Research

What is Chainlink and How Does it Work?

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Chainlink

TL;DR: ChainLink aims to build secure, sophisticated and scalable oracle services.

What are Chainlink’s main features?

  1. uses multiple oracles;
  2. has own reputation system;
  3. its oracles can stake their data; and
  4. its token LINK is used for staking and fees.

Current state of oracles?

The majority of oracles today are centralized services or oracles ran by the project using it. Fetching critical data in a trust-minimized manner is still a core Web3 functionality waiting to be solved.

Enter Chainlink

Chainlink ranks and aggregates data from multiple oracles who are able to stake their results. The Chainlink protocol performs its core functions through 3 main contracts:

  1. Reputation contract.
  2. Order-matching contract.
  3. Aggregating contract.

Reputation Contract

The reputation contract tracks performance of oracles that offer services through Chainlink. The higher an oracle’s (“Chainlink node’s”) reputation, the more work there is available. Bad or non-existent reputation can be mitigated with a higher stake (in LINK) by the oracle.

Order-Matching Contract

The order-matching contract matches orders (demand) with oracles (supply) by evaluating the buyer’s parameters (numbers of oracles needed, level of reputation etc).

Aggregating Contract

The aggregating contract collects the data delivered by the oracles — averages it — and creates a weighted aggregate result of the given data for the buyer.

What’s the token model?

The LINK token is used as a staking token and oracles are paid in LINK for their services. Slashed tokens are distributed to all oracles that delivered correct data. LINK’s staking and penalty functions are expected to launch in 2020.

There is a set amount of 1 billion LINK tokens:

  1. Only 35% of the total amount has been issued as is in circulation;
  2. 35% of the remaining LINK tokens are reserved for staking fees; and
  3. 30% is held by founders/team 💰.

How is Chainlink governed?

Chainlink doesn’t have inbuilt governance. The ecosystem consists of independent oracle networks controlled by its owners (who deployed the aggregator contract). The current oracle network (https://feeds.chain.link) is ran and governed by the Chainlink team.

Future outlook

Network effects will make Chainlink the most diverse and easiest oracle to integrate for developers who need external data of any kind. Scale will lead to the most reliable and cost efficient oracle services, and the potential for evolving into industry standard.

Questions to the team and community:

  1. How many independent oracle networks will eventually exist on Chainlink?
  2. Any verticals that need their own “app-specific” oracle networks?
  3. When will penalty/staking/reputation go live?

Some of the projects currently using chainlink’s oracle network: Set, Aave, Ampleforth, Nexus Mutual, and 1inchEchange.

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