BUY CHAINLINK (LINK) AT BIT2ME
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) and a ERC-20 token that allows creating a self-sustaining, secure and above all decentralized operating infrastructure.
In this article we will cover the history, concepts and operation of Chainlink, why this project has become the quintessential oracle of the DeFi world, and much more.
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 within the blockchain? Well, we will see that next.
Chainlink protocol operation
Chainlink owes its operation to a network of nodes called Chainlink Nodes (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 can we be sure that the data provided by the nodes is correct? To solve this, Chainlink obtains the information from many different nodes at random. After that, consensus is generated between the answers obtained, taking as valid the answer indicated by most of them. As a protection measure for manipulated data, Chainlink uses game theory, as well as incentives / disincentives to avoid malpractices or malicious manipulation of data.
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:
- First, a reputation contract, which assigns a reputation to each node within the network taking into account the quality of information it offers.
- 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.
- 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.
- 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.
- 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.
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.