What is Chainlink

Chainlink is a decentralized oracle network launched by Sergey Nazarov in May 2019. Chainlink aims to act as an abstraction layer for blockchain networks, which maximizes the utilization of off-chain sources enabling developers to create and use decentralized services. Market and Data Feeds is the main product of Chainlink. Based on this, it also provides services such as VRF (verifiable random number generator), Automation (smart contract automation), Proof of Reserve (on-chain auditing), FaIr Sequencing Services (transaction ordering), DECO (privacy-preserving oracle), etc.

Market and Data Feeds

Chainlink Price Feeds is the core oracle service of Chainlink which primarily powers decentralized applications with access to off-chain data and services. The service is provided by Chainlink's Decentralized Oracle Networks (DON) while DON is powered by a multi-layered decentralized aggregation system and an off-chain reporting mechanism.

• Decentralized Oracle Networks (DON)

Decentralized Oracle Networks (DON) is the core architecture of Chainlink. Apart from the price feeds, it also supports other services provided by Chainlink.

Chainlink Network comprises multiple Node Operators, and these Node Operators group together to build oracle networks. Each of the oracle networks operates independently to provide services (e.g. Price feeds) to clients, and they can customize the provided service, consensus mechanism, and inner rules (e.g. how data is sourced and aggregated).

• Multi-Layered Decentralized Aggregation System

Chainlink data feeds do not rely on any single data source, instead, it applies a Multi-Layered Decentralized Aggregation System. Each layer has multiple participants and data sources, and they will collect and aggregate data layer by layer to generate final, fair, and more accurate data.

• Off-Chain Reporting

In general, the off-chain reporting mechanism is how the final data within an oracle network is generated by node operators off-chain.

First, there will be a leader randomly selected among the node operators periodically. When the client requests data, the node operators will submit their observations with their signatures to the leader (in this phase, node operators would not know each other's observations to prevent cheating). Then, the leader will aggregate the observations into a report, and send the report back to the node operators to verify the report’s validity. If the report is approved by a certain number of operators, the leader will send the report to aggregated contract (on-chain) to generate a final result.

As most of the process happens off-chain, it can improve the network efficiency while saving operating costs. In addition, since all the original data is uploaded on-chain with the signatures, the aggregated data is trustworthy and verifiable.

Automation

Chainlink Automation is a decentralized off-chain computation layer of Chainlink. Developers can customize the automated execution of smart contracts as when a predefined event happens, the event will be broadcast to the smart contracts, triggering the execution. For example, Aave can ask for automated liquidation when a certain collateralized ratio is achieved.

You might also be interested in the following information: What is Lending & Borrowing? What is Aave?

Proof of Reserve

Chainlink Proof of Reserve is a real-time autonomous auditing service. It could be used to monitor the asset amount or the financial condition of protocols in real time. For example, to monitor the backing reserve of $WBTC, Proof of Reserve checks its corresponding BTC balance on the Bitcoin blockchain every ten minutes. Whenever a deviation beyond a predefined threshold of the balance is detected, Proof of Reserve will update the on-chain balance data.

Cross-Chain Communication

CCIP (Cross-Chain Interoperability Protocol) is a cross-chain communication standard as developers can build cross-chain bridges upon CCIP. CCIP enables developers to build across-chain applications as they can send tokens and even commands for smart contracts to another chain.

Fair Sequencing Services

Fair Sequencing Services (FSS) is a transaction ordering service. By FSS, users can send transactions to an oracle network. The oracle network will come to a consensus on the ordering of the transactions based on the receiving time of each transaction. Then the oracle network will sequence, pack, and send the transactions on-chain to be executed. FSS aims to prevent users from multiple attacks such as front-running, back-running, etc.

DECO

DECO is a privacy-preserving oracle product based on zero-knowledge proof. It enables the data verification off-chain while uploading the encrypted certification on-chain to be further utilized. DECO uses zero-knowledge proofs to attest to off-chain information without making it publically viewable on-chain or even to the oracles themselves.

VRF

Chainlink VRF (Verifiable Random Function) is a provably fair and verifiable random number generator (RNG). This service can ensure the fairness of different scenarios such as games, NFTs, lotteries, and airdrops.