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Today we’re going to dive into one of Defi’s more underrated protocols, Chainlink.
Let’s dive in!
What is Chainlink?
ChainLink is a decentralized oracle service, a platform that aims to build a decentralized oracle network. Bridging the gap between real-world applications and smart contracts on the blockchain. ChainLink provides smart contract interconnectivity by granting access to reliable data feeds, APIs, payments, and many other resources.
ChainLink serves as a middleware between on-chain and off-chain data systems. Giving smart contracts access to off-chain resources allows them to react to real-world events and execute necessary agreements that would otherwise need external proof of performance. It can securely connect smart contracts on any blockchain to external data.
Consider ChainLink as the protocol that bridges blockchains and real-world data.
How does ChainLink work?
The ChainLink protocol relies on 2 interactive components, the on-chain, and off-chain components.
On-chain
This is comprised of oracle contracts deployed on the Ethereum Mainnet, these smart contracts monitor and process users’ data requests. When a request comes in for off-chain data, the request is transferred to the ChainLink network where it is processed into a native blockchain contract. These contracts will match the request with a suitable oracle service.
Contracts on the ChainLink network can be broken down into 3 parts:
The Reputation Contract: records oracle-service-provider performance metrics
The Order-matching Contract: logs the user’s proposal on the network and collects bids from oracle providers. Selects them according to reputation contract analysis
The Aggregating Contract: collects oracle providers’ responses and computes the final collective answer to the original query.
The on-chain components follow a 3 step process:
Select an oracle
Report the data
Aggregate the results
As an added incentive for fair and reliable service, users can charge the oracles a penalty for false/misleading information.
Off-chain
The second half of ChainLink’s architecture relies on off-chain oracle nodes that connect to the Ethereum Mainnet.
These nodes are responsible for harvesting responses to external requests. Individual responses are summed up through several consensus mechanisms and turned into a single, reliable, global response and converted into a smart contract.
This data is processed via the ChainLink Core. A device that translates off-chain data and relays it to an on-chain oracle. They also allow the integration of external adapters written by developers to perform various subtasks, making data collection that much more productive.
Off-chain nodes are compensated via $LINK, the native token of the ChainLink protocol.
ChainLink addresses source and oracle distribution. Source distribution allows oracles to draw their data from multiple sources, oracle distribution sends requests made on the ChainLink network to several oracles.
The protocol measures data against other oracles. If one begins to push false data, it is immediately punished by the network and in turn, damages their reputation (as well as other penalties). This system keeps oracles honest and accurate.
$LINK Token Utility
$LINK in the native token of the ChainLink network. It is used to compensate node operators for the retrieval of data from external sources. Prices are set by the node operator based on the demand for the data they can provide as well as the current market for said data.
Node operators also use $LINK to stake in the network. ChainLink’s Reputation Contract considers the size of a node’s $LINK stake when matching nodes with data requests. Nodes with more $LINK at stake are more likely to be chosen to fulfill requests, and more likely to earn $LINK tokens.
ChainLink serves as the Bifrost for Defi and real-world applications. Bridging the gap between on-chain and off-chain data sources and decentralizing the distribution of reliable, trustworthy data. The power behind ChainLink can be applied to smart contracts across various sectors, in finance, real estate, insurance, etc. With everything the protocol has to offer, it has become more and more evident that blockchain technology is ready to disrupt industry standards through the use of secure and reliable smart contracts.
That’s it for today’s post crypto dummies!