One of the most exciting innovations in the blockchain industry has been the creation of smart contracts. Although smart contracts have the potential to completely change how we perform agreements, not many people are currently aware of what the technology entails. Often time, smart contracts are compared to real-life, traditional contracts. However, traditional contracts have little in common with smart contracts, which can create more confusion than clarity.
What Is a Smart Contract?
It’s much easier to think of a smart contract as a computer script, or program, than it is to think of it as of a legal contract. A smart contract is a written set of code with pre-established conditions that is stored permanently on the blockchain and is executed without a middleman. It directly controls the transfer of digital assets between parties when certain conditions are met. In very simple terms, the logic behind a smart contract is “If X happens, Y will be sent to whomever the contract specified under these conditions”. By its nature, a smart contract is highly reliable and transparent as it retains the permanence and tamper proof qualities of the blockchain. Because smart contracts can execute logic without the need of a third-party, they have the ability to disrupt many industries such as legal, insurance, financial, real estate, and more.
How Does a Smart Contract Work?
So you may be thinking, how do smart contracts work?
Take for example a hypothetical online food company called Yum Food that allows its customers to buy fresh products from all over the world through smart contracts. Yum Food works closely with farmers from many countries to get the best products. However, how does the blockchain upon which this smart contract is built upon know that the product has arrived to its final destination? In this example, let’s say Yum Food’s smart contract relies on Fast Track, a shipping company. If for some reason, Fast Track lies, the smart contract could never release the payment to Yum Food. This one centralized entity, Fast Track, becomes the single source of truth in this example, which is fundamentally at odds with the decentralized nature of blockchain and smart contracts. How can smart contracts rely on off-chain data?
Oracles: Bringing Real Data to Smart Contracts
Enter oracles. Oracles can bring reliable, off-chain data to a blockchain, which function as a bridge between smart contracts and real-world data. Oracles bring third-party sources of information to supply data to a blockchain, allowing for a more trustworthy execution of smart contracts.
For example, smart contracts that execute financial logic on the blockchain may need to know what the market price of Ethereum is in USD. As this data isn’t necessarily readily available on the blockchain, an oracle can provide this off-chain data by sourcing the spot price from multiple reputable exchanges. Oracles have the capacity to process numerous inputs, being able to comprise complex results. But by deeply relying on oracles to supply accurate data to smart contracts, we trust and give an enormous responsibility to a single and centralized entity as incorrect data can result in a wrong execution of smart contracts.
If an oracle is only a single person or organization which could manipulate the data in their favor, it would defeat the point of using a smart contract in the first place. Not only is this counter to the decentralized nature of smart contracts, but it also increases its level of risk and potentially questions the validity of the smart contract itself. These security, reliability, and trust concerns raise a fundamental question — can we really rely on centralized oracles? Is there a solution to these concerns?
Chainlink: A Promising Solution
Chainlink has the ambitious goal to eliminate any point of failure in centralized oracles by building a decentralized network of oracles that is highly secure, reliable, and trustworthy. Their network allows the evaluation of the same data before it becomes a vulnerability or a point of failure, maintaining the whole added value that smart contracts enable. Chainlink also creates incentive mechanisms for consensus on data to be reliably met. Oracles are incentivized to report false behaviors while also rewarding oracles for submitting correct data.
From a business’ point of view, using Chainlink means that you’ll be able to assure that your smart contract is secured, reliable, and trustworthy because all inputs and outputs pass through a decentralized process. For example, if you are a telecommunications company, you could use Chainlink to feed a smart contract with your performance data allowing it to calculate monthly payments or to issue a reimbursement based on your uptime and downtime performance. The goal of the Chainlink network is to allow smart contracts to reach their full potential to help push the innovation that smart contracts can create even further. In fact, there are at least 44 ways in how a smart contract could benefit from Chainlink network!
From a consumer’s perspective, you will benefit from more competitive products and services as well as simpler processes. For example, let’s say you bought travel insurance with a company that uses smart contracts with Chainlink network oracles. Your flight got delayed and with the new circumstances, it is impossible for you to fly to your destination. You cancel your flight and want to ask a reimbursement to your insurance company. Normally, you would go through a long and exhaustive process to submit relevant documents in order to prove your flight got delayed. Only after this tedious process, would you potentially get a refund from the insurance company. However, because this company uses smart contracts, based on the predetermined conditions, the smart contract would be able to conclude as soon as your flight was delayed that you are eligible for a refund, and your refund would be released immediately. The smart contract would be able to do so because the information that fed the smart contract would pass through Chainlink network, making sure the source is from an accurate, secure, reliable, and trusted source of flight times. Hence, your refund is given to you in a much simpler and quicker process than it would be without the use of smart contracts and Chainlink. The beauty of Chainlink is that even if you are unaware that it’s used, using Chainlink decentralized oracle network will be beneficial for both customers and businesses.
Chainlink’s objective is disruptive and the team is leading the way in decentralized oracle solutions. The impact they are creating in both the decentralized movement and in how smart contracts can reach their full potential is tremendous.
This communication and any discussions in connection with this communication is solely for informational purposes and is subject to change at any time without notice. This communication should not be relied upon nor used as the basis for making any investment decision nor should this communication be construed as a recommendation to engage in any transaction or be construed as a recommendation of any investment strategy.
This communication is not related to the provision of advisory services regarding investment, tax, legal, financial, accounting, consulting or any other related services and are not recommendations to buy, sell, or hold any asset.
This communication is not a personal recommendation and does not take into account whether any transaction is allowable or suitable for a particular person or persons. The information contained in this communication is based on sources considered to be reliable, but not guaranteed, to be accurate or complete in any way. GO.Exchange is not responsible for information obtained or derived from third party sources or statistical services. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice.
Neither GO.Exchange nor any of its directors, officers, employees, representatives, affiliates or agents accepts any liability whatsoever for any direct indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein.
In publishing this communication and any discussions in connection with this communication in physical, digital or other electronic form, GO.Exchange is neither advising on the value of or the advisability of trading in any sale of a commodity for future delivery, security futures product or swap, any retail commodity or retail foreign exchange agreement, contract or transaction, any commodity option or any leverage transaction nor soliciting funds, securities or property for the purpose of trading in any commodity.