Everything written in this post has come out of a conversation on https://t.me/chainlinkesp , mainly by Sylvarant.
My intention with this post is to make the conversation more structured and a lighter read.
This article is a translation of https://mariettee.medium.com/entendiendo-chainlink-15a2971bf5dd
To understand Chainlink, a couple of concepts need to be clear beforehand
Blockchains are decentralized registration systems / databases that are virtually impossible to manipulate because they are cryptographically secured networks thanks to a globally distributed network of nodes. Using blockchains, ownership of “things” can be transferred securely in a matter of minutes, which compared to the hours or even days it can take in the real world is quite fast. Also, one of the properties of blockchains is that they are resistant to censorship, so if I decide to send you an asset, no one could do anything to stop me. However, blockchains can only transfer ownership of “things” that they understand.
This article explores the concept, utility and history of the blockchain in brief:
Blockchains are the ideal scenario for the development of so-called smart contracts thanks precisely to their immutability, but…
What are smart contracts?
A smart contract is a digital agreement that exists on the blockchain in the form of an unmodifiable computer program, and requires certain conditions to be met for it to be executed. These contracts are extremely secure and work deterministically, i.e. “every time X occurs the contract will ALWAYS perform Y”. However, contracts in the real world operate probabilistically, i.e. “if I sign a lease on an apartment, the landlord will PROBABLY not breach the terms”. That subtle difference can open up a whole world of possibilities. You can find out more about what smart contracts are and how they work here:
This is where oracles come into play, what are they?
Oracles are computer programs that “translate” for the blockchain what the blockchain does not understand and is the mechanism used to let smart contracts know what is happening in the real world. For example: a concert ticket, a bicycle, a car, a train ticket, the ownership of a house… However, there is a problem: Oracles are centralized entities that work on the border between the blockchain and the real world, so they are not secured by the cryptographic network that protects the blockchain against all kinds of manipulations and that is serious. If an oracle could be manipulated, people could hack into an oracle and manipulate the data it sends to the various smart contracts, throwing off all the additional security of the smart contracts.
Why are oracles important?
In order for a real-world company or business to adopt blockchain technology (beyond accepting Xcoin payments) and benefit from the potential cost savings and efficiencies of using this technology by eliminating intermediaries and inter-company friction, it must first study and analyze the risks. One of the determining factors holding back the adoption of blockchains and smart contracts is precisely the conceptual design problem of using a centralized oracle:
If a company that is investing capital in upgrading its infrastructure by “moving” to a decentralized structure suddenly discovers that all that extra security (for which it is paying extra) is useless because it has no choice but to use a centralized oracle (which is susceptible to hacking), it makes sense for it to forgo this transition in PoS from a more traditional approach (a lifelong database).
Chainlink
Chainlink is a framework for creating oracle networks. Users (typically platforms using smart contracts) create the design of oracle networks that suit their needs to retrieve and store the data they need (e.g., the price of a concert ticket, the unique identification number of a deed, the price of Bitcoin). The Chainlink node operators (the oracles) in turn commit to delivering that data consistently and continuously over time. If an oracle goes offline or delivers a response that is out of sync with the response of the other oracles on that network (within a pre-agreed acceptable margin of error), that oracle is penalized or dropped from consideration for future data requests. With the Chainlink network anyone can set up their own node and become an oracle, which means that to cheat / hack the system someone would have to hack a huge number of oracles, which is much harder to do than if we relied on a single centralized oracle. This is why the Chainlink oracle network is said to be decentralized.
Is it currently working?
Yes. The Chainlink network went live on the Ethereum network on May 31, 2019. Currently there are several DeFi (Decentralized Finance) platforms that use Chainlink oracle networks to get the price of different cryptoassets. For example: Aave, Synthetix and Ampleforth. In general, you can find the list of active users here:
Where can I store $LINK?
LINK is an ERC-677, a special Ethereum token type that has certain unique functions that allow you to transfer LINK and execute contracts in the same transaction. For practical purposes this type of token is perfectly compatible with any ERC-20 wallet (which includes hardware wallets like Nano and Trezor). That is, you can send your LINK to any ETH address.
Why does the Chainlink network need its own token?
The value proposition of the LINK token is based on several premises and one of them is its utility.
- Because the network is designed to be agnostic between blockchains (interoperability), and therefore needs its own token to have an independent economic capacity.
- Chainlink nodes are programmed to accept only LINK payments. This is an ERC677, a special token developed by Steve Ellis (Chainlink’s CTO) specifically for Chainlink and has the special “CallAndTransfer” feature that allows you to get data and execute a smart contract in the same transaction to save gas.
- In the future, the system of fines and bonds will be developed. The creators of a contract will be able to require nodes willing to respond to their request to have a bond in LINK (the concept of staking with Chainlink is this). Ex: A company could ask nodes that are willing to respond to their solicitation to have a minimum bond of $1 million in LINK (predictably, if the bond required is that high, the payment in LINK will also be that high). This will create a shortage in the supply of LINK, while increasing the demand (the price goes up).
Is there a site that summarizes ALL the information about Chainlink in English?
Yes, the brochure prepared by David Miller:
What can smart contracts and Chainlink do for my company?
This article reviews 77+ practical applications of smart contracts:
I have understood the above, tell me more….
The Chainlink team calls the networks “blockchain agnostic”, and in fact both the token and the networks are already available on multiple blockchains and Layer2s (Ethereum, BSC, xDai, Fantom, Avalache, Solana, Arbitrum, Optimism…). Chainlink will never have its own blockchain, as it is a framework for creating decentralized oracle networks.
LINK has a series of cryptoeconomic mechanisms that, if launched today, would generate a correlation between the Total Insured Value of its networks (currently 80 billion USD) and its market cap. This value capture mechanism is Chainlink’s staking, whose operation has nothing to do with staking in DeFi or Proof of Stake networks.
LINK will be used as collateral in oracle networks in the future. The higher the insured value, the more security deposit the nodes will be asked for. If they defraud the system, bam, screw their LINKs. This will create a shortage as the nodes will presumably be asked for the equivalent of the total insured value as collateral.
CBDCs, SWIFT, Google, AXA, Banco Santander, CitiBank, everybody is in bed with Chainlink.
That is, part of Chainlink’s value proposition lies in its usefulness in capturing the value that its oracle networks will secure.
We can understand Chainlink as a cybersecurity company, might be the best way to contemplate the way they conduct development. That is:
Blockchains are so secure precisely because they have certain characteristics that make them stand out:
- Are isolated from the real world (in a sense).
- They are cryptographically protected.
- They work in a deterministic way thanks to their distributed consensus network.
- They have cryptoeconomic incentives for the continuation of the network.
Yet they do not understand real-world data. So they had to resort to oracles.
Traditionally, oracles were the “translators” that allowed the blockchain to understand external data, but unlike the blockchain, oracles did not share the characteristics of the blockchain, nor its security levels, nor its determinism, nor were they isolated systems. Chainlink’s great achievement is that it has managed to transfer the blockchain model to the oracle level. They achieve this by imitating:
- The distributed consensus model: aggregators and service agreements.
- Determinism (Chainlink nodes must be synchronized with Ethereum nodes).
- The crypto-economic incentive system: payments for serving correct data within a deadline, the fine and bond contracts or “staking”, a higher reputation score that will make you more likely to serve higher value contracts etc.
Right now, the cryptoeconomic incentive system of the e Chainlink network is not complete. We could say that it consists of three components:
- The indirect component or opportunity cost
- Direct fines
- Reputation system
The answer to why there are “only” 30 nodes (actually there are about 50 distributed in the different feeds, but it doesn’t really matter).
If Chainlink had accepted EVERYONE who wanted to be a node operator from the beginning and those nodes defaulted on their obligation to deliver data and disconnected, what do those nodes have to lose? If those nodes are owned by So-and-so or So-and-so, they would have nothing to lose by defrauding the system. That would create a perception of Chainlink as an oracle network provider that would be quite ominous, as groups of users could agree to manipulate Synthetix market data, for example.
So what has Chainlink done? It has called in the world’s top blockchain PoS validation companies, teams that run large scale mining operations, blockchain infrastructure managers, in short, people with a lot of experience in managing and administering cloud architectures or servers. With teams dedicated to keeping everything running smoothly 24/7 and told them “you are going to earn on average about $150k USD in link for being the backbone of the network in its early stages”.
When the staking is in place, people will lose their bonds if they act badly, but right now, considering that nodes are businesses whose value lies precisely in their ability to manage nodes and infrastructures, if they act badly, these companies lose their reputation as a company and their credibility as a serious business.
There are many people who don’t understand this type of staking and distrust it, branding it as a mere bombastic mechanism to get the attention of the average investor, when in fact in the context of Chainlink, staking, what it will allow is that any company can trust in an anonymous way, because everyone will have something to lose. For that reason we won’t see many new nodes until staking is up and running.
In the near future the world may run on smart contracts, and an end user will not even know that Chainlink exists even though the entire infrastructure will depend on Chainlink’s decentralized oracle networks. Some people like to compare it to the TCP/IP web protocol, which we use every day without even knowing what it is or what it consists of.
Sergey Nazarov (CEO and co-founder of SmartContract.com, later known as Chainlink) tweeted this 6 years ago:
Right now Chainlink is not that it is not 100% operational, it is that the current model is based on what Sergey calls “implicit staking”. Which are the long term incentives that node operators currently have. The equivalent in education to positive reinforcement, “if you behave well I’ll give you a cookie later and tomorrow another one”, while the “explicit staking” is “apart from running out of cookies, you owe me the cookie”.
Chainlink is currently following the “los leader” or “loss leader” theory that has been followed in the past by Amazon, which basically consists of cornering all possible use cases of other oracle networks in a near monopolistic manner and cornering all possible competitors in a voracious manner, reinvesting all profit back into growing. Case in point, Chainlink currently subsidizes virtually the entire DeFi ecosystem that depends on their pricing feeds such as Aave and Synthetix. These two started out as on-chain proof-of-concepts, but Chainlink approached them and said, there is a problem in the DeFi lending and synthetic asset creation protocols that to this day almost no one understands in the ecosystem, It’s called “flash-loans attacks” and it basically destroys any protocol that doesn’t use price feeds that take into account off-chain price discovery and volume-weighted price discovery.
This has cost and is costing hundreds of millions in subsidies, but by the time Chainlink cuts the tap and imposes a tariff, they will be profitable (estimated to be profitable around 2025). But instead, they continue to let them grow and more and more people depend on them, the longer the subsidy phase lasts, the more projects will depend on them. The same goes for Chainlink VRF (an on-chain random number generator whose seed is verifiable), hundreds of NFT projects already depend on Chainlink, and the same with Keepers, and with back-up testing.
