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Understanding Chainlink (LINK) in 5 Minutes ​

Chainlink is a decentralized network of nodes that enable off-blockchain data and information to be utilized by on-blockchain smart contracts through the use of oracles.

Overview ​

Chainlink functions as a decentralized oracle network providing real-world data to blockchain-based smart contracts. Smart contracts are predefined agreements on the blockchain that evaluate information and execute automatically when specific conditions are met. The network utilizes LINK tokens as its digital asset for payment.

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Smart contracts are agreements on the blockchain that execute automatically based on predefined conditions. For example, in crowdfunding, if a specific amount of ether (ETH) is deposited into a smart contract by a certain date, payment will be released to the fundraiser; otherwise, it will be returned to donors. Since smart contracts are immutable and verifiable on the blockchain, they provide a high level of trust among parties. However, to expand the scope of smart contracts beyond blockchain data, they require off-chain data in a format they can understand.

Bridging On- and Off-Chain Data ​

Oracles serve as intermediaries, translating real-world data to smart contracts and vice versa. However, centralized oracles can create vulnerabilities. Chainlink addresses this issue by offering a decentralized network of nodes that provide data from off-blockchain sources to on-blockchain smart contracts, ensuring data accuracy and reliability.

When a smart contract requires off-chain data, it sends a request (Requesting Contract) to the Chainlink protocol, which creates a Chainlink Service Level Agreement (SLA) Contract. This contract includes sub-contracts such as the Chainlink Reputation Contract, Chainlink Order-Matching Contract, and Chainlink Aggregating Contract. These contracts ensure the authenticity and performance of oracle providers, match requests to nodes, and validate and reconcile data from multiple sources.

Chainlink nodes use "Chainlink Core" software to translate requests from on-blockchain to off-blockchain language. They collect data from external APIs, translate it back to on-blockchain language, and send it to the Chainlink Aggregating Contract. This contract validates data from single and multiple sources, discarding faulty or dishonest responses, and reconciles the validated data into a single, accurate result.

LINK tokens are used by Requesting Contract holders to pay Chainlink node operators for their services. Node operators stake LINK to demonstrate their commitment and are more likely to be chosen for data requests. The network penalizes faulty or dishonest nodes by taxing their stake. LINK tokens are built on Ethereum and can be traded for fiat or other cryptocurrencies.

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