Smart contracts are very functional; they can even replace traditional agreements if used correctly.
But most blockchain platforms are isolated and cannot connect to external data channels. As a result, smart contracts cannot interact with banking or other systems. Chainlink solves this problem. The platform supports so-called oracles, a decentralized mechanism that collects data from third-party sources.
The Purpose of oracles
From a technical point of view, an oracle is a middleware intermediary that transfers information from the real world to the blockchain and vice versa. Oracles are also found in centralized systems. But it is their centralization that is the weak point. It is worth compromising it — and no one will be able to rely on the accuracy of the data.
The main features of oracles, smart contracts and their interaction:
- Smart contracts are immutable, verifiable software contracts that automatically execute under IF/THEN conditions.
- The data that determines the fulfilment of conditions usually comes from the blockchain.
- Oracles have been implemented in the Chainlink crypto ecosystem to transfer data from outside the chain to smart contracts inside the chain.
- Chainlink is a decentralized network of nodes that eliminates the problem of centralized oracles because centralized mechanisms are often wrong.
Chainlink offers reliable, tamper-proof inputs and outputs on any blockchain, helping bridge the gap between traditional data and blockchain, the future technology.
How the system works
Since the Chainlink protocol aims to bridge the gap between off-chain and in-chain resources, its operation is based on two essential aspects: off-chain infrastructure and infrastructure on-chain.
The first includes oracle nodes that are connected to an external blockchain. Basically, their job is to collect the data that the user requests. After that, the data passes through Chainlink Core, the software responsible for communication between elements inside and outside the chain.
The Chainlink Core then extracts the information and passes it to the oracle within the chain. They consider user requests for this data and process it to the desired format. Finally, the requested data is sent to the correct smart contract.
LINK is a token that runs on the Chainlink blockchain and other networks, including Ethereum, Arbitrum, Polygon, BNB Chain, Avalanche, and Fantom. It can be bought for fiat currency or cryptocurrencies using exchangers or exchanges.
Applications and protocols that own smart contracts use LINK to create requests for the data they need - this is a fee for oracle node operators. The nodes set the prices they consider appropriate based on the demand for their services and the current market situation.
The node operators use LINK to maintain the network; it is similar to the usual staking scheme - the operator deposits LINK into the system and receives the right to work and reward. Nodes that perform poorly can be penalized or eliminated, losing money, so it pays for operators to work honestly.
When matching nodes with requests for data, the smart contract in Chainlink takes into account the number of coins staked by the operator (but not only, there are other criteria). Therefore, in most cases, nodes with a high stake are chosen in priority to fulfil requests and thus earn LINK tokens.
Development and prospects of the project
Improved functionality and strong partnerships are two key indicators that affect the popularity of a particular cryptocurrency. Chainlink is doing just fine with this - in the second quarter of 2023 alone, a considerable amount of work has been done:
- A payment sharing agreement between GMX and Chainlink has been concluded whereby 1.2% of the total protocol fee received by GMX will be paid to Chainlink's service providers in exchange for using oracles and technical support.
- Deployed new information products for the growth of network derivatives; in particular, they help support interest rate swaps, volatility options and futures contracts. More than 40 testnet channels have already been deployed with these channels.
- The beta version of Chainlink features has been extended to the Avalanche testnet.
- The Celo community voted to join Chainlink's scaling program with 99.9% approval in a network vote.
- Launched the first proof-of-reserve data feed for liquid staking tokens through integration with Swell. This new PoR use case brings increased transparency and security to the DeFi ecosystem.
And much more. The project team is active in social networks and real life and regularly holds forums, conferences and master classes for developers, users, entrepreneurs and other interested people.
Chainlink functionality can be helpful in many areas of technology and finance. For example - the securities market, insurance companies, betting on sports or other events, and supply chains. Chainlink can be used wherever smart contract transparency, efficiency and security are required. Therefore, this technology was immediately appreciated and became one of the most critical components of decentralized finance (DeFi) and the whole blockchain ecosystem.