What is Chainlink (LINK)? | Chain Knowledge Encyclopedia
Chainlink's oracle solution can bridge the trust gap between off-chain data and the blockchain.To help more beginners increase their understanding of the blockchain industry, Chain Catcher has established the "Chain Knowledge Encyclopedia" column, which organizes and edits publicly available information on the internet to introduce important concepts and projects in the blockchain industry. We welcome reading and communication.
1. Overview
Chainlink is a decentralized oracle service that provides effective, reliable, and secure connections to off-chain data, which can be used by blockchain smart contracts. LINK is the native token of the protocol, which data requesters can use to pay for services on the oracle network, and it can also penalize nodes that provide incorrect data.
Currently, Chainlink has become the most influential oracle project in the blockchain ecosystem, supporting more than ten public chains including Ethereum, NEAR, Avalanche, and BSC. Its solutions have been adopted by hundreds of DeFi projects, and Google Cloud announced the integration of Chainlink's oracle solutions in 2019.
To understand Chainlink (LINK) and its role in the blockchain space, it is important to first understand the problems that Chainlink aims to solve. Since its inception, blockchain technology has aimed to address numerous real-world issues and has generated many application scenarios. Smart contracts are one of the most promising developments in blockchain to date.
Smart contracts are computer programs that run on blockchain protocols. They execute a set of predefined terms automatically, in a traceable and irreversible manner, without the need for a third party, and can be constructed to execute almost any imaginable contract. However, they often require input data from outside the blockchain network to execute their predefined terms. For example, relevant off-chain data may provide accurate real-time price feedback from sources like Binance, Kraken, and CoinMarketCap. Chainlink uses this information and data from other sources to aggregate multiple data points into a real-time and continuously changing price measurement verification system.
Oracles provide a trusted way for blockchain networks or smart contracts to retrieve external real-world data when needed. Oracles query, validate, and authenticate external data, then relay it to the smart contracts on the blockchain. This technology allows contracts to be executed in a trustless manner; however, the oracles themselves and the data they provide, in turn, require a high degree of trust, privacy, and security, which is known as the oracle problem, a dilemma that Chainlink is working to solve.
2. Chainlink's Decentralized Oracle Network
The accuracy and reliability of smart contracts largely depend on the quality of the data used to execute their terms, which means that oracles are a key component of smart contract effectiveness. Centralized oracles are controlled by a single entity and serve as the sole data provider for smart contracts, requiring network participants to place a great deal of trust in the validity of the data they provide. They also represent a single point of failure, threatening the security of smart contracts. Many oracle experts believe that centralized oracles are more vulnerable to attacks compared to decentralized oracles. In either case, if an oracle or the data it retrieves is compromised, the smart contract is also at risk.
Decentralized oracles aim to achieve deterministic, transparent results in the same way that blockchain networks do: by distributing trust among many network participants. By using many different data sources and oracle systems that are not controlled by a single entity, decentralized oracle networks can provide greater security and transparency, significantly improving the functionality of smart contracts.
Chainlink's oracle network is dedicated to enhancing the reliability and security of the underlying blockchain architecture. The open-source and decentralized nature of Chainlink proves this effort, allowing anyone in the blockchain community to independently verify Chainlink's source code and contribute to its development and improvement. The Chainlink crypto network is also decentralized, ensuring that no single node or data source can create a single point of failure. Compared to centralized oracles, Chainlink's oracle system can validate data across multiple nodes, so even if one or more nodes are attacked, as long as the unaffected nodes maintain a majority, the network will self-correct.
Customizability and end-to-end security are crucial for reliable oracle data delivery. With this in mind, Chainlink nodes enable smart contracts to access any application programming interface (API), greatly enhancing the system's security and flexibility in the process. Individual nodes can securely store account logins and API keys, allowing smart contracts to receive data from any external source or API (including password-protected sources or APIs).
3. Chainlink Data Delivery and Verification
Data quality is a significant issue faced by crypto enterprises like Chainlink. In particular, even if not every node can access the same data, oracle providers want to ensure the quality of the data provided. Questions like "What is the weather like in Los Angeles?" can generate a lot of subjective data. With this in mind, Chainlink has implemented several key features to ensure high-quality data transmission.
Chainlink has an on-chain service protocol function between smart contracts requesting data and oracles providing data. These outline the reward and penalty structure for performance. Chainlink oracles also employ a data signing process, where each node participating in data collection cryptographically signs the data it collects. This signing process provides an identifier that allows anyone to view the data delivery history of a specific node, helping smart contract service providers assess the performance record of a given node. Chainlink's identifier system incentivizes data providers to operate effectively and consistently deliver the highest quality data.
The trust system enhances Chainlink's identifier system by providing transparent information about network nodes, allowing smart contract service providers to make informed decisions about which nodes to use for specific smart contract needs. Some of the reported information includes the number of successful jobs, the total number of clients served, and the average data response time. Node availability (timely responses) and accuracy are the two main factors evaluated in Chainlink's crypto verification system.
Nodes can also increase their attractiveness for potential request contracts by obtaining various certifications or voluntarily providing additional information, such as implementing KYC procedures, providing location information, or conducting security checks.
4. Typical Application Scenarios
Various traditional financial products, such as loans, payments, derivatives, and asset rights, are beginning to appear on the blockchain through smart contracts. Smart contracts make these financial products more secure and transparent, lowering their barriers to entry. These DeFi applications access Chainlink oracles to obtain asset price feeds and interest rates, and to verify asset collateral ratios, thereby enabling various advanced functions, such as issuing loans at fair market value, automatically distributing dividends, or settling options contracts.
Smart contracts can also be used to create parametric insurance contracts on the blockchain. Chainlink is currently providing weather data for Arbol's crop insurance product, allowing farmers around the world to access this parametric crop insurance as long as they are online. This product provides timely and fair claims based on parameters such as rainfall and temperature, according to the logic pre-set in the contract (e.g., if this year's rainfall exceeds x, then pay y in compensation).
5. LINK Token
LINK is the token of Chainlink, built on the Ethereum blockchain as an ERC-677 token. The project has issued a total of 1 billion LINK tokens, with the total supply as follows: 350 million tokens were sold to Chainlink's initial coin offering (ICO) investors, 350 million tokens are reserved for incentivizing node operators, and the remaining 300 million tokens are controlled by the Chainlink team.
To make smart contracts applicable to Chainlink nodes, the requesting smart contract service provider must pay LINK tokens to the node operators. Chainlink node operators earn LINK rewards for retrieving external data and reformatting it into a structure that can be easily read by smart contracts on the blockchain. LINK fees are determined by node operators based on the quality and type of services they provide.
Node operators also stake LINK (similar to providing a security deposit) to demonstrate their commitment to network health and providing excellent service. Chainlink's reputation system also considers the size of a node's stake in the network when recommending specific nodes for particular jobs. Chainlink nodes accept LINK tokens as compensation for their services, but they may also be taxed or penalized in LINK for providing incorrect or dishonest information. This overall reward and penalty system helps maintain the decentralized oracle network as a reliable source of high-quality information, enabling Chainlink to integrate with multiple blockchain networks.
Further Reading:
“Dialogue with Aave and Chainlink: What Imagination Space Do Leading DeFi Projects Have?”
