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How Chainlink is Solving Blockchain Oracle Problem

Introduction

Let's assume Ronaldo and Messi want to bet on the outcome of a sports match. Ronaldo bets $25 on team A and Messi bets $25 on team Bravo, with the $50 total held in escrow by a smart contract. When the game is over, how does the intelligent contract know whether to release the funds to Ronaldo or Messi? The answer is it requires an oracle system to fetch accurate match outcomes off-chain and deliver them to the blockchain securely and reliably.

Blockchain oracles are technologies that connect blockchains to the external systems throughout, enabling smart contracts to do the work based upon inputs and outputs from the real world. Oracles provide the service as a gateway, processing external and deterministic data and converting it to a format that a blockchain can understand. Oracles are not left out of the shortcoming that often comes with great technology; hence they do have some problems which result from the inability of oracles to verify the integrity of their data. Despite that, many communications and transactions using blockchain technology will be impossible without oracles. Chainlink, for example, is an oracle network that feeds real-world data to blockchain-based smart contracts and lots of blockchain experts use Chainlink to resolve oracle issues.

Overview of Blockchain Oracle Problem and Chainlink

The blockchain oracle problem outlines an essential dilemma of smart contracts—they can't inherently engage with information and structures outside their local blockchain environment. Resources outside the blockchain are "off-chain," while information saved on the blockchain is considered on-chain. Blockchains reach consensus, validate transactions, and prevent double-spending attacks. Security through interaction with information outside the blockchain interoperating with an off-chain mechanism from a blockchain demands an extra piece of infrastructure called an "oracle" for real-time communication and relaying of data from the real off-chain world.

The blockchain oracle problems are divided into two parts. First, blockchains cannot access external data on their own, and then using centralized oracles negates the benefit of smart contracts—and introduces significant privacy issues. As blockchains are built-in functionality, the oracle problem revolves around a simple limitation, and thereby, it cannot push data out and pull in data to an external system. Such blockchains are isolated networks akin to computers without an internet connection. The isolation of a blockchain is the specific property that makes it highly secure and reliable. The shallow focus of blockchain consensus is why the smart contracts are referred to as being nominated—they execute as written with a much higher degree of certainty than traditional systems.

One aspect of blockchain that has the eyes of many and is often called the next digital lawyer is Ethereum smart contracts. Smart contracts have created a more transparent system for building trust and securing funds. Chainlink oracles help smart contracts by providing an intriguing decentralized way to authenticate relevant output data using smart contracts. Chainlink is one platform that has been able to succeed in intelligent contracts. It offers a transparent and decentralized way of taking off-chain information on-chain. Chainlink was founded in 2017 by two cryptocurrency experts, Steve Ellis and Sergey Nazarov, who went on to launch the company in the fintech niche.

What do Blockchain Oracles do?

Oracles facilitate the smooth functioning of blockchains. They provide the flow of information between the blockchain's input and output systems. The image given below summarizes how Chainlink wedges its oracle technology between external data events, such as a weather forecast, a decentralized platform such as Ethereum, and the off-chain users of the said platform. As a middleware, blockchain facilitates the secure connection between any off-chain system and blockchains, including information providers, enterprise backends, e-signatures, cloud providers, IoT devices, payment systems, other blockchains, and more. We can classify any system that connects a deterministic blockchain to off-chain data as a blockchain oracle. All data inputs are routed through an external transaction in these oracles.

With oracles, we can rest assured that a blockchain can get all the information it needs at the time when it is required. The link offered by oracles is indispensable in blockchain communication since smart contracts work more effectively with the data provided.

Types of Blockchain Oracles

Oracles serve as an interface to the world outside the blockchain. Depending upon the traits governing the source, the direction of information, and trust, blockchain oracles are classified as follows:

Hardware and software oracles

Most crypto oracles analyze digital data and information. While Hardware oracles deliver data from the physical world, software oracles have data from digital sources such as websites, servers, or databases. In addition, information from camera motion sensors and radio frequency identification (RFID) sensors can be delivered and relayed by hardware oracles. Real-time data, such as exchange rates, price variations, and travel information, can be delivered through software oracles.

Centralized and decentralized oracles

A central entity dictates centralized oracles, while decentralized oracles do not depend on a single source for transmitting the required information to the smart contracts. A single point of failure directly hampers the centralized oracles, while decentralized oracles build trust and are regarded as consensus oracles. The smart contract uses many oracles to assess the validity and accuracy of the data; for this reason, decentralized oracles are known as consensus oracles. However, other blockchains can use decentralized oracle services that some blockchain oracle projects provide.

Contract-specific oracles

If the experts intend to deploy numerous smart contracts, it will be necessary to build various contract-specific oracles. As they are constructed from scratch to provide a special purpose, experts can very well tailor them to the special needs. These are time-consuming, expensive to maintain, and cannot be used to extract information from different sources. Contract-specific oracles aren't really worth the time and work it takes to keep them up to date. On the other hand, they're inconvenient and should only be utilized in specific situations.

Human oracles

They can provide the authenticity of the information from various sources and transmit it to smart contracts. As humans are involved, and their identity is verified with cryptography, the possibility of fake identity fraudsters and data corruption is reduced.

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Computation oracles

Computation oracles can be used to provide computation on the set of inputs and return a modified result that would otherwise be impossible to calculate on-chain rather than just relaying the results of a query. If i give one example, to calculate the yield of a bond contract, a computation oracle could be used to provide a computationally complex regression calculation.

Cross-Chain Oracles

The types of oracles are cross-chain oracles which can read and write the information between various blockchains. These oracles ensure interoperability for forwarding data and assets between blockchains, like using data on one blockchain to initiate an action on another or bridging assets cross-chain so they can be used outside the native blockchain they were issued on.

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How Does Chainlink Work and The Technology Behind It?

Chainlink is a decentralized oracle solution that acts as a middleware agent between traditional data sources, blockchain projects & smart contracts. It also has a reward mechanism for nodes involved in the data communication process using its used token named LINK. The parent company is named SmartContract.com, which was founded in the month of September 2014. Chainlink team is headed by Sergey Nazarov, who joined the Crypto revolution in 2011 – his career focused initially was building P2P marketplaces before shifting to oracles. The individual nodes on Chainlink work as smart contracts on their own, and their task is to perform free & decentralized computations to verify the correctness & accuracy of the data being provided into the smart contracts. In addition to it, the middleware also ensures the privacy of the data between the intelligent contracts & blockchains.

Aa, a smart contract user, needs to be connected to a real-world data source; through the Chainlink system, they brought out a Service Level Agreement (SLA) request. It uses the information in the request to select oracles to provide the necessary data. Oracles process the real-world data and pass it on to the blockchain through a process where an internal chain system checks the sources for its accuracy. The last step works via the aggregating contract where the most accurate result from the oracles is inputted on-chain. Those who wish to get inside the real-world data pay a small fee, which is deposited in the native LINK token and moves towards incentivizing the nodes.

As demand for Chain link technology enhancement, scalability problems have already cropped up. However, the present team behind the project has initiated a second layer network it calls Chainlink 2.0. The new project offers "decentralized oracle networks'' (DONs) by a blockchain app development company, which permits the oracles to work on external data sources off-chain before registering them on the blockchain.

The expanding services available on the Chainlink network are fueling innovation across numerous leading blockchains, providing developers with an array of key oracle functionalities. Chainlink offers various useful features, which are discussed below.

  • The Chainlink offers an easy user interface and design to suit developer needs. Although reading the Chainlink original white paper may seem daunting, the user interface is very simple to use, and information is passed quickly to users. The architectural design is divided into two: on-chain and off-chain design.
  • Chainlink price feeds present an in-depth series of on-chain economic marketplace information for an extensive range of assets, which are used to steady billions of dollars for main DeFi programs such as Aave, Synthetix, and dYdX.
  • Chainlink proof of reserve resources offers on-chain information feeds that permit smart contracts to carry out on-call audits of tokenized assets reserves for stable coins such as TUSD and PAX and other cross-chain tokens.
  • Chainlink external adapters provide builders the gear to create communication to any off-chain aid or API. Everpedia, for example, is using Chainlink oracle to build an entire prediction marketplace that can simulate US election results on the blockchain.

Advantages and Disadvantages of Using Chainlink

Advantages of Chainlink

  • The Chainlink project provides compatibility between Bitcoin and Ethereum, and also allows banks and payment services to be included in the decentralized ecosystem.
  • One of Chainlink's goals is to completely decentralize smart contracts, which is going to help this system smoothly. This should increase the security of information as well as its accuracy.
  • Cooperation with the largest companies — like Google Cloud, Oracle, and SWIFT inspires confidence.
  • The LINK tokens can be a very good investment tool given the technological capabilities and goals of the Chainlink project.

Disadvantages of Chainlink

  • Chainlink is one of the first oracle projects, and as we have seen with Ethereum and other networks that came after Bitcoin, early projects easily miss out on some critical issues. There are already new oracle projects claiming to offer more secure and accurate off-chain and on-chain data.
  • The pace of development with Chainlink is not also commendable as there is still so much to achieve to get the project to full scale. There are also problems with tokenomics, with millions of Link tokens lying around, and there is no clear definition of how they will be allocated.

We Can Help You Build All Kinds of Oracle Solutions and Integrations

If you want to solve your blockchain oracle issues in the blockchain ecosystem or connect smart contracts to third-party APIs, we are always ready to assist you by providing our Chainlink blockchain development services. We have written over 100,000 lines of codes for several reputable blockchain projects to date. We believe that Chainlink has what it takes to become an even bigger player in the crypto space, and our belief is hinged on a projection of the team’s hard work and commitment to delivering value.

Considering the rapid growth of blockchain technology, instead of hiring freelancers or an individual blockchain developer, it’s always better to get the service from an expert team of professionals who all are working day and night to deploy all kinds of blockchain oracle solutions. From years of study and experience working in this technology, we offer stellar solutions for all kinds of projects.

Conclusion

Chainlink has partnered with WEF (World Economic Forum) and is interested in public and private institutions. With this in mind, we believe in Chainlink in the forthcoming years, and it's maybe only a matter of time before the project blows cynics out of the water. The Chainlink team's opaqueness when it comes to funds could land them in a vulnerable spot, but there have been lots of hiring lately, and they may be working to fix tokenomics issues. Chainlink is already popular in the developer community as lots of programmers building blockchain projects on Ethereum, Avalanche, Polygon, and Binance Smart Chain are leveraging the oracle benefits of Chainlink to code efficient smart contracts.

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