Chainlink is a decentralised oracle network that connects real-world data to on-chain smart contracts.
STOP – Yeah that doesn’t make a lot of sense and doesn’t help anyone…
Let’s break it all down strip back and then build it back up again. Tip – If you need to refer back to any words during this article open up our A-Z guide to crypto for reference.
DISCLAIMER understanding chainlink will turn you into a chainlink maximalist and cause you to bore people at parties, telling them about how it’s going to change the way the world works… SECOND DISCLAIMER: they won’t care they just want to get back to the party.
“Who was your weird friend who was showing me frog memes last night?”
Right back to it – To understand chainlink, you first need to understand smart contracts.
Smart contracts are, as Sergey Nazarov the founder of Chainlink describes them, “tamper-proof digital agreements beyond the control of any single party”. Smart contracts are revolutionising the way the businesses works and interact with one another. They remove any ability for personal gain once bound by a contract.
An easy example that can be used is flight delay insurance. The smart contract could say if your flight is delayed by 2 hours, then you will be subject to a partial 50% refund and if it is delayed for 3 hours then you will receive a full refund.
Situation 1 – without a smart contract. The flight is delayed for 3 hours and 1 minute. The airline states that the delay was from their own centralised records, 2 hours 59 minutes. This means you will receive a 50% refund… Have a nice holiday. Lots of love, Airline from hell x
This is effectively you against them and you have to challenge their decision which is the last thing anyone needs.
Situation 2 – Smart contract for travel delays – Funds are immediately released in full as the actual delay was 3 hours 1 minute and within the smart contract code this fulfils the requirements for a 100% refund. No ifs, no buts… This works in the favour of the holidaymaker and the airline, a purely trustless system.
So, where does the smart contract get the correct time information from? What if it only gets the time from one source and that is direct from the airline and that just so happens to be 2 hours 59 minutes?
The contract is only as good as the information it receives.
The smart contracts are built on the blockchain which makes it decentralised and free from manipulation. For more information on the blockchain read our article HERE.
To get the timing information from the real world and on to the blockchain so the smart contract can make a decision, is particularly difficult. This is the oracle problem.
To make smart contracts useful we need to bridge real-world info to the blockchain.
So how does chainlink determine whether the information it receives is good? What if it only receives information from one place? i.e. the airline directly? The airline would have an incentive to supply misinformation based on the best outcome for itself.
This is the beauty of the decentralisation of the chainlink network. Computers (nodes) that run the chainlink code are scattered around the world and can be set up by anyone who wants to join.
These nodes search for new requests to connect the blockchain to real-world information. Let’s stay with the airline delay insurance analogy… A smart contract built on the blockchain is requesting flight delay data to check for a recent claim. Lots of individual chainlink nodes, making up the oracle network, connect to multiple real-world information sources that can indicate how long the flight was delayed. Connecting to multiple sources of flight delay info and each individual node confirming that each other’s information is correct, removes any single point of failure or potential room for error/corruption. Collecting information from multiple sources in this way is called data aggregation.
Each node is incentivised to supply the best information possible. There are a few ways chainlink ensures this.
1. Each node receives payments in LINK to verify and supply the information to the smart contract. Prices from nodes can be set based on past completed jobs and a publically available reputation-based system. Better info and more higher reputation = higher fees charged by the node, which is fair enough.
2. Upon connecting to the smart contract creator, a node has to place down a considerable amount of LINK as collateral (basically insurance on behalf of the node), this ensures that information supplied is correct and proper. If the information supplied is wrong and causes a loss for the smart contract creator the collateral LINK put down by the node can be transferred to the smart contract creator as a reimbursement.
Back to the analogy… the oracles in the chainlink network connect with the smart contract looking for the flight delay data. They agree on a deposit of LINK as collateral, this is to be a deposit placed by the node. The best performing nodes can also request the highest payment. Following this, the oracles collect and aggregate flight delay information from multiple sources removing the vested interest from the airline company.
The oracles then translate the data in a way that it can be read by the smart contract making it useful. The aggregated information states that the flight delay time was 3 hours and 1 minute. This then executes the smart contract.
The smart contract can then connect to another real-world company that can handle the refund. The above process is effectively then done in reverse to allow the data from the smart contract that says “pay the people a 100% refund their flight was delayed greater than 3 hours” to make its way off the smart contract, through an oracle node and communicate the information to the airline company to trigger the refund through a payment provider such as SWIFT (who has a LINK partnership).
All this in a matter of minutes, no hassle, no fuss no middleman trying to ruin your holiday.
This flight delay insurance example is possibly one of the simplest and most user-friendly ways to explain Chainlink. The possibilities for linking off-chain information to the blockchain is endless. Connecting the financial sector to the blockchain, further insurance for things like crops by utilising weather data and even ensuring the correct price of stable coins on centralised exchanges are all happening use cases.
Chainlink can also enable brides between different blockchains which is going to further facilitate the DeFi explosion.
Tokenomics of Chainlink
Having a look at the tokenomics of Chainlink is really really exciting too. There is a maximum supply of 1,000,000,000 LINK, 404,009,556 of which are currently in supply. There is a huge Chainlink community online known as the Link Marines which are responsible for a lot of the natural marketing of Link. This introduced lots of new people to the token increasing the demand. This coupled with a fixed supply generates a higher price-point over time.
Link will have to be bought by smart contract creators to pay the oracles in the chainlink network for their retrieval of useable real-world information. Again, this increases demand.
Oracle nodes themselves also have to put down large sums of LINK as collateral once engaging in a smart contract request. This, as we described above, ensures the best practice from the node as any wrong or misinformation supplied can result in losing the collateral.
All this adds up to a wonderfully high demand for LINK whilst there being a fixed supply. This is the basics of supply and demand and has the potential to drive prices higher the more contracts and nodes that operate. A network effect.
Currently, LINK sits 7th in the cryptocurrency rankings with a total market cap of $9 billion.
Chainlink Partnerships –
The list of Chainlink partnerships within cryptocurrency alone is enough to reflect the current price. It’s the off-chain partnerships that are growing by the day that is really interesting. For Link to access its full potential, it is these real-world companies and datasets it needs to continue to partner with. Google Cloud, SWIFT and Intel are just 3 in a long list that continues to grow. To see that list click HERE.
Best Twitter accounts for Chainlink info –
@koroushAK – Great easy to follow technical analysis
@teddycleps – Beautiful charting and technical analysis
@ChainLinkGod – the name says it all
@SergeyNazarov – Founder of Chainlink and SmartContract
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