Blockchains 101: Chainlink

3 min readDec 19, 2020

The Trendy Oracle

Introduction

Chainlink (Ticker: LINK) is the ERC20 token powering the Chainlink’s Decentralized Oracle Network, built on top of the Ethereum blockchain and aiming to connect smart contracts with data from the real world.

Chainlink did an ICO in September 2017, raising $32 million and launched its mainnet in March 2019. Chainlink was developed by Sergey Nazarov, with Steve Ellis as co-founder.

Problem

One major challenge of decentralized networks operating decentralized applications is to guarantee that the external data feed provided to their smart contracts cannot be compromised by bad actors (man in the middle attack).

It is particularly critical since smart contracts often execute functions / actions based on this external data. (Ex: If BTC price > $20k, then …)

Corrupted or compromised data can lead to significant financial losses for the blockchain clients.

Solution: Oracles

Since blockchains cannot access trustless data directly from outside their network, Oracles bridge this trust gap by acting as a trusted third party between the blockchain client and the data.

Data provided by Oracles often lead to financial transactions (DEX, Lend/borrow & smart contracts…). Thus, Oracles aim at providing trust over data to keep blockchain’s applications operating decentralized and trustless.

Chainlink

A middleware connected to a staking smart contract and deployed between the Ethereum blockchain and external data sources incentivizes token holders to build an intermediary network of validators (Node operators), making it a decentralized and trustless third party.

This intermediary network allows to manage, process and verify the accuracy and integrity of the external data flow, before feeding it to on-chain decentralized applications and smart contracts.

It also let developers build and run data-connected smart contracts directly from the Link (nodes) network.

ChainLink price action up to date (TradingBull mobile app)

LINK token

The LINK token is used to reward node operators for aggregating, verifying and distributing data to smart contracts clients based on a reputation and incentive / punishment system.

In the case of a malicious Node providing wrong or inaccurate data, the algorithm will punish it by making it pay a penalty to the client from the staked LINK tokens kept within the nodes as collateral.

Additionally, Nodes can also loose reputation making them less attractive for blockchain clients, thus generating fewer rewards from staking.

The blockchain applications (clients of the oracles) pay a fee to the Node operators for the service of receiving trusted data.

Link is an ERC20 token with an additional ERC223 ‘transfer and call’ functionality (allowing tokens to be processed within a single transaction in an aggregated smart contract, limiting transaction fees).

Competition

There are other Oracles under development and built on similar principles, with the more relevant ones being Band, Tellor and DIA.

Komodo Network (KMD) includes an integrated Oracle structure through its Antara framework, directly on-chain (instead of being a third party) and used to power its cross chain decentralized Exchange AtomicDEX.