What is Chainlink and how does it work? Fundamental analysis

Dean Decho, 7 min read
Last Updated: 23 June, 2023

chainlink with logo and background

We’re diving deep into the cryptoverse today, specifically to talk about Chainlink – a remarkable decentralized oracle network.

If you’re thinking, “oracle…isn’t that something from Greek mythology?”, bear with me.

In this digital world, oracles serve a different, yet equally intriguing role.

 

Chainlink is an oracle. No, it’s not delivering divine messages from Zeus, but in the world of blockchain, it does something equally crucial. It connects blockchains with real-world data, APIs, and other external resources. This connectivity, this bridge between the physical and virtual, is what makes Chainlink unique.

Think of it this way: Chainlink is a translator that helps the blockchain communicate with the real world. This makes it an essential piece of infrastructure in the smart contract ecosystem.

Before examining the features of Chainlink technology, we would like to briefly describe the problem that most existing blockchains face. Most people have already heard of Bitcoin and Ethereum, indisputably the shining stars of blockchain technology.

But here is one problem.

Their blockchains are not capable of accessing or interacting with data outside their network – they operate in a kind of information silo. This is where Chainlink comes into play.

Individuals no longer need a trusted third party to facilitate and document exchanges between them, but can rely on a decentralised protocol to conduct transactions with each other (P2P). The results of these activities are recorded in a shared register that all participants can access. Although this was an important advance, the problem was that blockchains were limited to single functions – Bitcoin, for example, was only used as P2P money. Ethereum took blockchain functionality to the next level by making smart contracts available.

This means that its blockchain can perform different functions using a code composed of if/then parameters to create transactions, e.g. when ‘x’ is entered, the result ‘y’ will be obtained.

What has become possible with Ethereum and its smart contracts?

The blockchain should no longer be limited to cryptocurrencies. Other assets such as physical assets (products, real estate, etc.), data, securities, etc. can now appear digitally on the Ethereum blockchain and have contractual terms for their transfer.

These contractual terms could be triggered by external data, e.g. a sports bet that depends on the outcome of a sports match or bond payments that depend on the current interest rates of banking institutions. In principle, people could enter into various contractual obligations with people they do not know and trust that the contract will be performed as expected, provided that the smart contract contains the right data. The problem is that smart contracts cannot reliably obtain the necessary data for registration or connect to existing external systems.

This leads to the first important use case of Chainlink: connectivity. In relation to the above function, if ‘x’ is ‘y’, the first question is: what is ‘x’ and what is ‘y’? ‘x’ represents the contract records, which will always come from a data source. This could be sports data, market data, event data, data from a system database or data from any other source. The data is entered into the smart contract and then the smart contract logic sends the ‘y’ signal. The ‘y’ represents an action, which usually takes the form of payment, data transfer, granting or denying access/permission. This means that smart contracts can use external data to interact with their logic and thus generate an output that triggers some kind of action.

While most blockchain-based projects aim to eliminate and replace legacy systems, Chainlink takes a different approach, combining legacy systems (off-chain) with new blockchain systems (on-chain). This is crucial because most of the data needed to execute smart contracts resides in legacy systems. These legacy systems are not going to disappear anytime soon. That is why it is important for the blockchain to work with them. Legacy systems can also streamline many processes by integrating distributed ledger technology, thus taking advantage of blockchain’s technological advances. Chainlink Blockchain The property of connectivity should make smart contracts applicable in the real world, but this is only possible if the protection of user data is paramount, which brings us to the second special property of Chainlink: security. One of the reasons for the great popularity of blockchain is the high level of security compared to conventional database systems.

Because they are organised in a decentralised way and run on thousands of computers simultaneously managing a copy of the ledger, they cannot be hacked, unlike centralised systems. However, if one works with smart contracts, the problem is that Oracle’s current solutions do not work. These are either third-party solutions or internal Oracle solutions created by one of the parties involved.

The security of smart contracts is no longer guaranteed because the centralised oracle is a point of attack and can be manipulated. Decentralised oracles are necessary precisely for this reason. Chainlink allows the developer of a smart contract to choose any number of oracles (distributed oracles) and data sources (distributed sources). For example, a stock trading company can collect data from different providers (Reuters, Bloomberg, etc.) and process it further.

  • Trusted Execution Environment (TEE): the party requesting data publication can select nodes that use a specific type of trusted hardware, such as Intel SGX. This further reduces the attack surface.
  • Zero Knowledge Proof (ZKP): ZKP can be used to verify that a node has executed a transaction without revealing further details about that transaction. This technology is used in the cryptocurrency Zcash, among others. This principle has been applied in Chainlink during interactions between nodes and oracles.

Another problem with blockchain technology is limited scalability. Chainlink solves this problem by using WebAssembly software (WASM), which can be run in TEE. As a result, many off-chain functions can be executed in the TEE, which are significantly faster than the computations executed in the chain. Chainlink combines the three most important properties of blockchain platforms: connectivity, security and scalability. This means that it is currently one of the most interesting projects when it comes to combining real-world with distributed ledger technology.

The potential applications of Chainlink are manifold, as all available data can be entered and processed. Here are some examples:

  • Exchange rate data: an accurate breakdown of stablecoins in fiat currencies
  • Capital market data: prices of tokenized assets/securities
  • Comparative data: inclusion of interest rates in smart financial derivatives
  • Certification: e.g. government-issued identity documents.
  • Static/pseudostatic data: security indicators, country codes, currency codes
  • Weather data: calculation of insurance premiums based on forecasts.

The idea of being able to link all systems and databases worldwide without much effort or cost is already quite attractive. However, if we imagine that these systems can interact with each other without human intervention, just on the basis of data, we easily arrive at the idea of a fourth industrial revolution. Chainlink could become a pioneer in the digitisation of all related processes.

Chainlink's partnership with Google Chainlink caused a stir in spring 2019 when ‘Google Cloud’, the search giant’s cloud computing division, announced that it was working on hybrid blockchain/cloud applications with Ethereum and Google Cloud. Chainlink was also mentioned in the announcement. Chainlink must then translate and verify data from the Internet. “We showed how Chainlink services are used to deliver data from BigQuery’s public cryptocurrency ledgers to the blockchain. This technique can be used to reduce inefficiencies and, in some cases, add entirely new functionality to Ethereum smart contracts, so that new business models emerge on the chain. …” – Allen Day (Google) Besides the partnership with Google, there are others:

  • Dapps Inc: in partnership with San Francisco-based Dapps Inc, Chainlink will integrate its Oracle system with the ECB Dappsuite platform, also used by Salesforce.
  • Matic, GoChain and Harmony: these three cryptocurrency projects will also integrate Chainlink Oracle.
  • KAIKO: Kaiko is a data service provider for the cryptocurrency market and will serve as a data source for Chainlink Oracle.

Unlike many other blockchain platforms that are announcing numerous partnerships, Chainlink has specific application opportunities from the start.

Chainlink Research Team Ann Grackin CEO Ann Grackin heads Chainlink Research and is specifically responsible for supply chain strategy. Previously, she was vice president of supply chain strategy at AMR Research, led sales and product management at Verilytics and before that was executive vice president at Avicon, an IT consultancy.

Bill McBeath – research manager As research manager, McBeath coordinates the team’s scientific work. He has more than 20 years of experience in business and technology research and software architecture. Before founding Chainlink Research, he was director of networks, performance and systems integration. The other members are also highly qualified and can offer extensive experience in various fields. In the long term, this is an excellent basis for the continued sustainability of the Chainlink ecosystem.

Let’s face it, there’s a ton of hype around any new blockchain project these days. So, what sets Chainlink apart?

First and foremost, Chainlink is decentralized, meaning there’s not one single point of failure. This adds an extra layer of security and trustworthiness to the data it provides.

Secondly, Chainlink brings a whole new level of functionality to the blockchain space by enabling smart contracts to interact with real-world data. That’s a game-changer. It means smart contracts can now be used in a broader range of applications, from financial services to insurance, to supply chain management and beyond.

Additionally, Chainlink has already been adopted by high-profile companies such as Google Cloud and SWIFT. This adoption lends significant credibility to the project and provides a practical use case for Chainlink’s oracle network.

Investing in cryptocurrencies or any digital asset always comes with risks, and the same holds true for Chainlink.

Chainlink’s value proposition, however, is strong. Its unique role as a decentralized oracle, the impressive partnerships it’s garnered, and its potential use in a vast array of industries all indicate a promising future.

That said, as always, it’s essential to do your own research before investing. Make sure to understand not only the project itself but also the broader market conditions and the inherent volatility in the crypto space.

Remember, investing in cryptocurrencies isn’t for the faint of heart. They are highly volatile and investing should only be done with money you are prepared to lose. As the old adage goes, “Don’t put all your eggs in one basket.”

Need a guidance? Check our step-by-step on how to buy cryptocurrecny.

Conclusion

Chainlink has created its own niche as a decentralized oracle network. Its ability to bridge the gap between the blockchain and the real world gives it the potential to be a cornerstone of the growing smart contract ecosystem.

So, if you’re fascinated by the potential of blockchain technology and are prepared to stomach some ups and downs, Chainlink might just be a project worth looking into.

Remember, in the world of crypto and SEO, the key is to stay updated, remain adaptable, and keep on learning. With the right strategy, both SEO and the blockchain can offer a wealth of opportunities.

As always, if you enjoyed this post, do share it with others and stay tuned for more.

Till next time!

Dean Decho

Dean is a passionate advocate for the financial freedom and independence offered by Bitcoin and the cryptocurrency space. He's built this crypto learning platform to help others in the industry learn, grow and be part of it.

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