INTRODUCTION
When you open the Chainlink home page, you are greeted with the following welcome: "connect your smart contract to the outside world. Chainlink's decentralized oracle network provides reliable, tamper-proof inputs and outputs for complex smart contracts on any blockchain." [Chainlink. "CHAINLINK". (Accessed July 28, 2021). In this subsection of the Chainlink Coin Guide, let's try and make some sense out of Chainlink's stated purpose and look at that which Chainlink does.
HOW DOES CHAINLINK (LINK) WORK?
What happens when a smart contract requires a concept or information from the outside world which is absent from the contract itself on the blockchain. This problem is one that is widely known as the 'Oracle Problem' and much has been written on this subject. Chainlink's goal is to solve the problem by providing a vehicle to connect smart contracts to the outside world's data pools. They accomplish this by allowing smart contracts to have sight of all important and relevant information necessary to complete the contract in a trustless manner. In essence, Chainlink's goal is to provide a gateway for smart contracts to interact with real world data.
[Nagoda, K. "What is Purpose Behind CHAINLINK (LINK)". (Accessed July 28, 2021)]
So, why is there no simple solution available to solve this 'Oracle Problem'? The answer lies in solving the dilemma with respect to making the oracle completely trustless, without sacrificing decentralization or security.
To start with, let's say you build a very simple oracle to be connected to a smart contract which requires data from the outside world, and then that oracle fails. What happens to your smart contract with this failure? When the oracle fails, the smart contract likewise fails. This is not all, however, as other problems with a simple oracle include:
- the oracle might be broadcasting false data;
- the oracle created might work only with your smart contract thereby providing no solution system wide;
- your own reputation may not be sufficient for the satisfaction of auditors to certify the oracle; and,
- if you are running your own oracle, the incentive is present for you to give erroneous data to smart contracts resulting in greater profits for you.
Chainlink has developed a system whereby these problems are solved in a decentralized manner without sacrificing trust or security. Chainlink has approached these problems in the following five ways:
- anyone can take part in the network and run their own oracles (decentralization of oracles);
- smart contract based data aggregation is performed on-chain;
- provision for support of any source of data - public, subscription based or private;
- giving the end user an idea of the quality of the oracles used (reputation verification); and,
- imposition of a penalty/collateral system (LINK tokens are issued as collateral for a Chainlink oracle to accept a request and if the oracle provides bad or false data the tokens are forfeited thereby sullying the oracles reputation).
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By providing these solutions, Chainlink provides the Blockchain smart contract system the following beneficial results:
- a smart contract will always function because if one oracle fails Chainlink will automatically supply different oracles;
- multiple oracles are utilized to result in a consensus correct on-chain answer;
- every oracle has an on-chain reputation which may be verified by auditors;
- by the penalty/collateral system in place, oracles have both the reputational and financial incentive to provide true and accurate data; and,
- most importantly, Chainlink has provided an unlimited practicality of use in that any connection for which it has developer support, Chainlink oracles can be used for any practical application in any smart contract.
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CONCLUSION
There are a ton of articles available on the internet concerning Chainlink, but the majority of them are highly involved and extremely technical in nature. The information provided herein is intended to be as simplistic as possible with the design to give the potential investor an understanding of the inner workings of Chainlink. The goal herein is to provide sufficient details so that an informed investment decision can be made. But as always, before making any investment decision, do your own research diligently. And remember, please do not invest more funds than you can afford to lose.