Centralized and Decentralized Systems Finally Get ‘Chained’

What is Chainlink and how it differs from other crypto-currencies

Centralized and Decentralized Systems Finally Get ‘Chained’

Photo by israel palacio on Unsplash

While Bitcoin and Ethereum continue to trade at a relatively tight range, altcoins are soaring each day in value. What are altcoins I hear you ask? Well, any cryptocurrency other than Bitcoin. One altcoin which has been in headlines these days is Chainlink.

Most of the crypto-currencies function through tokenization and thus are treated merely as an investment. Bitcoin is treated as a currency token and only value it stores is a transaction between two parties.

Tokenization is the digitalization of an asset where each token represents ownership of a part of the underlying infrastructure project.

So, all this blockchain hassle just to buy a frappe?

Well, NO.

Bitcoin is a classic example and enables transactions in the most secure fashion, without relying on a third party. This makes transactions more trustable and not in control of any individual.

A more advanced use case of blockchain is smart contracts, which provides trust to both parties that terms of the contract will be met.

Without smart contracts traditionally on the internet, two parties rely on a third party (usually a for-profit company) to enforce the contract’s terms. For example, you purchase a book from a seller on Amazon, now it's the company's responsibility to make sure that the seller receives the payment and customer receives the purchased good.

Smart contracts are focused on moving business logic (contracts) from a probabilistic state where it will probably execute according to its terms, to a deterministic state where it is guaranteed to execute according to its terms.

Smart contracts require data from multiple off-chain sources (centralized systems) to execute the program. These off-chain sources are called oracles and they provide input to the smart contracts, because of their very nature of being centralized they negate the benefits of a decentralized system. This is the Oracle problem.

Source: [Chain Link](https://cdn.hashnode.com/res/hashnode/image/upload/v1627505460899/8diC_KCfA.html)Source: Chain Link

Chainlink is a decentralized middle agent between traditional parties and smart contracts, it tries to solve the Oracle problem. Again, it has nothing to do with the tech company Oracle.

This is why Chainlink is different and in headlines. The primary aim of most blockchain networks is to create decentralized smart contracts or develop a decentralized bank. Chainlink is trying to help both the parties, centralized institutions, and decentralized systems.

It has its own token called LINK, which is used to reward the node operators to provide reliable tamper-proof data as both input and output. Unlike Bitcoin, where the token is awarded to solve a useless mathematical puzzle, LINK is awarded to the nodes to authenticate incoming and outgoing data. In this way, no computation power is wasted. These LINK tokens function as stakes; if any node (oracle) fails to meet the contract requirements/specifications LINK is taken back from them and returned to the contract creator.

Source: [Chain Link](https://chain.link/)Source: Chain Link

  • Decentralized Oracles - Chainlink uses a set of Sybil resistant decentralized oracles to authenticate data from off-link systems. Smart contracts are only triggered when the same data is authenticated by multiple Chainlinks.

  • Quality Nodes - Smart contract creators can configure the security of these oracles. Some use cases require high decentralization, in that case, node quality may vary. Sometimes node quality is more important than decentralization and in that case contract creators can opt for that.

  • Crypto-economic security - Oracles in Chainlink have an incentive to provide tamper-proof data and assignment of smart contracts is based on their performance. Such a mechanism motivates nodes to provide quality data, increasing the overall security and reliability of the network.

  • Defense in Depth - Series of defense mechanisms are layered to maintain security, the next mechanism will stop the attack if the previous one is compromised. Chainlink uses various mechanisms such as Zero-Knowledge Proofs (ZKP) and Trusted Execution Environments (TEEs)

  • Assured quality data- Chainlink uses on-chain service agreements to ensure that the quality data will be delivered to the users and per their requirements. This includes delivery of data over certain time periods, frequency, or any other specification that smart contract creators need for their application.

Chainlink specializes in quality data delivery from off-chain sources to the blockchain networks running smart contracts and vice versa. The off-chain source can be anything from a bank to a gaming company, and likewise, any smart contract platform such as Ethereum or Cardano can be used.

I found an excellent post by Alexander Tsankov about why Oracle Problem isn’t a problem. It is pretty interesting. Check it out. The “Oracle Problem” isn’t a Problem, and why Smart Contracts makes Insurance better for everyone. One of the many criticisms of the usefulness of smart contracts is known as the Oracle Problem. Plainly put, because a…medium.com

Resources and References

Video by Chainlink on YouTube Chainlink (LINK) Becomes the 'Tesla' of Cryptocurrency - What's Next? As Bitcoin's ( BTC) price continues to trade in a tightening range, the altcoin market has been pushing higher each…cointelegraph.com 44 Ways to Enhance Blockchain Smart Contracts With Chainlink oracles Fundamentally, contracts define the obligations between multiple parties in an exchange of value. Thanks to distributed…blog.chain.link The “Oracle Problem” isn’t a Problem, and why Smart Contracts makes Insurance better for everyone. One of the many criticisms of the usefulness of smart contracts is known as the Oracle Problem. Plainly put, because a…medium.com What is An Ethereum Token: The Ultimate Beginner's Guide To a beginner, the entire concept of Ethereum and Ethereum token can get very confusing very fast…blockgeeks.com


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