Blockchain networks are a powerful technology that have opened the door to a wide range of excellent use cases. The cryptocurrency industry as we know it simply wouldn’t exist today without them. However, blockchains have their flaws — one of the biggest of which is that they cannot communicate and collaborate with the outside world by default.
This is a problem that must be solved if we want a world in which cryptocurrencies and other digital assets are a viable form of payment across the entire internet. One project hoping to help eliminate the issue is Chainlink, an oracle network that allows smart contracts to communicate with real-world data and services outside of the blockchain ecosystem in which they are hosted.
In this AAG Academy guide, we’ll look at Chainlink in more detail, explain its purpose, and find out more about its architecture. We’ll also cover some of Chainlink’s benefits and weaknesses, and answer some of the most common questions about this technology.
Founded in 2017, Chainlink is a solution for bridging the gap between on-chain and off-chain data. It is blockchain-based, like the smart contracts it was built to serve, but it has the ability to communicate with sources that exist outside of the blockchain. As a result, it has enabled the creation of a whole new category of decentralized applications (DApps).
Unlike most DApps, those that take advantage of Chainlink can communicate with a wide range of products and services that were previously out of reach of the blockchain, such as traditional financial and insurance services, games, internet of things (IoT) automation devices, and lots more. This has helped Chainlink become incredibly popular since its launch.
Chainlink has its own native cryptocurrency called LINK, which pays network operators and acts as collateral for its smart contract agreements. As of January 2023, the project is worth more than $3.5 billion.
As we touched upon earlier, Chainlink is a blockchain oracle network, which is what makes it different from traditional blockchain networks. Blockchain oracles are essentially middlemen or “middleware” that allow on-chain smart contracts to access data from off-chain sources. They cannot fetch data from those sources directly, so an oracle fetches it for them and feeds it back.
Chainlink is made up of around 1,000 oracles today, each of which provides a distinct service that is optimized for a particular application. For instance, one oracle may feed weather data to a certain DApp, while another may feed sports data to another DApp. Enterprises that use Chainlink can interact with any major blockchain, including Ethereum and Solana.
Chainlink oracle networks are decentralized and powered by node operators that watch the blockchain for incoming data requests, fetch the requested off-chain data from specific APIs, and then deliver it to on-chain smart contracts. This may require just one node, but if necessary, it’s possible to combine multiple nodes and aggregate data from any number of sources.
This makes the Chainlink network infinitely scalable, so no matter how demanding or expansive an application may be, Chainlink has the ability to serve it.
As we touched on at the beginning of this guide, blockchain technology is incredibly powerful on its own, but it has its limitations. Its inability to interact with off-chain data by default makes it unsuitable for all kinds of things that we expect from a modern internet. With that being the case, solutions like Chainlink are essential for blockchain technology to continue evolving.
And that must happen if Web3 is truly going to become the next generation of the internet. Chainlink’s primary purpose or goal is to bridge the gap between blockchain technology and the outside, off-chain world. This paves the way for a much more powerful and more capable generation of DApps and smart contracts that can function like traditional web-based apps.
We’ve covered the basics of the Chainlink architecture above, but let’s look at how it all works in more detail. One of the most important aspects of Chainlink is the ChainlinkClient, a parent contract that allows on-chain smart contracts to consume data fetched by oracles. The client constructs and makes the requests before a fee, paid in LINK, is collected.
The request is then sent to an oracle contract, owned by oracle node operators that run alongside off-chain nodes. The request is given an oracle address, a job ID that tells the node which tasks to perform, and a callback function. It is then sent for fulfillment to an off-chain node, which fetches the requested data. This is typically done by making a request to an API.
Once the requested information has been collected, the off-chain node converts it into blockchain-compatible data. The cycle that we’ve just described then gets reversed: the off-chain node passes the data back to the oracle node, which then passes the data back to the ChainlinkClient, which then makes the data available to the on-chain smart contract.
This process is known as the Basic Request Model, and it is what’s used to serve simpler smart contracts that don’t require a lot of data, or specialized applications that need specific data. However, Chainlink also offers a Decentralized Data Model, which is essentially an aggregated database of a wide range of information that on-chain smart contracts can pull from.
The Decentralized Data Model uses Data Feeds that are constantly collecting common information, such as market prices, and entering into the aggregated database. Smart contracts can then grab this data from the database whenever it is required, rather than having to make a new request to a dedicated client every time, which would be inefficient and pricey.
The biggest benefit of Chainlink is its ability to link on-chain smart contracts with off-chain data. This fixes one of the most glaring limitations that modern blockchains have and takes us one step closer to a truly next-generation Web3 internet. Without a service like Chainlink, a wide range of DApps and smart contracts that rely on real-world data would not be possible.
It should be noted, however, that Chainlink has its own weaknesses, too. Its capabilities are still somewhat limited because it is such a new technology, so there are many things Chainlink cannot do, and its oracle network of around 1,000 nodes is still relatively small when compared to a blockchain like Ethereum, which has more than half a million.
In addition, there are security concerns that Chainlink users should be aware of. Because it is fetching data from the outside world, there is a risk that oracle nodes could be hacked to feed malicious data into smart contracts that jeopardize their functionality.
Chainlink has become so popular because it provides a relatively simple solution for bridging the gap between on-chain smart contracts and off-chain data. This allows for a whole new generation of DApps that can take advantage of real-world information.
No, the company Oracle has no affiliation with Chainlink.
Chainlink 2.0 is the future of Chainlink and it is focused on advancing oracle technology in seven key areas, including hybrid smart contracts, scaling, confidentiality, and security.
You can buy Chainlink (LINK) from a wide range of centralized and decentralized cryptocurrency exchanges, including Binance, Coinbase, Crypto.com, and Kraken.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
Be the first to get our newsletter full of company, product updates as well as market news.