Chainlink is one of the blockchain platforms that help to fully implement the functionality of smart contracts, self-executing programmes. Smart contracts are very functional; when used intelligently, they can even replace traditional agreements.
But most blockchain platforms are isolated in themselves and cannot connect to external data channels. As a result, smart contracts cannot communicate with banking or other systems. Chainlink solves this problem. The platform supports so-called Oracles, a decentralised mechanism capable of collecting data from third-party sources.
The purpose of oracles
In technical terms, an oracle is a middleware, a kind of intermediary that translates information from the real world to the blockchain and back again. Oracles are also found in centralised systems. But it is their centralisation that is the weak point. Once it is compromised, no one can rely on the accuracy of the data.
Key features of oracles, smart contracts and their interactions:
Smart contracts are immutable verifiable software contracts that are automatically executed under IF/THEN conditions.
The data that determines the fulfilment of the conditions usually comes from a blockchain.
The Chainlink cryptoecosystem implements oracles to transfer data from outside the chain to smart contracts within the chain.
Chainlink is a decentralised network of nodes that eliminates the problem of centralised oracles – because centralised mechanisms are often flawed.
Chainlink offers secure, tamper-proof inputs and outputs to any blockchain, helping to bridge the gap between traditional data and blockchain – the technology of the future.
How the system works
Because the Chainlink protocol aims to bridge the gap between off-chain and on-chain resources, it relies on two important aspects: off-chain infrastructure and on-chain infrastructure.
The former includes oracle nodes that are connected to the external blockchain. Basically, their job is to collect the data that the user requests. The data then passes through the Chainlink Core, the software responsible for the communication between elements inside and outside the chain.
The Chainlink Core then extracts the information and passes it on to the oracle within the chain. They consider user requests for this data and process it to the right format. In the end, the requested data is sent to the right smart contract.
LINK is an ERC-20 token built on the Ethereum blockchain. It can be bought with fiat currency or cryptocurrencies through exchanges or exchanges.
Applications and protocols that own smart contracts use LINK to create requests for the data they need, a payment to oracle node operators. The nodes themselves set the prices they see fit, based on the demand for their services and the current state of the market.
The node operators themselves use the LINK to maintain the network, this resembles the usual steaking scheme – the operator puts the LINK into the system and is entitled to work and remuneration. Nodes that perform poorly can be penalised or excluded, losing money, so it is advantageous for operators to operate fairly.
When matching nodes with data requests, the smart contract in Chainlink takes into account the number of coins supplied by the operator (but not only, there are other criteria as well). Therefore, in most cases, nodes with a high rate are chosen as a priority to fulfill requests and thus earn LINK tokens.
Chainlink functionality can be useful in many sectors of technology and finance. For example – securities market, insurance companies, betting on sports or other events, supply chains. Chainlink can be used wherever transparency, efficiency and security of smart contracts are required. Therefore, the technology was immediately appreciated and became one of the most important components of decentralised finance (DeFi) and the blockchain ecosystem in general.