How Does Chainlink Work? It Might Not Be Too Late to Invest

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Chainlink Overview - Too late to invest

Welcome to another educational post on the SanFran Tribe! Today we will be diving into an exciting project – Chainlink. This project might not be as intuitive to most people that are unfamiliar with something called “oracles”, but hopefully after this post you will be a Chainlink wizard. Or… maybe at least be able to explain to your grandma what Chainlink is.

Near the end of this post we will take a look at some projections for the project, and I’ll let you know if I think it’s personally too late to invest or not!

Nothing should be considered investment or financial advice. Enjoy the ride.

Now, lets kick things off with taking a macro perspective to what Chainlink is:

What Is Chainlink

Chainlink is one of the newest comers to the market, but it has not taken it’s time in becoming well known.

In an effort to keep definitions simple, Chainlink takes off-chain data from sources it deems acceptable and provable, and provides that data to on-chain smart contracts through its oracles. The main contract of Chainlink core takes the data that it received from the selected oracles and validates the data for accuracy.

Right now Chainlink mainly functions on and for Ethereum, but long term it would function for any and all smart contracts.

But what IS an Oracle?

What is an Oracle on Blockchain

How does an oracle work and what is it?

Well, an oracle can also be called “middleware”. It is the intermediary between the world we live and interact in and the virtual world that needs information. In other words, it translates data to the necessary places that will utilize it to execute actions.

Smart contracts on the blockchain needs an oracle to feed them trusted and provable data that can be used to instantly execute the smart contracts. This is vitally important to keep the world of blockchain moving forward. Moving toward being used in the everyday economy we live in.

How Does This Innovate The Industry

Well the beautiful thing about blockchain and the crypto economy is that decentralization was at the heart of it. Which means no one has full autonomy or authority over the process or development. Ideally, the projects, updates, and developments are all lead and approved by the community, not a single entity of failure.

Along with the decentralization of authority, the decentralization of data and of a single point of failure makes blockchain much safer than traditional methods of data storage. While these strengths are important, the contracts written on top of these decentralized chains could still be manipulated by the inputs that are used to execute them.

Oracles Are Data Validators

For instance, Lets say we write a smart contract for a horse race. Lets just say there is $1,000,000 put into the wallet and the smart contract will execute upon the winner being announced.

After the race, the winning horse is announced, the contract executes, and someone is paid out $1,000,000!

Sounds great right? Simple enough.

Well, sadly there could be a problem with the data being transferred to the smart contract. The wrong horse could potentially be entered in or be debated after the race. In some extreme cases, the data provider could just lie about who won the race. The problem with this is that it could happen and does happen.

This is why Oracles are necessary. There needs to be a source that is provable and trustable that authenticates data BEFORE the smart contracts receive the data to guarantee that the contracts are executed properly.

In other words, oracles are data validators. And if you have ever worked with data, you know how tricky and important it is to check and correct errors in data before using it for your work or research.

They are the equivalent of a decentralized blockchain, but they are decentralized data aggregators for the blockchains. This data that is provided by the oracle is necessary for the smart contract market to become main stream and trusted by the public.

How Does Chainlink Work

Now that we have the macro view down, lets transition to the micro view:

How does Chainlink work? That is, how does the protocol work?

It all starts when a blockchain that hosts smart contracts needs data to execute one. The specific contract in question that requires data will send out a request for information which could be considered a requesting contract in itself.

This is where the Chainlink protocol comes into play. It registers the requesting contract as a single ‘event’ that will create a responding smart contract. These contracts are called Chainlink Service Level Agreement Contracts (or SLA contract) on the blockchain that basically ask it to get the required off-chain data.

SLA Contract on Chainlink

The SLA Contract will in turn generate three sub-contracts to complete the process:

  • Reputation Contract
  • Order-Matching Contract
  • Aggregating Contract

Don’t worry! We are going to go over what each of these do. Starting things off with the reputation contact.

What is a Chainlink Reputation Contract

Starting with the first contract that is created from a request for outside data: a Chainlink reputation contract.

The Chainlink reputation contract is a rating system in short. It uses an oracle’s data provider’s previous record to verify its authenticity and performance history. It then will rate the provider and discard unreliable or poorly rated nodes overtime.

This is extremely important to find the highest rated and most reliable providers to keep data secure and accurate. The next step is the order-matching contract.

What is a Chainlink Order-Matching Contract

The second part of the requesting contract is basically thought of as the “assignment contract” aka who is needed for what.

The order-matching contract takes the request for data to the Chainlink nodes. It will then take bids on the request to figure out how many nodes will be needed to complete the request. The entire point of this contract is to select the right number and type of nodes to fulfill the request.

In short, the Chainlink protocol does not want to waste unnecessary resources, and it wants to optimize the nodes that will properly fulfill the request in the shortest amount of time!

After this contract, we have the final piece – the aggregating contract.

What is the Chainlink Aggregating Contract

The last contract created by a requesting contract can be considered as the “gathering and confirming contract” or simply it collects the data and authenticates it.

The aggregating contract collects all the data from the selected oracles from the order-matching contract and validates, reconciles and insures the data results.

It is important to know that the aggregating contract can validate data from one to multiple sources all at once! It can also be used to reconcile data from multiple sources.

In a specific instance lets pretend a contract for a horse race was initialized. If 7 nodes bring data that tells the contract that horse A won, but 1 node tells the contract that horse B won, then that node will be deemed untrustworthy.

This process is repeated throughout validation for all of the sources and the data is reconciled by averaging the responses into single trusted answers. In other words, the trusted majority wins. Which is the theme for all decentralized consensus algorithms.

Chainlink Core Softward and API

After the three SLA sub-contracts are completed, it is time for the data to get pushed to the Chainlink Core software.

This software is used to manipulate on-chain languages to off-chain languages that way the data sources chosen can use it. This data once manipulated is pushed through an external API that will collect the data for the contracts to use.

After all of the process is complete, the data will once more be translated into on-chain languages and sent back to the third sub-contract, the aggregating contract.

Chainlink Protocol

Clearly, the Chainlink protocol is needed for the market to continue its progress.

Without it, decentralized blockchains will still have single points of failure for the data that is used on their smart contracts. This would completely defeat the purpose of having decentralized blockchains in the first place!

Is It Too Late To Invest

Whew! that is a lot to review. Thanks for sticking with me.

There is much more that goes into Chainlink, but this will help you conceptualize the project, while also giving you foundational knowledge to learn more on your own.

Lets get into the brass tax of things. Is it too late to invest in Chainlink?

In short, no. The project is extremely young, and it is a fairly new idea and innovation on the crypto market. With that being said, a new project and the first mover advantage can be misguiding. Given the project succeeds and other chains start to adopt Chainlink, then the project will have huge success moving forward.

Although, like all markets there will be strong competitors that rise soon. Some blockchains will even look to create their own native protocols for oracles. Recently, the IOTA project announced a collaboration with DELL to look into just that. As with all things, it is up to Chainlink to remain king in this area of time through innovation and collaboration.

What Are Link Tokens Used For?

Although before you invest, you need to know what the LINK tokens are even used for.

In short, the LINK tokens are used to pay the node operators for their work in supplying, verifying, and manipulating the data sent to Chainlink Core. The nodes are incentivized to supply accurate data or they do not get paid essentially. Over time, they will not even get chosen as a provider of data if they are proven to be an untrustworthy node.

With that in mind, trusted data will be provided by most nodes if they intend to get chosen and paid for their work continually.

In addition, LINK tokens will need to be staked in order to hold a node and provide the network with strength. Therefore, you can see the LINK tokens have decent economics behind them to keep them growing in value as the network and the Chainlink protocol develops.

Chainlink Predictions

For a project like Chainlink, I would say there is a strong hit or miss feeling. Either this project will get adopted by other projects, continue to service Ethereum contracts and become a standard, or it will get quickly replaced. I do not see this project going any other way.

Given they have a strong first mover advantage, this project is geared to succeed, but only time will tell.

Chainlink Overview

Thanks for reading our post on How Does Chainlink Work and if it is too late to invest in Chainlink! If you want to follow more news on this project or on other crypto projects make sure to head on over to:

I hope this helps you guys understand the project and gears you to make informed decisions on your investments. As always, Enjoy the ride.

Cheers

2 replies
  1. ANTONIO
    ANTONIO says:

    Amazing article… First time I read something that solve my doubt ls on how Chainlink technological solution works. Thank you very much

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  1. […] data verification process is mostly handled with oracles which would be a project like Chainlink. This protocol enables blockchains to pull verified and trusted data to use for their contracts. […]

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