As decentralized services and products are increasingly sought after, Chainlink is becoming one of the most popular decentralized oracle networks (DON) today. Being able to integrate real-world data into smart contracts securely and efficiently, Chainlink successfully gained its position among other leading decentralized oracle networks.
Moreover, Chainlink’s currency has become one of the most recognized digital money in the crypto market. The market cap for its crypto has reached over $9.5 billion in April 2022. So, what is Chainlink, exactly? How does it work? Find out the complete guide of it below.
Chainlink is a decentralized oracle network that aims to provide real-world data to smart contracts in blockchain. For those who are not too familiar with smart contracts, it is an agreement that will operate when certain conditions occur. Generally, people use smart contracts to develop new crypto assets or create crypto-financial products.
Then, why is Chainlink significant nowadays? It is essential because it can enhance the capabilities of smart contracts by providing access to data outside of the blockchain while giving assurance for the blockchain technology's reliability and security. In addition, Chainlink also delivers a single data point to the smart contract by evaluating collected information to reduce the risk of a centralized point of failure.
That is why Chainlink has become one of the most trusted and commonly used for oracle services. Not to mention, how many leading DeFi protocols, such as yearn.finance, crypto.com, and Aave reckon upon it to provide more accurate, real-world data.
SmartContract is the mastermind behind the discovery of Chainlink. This blockchain technology startup founded Chainlink in 2014. However, it officially started with a white paper published by Sergey Nazarov, Ari Juels, and Steve Ellis in September 2017. The paper then led the trio to a vision to create a decentralized oracle network.
The first version of Chainlink was launched in June 2017. Shortly, the Chainlink team held an initial coin offering (ICO) and successfully sold 35 percent of their one billion crypto units. The development of Chainlink aims to solve one of the core challenges of smart contracts experienced on blockchains. Chainlink is expected to be able to provide reliable real-world data for blockchains. Additionally, the company's headquarters are based in the Cayman Islands.
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LINK is a cryptocurrency product of the Chainlink network. The total supply of this decentralized oracle is worth 1 billion tokens, of which 35 percent were sold in 2017 at the ICO event. Meanwhile, 55 percent of the tokens are still held by the founding company.
LINK crypto also does not provide process mining, reward staking, or the production of new tokens. That means that the supply of this currency is unchangeable so that it won't be affected by inflation. On the other hand, LINK is also the only currency used by Chainlink. Ergo, its position is very vital in the network.
Smart contracts that want data from the Chainlink network must use LINK to pay the oracles. On the other hand, nodes wishing to become data providers on this network must stake LINK too. The deposit undoubtedly becomes the commitment shown by the nodes to the network. The larger the deposit, the greater the chance that an oracle is chosen to provide the data requested by the smart contract.
Chainlink facilitates its external data sources and users by implementing three steps in the execution process.
In the first step, users will be asked to provide a service-level agreement (SLA) containing their desired data requirements. Then, the Chainlink software will use the SLA as a reference in finding oracles that match user demand. After that, users collect the SLA and try to deposit their LINK crypto to the Order-Matching pact.
At this stage, oracles will try to connect to an external source. They will get the real-world data requested according to the user's SLA. After the searched data matches, Oracle will process it and send the information back to contracts provided by Chainlink.
After the oracle collects all data from outside sources, Chainlink software will translate it into blockchain language. In this step, the Aggregation contract will play its role. The aggregation contract will start validating all the data collected by comparing it with multiple sources. It can also filter out incorrect questions and provide a weighted score derived from the collected data.
Through the three stages above, Chainlink provides more reliable off-chain data to any smart contract which becomes the core value of this famous decentralized oracle network.
Furthermore, the Chainlink blockchain provides 5 smart contracts in its protocol, such as:
The work process will start with a smart contract that sends data requests on the Chainlink network. The request sent by the smart contract is then called the Requesting Contract.
After the Chainlink procedure records the request sent out by the smart contract as an "event," it issues a matching smart contract called the Service Level Agreement.
This contract validates the node's track record to check its integrity. The protocol will verify data such as the average response time, how many LINK crypto successfully staked, and the number of completed requests.
To provide the requested data, the nodes will place their bids. After that, the smart contract selects which nodes among the bidders are considered capable of submitting the requested data. In this contract, users can also pick their desired nodes.
The Chainlink Aggregating Contract checks all collected information from nodes. Then it verifies them and selects the most accurate result according to the smart contract request.
If the question is whether Chainlink is worth money, the answer depends on your investment goals. It also depends on how much risk you are willing to take. Thus, if you are still a beginner, understand the project thoroughly before investing in it.