Chainlink is a decentralized oracle network that allows smart contracts to securely access off-chain data and external resources. It is designed to provide a secure and reliable connection between smart contracts and the real world, enabling them to interact with external data sources, APIs, and other external resources.
Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. They are designed to be enforceable and transparent, but they are limited to the data and resources that are available on the blockchain. This is where Chainlink comes in. By providing a secure connection to external data and resources, Chainlink enables smart contracts to interact with the real world in a way that is verifiable and transparent.
Chainlink uses a network of independent nodes to provide this service, with each node responsible for retrieving data from external sources and feeding it back to the smart contract. This decentralized approach helps to ensure the security and reliability of the network, as it is not reliant on a single centralized data source.
Overall, Chainlink is a powerful tool that allows smart contracts to interact with the real world in a secure and reliable way, enabling them to access a wide range of data and resources that would otherwise be unavailable.
The history of Chainlink, a decentralized network of nodes that act as a connection bridge between the real world and the blockchain, dates back to 2014. That year, Steve Ellis, Ari Juels, and Sergey Nazarov came together to develop an architecture capable of using smart contracts. that unite the real world with blockchain.
The idea of these three young people soon became a technology that is currently part of practically all DApps that need to transport data from the real world to the blockchain and vice versa. The Chainlink mainnet went public on June 1, 2019, after five years of hard work and a successful $32 million ICO. Chainlink’s token LINK is trading at $7.67 at press time, growing over 7% in the last 24 hours. With a market capitalization of over $3,000, it is ranked 22nd in CoinMarketCap’s cryptocurrency ranking.
What is the ChainLink network?
What does Chainlink do and why has it become a critical technology for Defi? First of all, you should know that Chainlink is a decentralized network of nodes that are known as Chainlink Nodes (CN). These nodes have a very clear objective: to act as a connection bridge between the real world and the blockchain.
To do this, Chainlink has designed these nodes with the ability to adapt to different uses and depending on the objective that those responsible for them want to achieve. For example, a group of CNs can monitor flight data and itineraries from airports and airlines, and then generate a set of data that can be used to integrate them into DApps dedicated to this sector.
To achieve this functionality, CNs depend on a close relationship between their deployment within the Chainlink network and the blockchain networks where smart contracts are deployed to interact with said network. Initially, Chainlink only supported Ethereum, but as it has progressed in its development, we can now enjoy its capabilities in networks such as Polygon (Matic), BNB Chain, Avalanche, Fantom, and Arbitrum.
The nodes that watch over the world
Chainlink nodes are in charge of monitoring the real world, collecting the data for which they have been configured while exposing an on-chain smart contract to receive requests for information and respond to said requests. These requests are controlled by the Chainlink network, which is responsible for receiving them and issuing the request.
Meanwhile, the nodes compete to offer the best possible information that meets the request. The best information is chosen by consensus and is delivered to the DApp that has made the said request, which then displays said information.
All this is possible thanks to the so-called oracles, which have nothing to do with predicting the future. They are related to the ability to use networks to store and process data, which other people and applications can use for different tasks. Thus, Chainlink is one of the largest decentralized networks of blockchain oracles that exist today. It is also the most complete in terms of features, a fact that has been made possible thanks to the work of its community.
The main problem with Chainlink oracles depends on the actions of third parties. Although to a certain extent. Each node in the network is run by a person and the actions of said persons are something that Chainlink and the DApp devs that make requests to the network cannot control. Considering this situation, Chainlink has created a series of incentives and punishments, to prevent node operators from cheating or acting in bad faith.
First of all, Chainlink gets information from many different nodes in a totally random way. The answers are taken and then a consensus is generated among the answers obtained, taking as valid the one indicated by the majority of them. As a protection measure against manipulated data, Chainlink uses game theory, in a kind of zero-sum game.
The idea is that if you cheat you will be penalized and that if you do things right you will receive a prize. Penalties vary based on the node’s LINK token stake, the number of previous cheats, and other parameters.
⇒ All of these issues are controlled by the Chainlink community, which exercises decentralized governance over the protocol. On the contrary, if you do your job well, the network makes you a small payment and improves your trust status in the network. Basically, if you behave well, you gain recognition and trust, because your data is of high quality. Thus, with higher status, more money you earn. Simple but functional rules.
Smart contracts on Chainlink
Everything explained above is possible thanks to the smart contracts that are in the networks supported by Chainlink. As well as the smart contracts that work within the same network. Chainlink has smart contracts and its operation allows the network to create different operating profiles for its nodes. Smart contracts also provide enormous flexibility in expanding their horizons and functions.
For example, node stats are managed by a reputation contract. Reputation is assigned based on the quality of information it provides. The network also has an information request management system, connected by a bridge to the networks where the DApps are deployed. It also has its internal counterpart on the Chainlink network to enable two-way interoperability. That is, Chainlink has smart contract bridges that allow it to send and receive order information from the networks it supports.
⇒ Of course, the functionalities of the smart contracts in Chainlink are much more extensive and complex, but what has been explained gives us an idea of how fundamental they are for their operation.
Chainlink and DeFi
Now, as we mentioned at the beginning, Chainlink has great use within DeFi. Oracles are very useful for bringing information from the real world or from other sources to a decentralized application. We emphasize “other sources” because oracles not only relate to the physical world but also relate to the digital world beyond the blockchain that runs them.
For example, an oracle can keep an eye on the fluctuation of markets such as the NASDAQ, tracking the value of the shares of companies listed on that index. Or you can follow the value of other markets, such as crypto exchanges, to find out the value of a cryptocurrency or token at a given time.
⇒ And this is where the merger of Chainlink and DeFi begins. Imagine for a minute a DeFi like AAVE. How do you find out the price of the tokens and cryptocurrencies it supports? In the blockchain and its data, there is no field indicating “the value of a token”. It is something external that occurs in markets such as centralized or decentralized exchanges.
⇒ At that point, Chainlink kicks in, and every time a user interacts with AAVE to make a trade, AAVE requests the information it needs from Chainlink’s network of nodes. When processed by this network, it is shown to the user so that they know the value of the tokens they wish to exchange at the time of choosing a said exchange.
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Chainlink and the LUNA/UST crisis
We’ve talked about AAVE, but who else uses Chainlink? For example, arbitration. This Ethereum sidechain uses Chainlink to generate an off-loading computing system for its operation. This means that Arbitrum uses Chainlink, to generate the necessary environment to compute the data of the Solidity smart contracts between its sidechain and Ethereum. This means that without Chainlink, Arbitrum could not function. This includes all DApps deployed on said sidechain (including Defi).
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⇒ Another use of Chainlink can be seen in MakerDAO, which uses Chainlink to perform its Proof of Reserve process. In other words, MakerDAO uses Chainlink to generate auditable and transparent evidence about the vaults that are responsible for maintaining the stability of the DAI stablecoin price. A fact that was put to the test with the fall of LUNA/UST. When the entire crypto market was reeling, DAI remained unmoved, relying on Chainlink’s ability to deliver high-level information from its network for its operation.
⇒ After this analysis, it is clear that Chainlink is much more than just an “information library”. Chainlink has become a fundamental pillar for the construction of DApps and reliable applications within the crypto ecosystem. Chainlink’s capabilities and utilities are constantly being developed, one more example of the potential of this application and everything that this interesting network can offer us.