What is Chainlink that solves the Oracle problem?

What is Chainlink that solves the Oracle problem?

Chainlink is a decentralized blockchain oracle network. It is a platform with middleware functions that connects smart contracts on the blockchain and off-chain external systems.

Chainlink is responsible for solving the blockchain oracle problem. Oracle in the blockchain refers to a third party system or service that provides external data or information to smart contracts. It has nothing to do with Oracle, a common Oracle relational database product in IT.

Normally, it is difficult for blockchains and smart contracts to refer to off-chain information, that is, information from Oracle. For example, if there is a smart contract that wants to refer to the market price of virtual currency from external information, how to guarantee the authenticity of the external data is an extremely difficult problem. This is called the blockchain oracle problem.

Chainlink can significantly extend the capabilities of smart contracts by allowing access to real-world data and off-chain calculations while ensuring the security and reliability inherent in blockchain technology. It is a blockchain oracle network that can be done.

Chainlink can take external information into the blockchain while maintaining the strong security and reliability of the blockchain. source:ChainLink HP

Chainlink’s native token “LINK”

The chain link has a native token “LINK”. LINK is a token issued in compliance with ERC-677, which is an extension of ERC-20, which is a common standard of Ethereum. ERC-677 functions as a data payload while retaining the ERC-20 standard.

LINK is primarily used to maintain the chainlink ecosystem, including rewards for maintaining the operation of chainlink nodes and means of payment to node operators that collect and provide external data referenced by smart contracts.

Acting as a data payload, LINK supplies smart contracts with the data they need from off-chain sources. Smart contracts will be able to operate according to the data provided by LINK.

Another feature of the ERC-677 token is that it can be used with Ethereum’s ERC-20 compatible wallet because it includes the ERC-20 standard. Note that LINK has the same name as the native token LINK (LN) of LINE Blockchain developed by the LINE group of messenger apps, but the chain link LINK and LINE LINK are completely different virtual currencies.

Chainlink is open source software developed by Sergey Nazarov of Smart Contract, Inc., based in San Francisco, USA. A white paper was published on September 4, 2017, and was funded by ICO.

On September 19, 2017, Smart Contract conducted an ICO with LINK tokens worth $ 32 million in hard caps. Ethereum was used in the ICO, and it was possible to participate from 1ETH at a rate of 1ETH = 2600LINK.

The total supply of LINK is 1 billion LINK, giving 35% of the total supply to ICO participants. An additional 35% will be provided as rewards for nodes to maintain the ecosystem, and the remaining 30% will be used for development and payment to staff.

How Chainlink works

The main purpose of Chainlink is to bridge two different environments, on-chain and off-chain. Chainlink provides a decentralized solution that authenticates data from Oracle followed by smart contract output data.

Initially targeted at smart contracts on Ethereum, Chainlink’s Oracle network is expanding to support off-chain and cross-chain interactions for major smart contract networks.

Prior to the advent of chainlinks, smart contracts were secured on the blockchain. Because miners use a method of consensus based on blockchain-based transaction data, smart contracts cannot connect to external resources such as data feeds and APIs.

Blockchain does not have direct access to data outside the network, so Oracle is needed. However, because Oracle is not part of the blockchain consensus algorithm, and many of Oracle are centrally managed third-party services, so-called Oracle issues arise, such as whether the data received from Oracle is reliable. ..

source:ChainLink HP

Since smart contracts are automatically executed based on certain conditions, it is essential that Oracle provides accurate and reliable information. For example, if you have a smart contract that references external asset data, the smart contract may not work properly if you don’t trust the Oracle data.

In the past, some Oracle relied on notarization to validate the data, while others relied on humans to manually enter unstructured data. However, it is difficult to provide real-time data because the former requires verification and the latter is costly and resource-intensive.

Chainlinks allow anyone with a data feed or other API to offer them directly to a smart contract in exchange for the chainlink’s LINK token. This provider is called a node operator in Chainlink.

Data providers and service providers that provide data as node operators sell API-based services directly to smart contracts and receive LINK tokens as rewards.

Chainlink network configuration

source:ChainLink Blog

A Chainlink network is a decentralized network composed of chainlink nodes. Chainlink Node identifies the problem that centralized Oracle feeds are a single point of failure and sells specific data feeds, APIs and the use of various off-chain payment features directly to smart contracts. have.

Chainlink networks consist of independent on-chain and off-chain elements that interact to provide services. The network is built for upgrades and is designed so that better technologies and technologies can be replaced as components as they emerge.

On-chain components

The on-chain components of the network are composed of three elements: “reputation contract”, “order matching contract”, and “aggregation contract”.

These three components allow you to get a more accurate picture of the data provided by aggregating the Oracle data provided by multiple sources. It is also possible to reduce the reliance on a single oracle. In addition, through a reward-driven reputation system, we provide feedback to reputation contracts to control the accuracy of Oracle.

Specifically, using these metrics, Chainlink requests information from Oracle. After the request, Oracle’s response (external data) is collected and the information is provided as a result that can be executed by the smart contract.

Off-chain components

The off-chain component of the network consists of chain link nodes connected to the Ethereum network. The chain link node acts as an Oracle node that independently collects requests for Oracle.

source:ChainLink White Paper

For example, Oracle Node, operated by the New York Stock Exchange, provides real-time and accurate transaction information to the chainlink network. There are many such off-chain Oracle nodes in the chain link node.

Chainlink constitutes a network by making Oracle nodes from various industries into one element in the network. Chainlinks ensure that the results received from the Oracle node are accurate and allow them to remain independent in relation to the data provided by the Oracle node.

Companies and individual developers who can provide APIs for data, payment, etc. can easily join the Oracle network by connecting the conventional API to the chain link network. When an API is connected to a chain link, the user becomes an Oracle node operator and is responsible for keeping the API connected to the chain link network.

An Oracle node operator who provides API information can receive a LINK token as a reward for a successful on-chain request. Chainlink uses LINK to reward Oracle for providing accurate information.

In addition, service providers such as smart contract developers need to pay LINK tokens to Oracle nodes as a fee for referencing external data from Oracle. Oracle nodes can be selected automatically or by themselves.

Chainlink fraud countermeasures

Chainlink has introduced an evaluation system that raises the evaluation score of the Oracle node that provided the correct information by the reputation contract. The evaluation targets the node uptime, average time to response, success rate of completed jobs, and so on.

The higher the rating score, the easier it is for Oracle nodes to be selected by smart contract developers, and the more LINKs are designed to be rewarded.

In addition, smart contract developers require Oracle nodes to deposit any LINK as a deposit to ensure accuracy as a condition of providing information. Oracle Node is a mechanism that cannot provide information without depositing a LINK token.

This deposit will be forfeited as a penalty if the Oracle node provides fraudulent activity, incorrect data, or goes offline before the task is completed.

With these features, Chainlink ensures the authenticity of the external data provided by Oracle Node and prevents fraud.

Chainlink use case

Chainlink offers a fully decentralized Oracle network for Bitcoin, Ethereum and Hyperledger.

Chainlink, which allows you to refer to various external data, can be linked with Web applications, bank payments, and credit card information. As a result, data in all fields such as finance, securities, insurance, and trade can be connected to smart contracts.

In fact, Chainlink will be in November 202077 use casesWas explained in detail on the blog. The field is said to cover all genres such as DeFi (decentralized finance), external payments, NFT games, insurance, supply chains, utilities, and government agencies.

For example, the pre-built “Distributed Price Feed” provides market price data for various currency pairs of major cryptocurrencies, with a large number of crypto exchanges participating as Oracle nodes. As a result, decentralized price feeds can be quickly integrated into any DeFi application, and it is possible to build apps that respond to fluctuations in the market price of cryptocurrencies in real time.

source: ChainLink Price Data Feed

Chainlink’s Oracle will play an even more important role in building smart contracts that run on financial data, especially market data such as exchange rates, interest rates, asset prices and indices.

As a specific example, the largest lending platform project, Aave, uses Chainlink’s decentralized price feed to capture market data for about 20 different cryptocurrencies supported on the platform. It realizes the chain money market protocol.

With reference to real-time price data, the Aave protocol can calculate the valuation of each user’s collateral and liabilities to determine when clearing should begin. This ensures that the Aave protocol is always well secured and protects the value of the user’s deposit.

Asset management automation

Smart contracts can automate asset management by presetting transaction strategies. But for transactions to be consistently profitable, you need reliable real-time data from Oracle.

One example is Gelato, a transaction automation protocol for Ethereum developers. Gelato uses Ethereum’s GAS (Transaction Fee) Price Oracle by Chainlink to provide real-time access to fluctuating GAS prices. This allows the user to specify GAS price terms for a particular transaction or to stop executing an automated trading strategy if the GAS price soars.

External data is connected to the Chainlink network and brought into each DeFi protocol as an on-chain price feed. source:ChainLink Blog

Circuit breaker

Traditional stock markets have a “circuit breaker” feature that temporarily suspends trading by recording a historic plunge in stock prices. However, despite the high volatility of the cryptocurrency market, there are often no circuit breaker-like features.

Digitex Futures, a cryptocurrency futures trading platform, monitors the gap between internal price feeds and chainlink’s decentralized price feeds and protects users by activating circuit breakers.

Chainlink’s Oracle allowed us to implement circuit breaker functionality, allowing Digitex Futures to temporarily suspend trading and clearing. This mechanism will be adopted by many DEX and other DeFi protocols in the future.

Game and randomness

The Chainlink VRF provided by Chainlink can be connected to a fair and secure random number generator (RNG) by using a verifiable random function (VRF). It enables the development of smart contracts focused on blockchain games, Layer 2 protocols, and various other use cases.

Chainlink VRF is a safe and fair random number generation mechanism that can prove to the user that the randomness has not been tampered with. Fair randomness brings credibility to the rarity of items, guarantees the rarity of tokenized items (NFTs), like the virtual metaverse, and allows them to be used between different games. is.

For example, the probability of item appearance, which is a problem in the gacha system of existing games, is guaranteed to be fair and transparent randomness by Chainlink VRF. In other words, tampering by management becomes impossible. In the future, smart contracts will make it possible to realize things that require fairness, such as casino games and lottery tickets.

The future of Chainlink

In April 2021, Chainlink published a white paper describing new features of the Chainlink network, including off-chain calculations, staking, and privacy protection.Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle NetworksWas released.

Chainlink will continue to provide developers with the tools they need to connect to real-world data and events as a framework for building distributed Oracle networks. Also, the use cases mentioned above are just a few of the examples featured on the official blog.

If you look at the other use cases on the official blog, you’ll see the immeasurable potential for chainlinks. By solving the Oracle problem, the connection between smart contracts and actual external data may open up infinite possibilities.

It is no exaggeration to say that the success of blockchain and cryptocurrencies depends on the solution of the Oracle problem, that is, the rise of chainlinks.

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