ChainLink: “Smart Contracts Need “Plumbing” — ICOs Before Ethereum
A decentralized way to pull data from oracles and inject it into the Ethereum blockchain.
Just like the early days of the internet, blockchains and smart contracts also have some problems.
For instance, blockchains have no way of securely exchanging information with the outside world. In other words, they have a connectivity problem.
Take the world’s biggest blockchain: Bitcoin.
Today, the Bitcoin network can’t link directly to off-chain databases. For example, it can’t “talk” to the New York Stock Exchange (NYSE), the Visa retail payment system, or the SWIFT banking network.
If you want to enter that information into the bitcoin network, you need a third party. But third parties can be bribed or coerced into entering false or misleading data. That defeats the entire purpose of blockchain.
So you can see the blockchain can’t securely pull in data from multiple sources outside its own database. But back in the late 1980s and early ’90s, the internet had the exact same problem.
There was no reliable way to pull data from different sources… until IBM (and others) helped fix this problem with a suite of software tools that became known as “middleware.”
Middleware: The Plumbing of the Internet
Like the Roman aqueducts that connected water sources to the city, middleware connects different data sources. That’s why people in the tech industry call middleware the “plumbing” of the internet.
Today’s blockchains don’t have middleware solutions — yet. But once solved, blockchains’ usefulness will explode the same way the internet did.
For example, imagine you owned a retail store in the U.S. and wanted to order clothes from a Chinese supplier.
A smart contract on the blockchain would automatically verify your identity and ability to pay. It would also verify the vendor’s product and ability to deliver. That would cut down the time of doing the paperwork for the trade from days to minutes.
Let’s take it a step further… How valuable would it be to match blockchain tech with artificial intelligence (AI)?
For starters, it would do wonders for the insurance industry. A smart contract could use AI to acquire real-time weather data. And it could use the data to automatically write “one-off” policies for airline passengers, trucking companies, construction firms, oil rigs, and so on.
Or what about a blockchain that can automatically verify the collateral behind every derivative trade on its platform? If we had that in 2008, the financial crisis wouldn’t have happened.
But how can you trust data pulled from an outside third party?
How do you verify whether an event actually happened?
How do you know if a stock hit a certain price?
How do you know what the weather was on a certain date at a certain location?
How can you prove a person has the goods they say they have?
The answer is: You can’t… At least, not without the help of a universally trusted source of proof.
Enter the “Oracles”
In the blockchain world, we call a universally trusted source an “oracle.” It’s essentially an agent who finds and verifies real-world information and submits it to a blockchain for a smart contract to use.
For example, we all rely on the price data we receive from oracles like the Nasdaq and the NYSE. And the National Weather Service is a universally trusted oracle of temperature and wind speed.
So if blockchains are to become more than the blunt instrument the naysayers believe them to be, a low-cost, low-risk way is needed to link them to oracles.
I’ve discovered the project with the single-best solution for seamlessly integrating oracle data into blockchains. It’s starting with Ethereum… and eventually plans to support all smart contract platforms.
The project already has a deal in place with the world’s largest money transmitter. This partner is trusted to move $5 trillion per day among 12,000 participants. And it has dozens more deals in the pipeline.
This simple, yet crucial, technology will act as the “plumbing” between oracles and blockchains. And it’s doing so in a decentralized way that eliminates bad data, tampering, and fraud.
Plus, over the next three to five years, we think demand for the coin could cause it to rise over 3,200%. That’s enough to turn $500 into over $16,000.
The Most Widely Used “Link” to the Outside World
The name of the most credible player we’ve found in the space is Chainlink (LINK).
Chainlink traces its roots back to 2014. That’s when co-founders Sergey Nazarov and Steve Ellis started SmartContract.
Keep in mind, 2014 was before Ethereum was even founded. And before most people knew about smart contracts.
Sergey is known as a smart-contract pioneer and has the background to make Chainlink a successful project.
He worked at early-stage venture capital funds FirstMark Capital and QED Investors. He also has experience building decentralized applications. These include CryptaMail (the first blockchain-based messaging service) and Secure Asset Exchange (the first widely used decentralized exchange interface).
In September 2017, Chainlink conducted its initial coin offering (ICO), raising $32 million. Since then, it’s expanded its team to 12 members.
What makes Chainlink special is that it’s figured out a decentralized way to pull data from oracles and inject it into the Ethereum blockchain. To date, we haven’t seen any other project offer a similar solution that’s been so broadly accepted by the blockchain ecosystem.
Chainlink may not be a sexy business… But without Chainlink’s technology, smart contracts will forever be “dumb contracts.”
This is one of those leaps forward in network design on par with IBM’s foray into middleware. And it’s similar to Cisco’s early work on linking websites via routers to share a common language. It’s the leap that will take smart contracts from obscurity into the very fabric of our daily lives.
Chainlink’s solution opens the door to smart contracts that can automatically handle insurance payouts, financial contracts, legal documents, machine-to-machine commerce, and many more applications that haven’t even been thought of yet.
A Network Within a Network
In the blockchain ecosystem, a node is any computer connected to the network. Nodes verify transactions. And Chainlink will use a collection of independent “nodes” to collect data from oracles.
For instance, one node might connect with the National Weather Service. Another will connect with the NYSE. And so on…
To prevent fraud, Chainlink uses multiple nodes and compares their results. It then automatically smooths out the data and sends it to the requesting smart contract. The smart contract using the oracle will pay a fee in LINK (Chainlink’s token) for the data.
To make fraud uneconomical for a bad actor, Chainlink can insist node operators put up LINK tokens as collateral. So the punishment for providing bad data will be swift and financially painful.
How It Works
Chainlink’s On-Chain Architecture
As an oracle service, Chainlink nodes return replies to data requests and queries made by or on behalf of a user contract (which is called a requesting contract).
Behind the user interface, Chainlink has an on-chain component consisting of three main contracts: a reputation contract, an order-matching contract, and an aggregating contract.
- Reputation contract: Keeps track of oracle service provider performance metrics.
- Order-matching contract: Takes a proposed service-level agreement (SLA), logs the SLA parameters and collects bids from oracle providers. It then selects bids using the reputation contract and finalizes the oracle SLA.
- Aggregating contract: Collects the oracle providers’ responses and calculates the final collective result of the Chainlink query. It also feeds oracle provider metrics back into the reputation contract.
The on-chain workflow has three steps: 1) oracle selection, 2) data reporting, and 3) result aggregation.
Chainlink’s Off-Chain Architecture
Chainlink nodes are powered by the standard open-source core implementation (Chainlink Core) which handles standard blockchain interactions, scheduling, and connections with common external resources.
Node operators may choose to add software extensions — known as external adapters — that offer additional specialized off-chain services.
Adapters are external services. By modeling adapters in a service-oriented manner, programs in any programming language can be easily implemented simply by adding small intermediate APIs before them.
Security is essential for decentralized oracles to work as intended. Chainlink takes a number of steps to ensure the integrity of its services.
- Collateral insurance: Smart contract owners can request that a node stakes collateral (LINK tokens) to ensure it completes the job. If it fails to deliver the data, the deposit is forfeited to the smart contract owner.
- Decentralized approach: A simple way to deal with a faulty single source is to obtain data from multiple sources. Chainlink does this by using multiple nodes and data sources to service smart contracts.
Another method Chainlink will use in the future to further its decentralized approach is trusted hardware.
Trusted hardware is designed to be tamper-proof and resist direct physical access adversaries.
Trusted execution requires specialized hardware. To that end, Chainlink acquired a “trusted hardware system” called Town Crier. It was developed by Ari Juels, a computer science professor at Cornell University and technical adviser to Chainlink. Town Crier is a “high-trust bridge” between the Ethereum blockchain and online data sources.
Chainlink’s Security Services
These systems and services bring additional security to the Chainlink platform and its users.
- Validation system: Monitors on-chain oracle behavior, providing an objective performance metric that can guide user selection of oracles.
- Reputation system: Records and publishes user ratings of oracle providers and nodes, offering a means for users to evaluate oracle performance. It includes a basic on-chain component where user ratings are available for other smart contracts to reference.
- Certification services: Issues endorsements of high-quality oracle providers.
- Contract upgrade service: An opt-in service that users can control to deal with faulty smart contracts.
Chainlink has been building partnerships since it started as SmartContract. In total, it now has over 30. Here are some key partners:
The Society for Worldwide Interbank Financial Telecommunication (SWIFT): Global banking transfer system that moves over $5 trillion daily
Web3 Foundation: A Swiss foundation focused on blockchain technology
Data-provider partnerships: ClinTex (clinical trial data), Kaiko (digital assets data), Brave New Coin (crypto data), and Data Sports Group (sports data)
Notable cryptocurrency projects: ZeppelinOS and ConsenSys projects (OpenLaw ,Matic Network, Harmony and Kaleido)
A Disruptive Example
Financial companies pay Bloomberg $6.5 billion annually to access 325,000 terminals and the massive amounts of financial data they provide. Consider this the “yearly stake” for accurate and reliable data.
But there’s a problem: These companies totally rely on Bloomberg for their data. That presents a centralized point of failure. If Bloomberg is hacked or corrupted, that could affect its data feeds.
Enter Chainlink. It can use the blockchain to provide decentralized data. And as regular readers know, the blockchain is virtually tamper-proof because it distributes data across a network instead of housing it in one location.
But companies will still want assurances the data they receive from the blockchain will be accurate. So they’ll require Chainlink nodes to stake LINK as insurance.
So the node will lose its stake if it sends corrupted or data. This financial penalty incentivizes nodes to provide accurate information — making the system reliable.
Bringing It All Together
There are over 10 million smart contracts today. And by 2023, we expect there will be billions of smart contracts in operation.
To put that in perspective, it took six years for the internet to scale to 10 million websites. Today, we have over 1 billion websites.
If Chainlink comes to dominate this space as we think it will, virtually all smart contracts could end up relying on it for their decentralized oracle data.
By capturing just 2% of the global data market, LINK will be worth $28 per token. Today, we can buy it for under $1.
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