When people think about the services provided by decentralized oracle networks like Chainlink, they usually only think about Price Feeds, which provide DeFi smart contracts access to the financial market data they require for settlement. These smart contract functions can include liquidating undercollateralized loans (Aave), minting/swapping synthetic assets pegged to real world assets (Synthetix), trading advanced leveraged derivative perpetual products (dYdX), and more. However, transferring financial market data from the real world onto the blockchain is truly just the tip of the iceberg in terms of the broad array of hybrid services that Chainlink provides.
In a recent episode of the ChainLinkGod Podcast, my co-host Crypto___Oracle and I explored the various existing Chainlink oracle services that enable developers to create more advanced, data-driven and automated smart contract applications. Many of these services are already widely used across the smart contract ecosystem and on multiple blockchain networks so that Chainlink has effectively become the industry standard solution for hybrid off-chain services.
These services are built upon a generalized oracle framework that allows for connecting smart contracts to any external resources, enabling smart contract developers to overcome the data connectivity problem of blockchain networks and begin building more advanced decentralized applications. Specifically, the services made available by Chainlink oracle networks today include Price Feeds, Proof of Reserve, VRF (Verifiable Random Function), Any API, Keepers, and a Blockchain Abstraction Layer.
Chainlink’s Price Feeds were the first and currently the most widely adopted decentralized service provided by the Chainlink Network. Price Feeds are on-chain reference contracts that store the current price of a specific asset, which continually updates to keep the data fresh. DeFi smart contracts can connect to over 350+ reference contracts and pull data at any time to fetch financial market data on cryptocurrencies, stablecoins, forex, commodities, indices, equities, gas prices, and more. These feeds are available across multiple networks including Ethereum, Binance Smart Chain, Polygon, xDai, HECO, Starkware, and more in the future such as Arbitrum, Optimism, Polkadot, Cosmos, Avalanche, etc.
Chainlink Price Feeds are designed to provide the most reliable and secure source of pricing data, which is achieved through three layers of aggregation. This includes decentralization at the data source level, where professional data providers generate the volume weighted average price (VWAP) of a specific asset by tracking all centralized and decentralized exchanges, weighting each by volume and discarding outliers; at the node operator level, where each Chainlink node aggregates from multiple data providers to prevent any single source of truth, API downtime issues, or tampering by combining sources with different VWAP methodologies; and finally at the oracle network level, where responses from multiple independent Chainlink nodes are aggregated to increase tamper-resistance and reliability even if a fraction of nodes is offline or corrupted.
Additionally, because Chainlink Price Feeds operate on a shared cost model where feeds are collectively funded by many independent users, an economies of scale effect is created that lowers the per-user costs while raising the total security budget made available to oracle nodes, solidifying Chainlink Price Feeds as the dominant on-chain financial market data resource.
Proof of Reserve
With the massive growth in the amount of fiat-backed stablecoins, cross-chain tokens, and real world asset-backed tokens, there is a growing need for on-chain transparency about the off-chain collateral backing each token. Chainlink Proof of Reserve solves this dilemma by leveraging a decentralized oracle network to verify reserves and publish reserve data on-chain where it can be audited by smart contracts in real time. With this data, smart contracts can mitigate the side effects of unexpected fractional reserve activities by pausing dApp functionality during times of deviation.
For example, a Proof of Reserve feed can be used by a money market protocol to pause the lending, borrowing, and collateralization of loans with a stablecoin that is no longer backed 1:1 by US dollars in an off-chain bank account. Proof of Reserve feeds can be seen with BitGo’s WBTC, Ren Protocol’s renBTC, TrustToken’s TUSD, and Paxo’s PAX and PAXG tokens. Financial products such as insurance and swaps products can also be built using these data feeds.
Blockchains on their own do not generate a tamper-resistant form of randomness. Blockhashes can be manipulated by miners who withhold blocks with unfavorable blockhashes and on-chain hash functions with predictable data can be manipulated by anyone. Additionally, traditional off-chain oracle solutions offer no way to verify that the randomness generated hasn’t been tampered with (since fake randomness looks identical to real randomness without a proof).
Chainlink VRF (Verifiable Random Function) solves this issue by generating randomness data along with a cryptographic proof that validates that the combination of a specific seed value and an oracle’s private key resulted in the corresponding RNG value. This proof is validated on-chain before being consumed by smart contracts, and cannot be tampered with by any entity including the oracle, user, or dApp developers. dApps can leverage randomness from Chainlink VRF to assign verifiably random attributes to NFTs, distribute tokens in a provably random manner, generate truly generative unpredictable artworks, and more.
Chainlink oracle nodes are able to connect to any real-world data source using application programming interfaces (APIs), which are the standardized way digital services communicate to each other programmatically. Chainlink nodes have built-in capabilities for accessing any public open API out-of-the-box and can support any authenticated (password-protected) API through modular external adapters. These adapters allow oracle nodes to connect to any and all off-chain resources today and into the future, future-proofing the Chainlink Network.
This is commonly referred to as the “request and receive” model, where a smart contract pings a Chainlink node’s oracle contract for data from a specific API, and the data is returned to the contract after the oracle’s query is complete. This model is being used by Arbol to fetch weather data that settles parametric crop insurance agreements and Augur to fetch sports data that settles prediction markets on layer 2, as well as LaMelo Ball’s dynamic NFTs which track his performance in the NBA. These are just a few use cases; any data source imaginable can be connected to smart contracts using Chainlink oracle nodes and external adapters.
A little known fact about smart contract applications is they are not inherently autonomous; they are “asleep” by default and must be “awoken” in order to execute any state changes. This requires an on-chain transaction signed and initiated by a private key holder. This system is acceptable for use cases where the users themselves are interacting on-chain, but there are many smart contract functions – e.g. liquidating undercollateralized loans on money markets, rebasing the supply of algorithmic stablecoins once a day, settling futures contracts at expiry, harvesting yield for a yield aggregator – that need to occur on a standardized time or event-based schedule.
Chainlink Keepers provides a solution in the form of a decentralized transaction automation service that allows developers to automate these smart contract tasks by delegating responsibility to a decentralized network of keeper nodes who continually monitor the contract and create on-chain transactions whenever a state change needs to be executed. Compared to other keeper implementations, Chainlink Keepers provides greater reliability assurances by using the same set of highly reputable Chainlink nodes that already secure tens of billions of dollars for Chainlink Price Feeds. Additionally, cost-efficiency is guaranteed by using a round-robin approach to selecting nodes for jobs, preventing gas price auction wars and competition between nodes for a given task. This results in truly autonomous smart contracts.
Blockchain Abstraction Layer
Because Chainlink is a blockchain-agnostic protocol that is continually expanding support for additional chains, it serves as a blockchain abstraction layer for enterprises, allowing institutions to become “blockchain-enabled” by integrating a single piece of middleware. Chainlink’s secure middleware can be used to read and write data to and from any blockchain network, providing a future-proof solution for supporting all blockchains that exist today and in the future.
This secure blockchain middleware approach lowers development costs, reduces time to market, and allows enterprises to engage in contractual agreements with any counterparty, regardless of their preferred blockchain settlement layer (of which there are many). Because enterprises are historically slow to move, they are unlikely to reach consensus on a single blockchain. Instead, enterprises should be able to connect to many blockchain networks at any given time. As soon as one large enterprise integrates a secure blockchain middleware, there will likely be a domino effect where others follow suit in order to stay competitive.
Through all of its various decentralized services, including Price Feeds, Proof of Reserve, VRF, Any API, Keepers, and a Blockchain Abstraction Layer, Chainlink provides a holistic solution for the creation of increasingly advanced decentralized applications that require off-chain resources.
To learn more about Chainlink’s decentralized services and the unique value propositions they provide, check out the related episode of the ChainLinkGod Podcast, where Crypto___Oracle and I explore this topic in more depth and discuss the various design nuances behind each implementation.
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