Chainlink is an Ethereum-based decentralized oracle network or blockchain abstraction layer. Its purpose is to provide a reliable way for blockchain networks to access real-time data from external sources.
Acting as a middleware protocol, it bridges the gap between blockchain systems and trusted external data sources, making it a crucial tool for developers looking to create smart contracts built on timely data.
Beyond this, Chainlink also enables non-blockchain enterprises to securely and remotely connect with native blockchain projects to supply verifiable data.
The platform runs on independent data feeds known as oracles.
These oracles collectively retrieve data from multiple sources, aggregate, and deliver them to a single validated data point. This data point is then fed to the smart contract responsible for executing these functions.
By doing so, blockchain and legacy enterprises can compute external data both on and off-chain. Furthermore, blockchain protocols like Ethereum, Solana, and Cardano can interact with legacy companies.
The network runs on open-source software, meaning anyone can contribute and view the underlying code of the Chainlink protocol.
One of its notable strengths lies in its censorship-resistant nature, ensuring that no single central authority holds absolute control over the Chainlink network.
This also eliminates the vulnerabilities associated with centralized points of failure, a common issue that has plagued traditional oracle networks in the past.
Backed by the LINK token, which serves a dual purpose in computation and rewarding processes, the protocol enables secure transmission of inputs and outputs across multiple data points.
Chainlink offers the following key benefits:
- Generalized Architecture: Chainlink operates on a flexible framework that enables the seamless development and running of oracle networks.
- Data Signatures: Chainlink allows oracle networks to apply cryptographic signatures directly to the data they provide before it is added to the network. This process ensures that users can confidently authenticate the source and destination of the data.
- Blockchain Agnostic: Despite its roots in the Ethereum blockchain, Chainlink can supply well-vetted data to any blockchain network that supports its hybrid smart contracts.
- Top-of-the-Line Data: Chainlink’s data deliveries are closely vetted and pooled from premium data providers.
- Reputation Systems: Chainlink offers users access to oracle’s historical performance. This way, users have on-chain data on oracle’s average response time, completion ratio, average security deposit needed to pool data, and other details.
Chainlink relies on the LINK native asset for the smooth operation of its protocol.
With the LINK asset, users have several key functionalities:
- Governance: LINK token holders are often imbued with voting power. This allows them to dictate the direction the decentralized oracle network should head at any given time.
- Staking: Chainlink runs on Ethereum’s proof-of-stake (PoS) consensus algorithm and enables users to lock up (stake) their assets to secure the network. In return for staking, users are rewarded with newly minted coins after inflation has been factored in.
- Rewards: Node operators on the Chainlink ecosystem are paid for verifying data authenticity using the LINK token.
The Chainlink network was conceptualized in 2017 by the duo of Sergey Nazarov and Steve Ellis. The Chainlink whitepaper was launched in the same year together with Cornell University Professor Ari Juels.
Below is a snapshot of Chainlink since its early days:
|2017||Chainlink was conceptualized by Sergey Nazarov and Steve Ellis. V1 whitepaper is written alongside Ari Juels.|
|2018||Town Crier, a trusted execution environment-based blockchain oracle built by Juels, is integrated into Chainlink.|
|2019||Chainlink was formally launched with its trademark registered in the Cayman Islands.|
|2020||Chainlink integrates DECO, a Cornell project co-created by Juels.|
|2021||The second whitepaper is launched and details how hybrid smart contracts would be deployed to ensure on-chain and off-chain services on oracle networks.|
While it falls under cryptocurrency and blockchain protocol categories, Chainlink serves a distinct purpose. Unlike crypto-native protocols such as Bitcoin and Ethereum, which are renowned for cross-border and decentralized value transfers, Chainlink’s primary functions include:
- Decentralized finance operations
- Legacy enterprises
Decentralized Finance Operations
Decentralized finance (DeFi) stands as a transformative force, enabling trustless exchanges of digital assets on open, permissionless platforms. Chainlink plays a pivotal role in the smooth operation of these decentralized ecosystems. The abstraction layer enables these DeFi applications to precisely identify digital asset prices, access interest rates, validate collateralization, and execute various essential functions.
Moreover, Chainlink enables DeFi protocols to provide loans based on fair market values, automate dividend distribution, and ensure punctual contract settlements.
Chainlink has expanded its reach into the traditional insurance sector. Leveraging its smart contracts technology, enterprise businesses can create parametric insurance contracts powered by the Chainlink network.
These parametric insurance contracts represent a decentralized insurance approach that utilizes smart contracts to enforce the terms of agreements between insurers and customers.
With Chainlink’s involvement, customers of insurance companies can receive accurate compensation once the predefined conditions outlined in the agreement are met.
The decentralized oracle network extends its influence to the decentralized gaming landscape, where smart contracts are harnessed to create token-based collectibles, commonly called non-fungible tokens (NFTs).
These assets are rare and unique, with each NFT being distinct from any other. For decentralized gaming, Chainlink introduces its verifiable randomness function (VRF), which ensures no two in-game scenarios are identical.
For prize selections in gambling games, Chainlink’s VRF ensures that winners are randomly selected from a large pool.
Chainlink is not solely focused on the blockchain space. The abstraction oracle layer is also used by traditional systems like data providers, Internet of Things (IoT) networks, websites, and services to make their data and services available to blockchain networks.
This allows traditional businesses to provide blockchain-based services with the required data for verifiable information compilation.
The platform offers easy access to off-chain data unavailable on many blockchain networks. This is because blockchain protocols run siloed operations. This is largely due to the disparate consensus algorithms and different operational schematics they operate with.
In this siloed state, a blockchain network is locked out and ignorant of real-world events occurring in real time.
However, Chainlink solves this problem and allows non-native blockchain providers to transfer relevant data to distributed ledger tech (DLT) protocols.
This information is then processed using smart contracts, with the result making the blockchain even more relevant to the industry it serves. For instance, Chainlink provides the fiat price of cryptocurrencies like Ether to blockchain protocols using the ETH/USD price feed.
This makes Chainlink a unique and strongly relevant blockchain protocol for seamlessly integrating both traditional and next-generation blockchain systems.
Chainlink began its journey in 2017 on the Ethereum blockchain but has since pivoted to other smart contract networks. Now, Chainlink provides verifiable price feed data to Polygon, Arbitrum, HECO, Gnosis Chain, Optimism, BNB Smart Chain, Moonbeam, and others.
In the last six years, Chainlink has facilitated a transaction value well above $8.5 trillion across these blockchains. This points to its massive appeal across the crypto and tech ecosystem.
But that is not all the network is keen on achieving. It has been tapped by one of Australia’s largest institutional banks for the cross-chain purchase of tokenized assets.
.@ANZ_AU, one of the largest institutional banks in Australia, used Chainlink #CCIP to successfully demonstrate a cross-chain purchase of tokenized assets with A$DC, an ANZ-issued stablecoin of the Australian Dollar: https://t.co/l9iPE2JuWD
— Chainlink (@chainlink) September 14, 2023
These and several others make Chainlink an integral figure in the new decentralized ecosystem of the future.