Step-by-Step Guide to Chainlink

Chainlink Guide


What is Chainlink?

Chainlink is a distributed program built on top of Ethereum. Chainlink displays all high-quality data for smart contracts. Smart contracts are programs programmed into a blockchain that automatically perform the functions assigned to them, eliminating them from third-parties and other cumbersome trust processes. It is also impossible to manipulate or change smart contracts afterward.

Nevertheless, smart contracts also have their limitations. The great weakness of smart contracts is that they cannot independently access the data outside of the blockchain. If a smart contract wants to access data outside of the blockchain, it needs to be connected to an oracle, the information source. If a smart contract utilizes only one centralized oracle’s information, it is directly reflected in the data’s reliability. A smart contract’s reliability is significantly compromised if the smart contract uses only one centralized oracle as a source of information.

Chainlink is a project that aims to address the challenges posed by the centralized oracles used by smart contracts. Chainlink has solved the oracle problem of smart contracts by creating a distributed pool of oracles, in each of which the oracles all strive to produce high-quality information. Smart contracts that take advantage of a decentralized pool of oracles improve their reliability.

Chainlink has developed a system whose algorithm ranks oracles according to the reliability of the oracles’ data. In a system developed by Chainlink, oracles are rewarded with Chainlink’s LINK tokens. Oracles that produce high-quality information earn LINK tokens for themselves, while oracles that produce low-quality information lose their tokens. The system developed by Chainlink encourages oracles to produce high-quality information for smart contracts.

The history of Chainlink dates back to 2014 when the non-profit organization called SmartContract Ltd was founded. SmartContract Ltd is the organization behind the Chainlink. The CEO of SmartContract Ltd is Sergey Nazarov, one of the best-known people in the cryptocurrency world. The Chainlink project was quietly developed for several years, until in 2017, it organized crowdfunding, i.e., the ICO, thereby raising $ 32 million in funding for the project.

Chainlink began operations on the Ethereum blockchain in 2019. 2019 was a solid year for Chainlink. That year, Chainlink got many significant partnerships (Google, Oracle, and Microsoft), and it was also listed in the world’s largest cryptocurrency exchanges.

The year 2020 was also convincing for Chainlink. Chainlink established itself as the world’s leading oracle solution and one of the world’s largest cryptocurrencies in terms of market value.

The purchasers and providers of data are two parties of the Chainlink network. Moreover, five types of Chainlink contracts are involved in the process, as discussed below:

Requesting contract: When a smart contract demands data, the process begins on a blockchain, and a request for information is sent out by that smart contract called a requesting contract.

Service level agreement contract: To obtain the off-chain data, the Chainlink protocol registers this request as an “event” and produces a matching smart contract, called a Service Level Agreement (SLA) contract on the blockchain.

Three sub-contracts called a Reputation contract, an Order-Matching contract, and an Aggregating contract are generated by the SLA contract.

Reputation contract: The Chainlink Reputation Contract verifies an oracle provider’s legitimacy and performance history before evaluating and discarding unreliable nodes.

Order-Matching contract: The Chainlink Order-Matching contract requests Chainlink nodes, collects their bids and gets the request fulfilled by selecting the appropriate number and kind of nodes.

Aggregating contract: The Chainlink Aggregating contract checks all of the data from the chosen oracles to get and verify the results.

The aforementioned parties need to perform the following steps to meet each other’s needs:

Creation of an SLA contract for oracle selection

A Chainlink user creates an SLA contract that specifies a specific set of data needs. This SLA contract is then used by the Chainlink software to match the user to the most appropriate oracles that can give the data. Buyers choose the data they want, and providers compete to deliver it.

When making a bid (in an Order-Matching contract), providers must commit a stake of LINK tokens, which can be taken away if they misbehave. Once providers have been chosen, they are responsible for ensuring that the correct responses are added to the chain.

Data collection and processing

The oracles interact with external data sources in this step to receive the real-world data specified in the Chainlink SLA. The oracles then process the data and provide it back to the buyers via the Chainlink service.

Aggregation and verification of results

The final stage is to add up the oracles’ data collection results and return them to an Aggregation contract. The Aggregation contract takes the data points, evaluates their validity, and returns to the customer a weighted score based on the sum of all the data received.

Chainlink aggregates and weights the data provided using an oracle reputation system, which can determine the reliability of the data sources. Data providers get paid for their honest services if everything goes according to plan.

In all of the above stages, what role does LINK play? For the services provided by node operators, smart contracts that request data pay them in LINK. Demand for data and market conditions determine the price payable to the node operators.

What is Chainlink’s economic model?

Chainlink’s economic model revolves around the use of the LINK token to pay for the operation of a wide variety of oracle services in demand by smart contract developers and Web2 systems, as well as around using LINK as a cryptoeconomic mechanism for incentivizing the correct performance of oracle services and providing user assurances.

The supply side of Chainlink economics involves launching new oracle services and continually optimizing existing ones to further the adoption of Chainlinked smart contracts and trust-minimized Web2 systems with the aim of capturing new fee opportunities. It also includes continually provisioning higher security guarantees on oracle services through staking and other security assurances to enable more advanced and higher-value smart contracts to exist.

On the demand side, users pay node operators in LINK to access oracle services. Node operators and community members will also be able to stake LINK in the future as a form of service-level guarantee around oracle node performance, providing a powerful incentive and penalty mechanism for Chainlink nodes to generate accurate and timely oracle reports. Continued Chainlink adoption incentivizes oracle nodes to compete for growing user fees from Chainlinked dApps. This competition encourages oracle nodes to strengthen their reputation and increase their LINK stake, showcasing their commitment to honest behavior and maximizing the cost of attack for malicious actors. Increased stake can also drive increased opportunities for nodes to earn user fees from Chainlinked dApps since they are viewed as having greater incentive to perform jobs in a timely and accurate manner.

Within Chainlink’s economic model, the increased availability and adoption of oracle services cultivates more fee opportunities for node operators who support the protocol. This creates a virtuous cycle in which oracle networks can sustain themselves on user fees alone by providing new trust-minimized services, increasing security guarantees, and capturing new fee opportunities from growing adoption.

Many people hold their Chainlink and other cryptocurrencies in the hopes of seeing their value rise. Your Chainlink can be safely stored in your Binance wallet or its crypto wallet app called TrustWallet.

Moreover, using the most trusted hardware wallet, you can protect your Chainlink funds. The funds can be stored using encrypted cold storage wallets that keep users’ Chainlink assets offline, offering an extra degree of protection against the ever-evolving risks that come with being online. The Ledger Nano S (independently-certified Chainlink wallet) and the Ledger Nano X can be used to protect your Chainlink assets.

You may also use Coinbase Wallet to send crypto payments and utilize Google Drive to store your keys or the MetaMask Wallet, which offers both a mobile wallet and a desktop wallet and allows you to keep your LINK assets flexibly.

Chainlink supports a verifiable random function that provides a fair and safe random number generator for smart contract applications to nonfungible tokens. Additionally, the Chainlink Cross-Chain Interoperability Protocol (CCIP) to allow users to transfer tokens and send messages across various blockchains is also offered by the protocol. For the multi-chain ecosystem, the CCIP is an open-source standard.

Moreover, Chainlink proof-of-reserve supplies smart contracts with the data needed to determine the correct collateralization of any off-chain reserves-backed on-chain asset, ensuring the DeFi ecosystem’s end-to-end transparency.

What is off-chain reporting (OCR)?

Using a secure peer-to-peer network, the OCR protocol allows nodes to combine their observations into a single report off-chain. A single node then sends a transaction to the chain containing the aggregated report, which a quorum of nodes must sign. The bulk of Chainlink Price Feeds have already implemented OCR on the mainnet.

The OCR protocol will replace the FluxAggregator model in which every node must submit their price value individually, and once all responses are received on-chain, the contract combines them to confirm the price. However, the major drawback of this model includes repetitive gas fees to be paid by each node to submit a transaction per round.

Given its services’ expanding popularity, dependability and significant lead over the competitors, Chainlink has established a stable position. Now, if you want to know if Chainlink is a good investment, the clear answer is that whether an investment is profitable depends upon your investment goals and the amount of risk that you are willing to take.

Moreover, practice makes a man perfect, and to err is human, i.e., if you are a regular investor, it is likely that you will profit from crypto investments. However, if the market plays against your will, you may lose your funds (which is a possible outcome of your actions). Therefore, before committing your hard-earned money to any of the investments, make sure you understand the project, its goals and are aware of its prospects.

Off-chain networks built on top of the oracles will be one of the most advanced elements of Chainlink’s upcoming updates. Off-chain networks are intended to move the majority of the complex computing activities away from the primary layer of the smart contract platform.

For example, due to the increased demand for computational power, Ethereum’s gas prices have been rising, threatening to make the network unworkable for smaller transactions. Chainlink 2.0 aims to help users to overcome this problem by making the computing process for DApps more affordable and straightforward.