up a Smart Contract defines the requirements for the Oracle. On the one hand, these can be criteria that concern the reputation of Oracles, but on the other hand, the conditions of the contract are also included.
For example, the runtime of a Smart Contract can play an important role when it comes to the costs that the Oracle provider has to charge. A contract over many years is more expensive than one that requires only a few minutes of data monitoring. Contrariwise, for a contract whose terms are of a more long-term nature, it may be less significant whether an Oracle informs about certain events within a fraction of a second. Last but not least, of course, the buyer defines how many Oracles he needs for his smart contract and the maximum he is willing to pay for it. The requirements are published via Ethereum blockchain.
Providers whose Oracles meet the buyer’s requirements now have the opportunity to submit offers for the contract. These offers are aggregated automatically. The selection is done manually by the buyer (or he can let the software decide about it).
Who Delivers The Data?
The data suppliers receive the requests from the smart contract developers and check whether they can access and provide the required information. For this purpose, Chainlink provides a marketplace where Oracles and developers can meet.
Today, a large number of Oracles already offer their data through the aforementioned marketplace. These include Connexun (delivers news and events from world events), SportsDataIO (sports data and results from various fields), and Quantum Data Technologies (data from various industries). The integration of the Oracles is very easy for developers. The respective oracles of the data providers can be integrated into their smart contracts via simple code snippets.
In return, the data suppliers receive a reward in the form of the LINK token whenever they supply the requested data.
In the Chainlink ecosystem, the ERC-20 token LINK is used to pay data providers in the network for their work. In this process, the data subscriber transfers the token to the data provider. However, the token is also locked into smart contracts by the data providers and acts as a form of collateral. If incorrect data or no data at all is delivered, the deposited assets serve as collateral for compensation to the data subscriber. The more collateral a data provider provides, the higher the probability that it will be selected by data subscribers.
In addition, data providers can borrow more LINK tokens to increase their collateral pools. Staking services offer tokens and data providers give investors a percentage of the revenue collected from data sales. They are automatically considered more secure compared to other suppliers due to their higher collateral, which means they have a competitive advantage.
The token has been tradable on many exchanges since September 2017. It is now one of the largest cryptocurrencies with a market capitalization of $7,750,000,000 (22#).
Looking Back to the Year 2021
Generally speaking, 2021 was a good year for Chainlink, as more developers used the tools to optimize their apps. There were also some important partnerships with the platform, including Portal, KuCoin, IoTex, and Floki Inu. This trend is likely to continue in 2022.
Another important development in 2021 was the launch of Chainlink Keeper Mainnet in August. Developers can use this network to execute limit orders on DEX crypto exchanges. They can also mint tokens as reserves rise, making returns from Treasuries. In addition, on-chain trading and yield farming can be done. Keepers Mainnet enables all of this by performing calculations between on-chain and off-chain environments.
Furthermore, Chainlink’s price went up after the recent strengthening of the team. The developers announced that the former CEO and chairman of Google Eric Schmidt will join the board.
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The lack of a decentralized infrastructure for Oracle brokerage is a challenge for smart contract solutions implemented on Ethereum as well as on other blockchains and similar services. After all, fast, automated smart contracts need to be able to quickly respond to issues with an Oracle provider.
Chainlink serves a gap in the market for blockchain technology with a kind of meta-blockchain for trading with Oracles. The Oracles provide data that is needed for execution or as a component of smart contracts.
However, significant parts of the project are still under development. Time will tell whether the system will work as expected. Until then, Sergey Nazarov, who is a well-known crypto personality in the scene, will be responsible for the project.
Financial resources should also be available for the ambitious expansion plans. The company behind the project still holds around 90 percent of the funds raised in the ICO.
Chainlink’s success is directly linked to the overall success of blockchain technology. An efficient and reliable market for Oracles has the potential to increase compatibility between different cryptocurrencies and market penetration of the blockchain in general. Also, Smart contracts are finding suitable use cases in more and more areas, and data providers such as Chainlink are becoming increasingly important. Therefore, it is not surprising that almost all forecasts for Chainlink are positive.