Chainlink Overview and Use Cases
Chainlink is a decentralized oracle network (DON) that can take off-chain data such as weather data and provide that data to smart contracts on-chain to create a hybrid smart contract. These hybrid smart contracts can be used for a variety of things such as insurance, decentralized finance, etc. Chainlink also offers market/data feeds, VRF, Proof of Reserve, and Keepers. In the future, Chainlink will offer staking and Cross-Chain Interoperability Protocol (CCIP) which are two of the most anticipated features.
Smart contracts are predetermined snippets of code or agreements, which automatically analyze data and execute when that predetermined agreement is met. Smart contracts are important because they allow developers to build a large variety of decentralized applications on a blockchain and for users to interact with those decentralized applications. One of the main use cases for smart contracts currently is decentralized finance (DeFi) which allows users to trade, lend, borrow, and swap tokens. Although, because smart contracts are unable to send HTTP requests, they cannot access data that is off-chain. This issue means that smart contracts are unable to get data such as the current temperature in a specific location, sports data, etc. If smart contracts could access this data it could cause problems for security and decentralization by jeopardizing consensus.
Chainlink has solved this problem by being an oracle or an intermediary source of data between the smart contract and data that is off-chain such as weather data. It is important to note that Chainlink is not just one oracle network but many oracle networks run by many oracle node operators making it decentralized. When we connect this off-chain data with smart contracts that are on-chain it is called a hybrid smart contract. So why would we need this off-chain data in the first place? Well, if we want to use the power of smart contracts and a particular blockchain in the real world we need real-world data.
One of the most popular products Chainlink provides is market and data feeds. An example of this is decentralized finance (DeFi). DeFi applications such as Aave and Compound use Chainlink to get accurate price feeds for many assets on-chain. They do this by getting data from the nodes and coming up with the price feed based on all of the node operators answers to what the current price is. This allows them to properly determine when liquidations should take place based on a user’s collateral and debt.
The use case that fascinates me is data feeds being used for insurance cases. Chainlink can create “advanced smart contract-based parametric insurance agreements” that allow for insurance payouts based on real-world data as it happens. This reduces the dependencies on centralized insurance companies to process claims. The most common example of this would be crop insurance. For example, if there was a drought then that data could be provided to the blockchain and an insurance claim could immediately be filed on behalf of the user. This would allow people in developing countries to access the same insurance people in developed countries have access to but in a trustless manner. It would also allow for everyone to farm without the concerns of having a bad weather event or season ruin their crops.
Another product that is offered by Chainlink is the VRF (Verifiable Random Function) which allows Chainlink to be able to provide verifiable tamper-proof random numbers. To accomplish this, the VRF produces one or more random numbers and then provides a cryptographic proof detailing how those numbers were determined. This cryptographic proof is very important because it allows users to be able to verify that the generated random number was not tampered with by oracle operators, developers, users, etc. For example, imagine a lottery held on a blockchain using Chainlink’s VRF. The winning numbers could be randomly generated in a tamper-free way and this could be verified by anyone who may question the result.
Chainlink also offers Proof of Reserve (PoR) which allows for decentralized auditing of collateral that is backing an on-chain asset. This allows for greater transparency for the user of a certain on-chain asset because it allows for the collateral to be checked without relying on the word of off-chain centralized entities. An example of an asset that utilizes PoR is BitGo’s WBTC. The BTC balance of a specific wallet (the reserve) is checked every so often to update how much BTC is backing the WBTC.
The fourth product that Chainlink offers is Chainlink Keepers. This is an automation service used to help developers save gas and time. There are time-based triggers or custom logic triggers that developers can choose from to automate their contracts using the Keepers network. Time-based triggers are run and executed on a specific schedule. Custom logic triggers are run when a certain condition is met. A simple example of Custom logic triggers is when someone places a limit order. Let’s say someone places a limit order at $1000 for ETH, but the price is currently $1100. Once the price hits $1000, the custom logic will trigger and buy ETH at that price without relying on any centralized entities. This is a great way for developers to pass on the gas intensive, on-chain logic to another source (Keepers a.k.a nodes) without losing decentralization.
One of Chainlink’s most anticipated products is Cross-Chain Interoperability Protocol (CCIP) which is still currently under development. CCIP will provide interoperability between chains so that developers will not need to customize code for individual chains. It will accomplish this with a single messaging interface that is easy to integrate into smart contracts.
Something that is considered more a feature than a product of Chainlink is staking. Chainlink will add staking sometime in 2022 and the main goals for introducing staking are security, public participation, generating sustainable rewards, and node staking.
The products provided by Chainlink are used in many blockchains in the crypto industry such as Ethereum, Polygon, Solana, Avalanche, BNB Chain, and more! To understand the scope of the Chainlink ecosystem start here. As you can see, Chainlink is a fundamental project within the blockchain industry due to its wide range of adoption and use cases such as hybrid smart contracts, VRF, PoR, Keepers, and CCIP. In addition to these products, staking will be introduced, which will be a vital change in Chainlink’s future security.
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I am not a financial advisor. Nothing in this article should be taken as financial advice.