The rate at which data is increasing nowadays is fascinating. IDC, the global market intelligence firm, estimates that data will increase from 33 to 175 zettabytes in 2025. That is 175 followed by 21 zeroes!
Despite the sheer size of data, it is not utilized much effectively across multiple companies, industries, and economies. One, perhaps the chief, problem is data silos. Data silo is when data collected by one unit or department is not available to the rest of that organization. The same is true at higher levels – the data gathered by companies are typically not accessible to other companies.
But data economy is going to change this. Data economy is the global digital ecosystem where participants – both producers and consumers – collect, organize and share data to get insights. Data in this economy tends to be eclectic, meaning with the wide variety of sources. Search engines, social media platforms, online data vendors, companies using devices connected to Internet-of-Things, you name it.
Participating in data economy offers many benefits. By exchanging its data with other actors companies may develop a new business line. For example, medical device producers have a wealth of information on their users’ health, such as heart rate or insulin level. However, they don’t and cannot have a say on users’ well-being. Instead, they can collaborate with health care organizations by providing them with the patients’ tracking data in an ethical and secure way. All participants of the case will benefit from this data exchange; a medical device manufacturer will have created a new revenue stream.
Many DeFi applications need external data. For example, an on-chain betting market would need real-time odds from multiple bookmakers; or a decentralized trading app where you can trade a security linked to ETH futures price should be able to fetch ETH futures prices from outside exchanges, such as Chicago Mercantile Exchange (CME). So, there’s an urge to connect smart contracts with outside world information.
This is what a blockchain oracle does. It is a third-party service feeding real-world data into smart contracts powering DeFi. Decentralized oracles go even one step further by combining oracles into one system. They query multiple data sources and return the data to blockchain. The aim is to reduce the risk of the single point of failure.
Chainlink is a leading decentralized oracle network. Its architecture consists of three parts – Basic Request Model, Decentralized Data Model, Off-Chain Reporting. Basis Request Model is what its name suggests. If a smart contract needs at which price SOL is trading now on Binance, Basic Request Model will do it. This part of the Chainlink architecture is responsible for querying data from a single data source.
Decentralized Data Model (DDM) introduces the idea of on-chain aggregation. Data is aggregated from multiple independent oracle nodes which increases reliability and trustworthiness of the answer. Chainlink Data Feeds function based on the Decentralized Data Model. Data Feeds are sources of off-chain data, such as weather events, business financials, outcomes of sports events or asset prices. Data is aggregated on-chain so that consumers can always retrieve the answer.
Finally, Off-Chain Reporting (OCR) is what makes Chainlink truly special in the context of decentralization. The execution happens mainly off-chain. Oracle operators (nodes) over a peer-to-peer network communicate with each other. Each node regularly reports its data and approves it with the signature. All reports are aggregated in one transaction which is the final answer for that round and which is then transmitted. The main advantage for oracle nodes of aggregating reports into a single transactions is that they pay much less gas costs. Submitting one transaction instead of many of them decreases congestion of Chainlink blockchain, too.