Chainlink Guides


What is Chainlink and why does it matter in the crypto world?

Smart contracts and decentralised networks are no longer alien words in the crypto space, thanks to blockchain which has successfully paved the road for endless possibilities, and new solutions since its inception more than a decade ago.

While they are mostly interconnected, these new possibilities are the driving forces behind the crypto space’s rapid expansion in today’s world. Smart contracts, for example, play a critical role in guaranteeing a seamless synergy between the blockchain network and decentralised finance systems (DeFi).

Smart contracts are pre-established blockchain agreements that evaluate data and execute automatically when certain requirements are met. Likewise, because they are primarily integrated on a blockchain network, smart contracts allow for the input of additional data or resources in the system, further enabling it to respond to a wider range of features.

The need for smart contracts was necessitated by the absence of intermediaries or central authority in the DeFi system. More so, smart contracts were required to ensure the system stays true to its course while also maintaining transparency across the end-to-end processes involved.

Interestingly, with the emergence of innovative solutions like Chainlink, the present state of smart contracts and their widespread implementation in the emerging industry has lately improved.

What is Chainlink?

Launched on the Ethereum blockchain sometime in 2019, the decentralised oracle service is capable of increasing interconnectivity between smart contracts by granting them access to reliable data feeds, APIs and payment, among other resources. 

It is also compatible with other blockchain systems outside of the Ethereum network, and is addressing a long-standing limitation with blockchain technology.

Notably, blockchain networks are typically created in isolation from the rest of the world; yet, although this provides excellent security and unfettered scrutiny, it also makes data entry difficult, especially outside of the decentralised network.

Owing to the above, Chainlink effectively bridges the gap between on-chain and off-chain systems by delivering reliable, tamper-proof inputs and outputs for complex smart contracts on any blockchain. As previously mentioned, Chainlink’s technology allows smart contracts that run largely on a decentralised system to access reliable off-chain resources.

Why is Chainlink important?

Chainlink also addresses certain key obstacles that limit the widespread adoption of blockchain technology. It’s the ability to resolve these difficulties that make it essential to both decentralised and centralised systems.

The following are key issues that are been addressed by the oracle service…

Highly secure and flexible infrastructure: Being its major offering, Chainlink has built a hybrid system that is not only reliable and tamper-proof, but also one that offers seamlessly flexible connectivity between the on-chain and off-chain systems. 

While decentralised systems seek to operate in isolation, it is not always practicable. And while a lot of hybrid solutions are springing up with each passing day, the bulk of it has failed when it comes to offering a flexible infrastructure.

On the other hand, Chainlink oracle network provides a native platform that is easy to integrate. This is made possible by offering a flexible framework capable of receiving data from any API, as well as connecting with existing systems while making it integrate with any blockchain.

At the security end, in addition to the application of a decentralised system, Chainlink uses trusted nodes, premium data, and cryptographic proofs to connect highly accurate and available data/APIs to any smart contract. This makes the entire oracle network as well as the integrated system tamper-proof, and highly reliable.

The issue with Smart Contract interconnectivity (the centralised oracle problem): Let’s take a moment to explain what oracle means in crypto. According to cyptopedia, oracles are third-party information service providers that send real-world data to a blockchain protocol, usually to a unique or numerous smart contract, per the use case.

The finest part is that oracles provide supremacy to the blockchain network protocol, among other things. This is because oracles may exponentially safeguard, verify, and increase the authenticity of data received and used by a blockchain network.

Moving on, there were centralised oracle networks that aimed to solve the same challenges that Chainlink is tackling with its decentralised network of nodes prior to its establishment. However, because the majority of them are either untrustworthy or lack a flexible infrastructure, the benefits of on-chain smart contracts are ruined.

Furthermore, Chainlink does not rely on a single source of data. As such, it is able to align with the fundamental course of any blockchain system that is integrated.

How does Chainlink operate?

The process by which Chainlink operates is quite simple and clear. First, it is important to keep in mind that the platform relies on its decentralised network of nodes as its primary data sources. As such, it is able to supply integrated on-chain smart contracts with the required amount of data via its oracle network. This also implies that an integrated system does not rely on one, but multiple oracles for increased efficiency.

Notably, the network interacts with two closed components; the on-chain and off-chain ecosystems. The former, however, is made up of oracle contracts on the Ethereum blockchain and is responsible for data processing based on users’ requests.

For instance, when there is a request for off-chain data by an integrated system, the on-chain component transfers the requests in the form of a smart contract to the Chainlink oracle network where it is then processed into a native blockchain contract and subsequently matched with a suitable oracle service. 

Also, because multiple information being processed simultaneously, Chainlink contracts are made of three parts; a reputation contract, an order-matching contract, and an aggregating contract.

Each of these parts function uniquely. The first records and tracks the oracle service provider’s performance; the second processes the request for off-chain data, collects and evaluates bids from oracle providers; while the last collects the oracle providers’ feedback, and computes the final collective answer to the initial request.

On the other hand, the off-chain infrastructure consists of the oracle nodes that connect the Ethereum network. These nodes collect responses (which must have undergone several consensuses and then turned into a single smart contract) to external request and send to an on-chain oracle provider. These off-chain nodes, having played an integral role, are compensated with Chainlink’s native currency – LINK.

What is Link and should you invest in it?

Like most blockchain initiatives, Chainlink also makes use of a native digital currency – the LINK token. The digital asset is handy when it comes to financing the overall project growth, and encompasses paying incentives to the off-chain nodes, as well as other inbound initiatives.

As at the time of launch in 2017, ahead of Chainlink’s mainstream launch, LINK was priced below $1. However, there was a surge following the platform’s official launch in 2019. The token has subsequently reached an all-time high of $36 sometime in February 2021 but dropped more than 60% to sit around $10 a month after.

Whether or not to invest in the token is a personal decision, but given the widespread adoption of the entire Chainlink project, the possibilities are endless.

What are your thoughts on a decentralised oracle network? Share with us in the comment section below.


Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.