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Tech Deep Dives

What Is Chainlink?

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Published on:
July 2, 2021

Chainlink is quickly becoming an important tool blockchains use to gather information from the outside world. Learn more about what makes it unique and how it works.

What Is Chainlink?

Table of Contents

Smart contracts have come to play an increasingly central role in the world of blockchain and decentralized finance (DeFi). Their implementation helps to realize the core aspiration of Bitcoin and other decentralized networks – namely, enabling people to make secure peer-to-peer (P2P) transactions by removing the need for intermediaries like banks or governments. 


Given the absence of a central intermediary, developers face the challenge of finding a way to provide smart contracts with the real-world data they ideally need to interface with in order to be able to execute more ambitious functions. This data can include eclectic information on matters as diverse as currency conversion rates, the weather, or even sports game scores. 


Chainlink is a decentralized oracle network that provides this much-needed stream of information to the smart contracts that run on various blockchains. It aims to make smart contracts an even more powerful tool by enabling them to draw on dynamic data inputs gathered from outside sources. 


This data, as hinted at, is diverse and can range from price feeds, supply chain management data, temperatures relayed from a smart sensor, scores from a football game – anything that is relevant to the given blockchain’s purpose. 


Chainlink doesn’t have a native blockchain. Instead, it integrates with multiple blockchains simultaneously, providing them all with up-to-date information streams. It acts not only as an oracle but also as an oracle aggregator. Chainlink purchases information from many data providers, which it then streams directly to blockchains. It is in the data providers’ best interests to only offer up accurate information, as a negative reputation score will result in their removal from the network. 



The Chainlink oracle network empowers blockchains like Ethereum, as well as the decentralized applications (DApps) that run on them, to access data and thus to make use of a bridge between the real world and secure blockchain environments. The oracles within the network collect, query and validate data from thousands of data sources and deliver it to Chainlink, which then feeds the dynamic inputs to the smart contracts. All of this facilitates a smarter, more connected blockchain ecosystem. 


What Sets Chainlink Apart? 

Chainlink was a pioneer in enabling off-chain data to be integrated with existing smart contracts. It has therefore built up a strong reputation and already has the support of several high-profile players in the blockchain and wider tech spaces. Among others, Huobi, Brave New Coin and Alpha Vantage have all begun to sell their data to Chainlink.


Since it is a decentralized and open source network, Chainlink encourages a large number of users to operate nodes on the network and rewards them in the form of its native LINK token. 


The small army of node operators enables the oracle network to feed information like pricing data to blockchains. Multiple nodes will take requests for data and facilitate communications with real-world data providers. When they have the desired data, they report back to the Chainlink Aggregating Contract to compare answers. This all allows for the best balance of accurate information by averaging answers. 


The Chainlink nodes have the essential task of securing and validating billions of dollars in transaction value (when translated to fiat). These funds are traded on DeFi apps like Aave and Synthetic, and are essential in providing by-the-second data. Additionally, Chainlink’s partnership with Google allows developers building on the Ethereum blockchain to gain access to massive amounts of information. 

How Does Chainlink Work?

Chainlink facilitates communication between blockchains and external data sources through the following steps:


  1. Chainlink matches oracles with blockchain operators that seek out real-world information in an automated process. It does this by using a service level agreement (SLA) software that lays out the terms and expectations that the blockchain users want. For instance, a developer on a blockchain may want his smart contracts to be populated with daily banking interest rate data. Chainlink will match the blockchain operator with oracles that can provide the most accurate information per their request.

The operator will submit the SLA along with LINK tokens to be held in the contract. These tokens will later be used to pay the oracles that deliver accurate information that satisfies the contract terms. 


  1. Once oracles are selected, they will get to work obtaining the desired data from an external source (e.g. a report of banking interest rates). The oracles will process this data and route it through Chainlink. Chainlink will aggregate the data and assess the results, while choosing the most accurate answers and discarding outliers. This ensures that the end user will only receive correct information.

 

  1. This new information will be routed through Chainlink to the operator’s blockchain. It will then be input to the smart contracts to make changes according to the updated and reliable information. For example, if interest rates are above a certain level, the blockchain could change the price of a digital asset based on that information. 


Chainlink Nodes 

Keep in mind that anyone can run a Chainlink node if they have access to all the right equipment. Chainlink’s nodes can be divided into two types: 


Core. These nodes have the responsibility of reading the service-level agreements (SLAs) and streaming all new assignments and pairs to the Chainlink adapter.


Adapter. These nodes facilitate the bridge between the node and the external data. The adapters can read and write new information to blockchain smart contracts. 


Which Blockchain Does Chainlink Run On? 

Chainlink uses an Ethereum-based ERC-20 token to secure the oracle network. However, Chainlink is a step ahead of Ethereum, as it already has a proof-of-stake (PoS) consensus mechanism already in place. PoS determines which nodes will validate transactions based on how many LINK tokens they have staked on the network.


Ethereum itself plans to transfer to PoS with its Ethereum 2.0 update. Part of the impetus for this is that PoS consumes less energy than proof-of-work (PoW) and is more easily scaled up to increase the number of transactions the network can handle. 


What Is the LINK token? 

LINK is Chainlink’s native token. It is a utility token that is used for various purposes on the network: to incentivize data accuracy, to keep contracts stable, and to reward nodes for their work in validating transactions. 


LINK is an ERC-20 token that has an extra ERC-223 function. This latter provides a function termed “transfer and call,” which facilitates interaction with smart contracts. The more LINK tokens that a node holds, the more power it has within the PoS network. 


Alongside its function as a utility token, LINK is also a tradable cryptocurrency. Anyone who wants to invest in LINK can do so on most major exchanges, including Binance, Coinbase, Kraken, Gemini, OKEx, Huobi, and many others. 


Final Thoughts 

Chainlink is an indispensable oracle network that provides blockchains like Ethereum, Matic Network, Hedera Hashgraph and the Binance ecosystem with real-time information. With high-profile partners that include Google, Chainlink is a promising system that looks like it will continue to introduce exciting innovations to the crypto and blockchain space. 


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Author(s)

Kevin Dwyer

I'm a technical writer and journalist covering cryptocurrency and tech. I believe blockchain can build a better world - I'm here to report on how we get there.

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