What is Chainlink?

Chainlink (LINK) is a well-known decentralized oracle project that runs on the Ethereum blockchain, and has become the main interconnection pillar between the real world, DApps and the DeFi ecosystem on this blockchain. You may buy Chainlink o buying bitcoins on Bit2Me quickly, easily and safely.

Uno of the projects that have had the greatest relevance in the ecosystem of decentralized finance (DeFi) It is Chainlink (LINK) and not precisely because it is a lending protocol, yield farming o liquidity mining, but rather for providing a service that is vital for these and other platforms: a decentralized, secure and reliable oracle.

Of the blockchain oracles We have already spoken before at Bit2Me Academy. These are one of the tools that blockchain technology uses to interact with the physical world. That is, they are a means that allows real world information to be brought to the blockchain, and that in this way, smart contracts or smart contracts can execute actions according to this information. A bridge between the decentralized world of blockchain and the traditional one.

In this sense, Chainlink is precisely that, a huge network of decentralized oracles that runs with the help of the network Ethereum (ETH) or with a ERC-20 token that allows creating a self-sustaining, secure and above all decentralized operating infrastructure.

Chainlink, the origin

The history of the Chainlink decentralized oracle network dates back to September 2014 when Steve Ellis, Ari Juels and Sergey Nazarov started their SmartContract.com project. The idea that had brought these researchers together was to create a series of decentralized infrastructures capable of creating communication bridges between real-world events and public blockchains.

The work paid off three years later, in September 2017 when these researchers released the Chainlink whitepaper. It describes a decentralized oracle protocol that would run on top of the Ethereum blockchain.

Chainlink quickly drew the attention of investors who in the ICO boom injected 32 million dollars to finance the project. All this despite the fact that Chainlink was only an idea on paper and in the minds of its developers.

Contrary to many ICOs, the task force behind Chainlink quickly began to show progress on their idea. The first Chainlink tests cleared up doubts about this protocol, and by June 1, 2019, the Chainlink mainnet was successfully launched. With this, one of the main pillars in the operation of today's decentralized finance protocols (DeFi) was forged.

But how can Chainlink bring real world data to smart contracts on the blockchain?

Chainlink protocol operation

Chainlink owes its operation to a network of nodes called Chainlink Node (CN). The objective of these Chainlink Nodes is to execute a program capable of monitoring the data from an event in the real world and feeding this data to the smarts contracts that are working on the Ethereum network.

However, this leaves us a doubt: how are we sure that the data provided by the nodes is correct? To get around this, Chainlink gets the information from many different nodes randomly. After that, consensus is generated among the answers obtained, taking as valid the answer indicated by the majority of them. As a protection measure for manipulated data, Chainlink uses game theory as well as incentives/disincentives to prevent bad practices or malicious data manipulation.

The incentive for node operators is to give correct answers in exchange for a small financial compensation. The more accurate the information, the better the financial compensation, thus creating an environment in which the accuracy of data is rewarded. On the contrary, the manipulation of data from the nodes carries the opposite, assuming a kind of fine and the degradation in the trust of said node.

Chainlink smart contracts

This last characteristic of Chainlink's operation makes it very clear that its operation is sectioned. In other words, there are several elements in the network that are in charge of ensuring at all times that the information is correct and that each node will be analyzed in a fair and transparent way. For this, each task is executed by a series of smart contracts that we will describe below:

1. First, a reputation contract, which assigns a reputation to each node within the network taking into account the quality of information it offers.
2. Second, an order matching contract, which accumulates information on the nodes, the services that request information, the type of information requested, query parameters and the data sources to be analyzed.
3. And finally, an aggregation contract, which is in charge of collecting all the responses from the nodes, analyzing the data and offering the final answer to the requestor for said information.

This system, of course, has two models of operation.

1. First, if a client makes a request for information to Chainlink, this protocol can take the request and service it automatically using the resources that are within the network.
2. But additionally, the client can make a request for data to a custom group of nodes, from which it will obtain the response and can be verified. All this without neglecting the verification of data by the Chainlink network, thereby guaranteeing the reliability of the information received from said nodes.

In any case, the good performance of the nodes and their operators is rewarded with the LINK token, the platform's native token, which is added to the token holdings of those operators. In the end, said traders make a profit by trading said token or HODLing it.

Node operators

Of course, smart contracts on Ethereum are only part of the whole necessary to make Chainlink work. But there is another important part in the operation: the nodes and the node operators. These are known as “the backbone of the Chainlink Network”.

Chainlink node operators participate within decentralized oracle networks, allowing external data to be obtained in a secure and reliable manner. It is they who operate the oracle infrastructure so that the smart contracts on each blockchain have access to the real-world data they need to run properly.

For example, Chainlink uses a large collection of node operators to collectively power a wide range of live decentralized Oracle Price Feed networks in production, currently securing more than $ 4 billion in value for leading DeFi applications such as Synthetix, Aave, yEarn and more.

Token LINK, the economic heart of the protocol

Finally, the third important part of how Chainlink works is its token: LINK. It is an ERC-20 token, that is, it works on the Ethereum network. It is in charge of serving as an incentive for node operators to do a good job. With each node installed and request for information handled correctly, the nodes and their operators accumulate Link tokens that are delivered in compensation for their work.

In this sense, we can see the Link token in the same way that we would see the newly generated coins in each Bitcoin block, it is the payment for the work that is done. Thus, a Link token holder can go to a exchange and exchange these tokens for other tokens, cryptocurrencies or fiat. Also, as in any other cryptocurrency, you can HODL these tokens and bet on their price rise, something quite usual due to the growth that said token has had in recent months.

Why was Chainlink created?

Now that we understand a bit how Chainlink works, let's answer a very common question among those who seek to understand this protocol. Why is something like Chainlink needed? The answer is very simple: a blockchain cannot communicate directly with the real world, and this limits its functionality. Faced with this deficiency, Chainlink and other oracles seek to create a bridge that allows us to bring information from our real environment, to the blockchain world and its smart contracts, with total security.

To better understand this, let's do an example:

Suppose a synthetic token has been created in the Synthetix protocol which tracks the price of gold. The price of gold is not a price that is in real time within a blockchain, but it occurs in traditional markets that are part of our traditional world. This means that Synthetix cannot obtain this information using a direct smart contract, in fact.

Faced with this scenario, Synthetix developers turn to Chainlink, who can provide the information they need in real time, using various sources and in a completely decentralized and transparent way. In this way, Synthethix obtains the information it needs for its synthetic token, maintains the security of the protocol, and Chainlink fulfills the function for which it was created.

As you can see, this simple example gives you a very clear idea why Chainlink was created. In fact, that's what has made Chainlink one of the most widely used decentralized oracle protocols in the DeFi world.

Privacy at Chainlink

One of the main challenges for blockchain oracles is protecting the privacy of its users. The problem goes two ways. In the first place, you do not want the oracle to have a very high access to the information of the users who interact with it, along with the services with which it interacts. And, secondly, it is intended that the sessions and the information sent and received by the oracle do not allow the traceability of said data from its origin to the recipient, which would obviously allow the parties that make use of the oracle to be fully identified.

Let's take an example to see this in a simpler way. Let's suppose that a user wants to access a DApp where it is only possible to enter with a majority of age. For this capability, the DApp uses an oracle, which does a search in a database where it can obtain this data. When doing the search, the information that is in the blockchain, passes into the real world and can be associated with that person, their real identity and all their data.

Given this situation, there are two cases. First of all, verifying the age using this system will surely require you to provide a username and password (or other type of authentication) to access the information in the database. Second, the connection between the oracle and the database is over channels that you have no control over. And, third, it would be enough for those who manage that database to analyze the search request traffic and its origin (the oracle), to find out what these people do and why they require their services. At that point, a little more analysis can lead us to the DApp, address used by the user during the interaction, and other relevant data.

In each of these cases, the privacy of your data is at risk, and Chainlink does not escape this reality. The root of this problem is that although in blockchain everything can be pseudo-anonymous (or completely anonymous), the same does not happen outside this ecosystem. Every time you connect to the Internet, you start to leave traces of your identity, or of elements that can lead the authorities (or whoever is interested) to your data and your real person.

In fact, the problem is accepted in the same Chainlink whitepaper, where in its "Confidentiality" section they talk about this problem and a window to solve it, a job that has not yet been fully completed.

Chainlink pros and cons

Among the Chainlink pros we can mention:

1. It is a decentralized oracle with great extension capacity. The protocol can provide information on almost anything, something that is possible thanks to its extensible infrastructure.
2. The system is completely decentralized and is in fact built with security-centric operation in mind and the correctness of the data being provided.
3. The installation of the Chainlink nodes is simple to carry out, which allows the massification of the network of nodes of this network.
4. The economic model of the protocol allows anyone with a node within the network to obtain good profits by providing the services requested by those who use the protocol.
5. The system is completely free software and can be verified in all its instances of operation.

On the other hand, among its negative points we can highlight:

1. If privacy is your goal when using an oracle, Chainlink is not your option. In fact, no decentralized oracle protocol would fulfill this functionality.
2. Despite the fact that the system encourages the good behavior of the nodes of the network, it is possible that a malicious actor can perform a Sybil attack to the network, introducing false data and manipulating the information provided by the network, affecting those who request information manipulated by said actor. Although this is an unlikely scenario, the problem exists and therefore solutions are sought to help eliminate the problem completely.

Links of interest