Chainlink is a blockchain company that aims to incentivize a global network of computers to provide trustworthy real-world data to smart contracts that run on top of blockchains.
Smart contracts, for the uninitiated, are agreements that are programmed to execute if and when certain conditions are met. Smart contracts have been used for everything from developing new crypto assets to creating novel crypto-financial products.
However, one persistent issue is that most smart contracts require some kind of external data source to properly execute their terms.
Smart contracts seeking to replicate bonds or insurance agreements, for example, may require access to APIs reporting market prices or Internet of Things data. That’s where Chainlink sees an opportunity.
Incentivizing Data Providers
Chainlink was developed to address this issue by incentivizing data providers (referred to as “oracles”) to act as a bridge between blockchain smart contracts and external data sources.
Because each oracle in the Chainlink network is assigned a reputation score, they are all incentivized to provide accurate data. Furthermore, nodes are rewarded in Chainlink’s cryptocurrency, LINK, when they follow the software’s rules and provide useful data.
Since its inception in 2017 amid a crowded field of projects, the Chainlink team has been able to deliver on its vision, expanding efforts beyond Ethereum (ETH) amid a surge in market activity.
How Chainlink works
Chainlink divides its execution process into three distinct steps to facilitate communication between its users and external data sources.
- Oracle Selection – To begin, Chainlink users create a service-level agreement (SLA) outlining a set of desired data requirements. The SLA is then used by the software to match the user with Oracles that can provide the data. After setting the parameters, the user submits the SLA and deposits their LINK cryptocurrency in an Order-Matching contract that accepts bids from Oracles.
- Data reporting- Is the process by which the Oracles connect to external sources and obtain the real-world data specified in the SLA. The data is then processed by the oracles and returned to Chainlink blockchain contracts.
- Result Aggregation – The final step entails tallying the results of the data collected by Oracle and returning them to an Aggregation contract. The Aggregation contract takes the responses, evaluates their validity, and returns to the user a weighted score based on the sum of all the data received.
Architecture
Three types of smart contracts power the Chainlink blockchain.
- Contract Aggregation – Gather data from Oracles and match the most accurate results with the smart contract that requires them.
- Order-Matching Contract – This contract matches the service level agreement (SLA) of a smart contract with the best bidding oracles.
- Reputation Contract – Checks an oracle’s track record to ensure its integrity. This includes factors like the total number of completed requests, average response time, and the amount of LINK cryptocurrency staked by the oracle.
However, Chainlink interacts with oracles that do not operate on its blockchain and are responsible for collecting the real-world data requested by the contracts on their own.
The nodes are composed of two parts:
- Chainlink Core- Is in charge of reading newly filed SLAs and routing assignments to the Chainlink Adapter.
- Chainlink Adapter – Serves as a link between the node and the outside world. The adapter can read, process, and write data to the blockchain.
Final thoughts
Chainlink may be of interest to developers working on blockchain-based financial products that require access to and validation of external data sources.
Furthermore, LINK may be added to an investor’s portfolio if they believe the number of users for blockchain-based smart contracts will increase in the future.
If Chainlink ends up solving key problems for smart contract users, it could become a critical tool in the integration of blockchain technology and real-world applications.
Chainlink (LINK) at the time of this post has a price of $7.1215 per (LINK / USD). Chainlink is 86.53% below the all time high of $52.88.
Important: Cryptocurrency investments can be volatile. Do your own research and never invest more than you can afford to lose.