Intro to Chainlink

Chainlink caught my attention when Coinbase announced a couple of week ago that it will be available for trading soon. Given that it is the new kid on the block on one of crypto’s most mainstream trading platforms, I was curious to learn more about what it is and what it’s aiming to accomplish.

Chainlink is a decentralized oracle network / middleware that feeds smart contracts information from off-chain outcomes (an oracle is an entity that confirms an off-chain outcome relevant to a smart contract). Chainlink seeks to become the infrastructure which developers can rely on to seamlessly pull in data required for smart contracts to execute properly. In their words:

In order to maintain a contracts overall reliability, the inputs and outputs which the contract relies on also need to be secure. Chainlinks provide a reliable connection to external data, that is provably secure end-to-end.

– Chainlink
Source: Chainlink

Launched in 2017 by a company called SmartContract, the founders set out to fix the pain point of blockchain communication with external systems. They created Chainlink as a tool to help smart contracts realize their potential of one day changing how legal agreements are created and enforced – from an analog, manual state to one that is run by censorship-resistant programming logic connected to data feeds and APIs external to blockchains.

Chainlink fulfills the oracle function in a decentralized way by multiple nodes who are incentivized to provide data in order to earn LINK (Chainlink’s native token). In practice, this is meant to be done in a machine-based way – anyone with access to a relevant data feed can bid to participate in the Service Level Agreement that the oracle service purchaser outlays, after which nodes are selected according to their reputation and ability to satisfy the data requirements. Outside data (inputs) submitted by the nodes are aggregated and compared to each other – the result that is reported as consensus is deemed the accurate input by the system. Nodes that attempt to input inaccurate information are penalized the amount of LINK that they put in escrow, or “staked” as a way to incentivize nodes to report accurately.

This is an overly simplistic explanation of how the oracles work (I’d suggest reading their whitepaper for more detail!), but it hopefully give you an idea of how this works in practice.

Below is an early example of a use case that relies on oracles and how it compares to Chainlink.

Example: Augur

Augur is a decentralized prediction market that requires oracles to settle open markets. In order for a prediction market payout to occur, an oracle has to report the relevant result to the smart contract, which will in turn pay out a reward to those who made the correct prediction. Augur oracles are randomly chosen users who stake the native cryptocurrency (REP) and are responsible for inputting accurate information about an outcome. If they are found to be feeding the system inaccurate information (as compared to how the broader pool of users reports the specific outcome), they lose the REP that they put in escrow and are thus financially incentivized to play fair.

In Augur’s case, the oracle is a human participant and their input is subject to vote that spans multiple days to assess its validity. However, the role of the oracle is the same.

Looking Forward

In June, Google announced a partnership with Chainlink where it will integrate its service within its BigQuery enterprise cloud data warehouse in order to allow for on-chain interaction with Ethereum-based smart contracts. This is a big vote of confidence for the middleware service and it will be interesting to see how the partnership develops going forward.

Overall, Chainlink is offering a very important service to allow smart contracts that rely on external information to flourish. I see it as yet another building block that paves the way for future applications.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.