Chainlink (LINK) is a decentralized network that collects information from different sources outside a blockchain system and provides it to smart contracts.
Smart contracts are executable codes on a blockchain system that trigger a specific action when the predefined conditions are met. Some of these contracts depend heavily on information and this is where Chainlink comes into the picture.
Chainlink nodes are responsible for gathering the requested data from outside sources and changing it to a format suitable for blockchains.
LINK is the platform’s official cryptocurrency and is used by users to pay for the services they receive.
In this article, you will learn about Chainlink, its functionalities and features, and LINK, the network’s native currency.
Chainlink (LINK) is a decentralized oracle network that connects smart contracts on a blockchain network to the outside world by providing them with essential information.
Blockchain systems offer various features and functionalities, however, they are not the best option when it comes to interoperability.
Chainlink addresses this limitation in a decentralized manner to ensure the secure and seamless execution of smart contracts.
As the name may suggest, smart contracts are digital contracts that execute a function automatically when the predefined conditions are met.
They are run on a decentralized system which makes them tamper-proof. This simply means that no single party can change the rules or terms of the contract once it’s up and running.
But how a smart contract can know when a specific condition is reached? Through data, of course, which is provided by oracles like Chainlink.
Applications on a blockchain system (on-chain) cannot directly fetch the required data from sources outside the blockchain (off-chain) which is a result of the unique nature of blockchain technology.
This is where oracles can help. Oracles act as a secure and decentralized middle layer between on-chain smart contracts and off-chain data sources. They collect information, make it suitable for on-chain applications and contracts, and present it to those that require such information.
Consider the following example:
An airline uses smart contracts to reimburse its customers who have insurance when a flight is delayed. The smart contract reviews the real-time flight data and will trigger the reimbursement process automatically once a flight is delayed.
As we can see, this data has a critical role in the reimbursement process. If the data is incorrect or manipulated, the smart contract will act dishonestly as well.
A decentralized oracle, like Chainlink, ensures that this data is collected from a reliable source and presented to the contract unchanged.
Steve Ellis and Sergey Nazarov created Chainlink in 2017. With the help of Ari Juels, a professor at Cornell University, they published the first version of the Chainlink whitepaper in September 2017.
The Initial Coin Offering (ICO) happened in the same month and the project was able to raise $32 million. 350 million LINK tokens were sold in this event, representing 35% of the total supply.
Chainlink’s on-chain component consists of three main contracts: a reputation contract, an order-matching contract, and an aggregating contract.
A user, which is a smart contract here as well, will send its data request to Chainlink. The Chainlink nodes will then reply to that request by providing the requested data with the help of the mentioned on-chain contracts in the process.
This process happens in 3 steps:
The user needs to first specify its data requirements to the blockchain. These requirements can be the number of oracles needed which is set through a Service Level Agreement (SLA) proposal.
The user then needs to submit their SLA to an order-matching contract to start the bidding process.
Chainlink nodes can bid on an SLA based on their capabilities. By putting a penalty amount, they guarantee that they will provide the required data as the amount will be lost in case of misconduct.
Once the bidding period is finished, the order-matching contract will select the required number of oracles based on the SLA from the bids. The selected oracles then will be notified to start their work as defined in the SLA.
This part mainly happens off-chain and is handled by the Chainlink off-chain services. To put it simply, the nodes will collect the required information from the off-chain resources and reach a consensus on the integrity of the data collected.
This collected information then will be reported back to the on-chain components.
Once each oracle has reported back the data it was supposed to, the aggregating contract tries to calculate a weighted answer. This weighted answer is then sent back to the user.
Oracles will have a reputation based on the validity of the information they provide. This validity is calculated after each response is handed over to the aggregating contract and reported to the reputation contract.
Chainlink 2.0 envisions a broader role for Decentralized Oracle Networks (DONs), a set of Chainlink nodes that help smart contracts to get access to vast off-chain resources.
A DON tries to enhance the current system in 7 key areas namely hybrid smart contracts, abstracting away complexity, scaling, confidentiality, order fairness for transactions, trust minimization, and Incentive-based (crypto-economic) security.
LINK is the official token of the Chainlink ecosystem which is mainly used by users to pay for the services they receive from the oracles.
LINK is a utility token with a total supply of 1 billion. Even though LINK is an ERC-20 token, it has the “Transfer and Call” functionality of ERC-223 tokens as well. With this functionality, smart contracts can receive LINK tokens through one single transaction.
Users pay the Chainlink node operators with LINK tokens for services such as fetching data from off-chain sources and presenting them in a blockchain-readable format. The price of these services is set by Chainlink providers based on demand and other factors.
You can trade LINK on some cryptocurrency exchanges, like DIFX. On DIFX, LINK is available as the LINK/USDT pair for users to trade.
Sign up for a DIFX account today and start trading!