Before we dig into this, let’s go over a quick recap of what a smart contract is. Smart contracts are simply agreements written in code that are usually ran on a blockchain. Why a blockchain? What happens on a blockchain can’t be changed, so when you and someone else come up with an agreement, to change the agreement, you’d have to change millions of computers around the world… it’s no longer your word vs someone else’s word… or an agreement written on paper… it’s an agreement shared with millions of other people.
Moving on, smart contracts can be as simple as “If I pay you $10 today, you’ll pay me $1 back every day for the next 10 days”. They can be more complicated as “If I give you $10 of Ethereum, you give me $10 of Doggie Coins,” where the code can check if both people truly have $10 of each token they want to trade, and then also automate the trading so if one person doesn’t give all $10 or changes their mind, one person won’t be left robbed. Finally, financial smart contracts can be as complicated as “If you give me $10 of USDC, I’ll give you $8 of Ethereum, but you have to pay 6% yearly interest.” Just like addition eventually becomes the building blocks for multiplications and even exponents, these ‘simple’ smart contracts can easily and quickly become the backbone of an entire nation’s financial system.
But, there’s one problem. These smart contracts can only look at data on the blockchain. They can only look at your past transactions, your current account balance, or what your friend has done on the blockchain in the past. Inherently, this limits them.
What if we could bond real life data into a smart contract? Then we could create something like sports betting, where we could bet on who wins a game, or how many points a team may gain.
Let’s use a real-life example where Quarterback Patrick Mahomes throws a 50 yard touchdown to win an NFL game. A sports betting app may use smart contracts to take up bets before the game. At the end of the game, in the traditional world, the bookmaker would need to obtain information about the game from a sports website to pay out the winners. However, in the new world of blockchain technology, we don’t want to rely on a single person inputting the data… we don’t want to put our money in the hands of that single, human, error-prone, emotional-by-nature decider. What if that sports betting blockchain app had a way to gather real world data, put it on the blockchain, and in a way where we don’t have to rely on one person to hopefully give the blockchain truthful data? .
Today, we are going to explain what Chainlink is, how it works, the problem it solves, as well as its tokenomics. Actually, I’ve never done this before, but if you stick around to the end, I’ll show you how to view a pretty big research guide I’ve done on Chainlink including some price predictions.
Chainlink aims to create a network where data providers, which are also called oracles, are incentivized by money to provide truthful and reliable data to a blockchain. Chainlink is run by oracles, so it’s important you know what that is. An oracle is a software that acts as an intermediary, helping to do a two-way data transfer between smart contracts and the real world. We actually have a whole video on oracles, so this won’t focus so much on how they work, but more specifically on how Chainlink uses them.
As a quick recap of what an oracle is though: suppose you’re an avid reader of ancient mythology. In that case, you must have read stories about a fictional town sending its high priest or priestess to consult with oracles to get information about the future or to solve a problem. So, this is literally what these oracles help smart contracts do.
Chainlink is a decentralized network of oracles that provide data from off-chain sources to on-chain sources and vice versa. It allows smart contracts to access real-time information that exists outside of blockchain networks securely. Chainlink also tackles the reliability problems associated with using a centralized data source, but we’ll get to that.
Launched in June 2017, Chainlink is the brainchild of SmartContract.com; a company co-founded by Sergey Nazarov and Steve Ellis. Although their innovation arrived when the crypto industry was booming with new projects, Chainlink has continuously delivered on its promises, coupled with plans to expand beyond the Ethereum network.
The Chainlink network acts as a bridge between the new and booming blockchain industry and the traditional administrative structures that drive economies to build more efficient, secure, and transparent processes. It should be noted that Chainlink is an Ethereum-based network and is secured by the Proof-of-Stake consensus algorithm.
Considering that Chainlink connects different independent oracles to collect data, compiles and validates them before transmitting the data to the smart contract to trigger any action… while also eliminating any loopholes created by centralization. It’s safe to say that it works very similar to many other traditional blockchain protocols. Oh, by the way, Chainlink is a blockchain that was built to actually solve a problem… to put off-chain data like temperatures, stock prices, how many views this video has, and to allow blockchain smart contracts to access them. This is good news for investors, since many crypto tokens are unfortunately solutions looking for problems.
This is a good question. Why? Because if you Google it, you’ll find pages of really technical stuff that most people won’t understand. Also, if you look on Youtube and try to find a video that explains it… none of the videos on Chainlink explain how it really works… they only explain tokenomics, or what problem Chainlink is solving, or why you should invest… just nothing truly explaining how it works so you can understand. Well, grab a chair because I’m going to attempt to do so.
The first thing you must understand with Chainlink is that it is technically replacing a bunch of middlemen. Think about a real estate agent. Nowadays, a lot of people just go on a site like Zillow and find the house they want, opposed to hiring an agent to show them 8 different houses. The same with a travel agent, they were a middleman. Even more so, referring to our sports betting example, someone is collecting money on both sides of the bet and also being a ‘referee’ to decide who gets the winnings. Well, Chainlink’s oracles and the use of smart contracts will replace these people with code. The way they do that is very complicated, but here’s how it works.
Node Operators. This is a fancy word for someone who locks up some money and says “I want to be a trusted source of data, ask me questions.” You might be wondering, “Why do they have to lock up their money?” Well, if we can prove they are no longer truthful, we can take their money! This incentivizes them to tell the truth. However, why would they want to take this risk in the first place? Hint: it’s to earn money. People pay these node operators to give them reliable and truthful data. It’s a win-win.
It gets a little more technical than that though. When someone wants a piece of data, like the weather, they first have to set up a Requesting Contract, which is the start of it all. We’re about to get into some technical stuff, so if you grabbed that chair earlier, you better sit down in it.
After setting up a Requesting Contract, the Chainlink algorithm will register this request as an event, after which it will set up a new matching smart contract known as the Chainlink Service Level Agreement (SLA) Contract to access data off the blockchain. Afterward, the SLA contract will create three subcontracts—a Reputation Contract, Order-Matching Contract, and Aggregating Contract. We’ll go through these three next.
Chainlink’s Reputation Contract evaluates the track record of an oracle to determine its performance history and authenticity, and then will basically remove unreliable and inaccurate nodes. This basically checks to make sure whoever we’re getting the data from can be trusted.
The Order-Matching Contract sends the Request Contract’s query to trustable nodes and checks their bids. It then chooses the suitable amount and types of nodes to handle the request.
Somewhere in here, Chainlink converts the Request Contract’s question into another programming language, and then it can actually grab real world data from the internet.
Chainlink’s Aggregating Contract can validate data from both single and multiple sources. Also, it can handle data reconciliation from multiple sources. Using the previous NFL match as an example, assuming eight different nodes send one set of similar scores, and another three transmit a different game score, the Aggregating Contract will classify the answers sent by the three nodes as faulty, thereby discarding them.
The Aggregating Contract can repeat the validation process for multiple sources, after which it reconciles them by taking an average. It is worth noting that some answers cannot be average, but that is outside the scope of this video. With all these processes combined, Chainlink seamlessly and reliably provides accurate data for smart contract execution. Basically all of these contracts work together to follow this simple formula: you pay Chainlink to go find some trustable nodes (Reputation Contract), give them a question to answer (Order-Matching Contract), and then let Chainlink aggregate the data into a single answer (Aggregating Contract). Did I do a good job? Hopefully. Let’s move on to Chainlink’s Tokenomics.
First off, before I get into Chainlink’s Tokenomics, I wanted to share with you a project I’ve been working on. Basically, there are millions of people out there wanting a “Chainlink Price Prediction.” To help them make a more educated guess, I have actually created a Chainlink Price Prediction webpage that hopefully one day will show up on the first page of Google. Personally, I do not like price predictions because they are usually inaccurate, can become self-fulfilling prophecies, and can harm a person’s reputation if they are wrong. So here at WhiteboardCrypto, we have created a page for people wanting Price Predictions, but filled it with a bunch of information before the very conservative price predictions, so it’s not complete clickbait. The idea is to spoon-feed anyone who wants a price prediction enough information so that they themselves can accurately make an educated guess as to where the price of an asset may be going. If you’d like to see that huge research page we’ve put together on Chainlink, you can help us rank in Google by searching “Chainlink Price Prediction” and finding WhiteboardCrypto.com’s page to view it. This page has tons of information that we had to dig for to put together, and I think you’ll really like it. Anyways, there’s way too much stuff there to put into a video, a lot of it contains time-sensitive stuff, so let’s get back to the basic tokenomics of Chainlink.
The Chainlink blockchain has a native token, LINK, which is used to fund the project’s growth. During LINK’s ICO in September 2017, the developers stated that there would be a maximum supply of one billion tokens. At launch, Chainlink’s price was $0.11, but it trades between $20 and $30 today, representing over a 20000% increase from the launch price.
At the time of making this video, LINK has a circulating supply of over 464 million tokens, which is about 46% of the total supply, the max is 1 billion tokens. Being that LINK token supply is limited, it could be considered non-inflationary since an increase in demand will most likely make the price increase. Also, Chainlink has a market capitalization value of around $14 billion, sitting at the 15th position on the market cap list.
Chainlink’s whitepaper reveals that 35% of LINK’s total supply will be allocated to people who help secure Chainlink’s network and run oracles. Then, another 30% will be channeled towards the development of the Chainlink blockchain and ecosystem. The remaining 35% were sold in public sales events.
Since Chainlink is a decentralized network, users can leverage it to become node operators themselves and earn rewards by handling important data-related tasks that ultimately lead to the blockchain’s success. In short, the two main uses of LINK tokens are to pay the network to give you some data, and also used as deposits used by node operators to ensure they play nice.
Lastly, if you haven’t heard of our free DeFi for beginners guide, check out WhiteboardCrypto.com, where you can find our free little course, our newsletter, and a few custom tools we’ve created. If you’re really ready to dive into the rabbit hole of DeFi, you can join WhiteboardCrypto Club where you’ll gain access to a private community, get a signup bonus of $20 ETH to jumpstart your journey, be able to watch some premium tutorials I’ve put together, AND be supporting the channel and our future team’s work. No hard sell though, the opportunity will be waiting for you when you’re ready.
Thanks for reading; I hope you enjoyed the article, I really hope you learned something, and most of all, I hope to see you in our next article!