Chainlink
Today I am going to explore Chainlink, a blockchain service that allows a Decentralized Application (DApp) to get real world data from a decentralized oracle service, instead of needing to rely on a centralized solution in order to get access to that data.
For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advice.
What Is Chainlink
Chainlink is a service that allows Decentralized Applications (DApps) a way to get access to real world data in a decentralized way, through their oracle services. This could be any sort of data from the market price of a given crypto from different exchanges, real world weather data, or even sports scores. That data can then be used by the DApp as part of it’s decision making process, for example to settle a bet or to determine if there is a price difference between different exchanges.
Chainlink also manages to do this in a decentralized way, increasing the reliability of the data sources, as well as helping to prevent data manipulation from the source, that can affect the way the smart contract behaves, as bad data can lead to very bad things.
Since smart contract is actually bad term, they are not really smart, but they are very deterministic and predetermined, any outside data that comes into the contract needs to be able to be trusted as accurate. Once they are deployed on the blockchain, nobody can modify how it operates, but data manipulation can be just as bad as someone changing the code after it’s been deployed. This is why it was important for somebody to invent an economically motivated, decentralized way for these oracle services to be managed.
How It Works
The Chainlink service can best be thought of as two halves, the on-chain portion, and the off-chain. On-chain is where all the smart contract stuff happens, where the off-chain is where all the real world data is collected and aggregated out by the oracle services, and then Chainlink also provides the infrastructure for the two to bridge together.
The on-chain components are governed by the oracle smart contracts, which is the bridge that allows Decentralized Applications (DApps) to request off-chain data, and for the Chainlink nodes to pass the data back. There is also the Chainlink (LINK) token, which is used as the economic incentive for the node providers, and as the currency the consumers of the services pay their fees in.
The off-chain components are the Chainlink nodes, which have a few parts to them. They have the blockchain node, which allows them to listen for events to know when a new request has been made, as well as to give the connection back to the blockchain to provide the data.
There is also a Chainlink core node, which contains all the logic and code necessary to govern the flow of data, and interactions between the nodes. It handles all the general housekeeping of scheduling jobs with nodes and ensuring the requests are all being handled correctly.
There also also the external data sources, where the actual data resides, and the APIs that allows the nodes to fetch the data from them. The final piece of the Chainlink node is the data adapters, which process and filter the data into the format required by the end user. They can also aggregate data from multiple sources to provide averages, based on whatever criteria is specified by the given job.
An Example
Let’s say you are developing a Decentralized Application (DApp) that relies on knowing the current price of gold.
Your smart contract would make a request to the oracle smart contract that controls this data, and calls the function that creates a request for the price of gold. This generates an event on the blockchain to signal the node that it has work to do.
This event would get seen on by the node, which would accept the request and use whatever APIs it is configured to use to pull the data. It is then passed through whatever filters and formatters are required, and then passed back to the oracle smart contract, which then uses a callback function to the Decentralized Application (DApp) to hand the data over to be used for whatever it is needed for.
It sounds complicated but essentially, the DApp makes the request to the oracle smart contract, which gets it to a node. The node pulls the data, makes it all pretty for you, and sends it back to the oracle contract, which passes it back to the DApp.
Other Considerations
The Chainlink (LINK) token has a few uses in the ecosystem. First, nodes need to stake some up as a deposit in order to be active nodes. This deposit can be held if the node starts producing bad data, or if it is accepting jobs that it’s not capable of handling, so it helps act as a deterrent from shenanigans on the network.
It is also used by the DApps to pay their fees in order to use the services, which are paid out to the node operators, so acts as the economic incentive for the nodes as well. With a fixed supply, and a large amount of it being staked by the node operators, this creates a both a good supply/demand driver, as well as a good utility for the token itself, so has a few good factors that help with it’s price.
There are changes coming in the future to improve the way the system works, like having bidding pools between nodes to help drive further decentralization. Plans to expand to providing services on other blockchains also exist, so Chainlink does have some room to grow, and have plans in their roadmap to do so.
Conclusions
Being able to get real world data into a smart contract is a very important feature that has a lot of reach into basically everything. To have the ability to get this data in a reliable, decentralized way, that has both economic incentives and disincentives to ensure the data is good, is something that is very necessary in a decentralized world.
Chainlink has developed a pretty good system for this, and with their plans for the future, I think they have the benefit of both being first, as well as continuing to innovate and stay ahead of the curve. This would position them to be a pretty big contender, as they provide a very necessary service. As long as they continue to improve their services, and deliver on the future technologies, it would seem to be pretty blue skies for this protocol.
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Want some more content right now? Check out some of my previous posts:
Iron Finance Flash Loans Thorchain
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Originally Posted On My Website: https://ninjawingnut.xyz/2021/07/19/chainlink/
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