Chainlink for Beginners

Chainlink is a blockchain agnostic protocol for building decentralized oracle networks (DONs) that dramatically increases the capability of smart contracts by providing access to real-world data and off-chain computation, while maintaining the security and reliability of blockchain technology.

Below we will explore the network infrastructure of Chainlink, goals of Chainlink 2.0, and some uses cases of the Chainlink protocol.

What are DONs?

A DON is a decentralized oracle network, and an oracle sends and receives off-chain data such as price feeds, daily temperatures, sports results, and more to a blockchain such as Ethereum. This data can then be used by smart contracts to execute a transaction on-chain. In summary, a DON is a network maintained by a committee of Chainlink nodes.

The 3 fundamental components of a DON including networking, storage, and computation.

1. Networking: One functionality of the DON are adapters. Chainlink adapters can be used to receive and send information from data sources
2. Storage: Data can be stored on a DON ledger or other existing networks like AWS
3. Computation: Another functionality of a DON are executables. Executables can be thought of in a similar manner to smart contracts. Executables run fully autonomously on a DON and perform deterministic operations.

7 Foundational goals that the DON aims to achieve

1. Hybrid Smart Contracts: By combining on-chain and off-chain components into a smart contract, Chainlink has referred to this concept as hybrid smart contracts. This goal is one of the most important aims of a DON. Current smart contracts present limitations because on-chain contracts are unable to utilize the data feeds from the real-world to perform various functionalities including confidential computation and the generation of randomness secured against miner manipulation. By leveraging hybrid smart contracts, Chainlink creates a larger spectrum for smart contracts as it combines the on-chain immutability with the scalability, privacy, and connectivity of the off-chain infrastructure. Most of the computation will thus happen off-chain, making transactions faster and cheaper for the end user.
2. Abstracting away complexity: By creating a compiler, developers can launch Dapps on the protocol seamlessly, and the code would generated for both on and off-chain. You can think of this similarly to how SDKs support generalist programmers.
3. Scalability: Chainlink aims to continually meet the scaling needs of the blockchain ecosystem. DONs will look to support the transaction execution framework, which will allow for efficient integration of DONs with other layer-2 systems like zk- and optimistic-rollups.
4. Confidentiality: Due to the inherent nature of a blockchain being transparent, there has always been tension between confidentiality and transparency. Oracle networks aim to resolve this issue using 3 main approaches including confidentiality-preserving adapters, confidential computation, and support for confidential layer-2 systems.
5. Order fairness for transactions: One of the problems that many users aren’t aware of include miners and arbitrage bots front running your transaction to gain more revenues. Layer-2 solutions don’t solve this issue, so Chainlink is launching a service called Fair Sequencing Services (FSS), which aims to provide an order fairness of transactions, reducing transaction costs, and allowing priority ordering of transactions. Essentially, transactions pass through the DON first, where the DON can then order the transactions before forwarding them to the contract.
6. Trust minimization: DONs are by nature decentralized, and as such, they aim to build a trustworthy layer of support for smart contracts through cryptographic tools and cryptoeconomic guarantees. Two of the main mechanism highlighted include data-source authentication (Cryptographic signatures of the data, making it impossible for DONs to manipulate the data) and decentralized entity authentication (Using Chainlink nodes to authenticate your data).
7. Incentive based (crypto economic) security: The Chainlink ecosystem relies on nodes acting in an honest manner, therefore, it is imperative that the financial incentives are aligned. One of the underrated incentives is the implicit-incentive framework (IIF). The IIF and staking impact creates a positive economic flywheel for the oracle networks. As more users enter the system, the marginal costs for economic security drops.

Use Cases for DONs

Proof of Reserves

In the space of DeFi, relaying states between or among blockchains are very useful. This is evident in wrapped coins such as wETH and wBTC. When this takes place, the contracts on the target blockchain do not have visibility to the source blockchain. This reliance on the oracle to report on the deposits of the wrapped asset is what is known as a Proof of Reserve. DONs not only allow you to prove that these collaterals exists, but through the capability of holding private keys, can increase the security of these wrapped tokens

Providing enterprises a blockchain abstraction layer

Due to the blockchain agnostic nature of DONs, enterprises are provided a backend layer to connect with any blockchain they want to interact with. Consequently, enterprises can create any blockchain applications.

Decentralized Identity

A Committee of DONs can run a protocol for a decentralized identity, similar to CanDID. Thereby, leveraging these connection to create a decentralized identity.

Resource: Link to Chainlink V2 Whitepaper here