5 July 2020
One of the many things crypto brings with it is smart contracts. In all honesty, smart contracts are pretty awesome. In order to work though, smart contracts need to be able to access information on a blockchain. But how can smart contracts access information from the real world – information that is not usually accessible? This is where Chainlink (LINK) and its oracles join the party.
You might be asking, “What are smart contracts,” “What the heck is Chainlink?”, “How does it work?”, “What are oracles?”. We are here to help, and in this article we will hopefully clear up these questions for you.
What are smart contracts?
Smart contracts can simply be defined as predefined agreements on the blockchain. Smart contracts assess information and automatically execute only if the predetermined conditions are met.
For instance, if a certain amount of a cryptocurrency is deposited into a smart contract by a specific date, the payment will be made to a fundraiser. Once the cryptocurrency is deposited, the payment is automatically made to the fundraiser’s account. If not, the money is sent back to the donors.
Smart contracts exist on the blockchain. For this reason, they are immutable and verifiable. Therefore, parties using them are guaranteed that the smart contracts will not execute unless the set conditions are met.
However, because of how smart contracts are designed, they can only handle data on the blockchain. This means that their ability to provide decentralized and tamper-proof applications cannot be tapped outside the blockchain.
This is where oracles come in handy.
What is an oracle?
An oracle is a software that acts as an intermediary between the real world and the blockchain by translating real-world data to smart contracts and back again.
The problem is, because oracles are centralized, they create a weak link, causing the same problem that a blockchain-based smart contract aims to solve. There is no way to know if your data is accurate if the oracle is faulty. What is more, there is no point in using a secure, trustworthy smart contract on a blockchain network if the oracle that feeds it data is compromised.
The solution to this problem is Chainlink.
What is Chainlink?
Chainlink is a decentralized oracle network that uses oracles to provide data from off-chain sources to on-chain smart contracts. When used with secure hardware, Chainlink eradicates any reliability issues that might occur when only one centralized source is used.
Chainlink was officially launched in June 2017. Founded by the company SmartContract, Chainlink seeks to create a secure blockchain for all involved.
Features of Chainlink
· Has no single point of failure
How does Chainlink Work?
The entire process starts when a smart contract requests data. Here is the flow:
· When a smart contract requires data, it requests information in the form of a requesting contract.
· The Chainlink protocol creates a corresponding smart contract usually referred to as a Chainlink Service Level Agreement (SLA) Contract to help collect the off-chain data.
· The Chainlink SLA then creates three subcontracts (1. A Chainlink Reputation Contract, which as the name suggests verifies an oracle provider’s authenticity and eliminates unreliable or disreputable nodes. 2. A Chainlink Order-Matching Contract, which sends the requesting contracts request to Chainlink nodes and selects the correct type and number of nodes to fulfill the request. 3. A Chainlink Aggregating Contract, which validates and reconciles all the data from the chosen oracles to give an accurate result).
· Chainlink nodes take the requesting contract’s data request and transform it from an on-blockchain programming language to an off-blockchain language that can be used in real-world data sources. The translated version is sent to an external Application Programming Interface (API) that gathers data from that source. The collected data is converted back to an on-blockchain format and sent back to the Chainlink aggregating contract.
· The Chainlink aggregating contract can validate data from a single source and multiple sources. So, if a source delivers unreliable information, its answers are discarded, and the node is punished for being faulty. The aggregating contract repeats this validating process for multiple sources and then aggregates the data by averaging it.
So, where do LINK tokens fit in?
Node operators have to be paid for the work they do. Requesting contract holders use LINK to pay them. The node operators set the prices based on the demand for the data they are providing and the current market for the data.
Node operators are also required to stake their LINK in the Chainlink systems as a sign of their commitment to the network. The Chainlink reputation contract considers the size of the node’s stake when matching nodes with requests for data. Nodes with more significant stakes are more likely to be chosen to fulfill requests because they are deemed more committed to the system and, therefore, less likely to cheat. Faulty nodes are punished for poor service by having their LINK taxed.
LINK is an Ethereum based ERC20 token, which also has ERC223’s transfer and call functionalities. This means that LINK can be processed and received by smart contracts in a single transaction.
How Do I Buy Chainlink?
To buy LINK, you can either earn it as a provider or buy it using other cryptocurrencies or fiat money. In the US, the primary way to buy Chainlink (LINK) is Coinbase and Gemini. Both exchanges introduced LINK in 2020, which has seen LINK prices soar with US investors. Once you buy LINK, you can use any Ethereum compatible wallet such as Ledger Nano S and My Ether Wallet.
As we have seen so far, Chainlink may hold the key to unlocking the mass adoption of Smart Contracts. Its community remains as secure and intact as it’s ever been. Truth is, Chainlink has the ability to potentially connect the real world to the blockchain. Adoption has never been so close, and Chainlink and LINK may play a significant role in it. Recently, Chainlink (LINK) exceeded $30 billion of cumulative transaction volume since it was first launched in 2017. The popularity has even spurred interest from major players, such as Binance, to announce Chainlink as the “native oracle” for its Binance Smart Chain, which is a potential Ethereum (ETH) competitor.
For more information on Chainlink, check out “Eye on the Market” section to follow updated Chainlink news and Chainlink price updates.