Chainlink (LINK): Data delivery service for smart contracts

For financial products in the insurance and healthcare sectors, for tracking and tracing supply chains, in identity management or education: smart contracts are not only playing an increasingly important role in the crypto sector. Automating processes, bypassing middlemen, reducing dependencies on trust and being managed unalterably by the blockchain: The efficiency advantages of intelligent contracts can be played out across industries. You just have to feed them enough – with data, and reliable ones at that.

As the beginning of the causal chain, false information fed into smart contracts can have serious consequences. Anyone who has ever played Whispering Mail knows that. If a smart contract receives the information that the flight from Berlin to London is canceled although it is scheduled, a smart contract-based legal protection insurance could incorrectly reimburse amounts. A simple example, but the more capital and contracting parties the smart contracts involve, the greater the damage that can occur. Chainlink was developed to solve the information problem and provide blockchains with reliable data from the “real” world. Chainlink’s approach is already playing a key role in the DeFi sector. However, due to the increased integration of smart contracts in other sectors, it is becoming increasingly important.

Action, Reaction: Smart Contracts

The concept of smart contracts was developed in the 90s by the computer scientist Nick Szabo – one of the names that is often mentioned in connection with the legendary figure Satoshi Nakamoto. The autonomous computer contracts only became really applicable in 2015 through the Ethereum blockchain. If networks like Bitcoin were limited to the execution and management of peer-to-peer transactions in a decentralized register, the project led by Vitalik Buterin with the support of decentralized applications (dApps) on a smart contract basis should not only support developments in change the crypto economy decisively.

You can think of a smart contract as a simple contract that is stored and executed on a blockchain. Why smart? Because they run independently according to defined specifications, without anyone having to press a button. At a simple level, smart contracts depict if-then relationships between two contractual partners. For example, a token exchange transaction: The contract pays person B an amount as soon as person A deposits a predetermined amount. This still works without errors, but the more complex the contract structures become, the more vulnerable they are.

In the meantime, smart contracts no longer only cover exchange or lending transactions. They are all-rounders, their area of ​​application is wherever contracts have to be concluded and data has to be exchanged securely. This poses new problems for smart contracts. Because unlike the token exchange, which is carried out in a closed and transparent blockchain network, flight cancellation insurance is dependent on external data. However, information from outside must somehow get into smart contracts and be subjected to quality control. Oracles were developed for this.

Link between off- and on-chain

Oracles are computer programs, also known as agents, which act as an interface between blockchain networks and data suppliers and ensure the secure exchange of information. This can be readings from weather stations, satellite images of airport terminals or real-time stock prices for trading synthetic assets. Oracles are integrated into smart contracts via multisignature contracts (multisig), which must be signed by all contractual partners. A distinction is made between five Oracle types.

Software oracles transmit data that is available online, such as weather data. Hardware oracles forward sensory information from the “real” world, such as data from RFID sensors. Inbound oracles, in turn, provide blockchains with external data such as real-time quotes, while outbound oracles enable transmission in the opposite direction: smart contracts send information to the “outside world”. Finally, in consensus-based oracles, multiple oracles are linked together to create a consensus about the forwarded data.

Trust is good, control is better

Oracles feed data into smart contracts, but do not initially verify them. False or manipulated data can continue to leak out. This is where Chainlink comes in. Chainlink is a decentralized oracle network of nodes that feeds smart contracts with “off-chain data”. To put it simply: Chainlink accepts orders from smart contracts, forwards them to oracles, checks their answers and forwards them back.

In detail: if a smart contract requires data, it first sends a request (requesting contract). Chainlink registers this request and in turn generates a smart contract, the Chainlink Service Level Agreement Contract (SLA). They then create three sub-contracts: a reputation contract, an order-matching contract, and an aggregation contract.

The reputation contract examines an Oracle vendor’s track record and weeds out unreliable nodes. If the requesting smart contract does not contain a node preselection, the order-matching contract transmits the request to the nodes, takes their price offers, and then selects the right number and type of nodes to fulfill the request. The aggregation contract takes all data from the selected oracles, validates it and reconciles it with each other. The majority principle helps here. If, out of five nodes, three provide the same answer, but two nodes provide a different response, the aggregating contract excludes the two.

Another protective shield: the LINK token. Nodes are not only paid for their work with LINK. You must also deposit the tokens as collateral. The Chainlink reputation contract takes into account the amount of LINK deposits and gives preference to nodes with a higher LINK deposit when making requests. In addition, Chainlink punishes faulty or dishonest nodes with deductions. The cryptocurrency LINK ensures a functioning information network with carrot and stick.

Chainlink: The Giant Awakens

Chainlink’s oracle network provides the infrastructure for the flow of information between smart contracts and has thus become an important support for all decentralized applications. Not only, but especially in the field of Decentralized Finance (DeFi), where Chainlink already has over 600 partnerships and integrations. Among them Aave, Synthetix and Curve, the largest DeFi protocol by Total Value Locked.

But also crypto exchanges like octopuses, Gemini and KuCoin get their price feeds from Chainlink. Likewise the blockchains Ethereum, binance Smart Chain, Cardano, Solana, Polkadot and Avalanche. The long list – Chainlink counts a total of over 1,300 cross-industry integrations and partnerships – also includes the international payment system SWIFT, T-Systems of Deutsche Telekom, Swisscom, the press agency Associated Press and the Google Cloud Platform (GCP).

Not only the broad network gives Chainlink a monopoly position. Chainlink’s oracle network is nearly unrivaled. The next largest Oracle projects with similar areas of application are UMA, WINkLink and API3, which together account for just a seventh of Chainlink’s market capitalization.

Regulatory stumbling blocks

Chainlink is based on the conviction that smart contracts will sooner or later replace analog processes in many areas. Wherever data is exchanged securely and serves as instructions for action, the use of intelligent contracts promises more efficient, more secure and more transparent processes. From the management of health data and certificates to the insurance industry and Industry 4.0 to identity management. The potential in an increasingly digitized world is gigantic and thus also for Chainlink, which is only slowed down by regulatory hurdles.

Because smart contracts are not contracts in the legal sense and therefore not contestable. As long as the legislation does not improve and smart contracts remain contractually non-binding “arithmetic operations”, their area of ​​application should remain manageable. In this respect, an investment in Chainlink is still a bet on the future, despite its widespread network.

Hybrid Smart Contracts

But what that could look like for Chainlink was outlined by co-founder Sergey Nazarov at the Smart Contract Summit last year. “The vision behind Chainlink is to extend, complement, and enhance the capabilities of smart contracts to enable a new, more advanced class of smart contracts, called hybrid smart contracts, that expand the capabilities of blockchains and smart contracts .”

For Nazarov, the barriers between off- and on-chain are becoming increasingly permeable, smart contracts are becoming the industry standard and the paper tigers of bureaucratic administrative apparatus are becoming obsolete. According to Nazarov, this massive transformation process in data management creates a new understanding of cryptographic truth in code-driven and censorship-resistant information procurement – with noticeable effects on our living conditions.

“It’s not just about finance, gambling or insurance, it’s about the way the world works – and the way the world works affects everyone.” Paper contracts eat up human and time resources and also demand a lot level of trust. Blockchains, smart contracts and oracles are intended to reduce this dependency on trust: code is law. Chainlink’s stated goal is to build a decentralized information network that enables transparent communication between blockchain networks and the outside world. DeFi is just the beginning of this upheaval: For Nazarov, all documents will eventually be stored in smart contracts. The world is growing together through the blockchain – that is the vision.

The clock is ticking for Chainlink

The development goals are as ambitious as the vision is bold. Chainlink is far from the end of the roadmap. Chainlink wants to enable staking later this year. The ability to generate interest on temporarily blocked LINK deposits could further boost user activity and boost demand for the token. With a view to the course development, it also seems to have room for improvement.

Among the thirty largest cryptocurrencies, LINK has the worst performance over the year together with Bitcoin Cash. Compared to various hype-driven metaverse tokens and vociferous meme coins, Chainlink, which operates in the dark as a silent smart contract companion, has a marketing problem. However, the growth curve could be all the steeper if LINK receives the appropriate attention. Because there is no doubt about its importance in the crypto ecosystem. Total value secured (TVS) by the Oracle network surpassed $75 billion in 2021 – a tenfold increase from 2020.

Disclaimer: This article first appeared in the February issue of BTC-ECHO Magazine. It has been updated accordingly for online publication. Click here for the magazine shop.