Blockchain oracles. Chainlink – what is it, and how does it work?

Blockchain oracles. Chainlink – what is it, and how does it work?

Although most blockchains have native cryptocurrencies used to transfer value, some also enable so-called smart contracts. Applications in their field include blockchain oracles – decentralized third-party services that provide smart contracts with external information. The most popular of such oracles is Chainlink. 

Blockchain oracle – what is it?

Smart contracts – computer programs that run on the blockchain protocol are executed without the involvement of a third party and can be designed to perform almost any arrangement. In principle, the blockchains used in smart contracts only process the information on the network. However, the use of smart contracts comes with some limitations – the key one is the use of data outside the blockchain network (off-blockchain data). It is, therefore, necessary to “translate” them into the on-chain format. 

Thanks to oracles, this is now becoming possible, including the Chainlink analyzed in this article. The oracle mechanism is used to obtain accurate off-chain matching results and deliver data to the blockchain securely.

Decentralization of blockchain oracles

Blockchain oracles can operate in a centralized or decentralized form. However, the former comes with numerous risks, such as vulnerability to hacking attacks or dependence on oracle managers. To avoid this, it is recommended to use decentralized oracles (decentralize data feeds), where the processed data come from several sources, thus increasing the reliability of the information. The decision on a smart contract is taken by consensus of the nodes that constitute the network. 

Chainlink – the most popular blockchain oracle

Chainlink is nothing more than a decentralized oracle network built on Ethereum – collecting and delivering data from off-chain external sources to on-chain smart contracts via the oracles just mentioned. As a blockchain-based platform, Chainlink is designed to create decentralized oracle networks. Their goal is to connect smart contracts with secure sources of external input and output from the real world.

Chainlink, like cryptocurrencies, is a fully decentralized blockchain. This means that no central authority can control its operation. In addition, isolation from external systems makes the blockchain immune to double spending and network downtime. However, working securely with external chains requires an additional infrastructure, which is oracles that connect the two environments.

Linked to Chainlink is a virtual coin labelled LINK – its price has risen significantly in recent months, to which it owes its status as one of the more popular altcoins (cryptocurrencies alternative to Bitcoin). Above all, however, Chainlink is a token designed to provide smart contracts with accurate and secure data. This is dictated by the fact that the data provided by oracles to blockchains directly determine the performance of smart contracts. They, therefore, play a key role in their correct execution.

How does Chainlink work?

Chainlink, a decentralized network that collects and provides external data when a smart contract is entered into and the data needed for it, sends a contract requesting the data. This request takes the form of an event for which an on-chain smart contract is created, referred to as a Chainlink Service Level Agreement or SLA, to collect data from the off-chain network. 

The contract created to deliver off-chain information to the on-chain network has three elements:

  • Chainlink Reputation Contract – a sub-contract that verifies the authenticity of a node,
  • Chainlink Order-Matching Contract – a sub-contract that delivers queries to the nodes,
  • Chainlink Aggregating Contract – a sub-contract collecting data gathered and selected by oracles to produce the final result.

What is the application of Chainlink?

As we mentioned a moment ago, Chainlink was created with smart contracts in mind. These, in turn, are predefined contracts developed on the blockchain that analyze the terms before automatic execution. So-called smart contracts are both verifiable and immutable, which will give them a high level of trust between the parties. 

To ensure maximum functionality of smart contracts, they use oracles that are gaining in importance, including Chainlink. It works by mediating and translating external data into a form entirely understandable by on-chain smart contracts. The primary use of oracles such as Chainlink is to increase trust towards DeFi projects, which play an increasingly important role in the blockchain world and the financial sector.

Decentralizing data as a way to secure contracts 

Chainlink’s data feeds are powered by networks of independent and distributed node operators, giving them extreme reliability. At the same time, high-quality data sources avoid various types of manipulation and failures that could expose smart contract holders to losses. An additional advantage is total transparency – verifiable and immutable data in the chain ensures that users can audit any data stream in real-time.


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