Chainlink ↗ is a decentralized oracle network that provides real-world data from non-blockchain sources to smart contracts on the blockchain. To understand the challenges that the protocol is trying to solve, let us introduce two fundamental concepts: 1. smart contracts and 2. oracles. Blockchains such as Ethereum are decentralized, and highly secure networks with an immutable ledger whose entries cannot be changed. This creates a high level of trust among users. On the other hand, Ethereum also runs programs called smart contracts, with many of them relying on information from the real world such as prices or event outcomes ↗. A smart contract is a computer program running on a blockchain which is intended to automatically execute if certain pre-specified conditions are met - without the need for a third party. However, retrieving information as simple as the price of ETH typically involves trusting the source with being honest and not be compromised. In other words, this creates a single point of failure. Moreover, in order for smart contracts to work, off-chain (i.e. external) data needs to be translated into on- chain (i.e. blockchain) format. This is where oracles come into play. Oracles are a type of software called “middleware” that take off-chain data and make it usable on a blockchain. If smart contracts were to rely on just a few centralized oracles as their inputs, this would expose them to manipulation and falsification, among other things.
Here’s where Chainlink comes into play. The protocol attempts to solve the reliability issues by enabling access to real-world data and off-chain computation while maintaining the security inherent to blockchain technology. Chainlink offers a reliable, tamper-proof network based on trusted nodes, premium data, and cryptographic proofs to connect data to smart contracts. Every oracle within the Chainlink network is incentivized to provide accurate and useful data since a reputation score is assigned to each. Chainlink node operators are the backbone of the Chainlink Network, running and maintaining oracle infrastructure. For doing this, nodes are rewarded in LINK, Chainlink’s native token. Chainlink node operators must also demonstrate their commitment and meet service-level agreements (SLA) to the network by staking (i.e. depositing) LINK.
Photo by Simone Hutsch