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A Guide: ChainLink (LINK)

There are a ton of cryptocurrencies circulating the markets nowadays, and it’s hard to keep tabs on each and how they solve unique problems. Many people are familiar with the Ethereum blockchain network and how it uses smart contracts to bring legal agreements to the reliability and decentralized nature of the blockchain.

However, there are still issues that exist with smart contracts and external systems communicating and seamlessly working together. The developers behind ChainLink envision the platform as a blockchain middleware that connects smart contracts across blockchains through external data sources like web APIs or traditional bank payments. ChainLink is bridging the gap between smart contracts and real-world application.

What are smart contracts?

A traditional standard contract detailed the agreement terms and is a legally enforceable relationship. Smart contracts are agreements between multiple parties that are executed using the blockchain. The contract is only run once a specified set of conditions are met - i.e., payment is released when delivery of goods or services is made.

And furthermore, once executed, no party can alter the data because it’s stored on the distributed blockchain ledger. This creates a binding agreement between all parties involved, all through the blockchain.

However, this system has a few obstacles under the current framework and structure. Because it takes the network support and consensus of blockchain miners to verify and confirm the smart contract transaction data, these smart contracts aren’t able to integrate with external resources. This issue can be solved through a mechanism called an oracle, and ChainLink is building a decentralized network of oracles using the blockchain to connect smart contracts with the required external resources.

What is ChainLink?


ChainLink was launched in June 2017 by SmartContract, a San Franciso-based Fintech company. The developers refer to is as a blockchain of oracles that allow smart contracts to gain access to off-chain resources for more efficient processing and execution. The ChainLink blockchain ecosystem is supported by the LINK token and network.

Integrating the oracles into the network is the key to connecting the missing pieces. Because blockchains cannot directly access external data themselves, they must rely on oracles or external agents that identify and verify occurrences within the smart contracts. Once it finds the appropriate data, it submits the information to the blockchain to be used in executing the smart contract.

For example, if someone uses cryptocurrency to make an online retail payment, the smart contract can be created to schedule delivery of the purchased item upon receipt of funds. Once the oracle finds the transaction as cleared, it reports back to execute the smart contract and deliver the purchased item.

However, oracles are third-party services that might not be completely trustworthy sources of information. They are separate from the blockchain consensus protocol, and instead rely on notarization or manual input to verify the data. With smart contracts automatically executing upon verification of specified conditions, it’s critical that the oracle providing the external data is accurate and verified.

For example, if a stock is to be distributed once it hits a certain price per share, and the oracle relays inaccurate data, the stock might incorrectly be distributed and execute the wrong function. This could result in irreversible and costly errors, making accurate data a top priority for blockchain oracles.

ChainLink addresses this issue by creating a decentralized network of oracles to support smart contracts and their interaction with resources outside of the blockchain. An example would be data feeds that are cryptographically secure or the facilitation of interoperability between different blockchains.

Anyone in the ChainLink network can provide data feeds or APIs to support the network in exchange for LINK tokens. These participants are called Node Operators and give certain data providers a way to monetize their data and API services for LINK tokens. The LINK token supports the ChainLink ecosystem by incentivizing the Node Operators to provide critical data sources. The value of LINK tokens is tied to the number of Node Operators offering their off-chain data services to the network.

ChainLink Network

The ChainLink network can be conceptualized with two interacting parties, on-chain, and off-chain. The network has a distributed web of nodes that interact to provide data and source it directly to relevant smart contracts for effective execution.

The on-chain portion of the network takes the multitude of oracles and filters through them based on the required metrics or data by a smart contract. They use service level agreements to facilitate the dissemination of information, collecting oracle data and matching it with relevant service level agreement queries. The result is a structured ChainLink query that can be implemented into smart contracts for easy facilitation of external data.

The off-chain portion of the network is made up of the various oracle nodes connected within Ethereum’s network and independently collect data related to off-chain requests. An example of an off-chain node might be the New York Stock Exchange providing real-time share price information for publicly traded stocks, or Bank of America could help settle transactions by relaying transactional data from consumer and merchant.

The ChainLink blockchain is looking to synergize those efforts of partnering the on-chain and off-chain nodes into an all-in-one network. ChainLink will collect the information from all off-chain nodes and determine which has relevant information for requesting smart contracts. ChainLink is the blockchain oracle middleman to collect and interpret the off-chain data properly to be effective in helping the execution and reliability of smart contracts.

ChainLink has made it easy for any data provider to join the network and provide payment, digital signature, or any other API provided data. Once the data provider gets their API setup on the ChainLink network, they become a Node Operator and need to keep the API connected. Node Operators are compensated with LINK tokens for their contributions to the network.

The network currently supports oracles that are compatible with Ethereum, Bitcoin, and Hyperledger blockchains, with more to be added in the future with the goal of providing connectivity across chains between smart contracts. Under that framework, anyone could use ChainLink to provide smart contracts with seamless access to the critical external data to execute the agreement.

Final Thoughts

ChainLink has found a unique niche in solving problems within the blockchain ecosystem. Blockchain networks like Ethereum generated a lot of reason to be excited about the opportunities associated with blockchain, like secure agreements via smart contracts. ChainLink might have the perfect way to take that concept to the next level and make smart contracts a real-world reality.

This would allow smart contract activity to closely resemble most of the financial agreement structures currently available. Under the ChainLink network, anyone can provide access to key off-chain data and receive LINK tokens. This network support follows similar lines of other blockchains supported by miners who verify the network in exchange for the network’s tokens. Node Operators provide data to support the network in exchange for the network’s tokens.

The potential application for ChainLink could continue to grow as blockchain technology is adopted by more companies and organizations, providing a secure method for smart contracts. The true test will be how many Node Operators they can harness on their platform to build the system of data reliability.

Blockchain | Blockchain technology | Chainlink | Cryptocurrency | Link | Off chain | On chain | Smart contracts

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