Chainlink is a decentralized oracle network that connects smart contracts on blockchains with the real world. Using a system of nodes and operators, it is able to answer data requests from smart contracts by collecting data from multiple sources and reconciling it to provide a single reliable piece of information. For example, if a smart contract needs the current price of Bitcoin, it can request that data from Chainlink, which will look at several different reliable sources and provide an answer based on them.
In order for Chainlink to function, it is supported by LINK, its native token, which is used as compensation for the work Chainlink network operators do in providing smart contracts with requested data.
CHAINLINK (LINK) ESSENTIALS
- A decentralized oracle network that connects smart contracts with the real world.
- Provides real-world data from multiple reliable sources to smart contracts on the blockchain.
- LINK is Chainlink’s native token — it’s used as compensation for Chainlink network operators.
How smart contracts access off-chain data
Many smart contracts need to access real-world data outside of the blockchain for their operation. Whenever a smart contract requires data from outside the blockchain, it relies on so-called oracles. An oracle is a piece of software that acts as an intermediary between the blockchain and the real world. It translates smart contract requests into a programming language understandable outside of the blockchain and back again. Thus, oracles allow smart contracts to communicate with the real world.
But there is a problem with oracles. A blockchain network may be decentralized and distributed, but oracles are not. If a smart contract relies on a single oracle for data, it has no way of knowing if that data is incorrect or incomplete. A single source of information like this poses a problem for decentralization.
Enter Chainlink: a medium to reliable information
Chainlink uses a network of nodes to collect data from various oracles and feed it to smart contracts on the blockchain. One of its biggest advantages is that the network can collect the same data from different sources and reconcile it into a single answer. This means that pieces of information from different sources are compared to each other to get the most accurate answer possible. If any source is found to be deviating from the rest, it is flagged as unreliable, which lowers its reputation score and makes it less likely to be selected when similar data is required again.
How does Chainlink work?
When a smart contract requires off-chain data, it creates a requesting contract, which mainly specifies what data it needs. This contract is picked up by the Chainlink network, which creates an SLA contract (Service Level Agreement contract). This contract generates further contracts required to process the request and in turn takes care of all the operations required to provide the smart contract with required data. It checks the reputation of the oracles providing the data, selects the nodes to carry out the task and translates the request to a programming language that the oracles can understand. It then sends the request through an API to the oracles, collects the necessary data, and sends it back to the Chainlink network. The data is collected from multiple sources and aggregated and reconciled to get a single unanimous answer. This piece of data is then sent back to the smart contract on the blockchain.
A Chainlink request in action
Let’s say that a smart contract requires the current price of Bitcoin. The smart contract calls upon Chainlink to provide the data. Chainlink selects oracles from multiple crypto exchanges which have previously provided accurate data on Bitcoin’s price and thus earned reputation on the Chainlink network. The data is extracted from the oracles and reconciled, that is compared and made into a single reliable answer, before it is returned back to the smart contract. If Chainlink finds that one of the exchanges published an exceptionally low or high price for Bitcoin, it would ignore that data in calculating the mean and label that exchange as less reliable than previously thought.
What’s the role of LINK?
But Chainlink doesn’t just function by itself. As a decentralized network, it requires independent nodes, so-called operators, to perform the tasks associated with fulfilling requesting contracts. And in order to perform their job, Chainlink operators require payment. This is where LINK comes in. If you want your smart contract to access data from the Chainlink network of nodes, you must pay a fee in LINK to the Chainlink operator who picks up your contract. Operators set their price in advance based on the demand for the data they are providing and the current market for that data.
Staking on Chainlink
Chainlink also supports staking, but it works a little differently than what we’ve come to expect from staking. On Chainlink, staking is reserved for node operators, who lock their funds with the network as collateral. This demonstrates their commitment to the network and makes them eligible to perform operator duties and receive reimbursement. An important factor in selecting an operator to fulfill a requesting contract is the size of their stake in the network. Those with a greater stake are more likely to be chosen and consequently earn LINK for their services. If a node is faulty or dishonest, the Chainlink network penalizes it by taxing its stake.
This type of staking is a relatively technical part of the network itself and is not the same as staking on proof of stake cryptocurrencies, where any user can stake their tokens to receive rewards. This kind of staking for the average user is planned to be added to Chainlink in a future update, but is not available at the moment.
Trade LINK at Bitstamp
LINK is essential for the operation of the Chainlink network, but it is also an investment asset, like most other cryptocurrencies. You can easily buy and sell LINK from anywhere in the world at Bitstamp, the world’s longest-running cryptocurrency exchange. What’s more, LINK trading at Bitstamp comes without any fees until the end of 2020!