What is Chainlink? - Intro to the Oracle Network for Hybrid Smart Contracts

Chainlink is an Oracle Network for Hybrid Smart Contracts. Acting as an interface between real world data and blockchains, it is often referred to as a Middleware. It provides the necessary inputs for smart contracts to execute. Those inputs, in their larger sense, are “Knowledge” or the “Truth” about an event, price, or anything imaginable. They are generated through a pre-determined consensus mechanism by a decentralized network of Oracles. Such services are vital to blockchains as they cannot communicate with the real world themselves. Much like sovereign states, they don’t communicate with each other either. This is not ideal as many different infrastructures like Ethereum, Solana, Zcash, Bitcoin, and Algorand each emerge with a specific set of skills and attributes. Some are good at security, others at speed, scalability, or privacy.

As of today, most Oracles simply provide price feeds, while other protocols focus on necessary things like Off-Chain-Computation or Randomness, which are often used as scaling solutions. It is both cheaper and faster to do the work off-chain and prove that it has been done, rather than having every node perform and verify the same computations. Nodes or miners can then solely execute State Changes. While most Middleware choose to focus on one protocol, Chainlink is trying to bundle many different services through various networks of Oracles.

As laid out by its founder in a recent presentation, the end goal is to allow for smart contracts to not only communicate with the real world but also between each other and across different blockchains to leverage the best attributes of each infrastructure. For example, a single smart contract could be split and use Ethereum for custody while using Solana for transactions thus achieving both security and speed. A sort of blockchain agnostic solution to the Blockchain Trilemma. Chainlink would simply act as an “abstraction layer” and allow individuals or enterprises to interact with any chain through one single interface. To paraphrase Sergei Nazarov, it wants to become a “Universal Gateway” or the “Internet of Blockchains.”

Blockchain bridges already exist. They are mostly used by non-native assets to gain access to DEFI and other services through a process called Wrapping. They have been criticized by Vitalik Buterin as unsafe because a breach of security in a smaller side-chain through a 51% attack or bug can be contagious. The recent 300m Wormhole Hack proved him just right.

Chainlink’s planned Cross-Chain Interoperability Protocol (CCIP) is somehow different as it acts as a communication protocol rather than a side-chain. By removing smaller side-chains from the equation and simply acting as a messaging service between main-chains, it should inherit their security. Central Banks Digital Currencies (CBDC), which would most likely have their own infrastructure, could be bridged onto the Ethereum DEFI scene, providing much liquidity and Hyper Adoption. Chainlink also plans the introduction of a decentralized Anti-Fraud network to monitor the integrity of the data transmitted.

While CCIP still seems utopic and must yet be proven and tested, Chainlink’s economics are not. Most middleware still subsidize activity on their network with funds raised during their ICO or through VC financing rounds. Many of Chainlink’s oracle networks are on the other hand already profitable and can survive based on transactions fees only. Financial Health attracts more users through Trust, as would be the case for any traditional institution. This in turn allows those networks to add further services such as CCIP, Proofs Of Reserves (Audits), Keepers (Computation & Automation), or VRF (Randomness) to traditional price feeds and offer more value than stand-alone protocols.

As more and more Oracle nodes join the network and compete for the fee opportunity, the network’s value accruing mechanisms will also be further enhanced by the development of Staking.

While both node operators and contract holders already need LINK to interact, Oracle networks also must stake LINK. Dishonest behaviour is discouraged by the slashing of one’s stake. The proceeds are not burnt but rather given to the whistleblower.

As of today, the Chainlink smart contract chooses the node according to a reputation system when matching requests. The reputation is based on their stake and other factors such as speed or up-time. As the node infrastructure quality grows, it is likely that many will become evenly matched on all qualitative aspects. At this point, the ones with the largest stakes will become the chosen ones. Nodes competing for fees will have to buy more LINK tokens or borrow them on the open market. As the finite supply of LINK slowly vanishes, yield opportunities will arise for investors.

We have seen what had happened to the price of Ether as the “burn rate” increased due to the demand-driven increase in transaction fees. Combined with the infinite amount of real-world use cases that will require Oracles and the potential of CCIP, it is no wonder that people like Eric Schmidt (Google) or Christian Catalini (DIEM, LIBRA) have joined the project.

We also understand the importance of governance at this stage and that its centralization might be a necessary evil to bridge the gap between today’s institutions and truly decentralized blockchains. However, as Chainlink’s role expands, we hope that governance is slowly assigned to a large enough number of token holders. In the end, Knowledge and the institutions in charge of its record-keeping and propagation should belong to the people. Providing that transition is smoothly executed, Chainlink could become one of the main providers of Institutional Knowledge across many aspects of society, a real “Middlemachine” (Mario Laul, Placeholder Vc).