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Blockchain Oracles are essential to the successful functioning of Smart Contracts and therefore, decentralized applications in the crypto world.
Why, you ask?
Let’s start with a recap on what Smart Contracts are.
In a nutshell, Smart Contracts are codes that outline the terms of agreements between different parties. Once the agreed conditions are met, the contract will self executive itself, without the need for intermediaries to be involved, therefore making it trustless and more secure (for a 101 on Smart Contract, click here).
Now, the question is, how do Smart Contracts know when the agreed conditions are met?
Enters, Chainlink (or any other blockchain oracle, but it is by far, the leading one in the space).
Essentially, blockchains are digital ledger that keeps the record of different transactions within their blocks. However, they are isolated ecosystems, so they don’t have access to real-world data by themselves.
This is where Oracles play a key role: they act as a link that connects blockchains to external systems, providing reliable data from the real world, thereby enabling Smart Contracts to execute based on this information.
Now that Blockchains can use Oracles like Chainlink to gain access to off-chain data, a second key question arises…
How do we maintain the decentralized nature of these applications?
Let’s remind ourselves that the whole point of using blockchain and smart contracts is to remove the need for intermediaries, and therefore avoid one person/company controlling them.
So when it comes to Oracles, using a centralized entity to deliver data to execute these smart contracts introduces a
single point of failure,
defeating the entire purpose of a decentralized blockchain application: if such single oracle goes offline, then the smart contract will not have access to the data required for execution, or will risk executing based on potentially corrupt data.
Therefore, it is extremely important for Oracles to be decentralized as well, in order to prevent data manipulation, inaccuracy, and downtime.
How does Chainlink ensure decentralization?
Similar to how decentralized blockchains have their network of validators around the world, Chainlink also has a distributed network of Node Operators that provide information to the Oracle.
Anyone can run a Chainlink node as long as they have access to the right equipment and lock in a certain amount of LINK as stake.
In exchange, these Node Operators will receive rewards for the information provided.
Key Information about Chainlink!
Chainlink is a decentralized network of oracles that provides data from off-chain sources to on-chain sources.
It was founded by Sergey Nazarov and Steve Ellis in 2017, under the software company Chainlink Labs, based in San Francisco.
Chainlink was launched with an ICO (Initial Coin Offering) in September 2017, raising $32 Million.
Chainlink’s mainnet went live 2 years later, in 2019.
It uses Proof of Stake as consensus mechanism.
Even though Chainlink doesn’t have its own blockchain, it does integrate with different blockchains, starting with Ethereum. Now, it has rapidly expanded to other key players, such as Solana, Arbitrum, and Fantom, as the key decentralized blockchain for these blockchains to run their Smart Contracts properly.
In terms of Tokenomics…
LINK is Chainlink’s native token, ranking 23rd by market cap at the time of this article.
It is an ERC20 token (built using Ethereum’s standards), with a maximum supply of 1 billion coins.
LINK is a utility token, primarily used for:
Rewarding node operators for their work.
Staking: node operators need to lock in a certain amount of LINK as part of the commitment, as well as an incentive mechanism to ensure proper behavior and data accuracy.
LINK can also be used for investment purposes, it is widely available in different exchanges.
What are some of the main Use Cases?
Smart Contracts developers use oracles to build more advanced decentralized applications. Among the most common ones, we have:
Decentralized Finance (DeFi): most DeFi applications need access to financial data about assets and markets. For example, synthetic asset platforms such as Mirror Protocol (Terra) use price oracles to peg the value of tokens to the real asset.
Insurance: oracles are used to verify the occurrence of insurable events.
Dynamic NFTs and Gaming: Dynamic NFTs that can change in appearance, value, or distribution based on external events would use oracles to have access to such events. Similarly, oracles can be used to create verifiable randomness, in order to select random winners in NFT drops, or surprise rewards in gaming applications.
So how does the Process work?
So far, we already established that:
Oracles link blockchains to external systems to access off-chain data.
Blockchains need this data to ensure their Smart Contracts can self execute accurately.
Oracles have Node Operators, who are data providers that need to lock in a certain amount of LINKs as stake to ensure reliable and truthful data. In exchange, they receive rewards for their information.
Now, without going into details, normally a Requesting Contract needs to be raised, so Chainlink can set up a matching Smart Contract, known as the Chainlink Service Level Agreement Contract (SLA), which would eventually allow the requestor to access data off the blockchain.
Within this SLA, 3 contracts are created:
Reputation Contract: to evaluate the track record of an oracle to determine its performance and authenticity, in order to remove those unreliable nodes. It’s pretty much a filter.
Order Matching Contract: it sends the query received to trusted nodes for them to bid. It then chooses the suitable amount and types of nodes to handle the request.
Aggregating Contract: validation process of data from both single and multiple sources, to reconcile them by reaching the ultimate answer to the query.
It’s worth mentioning that Chainlink has been expanding aggressively its integration during the last 2 years, partnering up with some famous names such as Google Cloud, Accuweather, Amberdata.
Final Comments…
It is worth noting that Chainlink is not just about providing data.
Market and Data Feeds is just one of the services Chainlink provides.
There are some key products that are quite relevant to mention as well. I’d like to highlight 2:
Proof of Reserve: this is critical for Stablecoins, as the majority uses reserves to maintain the 1:1 value with the pegged asset. Chailink’s Proof of Reserve enables the reliable and timely monitoring of reserve assets using automated audits based on cryptographic truth.
VRF (Verifiable Randomness): cryptographically secure randomness for blockchain-based applications.
Thanks for making it this far! If you enjoyed it, make sure to like, subscribe and share! And if there is any particular topic you’d like me to cover, leave a comment below!