Originally published in the NOWNodes blog.
A smart contract requires real-world data for execution. So, how does it get real-world data? It leverages decentralized oracle networks to provide data from outside the blockchain. ChainLink provides the decentralized Oracle network required for feeding real-world data to the smart contracts.
You must also have heard about a crypto token known as “Link.” It is the native crypto token of Chainlink. The Chainlink users can pay in LINK tokens to pay for services on their network. You must be having many questions about how Chainlink functions and what are the benefits of Chainlink. Our 5-Minute guide on Chainlink will answer all your questions. There are a few main parts that we must understand before we start understanding the Chainlink project. We will begin with smart contracts.
Smart Contracts Explained
Smart contracts are predefined agreements made on the blockchain network. It automatically executes when the prespecified conditions are met. Smart contracts decide if the prespecified contracts are met or not through the evaluation of information.
Let’s dive into an example of a smart contract. Suppose, a company is trying to raise funds in Ether. They create a smart contract to oversee the crowdfunding process. The startup sets up a stipulation that if the total fund reaches 500 ETH within 30 days, the funds would be transferred to the startup. But if the total funds do not exceed 500 ETH, the funding would be returned to the donors. Such stipulations are automatically met by smart contracts without any human intervention.
The good thing about smart contracts is that they are on the blockchain. Hence, no one can interfere with it as they are immutable. Smart contracts are also easily verifiable. Hence, all involved parties can go ahead with the contract without them trusting each other. All involved parties can rest assured that the smart contract will only execute once all parameters are met.
Yet, in some instances, smart contracts require off-chain data in an on-chain format to craft agreements. Now, here’s where the problem arises. One of the most prevalent issues among smart contracts is to connect with real-world data in a language common to the source as well as the blockchain smart contract. It is one of the things that is limiting the implementation of smart contracts in various sectors. Oracles are the answer to this problem. Now, let’s discuss oracles to understand what are Oracles.
Blockchain Oracles — What are They?
Technically speaking, Oracle is a software. It is also referred to as “middleware.” Oracles act as an intermediary between the smart contract and the real-world data. It translates the real-world data and feeds into the smart contract that is on the blockchain. Then, it again goes back and repeats the process. Well, do you think that all problems are solved now? There are no issues anymore? Well, there is still one major problem.
There is one central point of weakness with the oracles. The funny thing about the problem is that it is the same issue that smart contracts are meant to solve. How would one know which of the data is providing accurate information when one of the oracles is compromised or faulty. A smart contract’s qualities such as trustworthiness and security would be of no use if the data that is fed into it is questionable.
With Chainlink, you don’t have to worry about the quality and correctness of data going in and out of the blockchain. The Chainlink team has found a way to feed correct data to the smart contracts. At the same time, their method also maintains qualities such as security, decentralization, and trustworthiness of the smart contracts. With Chainlink, Oracles cannot be a single point of failure in a smart contract.
Chainlink feeds data into a smart contract through a network of nodes. It has led to the creation of an important piece of the infrastructure powering smart contracts. If you are planning to create a smart contract then you can leverage the capabilities of Chainlink oracles. These Chainlink oracles can feed a variety of information to your smart contract. It includes information such as prices, results of events, among many others.
You can feed a variety of information to your smart contract through ChainLink oracles. All this is possible without compromising the security or decentralization aspect of the smart contracts.
Chainlink — How Does it Work?
We know that Chainlink is a decentralized oracle network. To learn how it works – We must know that the Chainlink oracle network consists of a data purchaser and a data provider. Here, Purchasers request for the data from the data providers. Once the data providers receive a request for data from the data purchasers, the providers securely return the data.
The process requires purchasers to select the data that they need. Thereafter, the data providers bid on the purchase request made by the purchaser. Here’s where the data providers will require LINK tokens. The data providers must commit LINK tokens while bidding.
If a data provider misbehaves, their staked LINK tokens could be taken away. The data providers get paid only if the whole process goes smoothly and all involved parties are happy.
The responsibility of getting correct answers on the chain lies solely on the data providers once they are selected for the job. Now, the question arises – how does Chainlink aggregate and weigh all the data? They have put in place an oracle reputation system for it.
The Way Ahead
The current CEO and the current CTO of Chainlink are the founders of the company. Their names are Sergey Nazarov and Steve Ellis. In September 2017, Chainlink conducted its first ICO. They were able to raise a total amount of $32 million.
There are over 5000 cryptocurrencies active in the market currently. Yet, very few of them are known to solve some of the real-world problems. Chainlink is one of the projects that actually solves one of the real-world problems. Don’t believe us? Check out the long list of partnerships that Chainlink has inked so far.
Many of the leading names in the crypto space are using Chainlink currently. It includes bigwigs such as Synthetix and Polkadot. Even the huge corporations from the business world are using Chainlink – Google and Swift. ChainLink has tremendous potential. With the growth of smart contracts, the number of companies using Chainlink will also rise.
From what we can see, Chainlink has a very bright future ahead. Yes, the LINK token holders are in for a very fulfilling ride ahead.