Cryptocurrency

Understanding Chainlink and how it works

chainlink cryptoshimbun

The same way people have different languages, computers and networks also have their own way of communicating. These programming languages are native to networks, and while they make things work through code, they also limit their capabilities to only within their own systems.

To make networks with different languages understand and work with each other, they need translators. Chainlink provides this service using blockchain technology, allowing seamless interoperability between different networks. Find out how Chainlink solves this long-time problem through smart contracts when you continue reading here at BTC Post.

What is Chainlink?

Chainlink is a decentralized network of oracles that connects real-world data to on-chain smart contracts. It translates off-chain data to a language the blockchain can understand to create smart contracts. To do this, Chainlink uses oracles that act as the intermediaries or translators between data written in different languages.

Today, a smart contract is limited to information written in an on-chain format, meaning it cannot understand information from outside of the blockchain such as real-world events. Chainlink solves this problem by acting as the bridge between blockchains and other programming languages.

To better understand how the Chainlink network works, you need to learn some of its key concepts first such as smart contracts and oracles.

Smart contracts

Smart contracts are contracts written on the blockchain that self-executes when predetermined conditions are met and cannot be altered once uploaded.

These contracts work through an if/then framework. If certain conditions are met, then the agreed results will take place. To better illustrate how this work, here’s an example:

A crowdfunding campaign created a smart contract that says if 100 ETH are deposited into its address, the fundraisers will receive all the donated tokens. However, if the required number of tokens is not met, and say, only 99 ETH are deposited, then all the tokens will be returned to the donors.

The if/then framework of the example above goes like this:

  • If the campaign reaches 100 ETH, then fundraisers will receive the tokens.
  • If the campaign does not reach 100 ETH, then donors will receive their tokens back.

This gives donors insurance that if the campaign does not go as planned, their money will not go to waste and will be returned to them immediately. All these processes work without the need for an intermediary, making exchanges seamless and tamper-proof.

Oracles

Now how does Chainlink fit into this scenario? As established, smart contracts require data written in an on-chain format to work. If you’re using real-world information that is different from on-chain data to construct a smart contract, you would need third party applications to translate the information you need. Tedious and time-consuming, this process takes up a lot of resources, manpower and money.

Chainlink solves this problem through oracles, which are networks that connect off-chain sources to the blockchain. Oracles record information on decentralized nodes instead of keeping all data on a centralized server. This is to ensure data security and eliminate a single point of failure. Before off-chain data can be included in an on-chain smart contract, they are verified by all nodes in the network and recorded on a public ledger. Once data is recorded on the blockchain, they cannot be altered, making them immutable and verifiable.

By making oracles decentralized, Chainlink ensures that data cannot be tampered with before they are processed in a smart contract. In exchange for maintaining the security of oracle networks, validating node operators are incentivized with Chainlink’s native token, LINK.

How the linking process works

In a nutshell, Chainlink collects data from real-world sources to make smart contracts work, and translates it to a language the blockchain can understand. Chainlink makes this possible by creating smart contracts that select oracle nodes, choose real-world data sources and verify gathered information before translating the data through the Chainlink core software.

The process begins when a client creates a Requesting Contract that puts out a request for information. Afterwards, the Chainlink protocol creates a Service Level Agreement (SLA) Contract that further generates the following three sub-contracts:

  • Reputation Contract
  • Order-Matching Contract
  • Aggregating Contract.

The Reputation Contract checks the performance of all oracle nodes that will process the contract to ensure its authenticity. If a node has a history of misperformance and is deemed unreliable, it will be discarded and another node will be evaluated. This ensures that only top-notch nodes will remain on the network.

Once the oracle nodes are evaluated, the Order-Matching Contract considers their bids on request and chooses which node/s will process the request. Afterwards, the Aggregating Contract takes all the information from the oracle nodes and validates it to come up with a single, accurate result.

This is how the data collection and translation process works:

The Chainlink core software then translates the on-chain data from the Requesting Contract to a programming language that off-chain data sources can understand. Afterwards, an external application programming interface or API collects data from the real-world source. Once the needed data is collected, it goes back through the Chainlink core for translation then grouped into the Aggregating Contract.

LINK tokens

Where do LINK tokens fit in all these processes? As with other native tokens like ETH, LINK is used to incentivize node operators. Clients who request contracts pay node operators their set price using LINK. Operators set their price based on the data and work requested.

Additionally, node operators need to stake LINK in the network before they can validate data. The staked tokens will hold them accountable for any misdeeds such as foul behaviour and miscalculations. In such cases, their tokens will be confiscated.

Where to buy and store LINK?

If you’re interested in investing in the Chainlink project, you can do so by purchasing LINK on trusted exchange sites such as Coinbase, Binance and Huobi. Additionally, LINK is built on the Ethereum network so you can store them in any wallet compatible with ETH.

Linking the world to a better future

Chainlink aims to be the bridge between different online infrastructures and networks in today’s ever-growing society. Through Chainlink’s blockchain technology and decentralized services, the future can see a more advanced world where language barriers are no longer a problem.

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