What is Chainlink?
Chainlink is a decentralized oracle network. In layman terms it enables smart contracts to retrieve and use data that is secure and reliable.
An oracle is a source of data that provides real world data to smart contracts. The oracle is responsible for authenticating and validating the information received and making sure it is good data for a blockchain to use. However having one oracle to rely on for information defeats the purpose of decentralization. If there are any discrepancies or corruptions relating to that central point of data it can result in monumental errors with the smart contract and the wrong party can have large financial losses.
Chainlink aims to fix that problem by decentralizing it. Instead of one singular point of data there are multiple oracles which come to an agreement before relaying data to the smart contract. This allows for data to be decentralized , and lessens the rate of errors. If one data point fails the system as a whole still thrives as long as the majority can come to a consensus.
Breakdown of a Decentralized Oracle Network:
This is an example taken from the Chainlink website for the ETH-USD price feed. You can see several different sources of data 21 to be exact. To the right there are multiple key indicators to look at:
Trusted answer: This answer is the answer calculated by an algorithm after taking into account all the answers from the other nodes.
Trigger Parameters: These parameters are in place so the data is always relevant and accurate. Whenever one of these parameters is met data is aggregated to come up with a new trusted answer. The first parameter is the deviation threshold it determines the appropriate deviation between the off chain price and the trusted answer. When the deviation reaches the threshold a new trusted answer is written. The second parameter is the heartbeat which is the amount of time allowed for the trusted answer to stagnate without any updates if the first parameter is not met.
Oracle responses: To create a decentralized network of oracles you need various oracles. There is a minimum of 14 oracles required to write a trusted answer but it cannot exceed 21 at this moment.
Last update: The time since the latest trusted answer was written on the chain.
Legend : There are two indicators for oracles. A green bar means an oracle has responded or input their answer , and a yellow one means a response is still pending from that source.
What are Node Operators?
Node operators are the backbone of the Chainlink network, they wait for data requests from smart contracts then go retrieve data from an external source such as an API. Once they have retrieved said data they can go on chain and report this information to a smart contract. Nodes do not depend on one another. A node can choose to be part of a variety of networks or even run independently if they so choose. Networks can restrict individual nodes from operating in their network and choose how data is accumulated and obtained.
There are several things required to operate as a chainlink node. Chainlink Software is open source software ran by nodes to bridge off-chain and on-chain environments.
Oracle on chain smart contract detects any data requests from provides a response towards the smart contract requesting said data.
Data Source Subscriptions are the APIs which oracles rely on for data fetched for a smart contract.
External monitoring systems keep an eye on the accuracy and performance of nodes in real-time.
Everything that occurs in the network is documented. Responses and requests are recorded on the chain and are transparent for anyone to observe. Statistics on these actions can provide insight into the performance, accuracy, and reliability of any node operators and even the network as a whole. This allows for reputations to be built and incentivizes nodes to be more reliable.
Chainlink Use Cases:
Chainlink currently secures billions of dollars across Defi and several other facets of the crypto world. There are a multitude of oracle services that are provided by networks or even individual nodes in the chainlink system and with the number of nodes growing everyday the network’s data pool grows larger. Here are examples of some use cases for chainlink data.
VRF for gaming
Connecting off chain bank payments
Chainlink also gives developers the tools to make their own oracle network so as to not limit the types of data that can be acquired from oracle networks. So realistically there is no limit to the possibilities available with Chainlink.
Chainlink is a pioneer in the crypto world and the system they have set in place is a step forward in the complete decentralization of data and a major leap in the right direction for crypto due to the amount of vulnerabilities that will be avoided in the future with this technology. Good tech requires good data and for the crypto sector to succeed there has to be both. Chainlink is an integral piece in that decentralized puzzle.