Overview

Chainlink is a Decentralized Oracle Network (DON) that enables the secure connection between on-chain smart contracts and off-chain data providers and services. Chainlink’s infrastructure has set an industry standard for decentralized Oracle networks. By providing tamper-proof inputs and outputs, Chainlink’s Oracle Network expands the capabilities of smart contracts by enabling access to real-world data and off-chain computation.

Furthermore, Chainlink can be categorized as an industry standard for building, accessing, and selling Oracle services that are needed to power dApps and smart contracts on any blockchain. This is achieved by relying on Oracle networks that have the ability to connect any API or off-chain computations to on-chain smart contracts across DeFi, insurance, gaming, and other major industries. Oracles are needed for all the best blockchain use cases to work, and Chainlink is the primary Oracle provider.

Chainlink connects smart contracts with external data APIs using its Oracle network. A Basic Request Model is used to request data from a single Oracle source. This oracle source will provide a robust and trustworthy response that results from the aggregation of data from many oracles. With on-chain aggregation, the data is put together by a decentralized network of independent Oracle nodes.

Contracts are meant to define the terms and obligations that must be met between two or more parties to exchange value with one another. Historically, a third party acts as an intermediary to verify that all terms and conditions are met. However, thanks to the advent of blockchain technology, smart contracts, and oracle networks that can bring real-world off-chain data on-chain, it is now possible to replace centralized intermediaries with decentralized infrastructure. This reduces counterparty risk and improves operational efficiency.

To overcome the lack of connectivity between different blockchains and data providers and API services, Chainlink enables hybrid smart contracts that can act as the middleware layer. As such, Chainlink facilitates the retrieval of external data inputs and pushes them on-chain. Not only do oracles serve as a two-way bridge between smart contracts and the outside world, but they also provide a security framework that protects against any single point of failure such as data manipulation or downtime.

Besides, it is worth noting that Chainlink is not a single Oracle network. Instead, it is an ecosystem consisting of multiple decentralized oracle networks running in parallel. Each oracle network can provide a multitude of oracle services without cross-dependencies on other oracle networks.

Chainlink provides the necessary developer tools required to construct any type of Oracle network, such as using multiple data sources, multiple Oracle nodes, various aggregation methods, payment penalties, reputation services, or visualization tools.

How Chainlink Works

Chainlink’s core functional objective is to bridge two environments: on-chain and off-chain. This is achieved through an on-chain workflow that has 3 steps: oracle selection, data reporting, and result aggregation.

Chainlink nodes are powered with the Chainlink Core software, which is responsible for interfacing with the blockchain, scheduling, and balancing work across its various external services. Node operators may then choose to add software extensions, known as external adapters, that allow operators to offer additional off-chain services.

Chainlink Architecture

Chainlink’s Data Feed Architecture is made out of 3 components: the Basic Request Model, the Decentralized Data Model, and Off-Chain Reporting.

Basic Request Model

The Basic Request Model connects smart contracts with external data by handling Chainlink API requests 1:1 by an oracle node.

This model uses a ChainlinkClient smart contract that enables other smart contracts to consume the data provided by Oracle nodes. The client constructs and sends requests to known Chainlink oracles by using a transferAndCall function that is implemented by the LINK token. This request will send encoded information in order to trigger a specific logic in the receiving contract within a single transaction.

The Oracle contracts that receive the encoded information are owned by Oracle node operators, which run alongside off-chain Oracle nodes. These contracts are responsible for handling the requests made through the LINK token. After execution, they send an event containing information about the original request. By emitting this event, the Oracle network can monitor the off-chain data being emitted.

Off-Chain Oracle Nodes will listen for the events emitted by Oracle contracts and, once they detect an event being emitted, they will use that data to perform a specific task. The most common job performed by these Off-Chain Nodes is to send a GET request to a given API in order to retrieve data from it, parse the response, convert the result into a blockchain-compatible data format, and submit the transaction back to the Oracle contract.

• Introduction to using any API
• ChainlinkClient API reference
• Make a GET request

Decentralized Data Model

The Decentralized Data Model is based on the premise of on-chain data aggregation from many independent oracle nodes in order to provide a trustworthy data response. This is the underlying mechanism for updating Data Feeds.

Each Data Feed is updated by multiple independent Chainlink Oracle operators, whose results are aggregated on-chain by the AccessControlOffchainAggregator.

Data Feeds are built and funded by the community. Normally, these are users and protocols that rely on the accuracy of the data being used by their smart contracts. As more users rely on a specific Data Feed, the quality of its data will improve. Because of this, each Data Feed has its own properties based on the needs of its community users.

Each Data Feed is updated by a Decentralized Oracle Network, and each Oracle operator is rewarded for publishing the data to the network. The exact number of oracles contributing to each feed varies from one use case to another. However, for an update to take place, the Data Feed aggregator contract must receive responses from a predefined minimum number of nodes.

• Minimum number of oracles for each Data Feed: https://data.chain.link/
• Using Data Feeds: https://docs.chain.link/data-feeds/price-feeds/

Components of a Decentralized Oracle Network

• Consumer contract: uses Chainlink Data Feeds to consume aggregated data
• Proxy contract (AggregatorProxy.sol): smart contracts that point to the aggregator contract for a particular Data Feed. Using proxies enables the underlying aggregator to be upgraded without causing any interruption to consumer contracts.
• Aggregator contract (AggregatorV3Interface): receives periodic data updates from the oracle network and stores the aggregated data on-chain so that consumers can retrieve it and act upon it within the same transaction

Off-Chain Reporting (OCR)

Off-Chain Reporting (OCR) is an improvement in the degree of decentralization and scalability of Chainlink. By using Off-Chain Reporting data aggregators, all nodes can communicate using an off-chain peer-to-peer network. In this process, a lightweight consensus algorithm is run in each individual node in order to report observations and sign their validity.

1. The nodes regularly elect a new leader who will request its followers to provide freshly signed observations in order to aggregate them into a single report.
2. This report is then sent to the follower nodes in order to verify its validity.
3. If a quorum of followers approves the report by sending a signed copy back to the leader, the leader assembles a final report with the quorum’s signatures and broadcasts it to all followers.
4. The nodes attempt to transmit the final report to the aggregator contract according to a randomized schedule. Once the aggregator receives this report, it will verify the quorum signatures and expose the median value to data consumers with the corresponding block timestamp.
5. All nodes watch the blockchain and remove any single point of failure during the data transmission. If the designated node were to fail to get the transmission confirmed, other nodes will intervene until the final report is confirmed.

The end result is a single aggregate transaction that is transmitted, saving a significant amount of gas. Submitting one aggregated transaction provides benefits such as:

• Reduced network congestion from Chainlink Oracle networks
• Fewer gas costs for node operators
• More scalable data feeds that can accommodate more nodes
• Increased decentralization of Oracle networks to benefit from additional accuracy and availability

Data Feeds

Chainlink Data Feeds are used by developers to connect their smart contracts with real-world data (can be historical data too). Data Feeds are aggregated from many data sources by a decentralized set of independent Node Operators, following the requirements of the Decentralized Data Model.

1. First, data providers aggregate raw data from a series of centralized or decentralized sources. For instance, this could be centralized and decentralized exchanges whose raw data would account for time, volume, and outliers in price data.
2. Second, independent Chainlink nodes fetch the data from the data providers and combine the results into a single aggregated value.
3. Finally, multiple Chainlink nodes aggregate their results together off-chain to generate a tamper-resistant oracle report that is made available to smart contracts on-chain.

Proof of Reserve Feeds

Chainlink Proof of Reserve verifies the collateralization of any on-chain asset backed by off-chain or cross-chain reserves. This approach challenges the way the traditional financial system works, which operates in an opaque and undercollateralized manner that results in systemic risks and market-wide failures.

Decentralized Finance provides a more transparent and trust-minimized alternative to financial products that are powered by deterministic smart contracts and cryptographic truth. The latest developments of the industry have resulted in an increasing demand for new collateral types that extend beyond native on-chain assets, including cross-chain tokens, fiat-backed stablecoins, tokenized real-world assets… Because of that, it is critical that businesses that hold cryptocurrencies can create public attestations regarding the state of their reserves in order to prove solvency to their depositors via independent audits.

Chainlink Proof of Reserve Feeds provides the status of the reserves for several assets that belong to an entity. This is achieved by a decentralized network of oracles that enable the autonomous auditing of collateral in real-time.

There are two types of Proof of Reserve Feeds: cross-chain reserves and off-chain reserves.

• Cross-chain reserves are sourced from the network where the reserves are held. This is achieved by running an external adapter that queries the source-chain client directly.

• Off-chain reserves are sourced from APIs through an external adapter where the data can be provided by:
  • Third-party auditor that verifies the reserves and provides the data through an API
  • Custodian or bank responsible for holding the reserves
  • Self-attested API from the token issuer

NFT Floor Pricing Feeds

Chainlink NFT Floor Pricing Feeds are supported by Coinbase Cloud’s aggregation algorithm to offer users a conservative and risk-averse estimation of the price floor for an NFT collection. Combined with Chainlink’s infrastructure, NFT Price Floor Feeds can eliminate extreme price outliers and make these feeds resistant to market manipulation. This is a critical feature for dynamic NFTs, on-chain derivatives, NFT borrowing and lending markets, gaming guilds, CeFi products, prediction markets…

NFT Floor Pricing Feeds can be used to derive the denominated pair in multiple currencies (BTC, ETH, stablecoins…)

Rate and Volatility Feeds

Chainlink rate and volatility feeds provide data for interest rates, interest rate curves, and asset volatility. You can read these feeds the same way that you read other Data Feeds.

There are 3 types of data feeds available under this category:

• Bitcoin Interest Rate Curve
• ETH Staking APR
• Realized Volatility

The addresses for these feeds can be found here.

Bitcoin Interest Rate Curve

Lenders and borrowers use base rates to evaluate interest rate risk for lending and borrowing contracts, asset valuation for derivatives contracts, and an underlying rate for interest rate swap contracts.

Bitcoin Interest Rate Curve Data Feeds provide a base rate to assist with market decisions and quantify the risks of using certain protocols and products based on current and predicted baseline interest rates. The curve’s normalized methodology and daily rates introduce more consistency and predictability to the ebb and flow of digital asset markets.

Bitcoin Interest Rate Curve Feeds incorporate a wide range of data sources such as OTC lending desks, DeFi lending pools, and perpetual futures markets.

ETH Staking APR

The ETH Staking APR feeds provide a trust-minimized and tamper-proof source of truth for the global rate of return from staking as a validator to secure the Ethereum network. The annualized rate of return is calculated over 30-day and 90-day rolling windows. Data providers use off-chain computation to calculate returns at an epoch level, reach consensus on the APR, and then write the results on-chain to be used by decentralized protocols and Web 3 applications. Feeds are currently configured to update at a minimum of once per day.

Realized Volatility

Realized volatility measures asset price movement over a specific time interval. This value is expressed as a percent of the asset price. The more an asset price moves up or down over time, the higher the realized volatility is for that asset. Please note that realized volatility is not the same as implied volatility, which measures the market’s expectation about future volatility typically derived from options markets.

Each data feed reflects the volatility of an asset over a specific rolling window of time. For example, some data feeds provide volatility data for the last 24 hours, 7 days, and 30 days of time. You can compare the data across these windows to infer whether the volatility of an asset is trending up or down. For example, if realized volatility for the 24-hour window is higher than the 7-day window, volatility might increase.

The same high-quality data providers used in Chailink’s price feed sample price data every 10 minutes to refresh volatility estimates. On-chain values are updated when the feed heartbeat or deviation threshold is met.

L2 Sequencer Uptime Feeds

L2 Sequencer Uptime Feeds are used in the context of Layer2 chains, specifically optimistic rollups. Optimistic rollup protocols move all execution off of the Layer 1 chain and return the results of that execution from the Layer 2 back to the Layer 1. To do this, these protocols rely on a sequencer that will roll up the L2 transactions by batching multiple transactions into a single transaction.

If a sequencer becomes unavailable, it is no longer possible to read/write the APIs that consumer applications are using on the L2 network. The only way to do this would be to interact directly with the L1 optimistic rollup contracts. This would be unfair for users, for whom the L2 chain would be down and, therefore, it would be impossible for them to interact with any dApp on that chain.

By keeping track of a sequencer’s uptime, Chainlink can inform its users and applications about the status of the sequencer at any given point in time. This could, for example, help to prevent a cascade of liquidations on money markets.

1. Every 30 seconds, Chainlink nodes trigger an OCR that updates the status of the sequencer by calling it through a proxy contract
2. The validator contract on the L2 chain will check if the latest status is different from the previous message and will send the information back to the sequencer uptime feed
3. The sequencer uptime feed will mark the status of the sequencer as 0 if the sequencer is up, and 1 if it is down
4. A consumer contract on the L2 chain can read these values from the proxy contract and handle any possible outage.

For instance, if a Layer2 chain like Arbitrum becomes unavailable, the ArbitrumValidator contract will continue to send messages to the L2 network through a delayed inbox on the L1. This message will stay there until the sequencer is back up again. When the sequencer comes back online after its downtime period, it will process all transactions from the delayed inbox before it starts accepting new transactions.

This process is different on Optimism and Metis, where a network of node operators will run an external adapter on the L1 chain in order to relay the status to the Aggregator contract, which will update the status of the L2 validator contract. On the L2, the sequencer will post the message to the OptimismSequencerUptimeFeed contract, which contains all the instructions necessary to update the status and allow consumers to read the status of the sequencer.

Real World Data

Smart contracts can be connected to the outside world with off-chain generalized data such as parametric insurance, weather data feeds, sports data, prediction markets that rely on sporting, or political events, predictive supply chains…

Feed Registry

The Chainlink Feed Registry is an on-chain mapping of assets to feeds. This allows anyone to query data feeds from asset addresses directly, without needing to know the feed contract addresses.

• Historical Price Data
• Cryptocurrency price pairs
• Price Feeds API Reference
• Price Feed Contract Addresses
• Proof of Reserve Feeds
• Proof of Reserve Feeds Contract Addresses
• NFT Floor Pricing Feeds
• NFT Floor Pricing Feeds Contract Addresses
• Forex pairs
• Data Feeds on Solana
• Solana data feeds addresses

Chainlink VRF

Chainlink VRF (Verifiable Random Function) is a provable and verifiable Random Number Generator (RNG) that enables smart contracts to access random values without compromising security or usability. For every request, Chainlink VRF generates one or more random values along with a cryptographic proof to show how those values were determined. This proof is then published and verified on-chain before any consuming application can use it. This process ensures that the results cannot be tampered with or manipulated by any single participating entity, including miners, oracle operators, or smart contract developers.

Chainlink VRF is helpful for building reliable smart contracts used in applications that rely on unpredictable outcomes, such as on-chain games, NFT rarities, random assignment of duties, and choosing a representative sample for consensus mechanisms.

Since its mainnet launch in October 2020, Chainlink VRF gas services over a million requests across multiple chains.

Why Chainlink VRF?

From selecting winners in games to generating unforeseen variations in digital artwork, entropy is a core component for unprecedented use cases in gaming, NFTs, art, and even science when it comes to blockchain applications. Accessing a secure, unpredictable, tamper-proof, and auditable source of entropy is a game changer for an industry where all outcomes are deterministic by design. For instance, if we had to generate a random number by using the properties offered by a blockchain itself, such as block hashes, we could introduce attack vulnerabilities where miners/validators choose to only publish a new block when it is a favorable situation for them.

In computer science and mathematics, a deterministic system is one where there is no randomness involved and, because of that, it produces the same output given the same inputs.

As an alternative to on-chain deterministic solutions, there are off-chain API providers. However, they are opaque and unverifiable. Because of that, users have no way to verify whether the results are true or manipulated.

Smart contract developers should not solely rely on block hashes as a source of randomness. For example, we could take a contract that makes decisions based on the parity of the last bit of a block hash. At first, we could think that this would yield a 50/50 outcome. However, it is possible for a miner (or coalition of miners) to discard blocks for which the last bit of the block hash is one, forgoing the block reward. In this case, the miner could bias the zero outcome from a reliable 50% likelihood to a ⅔ likelihood. This could lead to the loss of user funds from any smart contract relying on such a method for randomness generation.

To avoid this kind of scenario, developers should turn their attention to off-chain solutions where a random number that is generated off-chain is then brought on-chain. For this method to be effective, there must be a cryptographic proof supporting the evidence that the randomness has been produced fairly.

Chainlink Verifiable Random Function (VRF) overcomes all those limitations using off-chain oracle computation and on-chain cryptography. This method works by combining block data that is still unknown when the request is made with the Oracle node’s pre-committed private key to generate both a random number and a cryptographic proof. As a result, the consuming application will only accept the random number if it has valid cryptographic proof, which can only be generated if the VRF process is tamper-proof.

Chainlink VRF is powered by open-source code and all cryptographic proofs are verifiable on-chain by anyone.

How Chainlink VRF works

Chainlink VRF works by combining block data that is still unknown when the request is made with the oracle’s node pre-committed private key to generate both a random number and a cryptographic proof. For this process, each oracle uses its own private key.

When the result is published on-chain along with a proof, it is verified on-chain before being sent to the target smart contract. In fact, verifiable randomness is the fundamental benefit of using Chainlink VRF. Even if a node is compromised, it cannot manipulate or supply biased answers, since the on-chain cryptographic proof would fail.

The worst case scenario is that the compromised node does not return a response to a request for randomness, which will be forever visible on-chain. If this happens, users would no longer rely on those nodes that stop responding or refuse to provide randomness with a valid proof. Compromised nodes can only withhold a request by giving no response, for which they would be penalized using Chainlink’s upcoming staking capabilities and removed from future queries.

An additional benefit of VRF is that, as more users utilize it, the amount of fees paid to node operators increases as well. This creates an incentive for node operators to provide as many security guarantees as possible.

Use Cases of Chainlink VRF

Using Chainlink VRF it is possible to build reliable smart contracts that require unpredictable outcomes. This is useful for use cases such as generating provably random assignments of duties and resources (e.g. randomly assigning judges to cases or auditors to firms under scrutiny), choosing representative samples for consensus voting on proposals, making games more fun by generating challenging and unpredictable scenarios…

• Fair NFT minting
  • Helpful for collections with numerous attributes and trait combinations with varying levels of rarity. For example, Polychain Monsters is a blockchain-based game inhabited by NFT-based monsters with 3 distinct categories of characteristics – color, horn types, and glitter – and several traits with varying rarities within each category.

• This helps to ensure that everyone has an equal chance of minting an NFT with rarity traits that potentially bring in additional value.

• Random NFT and loot box drops for art collections and in-game items.
  • Chainlink VRF is used to determine which NFT a user receives during a drop, helping prevent anyone from being able to influence or tamper with the distribution mechanism.
  • Some examples of metaverse projects using VRF include MTVE, and Evolution Land, which use it for creating loot boxes or distributing in-game prizes as random rewards. Blockchain games like DeRace are also using it for randomizing race outcomes. Other games see the opportunity in using random algorithms to generate new lands or maps. This is the case of OVR, an open-source AR game that thanks to VRF has the ability to spawn special items and experiences in unpredictable locations.
  • Illuvium uses VRF to reward community members with limited editions

• Lucky draws and community giveaways to select winners from a set of eligible participants. This brings transparency to the winner selection process.
  • Bored Ape Yacht Club (BAYC), one of the top 10 NFT projects according to DappRadar used VRF to distribute their new Mutant Serum NFTs to current BAYC NFT holders, giving users the ability to mutate their Bored APE into a new limited edition NFT.
  • PoolTogether integrated Chainlink VRF to select winners from weekly no-loss pools, helping ensure winners are chosen fairly based on their initial deposit amount.
  • Moonpot integrated VRF to fairly distribute yield rewards by allowing users to buy tickets with which they could earn a percentage of all the aggregated yield from various protocol pools.
  • Apeswap stopped relying on its team to select the winners of its BANANA weekly rewards.
  • Bittrue uses VRF for its daily XRP Raffle.

• Player vs. player (PvP) battlers for player matchmaking or NFT battle royal contests. There are turn-based games where players can get an advantage based on the order of their participation. One of the first games to use VRF for turn-based use cases was Avaxcells, an NFT trading cards game that uses VRF to fairly determine which players get to attack first in a PvP duel.

• Queue ordering for games, sales, events, or any other type of turn-taking process.
  • An NFT platform, UREEQA integrated VRF to release a limited edition set of baseball trading card NFTS as well as to randomly assign NFTs to special perks such as in-game tickets or memorabilia.
  • Instead of releasing tickets on a first-come first-serve basis, GET Protocol integrates Chainlink VRF to randomize ticket queues based on the participants who signed up beforehand.
  • Companies can drive up engagement for marketing campaigns by issuing rewards that are based on outcomes. Doing this they could have multiple tiers to drive increased interest to reach higher rewards. This would avoid problems such as McDonald’s Monopoly game, which increased the winning probabilities for insiders.
• Whitelisting users for ICO allocations has been a popular use case by multiple launchpads, such as Cardence, Cardstarter, MaticLaunch, Poolz, RoboFi, Seedify, Trustpad, or ZeroSwap
• Randomizing audits to ensure recordkeeping processes are accurate. This can be used by tax organizations or accounting firms. In traditional finance, these auditing systems are automated, but their selection processes are often opaque, meaning it is unclear why a particular entity ended up being selected. By using Chainlink VRF as a solution, governments and organizations can prove that their calls are impartial and fair to all parties involved.

• Sampling in polls and clinical trials could use VRF to remove any bias and provide transparency and integrity to the study in question. One way to increase accountability and help prevent sampling fraud is to use Chainlink VRF for the impartial selection of study participants.
• Ticket authentication to avoid fraud such as fake tickets, scamming, scalping… For instance, DigiTix issues tickets as NFTs so that anyone can verify the origin of the ticket on-chain. DigiTix also uses VRF to authenticate tickets in an unpredictable manner, helping eliminate the ability to reverse engineer the ticket authentication process.

Methods to Request Randomness

Chainlink VRF offers two methods for requesting randomness:

• Subscription model where users can fund their accounts with LINK tokens. This way, users can connect multiple consuming contracts to the subscription account so that when the consuming contracts request randomness, the transaction costs are deducted from the subscriber account.

• Direct funding allows consuming contracts to pay with LINK every time they request random values from Chainlink VRF. Users and projects and responsible for funding the consumer contracts to ensure that there are enough LINK tokens to pay for randomness requests.

Considerations for Choosing Request Methods

• If a use case needs regular requests, it is recommended to go for a subscription method, since it will simplify funding and reduce the overall costs.
• If an application has multiple consumer contracts, the subscription model will reduce the cost overhead
• The direct method is more suitable for infrequent one-off requests.
• The subscription model reduces the gas overhead and allows to have more control over the maximum acceptable gas price per user request.
• Because the direct funding method has a higher overhead, it cannot return as many random words in a single request as the subscription.
• For applications that want to transfer VRF costs to the end user, the direct funding method may be more suitable, since the cost is known and charged on every request.

Benefits of Chainlink VRF V2

• Pay-as-you-go at scale. The introduction of a subscription management app allows for a cost-efficient business model that enables smart contract applications to pre-fund multiple requests for randomness using a single LINK token balance.
  • 60% savings in gas fees, since there is no need to transfer LINK tokens for each individual request
  • After fulfilling a request, the amount of ETH needed to pay in gas is calculated and converted to LINK using an ETH/LINK Chainlink Price Feed that will charge the subscription contract along with a flat per-request fee.

• Variable Gas Limit and more flexibility for developers. Users can adjust the gas limit of their function calls whenever they request verifiable randomness for their smart contracts. This enables consuming contracts to execute more complex logic in the same transaction, which means that they can introduce randomness even during times of extreme network congestion.
• Configurability and more user control in defining security parameters
  • Users can specify how many block confirmations must pass after a request transaction is made before verifiable randomness is generated and delivered on-chain (ranging from a minimum of 3 blocks to a maximum of 200 blocks).
  • A configurable block confirmation parameter offers development teams the ability to strike their desired balance between security (protection against block reorgs) and performance (latency from request to response) for their application needs.
• Multiple random outputs in a single request
  • Lower costs, since the VRF Coordinator contract can request multiple random numbers in a single on-chain transaction, which also reduces latency
  • Users can batch multiple requests and responses into single transactions, achieving significant gas savings.
• Unified billed and delegation of subscription balances
  • Multiple smart contract addresses (up to 100) can fund their requests from a single LINK subscription balance that is managed by the subscription owner.

Chainlink Automation

Chainlink Automation enables the conditional execution of smart contract functions using a variety of triggers.

• Time-based triggers execute smart contract functions according to a time schedule.
• Custom logic triggers execute smart contract functions based on custom logic that is evaluated by Chainlin’s Automation Nodes.

At the moment, the Chainlink Automation Network is not accepting node operators. For future participation, Chainlink encourages users to sign up for their mailing list or join the Discord server to be notified when this becomes available.

Chainlink Functions

Chainlink functions are a serverless developer platform that empowers anyone to easily connect a smart contract to any Web2 API and run computations using the Chainlink network. This gives developers an alternative to access social media signals, AI computation, and messaging services… without having to build up their own Web2 infrastructure.

Leading cloud providers such as AWS and Google Cloud, as well as companies like Meta, have already collaborated on example use cases such as AI integrations to DAO governance.

Chainlink functions act as a decentralized computing runtime environment where developers can run custom logic that powers off-chain Web3 applications. This is a similar version of what AWS Lambda or Google Cloud functions already do, but Chainlink enables trustless use cases and interconnectivity to a permissionless blockchain.

Thanks to Chainlink functions, it is no longer necessary to host and run external adapters to perform off-chain computation or to source/run a Chainlink node to connect smart contracts to the outside world.

Use Cases for Chainlink Functions

• Data connectivity to connect to any private or public API allows for use cases such as fetching gaming data, sports results, and pulling metrics from Token Terminal to track protocol revenue, user fees, and active users…
• IoT devices and traditional backend connectivity to any enterprise system: fetch data from a smartwatch, retrieve information from a sensor, connect to an enterprise ERP system such as SAP, access payment processing platforms…
• Data connectivity and transformation, to analyze social sentiments based on media posts, to trigger changes on NFTs…
• Off-chain computation and storage by allowing developers to connect to decentralized databases such as IPFS and Filecoin.

Fair Sequencing Services (FSS)

Fair Sequencing Services is a transaction ordering solution that aims to mitigate harmful forms of MEV to help decentralized systems become fairer for the end user. Harmful MEV often presents itself in malicious front run and sandwich attacks on ordinary DEX trades, causing unnecessary slippage, creating an invisible tax on users, and degrading the overall user experience.

FSS uses Chainlink decentralized oracle network to fairly order transactions based on one or a combination of two different techniques:

• Secure casual ordering: users send transactions to Oracle nodes that are threshold-encrypted, where the transaction is not revealed until after the transaction order has been agreed upon.
• Temporal ordering is a mechanism that aims to secure that transactions received first by the oracle are the first to be output, helping facilitate a first-in, first-out (FIFO) ordering policy.

Cross-Chain Interoperability Protocol (CCIP)

Cross-Chain Interoperability Protocol (CCIP) is a universal and open standard for developers to build secure services and applications that can send messages, transfer tokens, and initiate actions across multiple networks. This protocol enables smart contracts to interoperate across all public and private blockchain networks, eliminating the need for developers to create custom code for cross-chain integrations.

Among the use cases that stand out:

• Cross-chain yield harvesting.
• Cross-chain collateralized loans (allowing users to borrow an asset on one chain while providing collateral on another).
• Low-cost transaction computations that can be processed on a high-throughput chain and then bridge the results to another higher-cost trusted chain for settlement.
• Decentralized and Sybil-resistant token bridge secured through an independent anti-fraud network that proactively monitors the blockchain to detect issues and prevent malicious activities (e.g. halt the transfer of user funds).

Anti-Fraud Network

CCIP includes a new risk management system called Anti-Fraud Network, which consists of decentralized oracle networks whose sole purpose is to monitor CCIP services for malicious activity that could lead to financial loss.

The Anti-Fraud Network will have fully independent committees of nodes compared to the node committees they are responsible for monitoring. This completely separates anti-fraud detection processes and cross-chain services.

The Anti-Fraud Network acts as a verification layer that periodically submits heartbeat checks when the system is operating as normal. If the Anti-Fraud Network’s heartbeat messages stops or its nodes notice any nefarious activity, an emergency shutdown is automatically triggered to stop a particular cross-chain service.

How CCIP Enables Secure Cross-Chain Bridging

The goal of CCIP is to enable cross-chain communication and cross-chain asset transfers through a unified standard interface between hundreds of blockchain networks. To do that, CCIP will feature a Programmable Token Bridge which will empower users to move assets across chains in a highly secure, scalable, and cost-efficient manner. This will unlock liquidity between different networks, whether they are EVM chains or not.

At the most basic level, cross-chain bridges are a committee of nodes that collectively attest to information on one chain and relay it to another by cryptographically signing transactions. With OCR 2.0 (Off-Chain Reporting), Chainlink will scale the number of nodes that can sign committee-based reports, leading to increased security of locked funds while maintaining a high degree of cost efficiency for users.

Programmable Token Bridge

The Programmable Token Bridge is a reference bridge implementation built upon CCIP that allows developers to build cross-chain applications using a unified bridge system. With these methods, various bridge connections between chains are secured by unique committees of nodes that maintain a secure and universal standard for interoperability.

The Programmable Token Bridge will support existing token standards, meaning that all liquid assets can be instantly used within the smart contracts of multiple ecosystems.

Users don’t need to know how to use other blockchains. Instead, they just need to send instructions to the bridge about how they want to interact with other chains, and the bridge will automatically move the tokens cross-chain and deploy them in smart contracts on the destination chain. This means that a user can stay on their blockchain of choice while still benefiting from smart contract ecosystems on other networks.

Chainlink Node Operators

Chainlink Node Requirements

• LINK tokens to deposit as a penalty fee in the event that the node doesn’t fulfill the requests.
  • It is possible to run a node with 0 LINK, but the node will not be able to participate in requests that require a deposit until it has earned some LINK first.
  • Since penalty fees are optional, not all requests will require it
• Chainlink node
  • The minimum requirements would be achieved with a machine that has at least 2 cores and 4GB of RAM
  • The recommended requirements scale as the number of jobs to run in the node increases. For nodes with over 100 jobs, it is recommended to have a machine with at least 4 cores and 8GB of RAM.
• PostgreSQL Database
  • The minimum requirement is to have at least 2 cores, 4GB of RAM, and 100GB of storage
  • The recommended setup for more than 100 jobs is to have a database server with at least 4 cores, 16GB of RAM, and 100GB of storage
  • Guide for connecting to an external database
• Ethereum client. Connectivity to an Ethereum client is required for communication with the blockchain. Users who plan to run their own Ethereum client will want to run it on a separate machine. The requirements of Ethereum clients can change over time
  • Guide for running an Ethereum client

Chainlink Jobs

To do anything useful, Chainlink nodes execute jobs. Currently, Chainlink supports job types such as cron jobs (for scheduling tasks), direct requests, monitoring, keepers, off-chain reporting, or webhooks.

• Cron jobs allow you to execute tasks based on a predefined schedule. By using the Chainlink Job Scheduler, nodes can leverage the Chainlink Automation Network to execute calls on smart contract functions.
• Direct request jobs are executed upon receipt of an explicit request made by a user.
• Flux monitor jobs are responsible for continually updating data feeds that aggregate responses from multiple oracles. This can be achieved via the following triggers:
  • An occasional poll that shows that there has been a sufficient deviation from an off-chain data source before a new result is submitted.
  • New rounds are initiated by other oracles. If another oracle notices sufficient deviation, all other oracles will submit their current observations as well.
  • A heartbeat that ensures that no deviation occurs.
• Keeper jobs occasionally poll a smart contract method that expresses whether something in the contract is ready to perform some action on-chain. When it is ready, the keeper job executes the on-chain action. This is used for liquidations, rebalancing portfolios, adjusting the supply of rebasing tokens, auto-compounding, and limit orders.
• Off-chain reporting jobs are used similarly to Flux Monitor jobs, They update data feeds from many Chainlink oracle nodes. The difference is that they do this aggregation using a cryptographically-secure off-chain protocol that makes it possible for a single node to submit all answers from all participating nodes during each round. This saves a significant amount of gas.
• Webhook jobs are initiated by HTTP requests that trigger an action in response to a change or update given by a specific web request.

External Initiators

External initiators allow jobs in a node to be initiated depending on some external condition. By having the ability to create Chainlink initiators, Chainlink nodes enable blockchain-agnostic cross-chain compatibility.

• Guide for building External initiators
• Adding external initiators to nodes

External Adapters

External adapters are how Chainlink enables the easy integration of custom computations and specialized APIs. These are services that Chainlink nodes use to communicate via their API (following a JSON specification). They are used for connecting to any off-chain resource, including premium data providers, authenticated web APIs, IoT sensors, bank payments, enterprise backends, other blockchains…

Information relative to external adapters is relevant for smart contract creators, developers who implement an external adapter for an API, and node operators. API calls in Solidity, the native language of Ethereum, is the method used by development teams to bring off-chain data into their smart-contract-based applications. By using Chainlink’s blockchain-agnostic decentralized oracles, developers can connect real-world data and events by configuring and validating the data provided by any open API.

There are two types of adapters:

• Core adapters are functions that are natively installed in a Chainlink core node client, such as Httpget, Copy, and Jsonparse. They allow the customization of the functionality of Oracle networks.
• External adapters enable the integration of custom computation and specialized APIs, such as asset prices, weather data…

It is possible to access this custom functionality without running a node. To do that, other nodes will host the adapter for you. This explains why multiple projects use Chainlink without running nodes themselves. This way, smart contract engineers can focus on the business logic of their applications and delegate this task to node operators.

• External adapters can be added to third-party node operator services such as market.link so that they host the adapter on your behalf

Developers can build external adapters using any programming language and even run them on separate machines. They should know Chainlink nodes request data from it and how the data should be formatted to get a response.

• Developer guide for building external adapters
• How to add external adapters to a node

Chainlink Data Streams

Chainlink Data Streams provides low-latency delivery of market data off-chain that you can verify onchain. With Chainlink Data Streams, decentralized applications (dApps) now have on-demand access to high-frequency market data backed by decentralized and transparent infrastructure. When combined with Chainlink Automation, Data Streams allows decentralized applications to automate trade execution and mitigate frontrunning.

Traditional push-based oracles provide regular updates onchain when certain price thresholds or update time periods have been met. Chainlink Data Streams is built using a new pull-based oracle design that maintains trust-minimization using onchain verification.

Use Cases

Pull-based oracles allow decentralized applications to access data that is updated at a high frequency and delivered with low latency, which enables several new use cases:

• Perpetual Futures: Low-latency data and frontrunning prevention enable on-chain perpetual futures protocols that can compete on performance with centralized exchanges while still using more transparent and decentralized infrastructure.
• Options: Pull-based oracles allow timely and precise settlement of options contracts. Additionally, Data Streams provides more detailed market liquidity data that can support dynamic on-chain risk management logic.
• Prediction Markets: Higher frequency data updates allow for applications where users can act quickly in response to real-time events and be confident in the accuracy of the data used in the settlement.

Billing

Chainlink Data Streams supports fee payments in $LINK and in alternative assets, which currently include native blockchain gas tokens and their ERC20-wrapped version. Payments made in alternative assets have a surcharge when compared to $LINK payments. You pay to verify reports from Data Streams on-chain using the verifier contract. The price of verification depends on the stream ID that you are verifying. You pay per report verified. If you verify multiple reports in a batch, you pay for all of the reports included in that batch.

Architecture

Chainlink Data Streams has the following core components:

• A Chainlink Decentralized Oracle Network (DON): This DON operates similarly to the DONs that power Chainlink Data Feeds, but the key difference is that it signs and delivers reports to the Chainlink Data Engine rather than delivering answers onchain directly. This allows the Data Streams DON to deliver reports more frequently for time-sensitive applications. Nodes in the DON retrieve data from many different data providers, reach a concensus about the median price of an asset, sign a report including that data, and deliver the report to the Chainlink Data Engine.
• The Chainlink Data Engine: The Data Engine stores the signed reports and delivers them to Chainlink Automation when it is requested.
• The Chainlink Verifier Contract: This contract verifies the signature from the DON to cryptographically guarantee that the report has not been altered from the time that the DON reached concensus to the point where you use the data in your application.

Using Chainlink Automation with Data Streams automates trade execution and mitigates frontrunning by executing the transaction before the data is recorded onchain. Chainlink Automation executes transactions only in response to the data and the verified report, so the transaction is executed correctly and independently from the decentralized application itself.

Comparison to push-based oracles

Chainlink’s push-based oracles provide regular updates onchain. Chainlink Data Streams operates as a pull-based oracle where you can retrieve the data in a report and use it on-chain any time. Verifying the report on-chain confirms that the data was agreed upon and signed by the DON. While many applications benefit from push-based oracles and require data only after it has been verified on-chain, some applications require access to data that is updated at a higher frequency and delivered with lower latency. Pull-based oracles deliver these benefits while still cryptographically signing the data to ensure its veracity.

Additionally, pull-based oracles deliver data onchain more efficiently by retrieving and verifying the data only when the application needs it. For example, a decentralized exchange might retrieve a Data Streams report and verify the data onchain when a user executes a trade. A push-based oracle repeatedly delivers data onchain even when that data is not immediately required by users.

Example trading flow

One example of how to use Data Streams is in a decentralized exchange. An example flow might work using the following process:

• A user initiates a trade by confirming an initiateTrade transaction in their wallet.
• The onchain contract for the decentralized exchange responds by emitting a Log Trigger event.
• The Chainlink Automation upkeep monitors the contract for the event. When Automation detects the event, it runs the checkLog function specified in the upkeep contract. The upkeep is defined by the decentralized exchange.
• The checkLog function emits an event called StreamsLookup.
• Data Streams detects the StreamsLookup event and returns the requested report in the checkCallback function for Chainlink Automation.
• Chainlink Automation passes the report to the Automation Registry, which executes the performUpkeep function defined by the decentralized exchange. The report is included as a variable in the performUpkeep function.
• The performUpkeep function calls the verify function on the Data Streams onchain verifier contract and passes the report as a variable.
• The verifier contract returns a verifierResponse bytes value to the upkeep.
• If the response indicates that the report is valid, the upkeep executes the user’s requested trade. If the response is invalid, the upkeep rejects the trade and notifies the user.

This is one example for how you can use Data Streams and Chainlink Automation in combination, but the systems is highly configurable. You can write your own log triggers to initiate upkeeps on Chainlink Automation for a various array of events. You can configure the StreamsLookup to retrieve multiple reports. You can configure the performUpkeep function to perform a wide variety of actions using the report.

Why the Project was Created

Due to the consensus protocols used by blockchains, it is not possible to connect smart contracts with external systems that provide or retrieve information for one chain. Before Chainlink, the solution to this problem was to introduce a new functionality called “oracle” that would provide connectivity to the outside world. However, this comes at the cost of centralization risk. Any smart contract using such services would be exposed to a single point of failure, making it no more secure than a traditional centrally run digital agreement.

The vast majority of smart contract applications rely on data reliable from the real world provided by key sources, specifically data feeds, and APIs. To solve this problem of trust, Chainlink provides external connectivity for smart contracts through an on-chain data aggregation contract and an off-chain consensus mechanism. At the beginning, what differentiated Chainlink’s connectivity from other Oracle solutions is its ability to operate as a fully decentralized network. This decentralized approach would limit the trust in any single party, enabling the tamperproof properties of smart contracts to be extended to end-to-end operations between smart contracts and the APIs they rely on.

Chainlink’s vision is that when smart contracts replace the traditional contractual digital contracts in use today, those smart contracts will require high-assurance versions of the same types of inputs and outputs. Currently, the main use cases of smart contracts are related to the management of tokens. However, Chainlink believes that the focus on tokens ignores other possible applications due to a lack of adequate Oracle services. By solving the problem, a plethora of new use cases would open up, such as:

• Securities smart contracts: bonds, interest rates, derivatives…
• Insurance smart contracts that require data feeds about IoT data related to the event in question
• Trade finance smart contracts, like GPS data about shipments, data from supply chain ERP systems, custom data about goods being shipped in order to confirm the fulfillment of contractual obligations…

Upon this premise, Chainlink’s roadmap in 2019 conceived a long-term development strategy that would take into consideration better confidential protections, the use of trusted hardware, infrastructure changes, and general oracle programmability.

Roadmap

Chainlink’s roadmap is built on the premise that the demand for cryptographic truth and trust-minimized guarantees will increase exponentially over time. This will be the result of less predictable economic outcomes (crisis, inflation…), less reliable incentives (increased downtime, data leaks, cyberattacks…), and less safety for users who rely on unverifiable sources of trust (such as insolvent centralized exchanges). The recent mass adoption of proof of reserves is one of the most notable examples that reinforce the goal of achieving cryptographic trust.

In 2022, Chainlink has achieved major network and community milestones:

• $6.9 trillion in TVE (Transaction Value Enabled)
  • TVE is the sum of the USD value of all transactions enabled by a protocol
• $5.8 billion data points delivered on-chain have helped to fuel dApp innovation across multiple Layer1 and Layer2 chains
• 700,000 verifications of off-chain and cross-chain reserves through Chainlink Proof of Reserve have helped to provide transparency around the reserves backing stablecoins, wrapped assets, and other digital tokens.
• The Chainlink ecosystem has grown to 1,600+ projects and has become one of the largest ecosystems across DeFi, gaming, NFTs, insurance, randomness, automation…
• 1,000+ Oracle networks launched to support new asset categories (commodities, FX rates…), NFT floor prices, cryptocurrency prices…
• 10.5M randomness requests have been served by Chainlink VRF
• 18,000+ public Github repositories are currently using Chainlink.
  • Chainlink Hackathons have played a significant role in onboarding and accelerating the growth of Web3 developers
• 19,000+ SmartCon 2022 attendees (in-person and virtual)

Market Demand

Moving forward in 2023, Chainlink has 3 main categories of market activity that they have expressed interest in.

• Moving information/market data and commands/event messages from traditional systems into blockchains.
  • Effectively making Chainlink a key conduit for all commands and information both to and from all blockchains.
• Connecting all blockchains into a large interoperable network for both value transfer and smart contract interoperability. 
  • Developers should be able to connect smart contracts across multiple chains, just like they connect code across multiple clouds.
• Adding key off-chain computations that make advanced trust-minimized applications possible. 
  • Existing examples are VRF, Chainlink Automation, and zero-knowledge proofs with DECO, with many additional types of computation being worked on.

The first two priorities focus on making Chainlink into the system that moves all key information and value into, out of, and across blockchain ecosystems while the third priority continues the expansion of Chainlink into the sphere of a general-purpose trust-minimized computing environment.

What’s Next?

• Expansion of the data products that are available on-chain. This includes volatility measures, real-world asset prices…
• In addition to existing Chainlink price feeds, which deliver a single data point, Chainlink is planning to publish additional data points via the low-latency Oracle infrastructure. This will be for use cases in order books that require to know the market price, the bid price, and the ask price to better represent liquidity conditions in the market.
• Mainnet release of the CF Bitcoin Interest Rate Curve (BIRC). BIRC serves as a standard market gauge of current and forecasted Bitcoin interest rates that are representative of economic reality and resistant to manipulation.
• Introduction of a Digital Asset Classification System that will be used to coherently segment the digital asset ecosystem along industry standards. This will allow users to conduct more in-depth analysis for portfolio allocation and risk mitigation.
• Further development of the Staked ETH APR fee, which represents the “cost of capital” or “risk-free” rate of return for ETH and provides a better understanding of the Ethereum economy, allowing investors with staked ETH positions to swap the variable return from staking for a fixed return using tokenized interest rate swaps.

Chainlink Economics 2.0 and Staking

Chainlink Economics 2.0 consists of an array of initiatives, including Chainlink’s BUILD Program, the Chainlink Scale Program, and Chainlink Staking.

V0.1 was launched on December 6, 2022. This was the first step in allowing the community to help secure the Chainlink Network.​

V0.2 was launched on November 28, 2023, and builds on v0.1 lessons, focusing on the following goals:

• Greater flexibility for Community and Node Operator Stakers via a new unbonding mechanism, while retaining a secure non-custodial design.
• Improved security guarantees for oracle services secured by Chainlink Staking via the slashing of node operator stake.
• Modular architecture to iteratively support future improvements and additions to Chainlink Staking, such as expansion to more services.
• Dynamic rewards mechanism that can seamlessly support new external sources of rewards in the future, such as user fees.

v0.1 Migration and Phased Rollout
The launch of Chainlink Staking v0.2 will involve multiple entry phases so that a wide diversity of Chainlink community members can contribute to the crypto economic security of the Chainlink Network. By increasing the likelihood that the v0.2 staking pool is distributed across a large number of entities, including smaller participants, the security assurances provided by Chainlink Staking are strengthened.

Phase 1: Priority Migration
At launch, v0.1 stakers will have the opportunity to migrate their v0.1 stake and accrued $LINK rewards to v0.2 or withdraw. This Priority Migration period will last for seven days, where v0.1 stakers can choose to migrate all or a portion of their v0.1 stake and $LINK rewards. If choosing to migrate a portion, then all non-migrated v0.1 stake or rewards will be withdrawn. If a v0.1 staker takes no action, then their staked $LINK and rewards will remain in v0.1 and no longer earn additional rewards.

Given that the v0.2 pool is larger than the v0.1 pool, and accounting for accrued rewards, v0.1 stakers have guaranteed access to v0.2 if they participate in the Priority Migration phase. Once the Priority Migration period ends, v0.1 stakers can still migrate or withdraw during Early Access and General Access; however, entry to v0.2 will not be guaranteed due to the capped pool size.

Note that v0.1 stakers are only eligible to migrate an amount equal to the sum of their staked $LINK and any $LINK rewards accumulated in v0.1 during the Priority Migration phase. v0.1 stakers who want to stake more $LINK, up to the per-address cap, have the opportunity during later entry periods.

Phase 2: Early Access
After the Priority Migration period ends, $LINK token holders who meet at least one predefined criterion on the updated Early Access Eligibility List will have the opportunity to stake $LINK in v0.2 up to the per-wallet maximum. Similar to the Early Access period during the v0.1 launch, being on the eligibility list provides an opportunity to stake in v0.2 but does not serve as a guarantee of entry given the capped pool size. The Early Access entry period will last for two days. The Early Access Eligibility List builds upon the list previously used in v0.1. Similar to v0.1, there will also be an Early Access Eligibility App made available before launch that can be used to check eligibility for Early Access.

Phase 3: General Access
After Early Access ends, the v0.2 staking pool will open to General Access, at which point anyone will have the chance to stake up to the per-wallet maximum, provided that the v0.2 pool has not yet been filled.

Modular Framework For Iterative Upgrades
The Chainlink Staking v0.2 codebase has been rearchitected to operate as a modular set of smart contracts. This modularity allows a broad scope of upgrades, including new features and configuration changes, to be applied without requiring a full staker migration to a new set of smart contracts.

Expanded Pool Size and Accessibility
Staking v0.2 will feature an expanded total pool size of 45M $LINK to increase the accessibility of Chainlink Staking to a broader diversity of $LINK token holders. The pool size represents an 80% increase from the pool cap of v0.1 and would account for over 8% of the current circulating supply of $LINK.

Unbonding Mechanism
A key design principle in the development of Chainlink Staking v0.2 has been to provide $LINK stakers greater flexibility and predictability around how they manage their staked $LINK. Instead of locking up staked $LINK until the next version of staking is released, v0.2 introduces an un-bonding mechanism for withdrawing staked $LINK.

Claimable Rewards and Ramp-Up Period
v0.2 features a new $LINK rewards mechanism designed to further incentivize the stability of the v0.2 staking pool, support the security assurance provided by staking, and provide greater flexibility around staking rewards.

Dynamic Reward Rates
The reward rate calculation for v0.2 has been rearchitected to incentivize a fully filled Staking pool and improve support for new sources of staking rewards in the future (e.g., user fees). While v0.1 has a fixed reward rate (i.e., a single rate for all Community Stakers regardless of pool fill rate), v0.2 will have a variable reward rate.

Staked LINK Slashing For Node Operator Stakers
Chainlink Staking v0.2 offers increased crypto-economic security by supporting the ability to slash a portion of staked $LINK by Node Operator Stakers who help power oracle services secured by Staking. When a valid alert is raised and a slashing condition is met, these Node Operator Stakers will see a portion of their staked $LINK slashed as a penalty for failing to meet performance requirements.

Timelocked Upgradability
For any iterative upgrade to the modular Chainlink Staking v0.2 codebase that materially impacts stakers, such as the modification of slashing conditions, upgrades will be announced proactively such that stakers can choose to initiate and complete a withdrawal of their staked $LINK before the upgrade is completed on-chain.

Staking Roadmap

The Evolution of Chainlink VRF

Chainlink’s upcoming approach towards a highly scalable and cost-effective decentralized infrastructure network will rely on threshold signatures not only to provide verifiable randomness but also to guarantee the uptime and availability of nodes.

By allowing the wider ecosystem of Chainlink nodes to participate in Chainlink VRF random number generation, Chainlink becomes a globally distributed network of node operators that are economically incentivized to both generate and broadcast verifiable data on-chain.

This means that not only will the responses from VRF be verifiable on-chain, but Threshold Signatures will also help to prevent adversaries from stealing user funds.

Threshold Signatures are a cryptographic technique used for distributed key generation and signing.

Team

Chainlink Labs has around 400 employees.

The first whitepaper published on September 4, 2017, was co-authored by:

• Sergey Nazarov, Co-Founder
• Steve Ellis, Co-Founder, and Chief Technology Officer
• Ari Juels, Chief Scientist

The second whitepaper published on April 15, 2021, was co-authored by:

• Sergey Nazaro, Co-Founder
• Steve Ellis, Co-Founder, and Chief Technology Officer
• Ari Juels, Chief Scientist
• Benedict Chan, VP of Engineering
• Brendan Magauran, Chief of Staff
• Lorenz Breidenbach, Head of R&D
• Fan Zhang, Security Researcher
• Alexandru Topliceanu, Research Engineer
• Alex Coventry, Researcher/Developer
• Farinaz Koushanfar, Research Scientist/Advisor
• Daniel Moroz, Research Scientist/Advisor
• Christian Cachin, Advisor
• Andrew Miller, Advisor
• Florian Tramer, Advisor

Other notable employees are:

• Mark Wagner, Chief Financial Officer, and Managing General Partner
• Dahlia Malkhi, Chief Research Officer
• Kemal El Moujahid, Chief Product Officer
• Adelyn Zhou, Chief Ecosystem Growth Officer
• Todd Barr, Chief Marketing Officer
• Mickey Graham, Head of Growth
• Yaser Jazouane, Head of Data Products
• Chris Barrett, Head of Public Relations

Sector Outlook

Oracle infrastructure is critical for the integration of blockchain technology in a wide variety of industries. By connecting smart contracts with off-chain information from the real world, Chainlink can replace the need for legal agreements and centrally automated digital agreements. The potential of an Oracle network can bring a lot of upside to the cryptocurrency industry as a whole, since the blockchains where smart contracts run cannot support native communication with external systems. As an overall thesis, by allowing smart contracts to interact with off-chain resources, the sector of Decentralized Oracle Networks has the potential to replace all sorts of digital agreements that are used nowadays. Besides, Chainlink’s ability to securely push data to APIs and various legacy systems on behalf of a smart contract permits the creation of externally-aware tamperproof contracts.

Large Ecosystem Support Across Blockchains

With CCIP, Chainlink has access to larger network effects than its competitors. These network effects lead to increased security of users’ funds, increased token access, a simplified user experience, better tooling and documentation for developers, and more revenue opportunities.

With over a hundred Layer1 chains and many Layer2 solutions already integrated, Chainlink is becoming the de-facto solution across all chains. Not only does Chainlink already work with the top lending, insurance, and DeFi protocols, but it is also innovating the open-source development of new use cases through the Chainlink Community Grant Program.

Reliability and Uniqueness

Chainlink is the most widely used and adopted oracle solution in DeFi, securing billions in value in production for innovative DeFi protocols such as Aave, Synthetix, and Compound. This benefits the protocol in terms of achieving growing network effects and attracting more users.

The Chainlink Network is a blockchain-agnostic oracle framework. Because of this, it is utilized by DeFi applications, web services, and traditional enterprises alike. Besides, it is operated by leading DevOps and security teams, such as Deutsche Telekom’s T-Systems, that have decades of experience running mission-critical infrastructure. Users can check the performance metadata of the network at market.link.

Chainlink is supported by a multitude of leading engineers and academics, such as Chainlink Labs, Chief Scientist Ari Juels, Chainlink Labs Chief Research Officer Dahlia Malkhi, and Chainlink Labs Chief Product Officer Kemal El Moujahid. The researchers working on the Chainlink protocol are industry experts in blockchain oracles and are responsible for some of the most innovative developments in the space such as DECO and Town Crier mentioned above, VRF, Mixicles, and more.

Chainlink oracle networks operate using multiple layers of data aggregation to ensure there is no single point of failure or any reliance on a single source of truth that could be corrupted. This redundancy is not only required to ensure high-value smart contracts consume highly refined data but also to ensure Chainlink Price Feeds provide full market coverage that reflects the true market price of assets. With Price Feeds securing tens of billions in user funds, these layers of aggregation secure the DeFi ecosystem.

• The first aggregation layer is at the data source level, where professional data aggregation firms (e.g. BraveNewCoin, CoinGecko) fetch market data from hundreds of exchanges (taking into account volume and liquidity differences) and generate a single weighted reference price point.
• The second aggregation layer is at the node operator level, where each individual Chainlink oracle node sources price data from multiple data aggregation firms and takes the median. This measure mitigates the effects of outliers, APIs downtime, and ensures that nodes do not solely rely on one source.
• The third aggregation layer is at the Oracle network level. This is where the responses from multiple Oracle nodes are aggregated by taking the median. Because of this, no individual node has control over the resulting data point delivered to smart contracts.

Accelerating Adoption

Similar to the block reward incentivization model of blockchains, Chainlink oracle networks generate early-stage economic incentives through the use of oracle rewards – incentives paid to node operators in addition to user fees.

For instance, Chainlink Data Feeds are decentralized oracle networks that provide DeFi applications access to high-quality financial market data. Chainlink Data Feeds are launched based on demand from users for a specific piece of data on a specific blockchain (e.g. the BTC/USD exchange rate on Ethereum). After launch, Data Feeds are initially supported through Oracle rewards, in addition to user fees paid by the feed’s active sponsors.

Since Chainlink Data Feeds function as shared public goods, any number of users can consume and fund the same feed. With each new paying sponsor of a Data Feed, and as existing sponsors generate more fees, a greater portion of the Data Feed’s costs can be covered by user fees. Eventually, once user fees surpass the network’s operation costs, the Data Feed’s operation no longer requires oracle reward support and the feed becomes economically sustainable. In fact, multiple Chainlink Data Feeds have already reached a state of sustainability on higher-throughput blockchains such as BNB Chain and Polygon.

To accelerate the rate at which Chainlink Data Feeds and other Chainlink services reach economic sustainability, numerous cost-reduction solutions have been deployed to allow Oracle rewards to be used more efficiently. For example, the launch of Off-Chain Reporting reduced the operating costs of Data Feeds by up to 90%, enabling 10x more data to be delivered on-chain, which resulted in a rapid increase in the number of Data Feeds deployed. In combination with the increased scalability of blockchains, additional cost-reduction solutions are underway to fuel the growth of the Chainlink ecosystem, including:

• OCR 2.0: An upgrade to the Off-Chain Reporting protocol powering Chainlink Data Feeds that will facilitate increased cost-efficiency for data delivery, allowing for a greater number of Oracle networks to be deployed and user fees to be generated.
• Fast-Lanes: A technical solution where a blockchain allocates a portion of its bandwidth to or establishes priority transaction ordering for public goods such as Oracle networks. This can significantly reduce or eliminate the on-chain costs associated with Oracle updates, increasing response times and reliability during blockchain network congestion.
• Blockchain Gas Grants: An initiative where blockchain projects commit to offsetting the on-chain gas costs of Oracle networks. This approach is backward-compatible and doesn’t require technical changes to the underlying blockchain network. Grants from a number of leading blockchain ecosystems are expected to be announced in the near future.

As more Chainlink Oracle networks reach economic sustainability, oracle rewards can be reallocated to support new Data Feeds and other Chainlink services, opening up additional potential fee opportunities for node operators and rewards for community stakers over time. This approach to Oracle network economics helped ensure individual users are not required to pay the full costs of a Data Feed’s operation, cultivating a strong network effect around Chainlink.

Chains

For Users

EVM Node Operators

Node operators can choose to run a single or multi-node setup.

Single Node Setup

A single-node setup is the most basic and default deployment. This configuration relies on the default settings and runs on a single primary node.

This configuration is appropriate for small or simple workloads that only need a few jobs that execute infrequently.  For more complex runs that require hundreds of jobs and thousands of transactions per hour, the Chainlink and RPC nodes will require a more advanced configuration.

An RPC node is a computer that runs a blockchain client software – for example, a server that is running a consensus and an execution client for Ethereum.

A node with the proper software to respond to RPC requests is capable of retrieving information for blockchain users. RPC nodes work by connecting a dApp to all of the blockchain’s information so that when a program initiates a subroutine, an RPC node is able to retrieve the necessary requests through the blockchain and send its payload back to the dApp.

Multi Nodes Setup

These Chainlink configurations consist of multiple primary nodes and send-only nodes with automatic liveness detection and failover mechanisms. Because of this, it is no longer necessary to run a load-balancing failover RPC proxy between Chainlink and its EVM RPC nodes.

It is possible to have as many primary nodes as desired. Since requests are evenly distributed across all nodes, the performance increase will be linear as more nodes are added.

If a node fails with a failed liveness check, send-only nodes will broadcast transactions and not process regular RPC calls.

Best Practices for Deploying Nodes on AWS

Chainlink nodes can be deployed on AWS Cloud using the AWS Quick Start guide. This will create public resources such as an Elastic Load Balancer (to access the graphical interface), a Linux Bastion host in an Auto Scaling Group (to allow SSH access to EC2 instances in public and private subnets), and managed NAT gateways for internet access.

For a more detailed overview of the AWS resources being created and best practices, read Chainlink’s recommended setup.

Use Cases Enabled by Chainlink

Decentralized Finance

Since money is the primary medium for exchanging value and assets, current financial products provide different vehicles for people to maximize the value of their money via different strategies like hedging, speculation, earning interest, collateralizing loans… However, traditional finance is often gated by intermediaries that have disproportionate control over the issuance of money and the creation and offering of financial products. This results in a lack of universal access to certain financial products and also introduces counterparty risk.

Blockchains and smart contracts can bring deterministic execution to financial products, which allows for the creation of tamper-proof monetary policies that can be applied to assets on-chain. Chainlink oracles play a critical role for representing financial products and monetary instruments such as FX rates, interest rates, asset prices, indices, etc.

Money Markets

Blockchain-based money markets are a critical piece of infrastructure to connect lenders, who want to earn yield on their assets, with borrowers, who want to gain access to extra capital. Decentralized money markets allow users to increase the utility of their crypto holdings and participate in both the supply and demand side. Hence, decentralized money markets need to ensure that the platform is solvent. To do that, they use Chainlink price feds in order to track the valuation of assets that are used on the platform. This gives money markets a guarantee that its loans are issued at fair market prices and that liquidations can occur automatically on loans that become undercollateralized.

Some examples include Aave, Compound, or Liquity, all of which rely on Chainlink to access real-time pricing data to calculate their users’ collateral and debt requirements to determine when liquidations should be initiated.

Decentralized Stablecoins

Stablecoins are assets that are pegged 1:1 to the value of a given fiat currency, most often the US dollar. They provide users with the ability to hold non-volatile assets. Most stablecoins are backed by fiat in an off-chain bank account, which means that they are not decentralized. However, there are some stablecoins that are decentralized in nature, since they are overcollateralized by other on-chain assets. These decentralized stablecoins require price data to maintain full over-collateralization (e.g. a user’s collateral is worth 150% of their loan).

DeFiDollar (DUSD) is one example of a decentralized meta-stablecoins (a stablecoin that is backed by multiple stablecoins) that uses Chainlink Price Feeds to track the price of the underlying assets, which include $sUSD, $USDT, $DAI, and $USDC. If one or multiple of those assets deviate from their 1:1 USD peg, this would cause $DUSD to also lose its peg. When this happens, a rebalance is triggered between the four reserves in order to preserve the dollar parity of $DUSD.

Another example includes algorithmic stablecoins, which maintain their peg using automated rewards and penalties to drive the price toward the peg. Most of the time this is achieved by burning the stablecoin when it is under its peg (deflation) and minting more units when it is over its peg (inflation).

Fei Protocol is an example of an algorithmic stablecoin that uses Chainlink Price Feeds as the reference for setting their protocol-controlled value bonding curve.

Futures

Futures are financial instruments that give traders the obligation to buy or sell an asset at a predetermined price at a specified time in the future. Futures are often used for hedging and leverage exposure. Since decentralized futures require collateralization, price feeds are used to determine whether liquidations should occur or not.

Lyra and MCDEX are examples of on-chain applications that use Chainlink Feeds to ensure the solvency of their platforms.

Options

Similar to futures, options are a financial derivative instrument that grants traders the right but not the obligation to buy or sell a certain amount of a particular asset by a future date. In the off-chain traditional finance realms, centralized entities often underwrite the contracts, but on the blockchain decentralized peer-to-peer options are possible.

Some examples of protocols using Chainlink feeds are Opyn and Thales, which use Chainlink for calculating the valuation of assets and enabling users to mint, trade, and settle option contracts. Additionally, oracles nodes like dxFeed provide information about Implied Volatility, which gives contract creators the ability to calculate a contract premium in a reliable and tamper-resistant manner.

Synthetic Assets

Synthetic assets are financial derivative instruments that provide traders price exposure to specific assets, such as indices or commodities without requiring ownership of the physical asset itself. Using smart contract-based synthetic assets allows traders to create advanced non-custodial trading strategies and gain exposure to traditional assets that don’t necessarily live on-chain.

Synthetic is an example of a protocol that uses Chainlink price feeds to enable the minting of synths assets that allow traders to gain on-chain exposure to assets like cryptocurrencies, fiat currencies, commodities, indices, equities…

Credit Default Swaps

Credit Default Swaps (CDS) are financial agreements that allow lenders to hedge against the possible occurrence of a borrower’s default (lack of payment). If the borrower goes into default, the party who issued and sold the CDS reimburses the lender for the outstanding funds not paid by the borrower.

Opium.Exchange is an example of an on-chain protocol using Chainlink to settle financial instruments on USDT. This allows traders to hedge against the value of USDT deviating and failing below its $1 peg.

Bonds

Bonds are a financial agreement to raise short-term capital by issuing debt to be paid back at a later date. Chainlink has already demonstrated with a POC with SWIFT that it can aggregate interest rates from 5 major banks, fetch debt score data from S&P, and generate an interest payment in the form of an ISO20022 SWIFT payment. Bringing bonds onto the blockchain is a multi-trillion-dollar opportunity that can reduce counterparty risk and lower operational costs across the board.

Tokenized Portfolio Management

Managing portfolios in a non-custodial manner is possible by using smart contracts to rebalance user portfolios by executing trades on their behalf based on preset conditions. This can be used to offer users financial products that programmatically manage investment based on the current market-wide price of specific assets.

For example, Tokensets uses Chainlink price feeds to generate tokenized positions that execute trades on behalf of users. These trades are often based on technical analysis indicators such as RSI or moving averages that can catch key price action trends. Besides, users can use their Set tokens as collateral within other protocols, such as Aave, to gain additional capital efficiency.

Proof of On-Chain Reserve

To ensure the integrity of DeFi applications that support non-native assets such as bitcoin in Ethereum, protocols like Ren and Bitgo rely on the issuance of wrapped assets that are collateralized on-chain. They use Proof of Reserve references to allow anyone to autonomously verify collateral reserves.

Proof of Off-Chain Reserve

Bringing real-world assets on-chain provides an opportunity to expand the use cases of DeFi. This requires that the underlying collateral is held by a central custodian, which creates a disconnection between the on-chain tokenized representation from the actual off-chain asset itself. Through Chainlink Proof of Reserves, smart contracts are able to autonomously audit the collateral of real-world asset-backed tokens, which protects users during black swan events.

Examples of this are Paxos Proof of Reserve for PAX and PAXG as well as the TrustToken Proof of Reserve for TUSD. For instance, this collateralization data can be checked against the total amount of circulating TUSD tokens on various blockchains, as reported by the complementary TUSD Proof of Supply feed, to determine the collateralization of TrustToken’s tokenized USD.

Automated Asset Management

Smart contracts can be used to automatically execute trading strategies at predetermined time intervals. Pickle Finance is an example of a protocol that uses Chainlink Automation to help automatically manage capital-efficient LP positions across Uniswap V3.

Revenue Sharing

As the number of DeFi products with DAO governance increases, there will be an increasing need for developers to distribute protocol revenue in a decentralized and real-time manner. Using Chainlink oracles, DAOs can distribute their revenue proportionally across participants according to various metrics such as governance participation, developer activity, or any customized set of requirements.

For example, Synthetix is using Chainlink Automation to trigger the distribution of exchange fees and staking rewards to its users on a weekly basis. This works by having Chainlink Automation monitor the state of smart contracts off-chain and autonomously calling the distribution function in the protocol’s fee pools after the fee period has ended.

Yield Farming

Yield farming is a DeFi practice where protocols incentivize usage of their platform by distributing governance tokens of the protocol. This is a way for projects to bootstrap their liquidity and facilitate a fair distribution of governance power across multiple users.

Yield-optimizing protocols can automatically harvest and compound yield for their users by depositing assets into a vault that automatically harvests yield at critical times to maximize compounding returns. Since smart contracts cannot execute their own functions, yield optimizes automate this process using Chainlink Automation.

Two protocols using Chainlink oracles for yield farming are Plasm and StrongBlock. Plasm uses Chainlink price oracles to determine the amount of liquidity that users have locked on their platform and then distribute rewards accordingly. Similarly, Strongblock calculates the USD value locked in community pools once every 24 hours.

Leveraged Yield Farming

Users can increase their capital efficiency by using leveraged yield farming protocols that lend depositors capital through protocol-controlled undercollateralized loans. With these positions, borrowers can maximize the value of their assets while lenders can earn a passive income from borrowers who want to amplify their exposure to yield farming.

Alpaca Finance is an example of a protocol using Chainlink price feeds to enable users to leverage up their positions by borrowing capital and calculating collateralization ratios during the issuance of loans. Oracles are also used to liquidate positions and ensure the solvency of the protocol.

Self-Repaying Loans

Self-repaying loans are a DeFi primitive that enables users to deposit assets as collateral and borrow/mint synthetic assets to provide working capital. The protocol then takes the collateral and routes it to a yield-generating protocol, so that the yield is used to automatically pay down the debt over time.

Alchemix is an example of a protocol that facilitates self-repaying loans by using Chainlink Automation to trigger vault harvesting and automate debt repayments each day.

Circuit Breaker

In situations of high volatility where the prices of cryptocurrencies change very quickly, some protocols might trigger a loss of funds for its users due to wrongly liquidated leveraged positions. Decentralized exchanges that enable this functionality can benefit from using a circuit breaker that is triggered when certain deviations occur.

For example, Digitex is an exchange that protects users from market manipulation by monitoring the deviation between its internal prices and Chainlink Price Feeds. This provides an extra layer of security for users trading on the platform. If the exchange’s price deviates beyond a certain percentage from the wider market price reported by Chainlink, a “circuit breaker” is triggered to temporarily halt trading and liquidations.

Decentralized Exchanges

Decentralized Exchanges can use Chainlink price feeds to implement custom functionalities, such as conditional trading functions based on the price action of an asset. For instance, Bamboo Relay implements stop-loss orders so that each trader’s order will only be executed when the market-wide price of an asset surpasses a predefined threshold. This prevents market manipulation attacks from falsely executing trades.

Automated Market Makers

Automated Market Makers (AMMs) are an example of a decentralized exchange that is categorized as an alternative for an order book model. AMMs rely on liquidity pools that facilitate asset swaps based on a predefined price formula. By pooling capital, liquidity providers can earn passive yield and traders gain access to on-demand liquidity.

DODO is an example of an AMM protocol that uses Chainlink Price Feeds to power a new AMM design known as Proactive Market Maker. This model requires the use of Chainlink Price Feeds in order to mimic human market-making behaviors and facilitate more efficient and frequent trading

Staking

Staking is the practice of locking cryptocurrency assets into a smart contract in order to secure proof of stake networks. Other forms of staking that do not involve proof of stake chains consist in locking collateral in order to access protocol revenue or inflation rewards.

For instance, AdEx requires its validator nodes to stake collateral and maintain high availability. The protocol uses Chainlink oracles to monitor node uptime and trigger slashing of collateral if any of the nodes does not meet the minimum uptime requirements.

Rebasing

Rebasing is the practice of adjusting the supply of a token in order to maintain the peg of the underlying asset to a specific reference asset. For example, if the price of the token is above its peg during the rebase, the protocol will mint more tokens and give them proportionally to token holders with the goal of lowering the per-token price. Conversely, if the price of the token is below peg then a percentage of each user’s holdings will be burned to increase the per-token price.

Ampleforth is an example of a rebasing protocol that uses Chainlink price feeds to power its native rebasing functionality. The total supply of AMPL is rebased on a daily basis to track the current Consumer Price Index rate (CPI) of the inflation-adjusted US dollar. Both the volume-weighted average price of AMPL and the CPI index are provided by Chainlink oracles.

Liquidations

Most decentralized money markets are overcollateralized positions that ensure that the protocol can remain solvent at all times. Money market protocols like Aave use Chainlink Automation to trigger the liquidations of user positions that become undercollateralized (positions that fall below the predefined liquidation threshold). The decentralized Chainlink Automation Network is responsible for calling the liquidation function and closing the positions, even during times of high volatility and blockchain network congestion.

External Payments

While it is simple to issue payments in a blockchain setting, many businesses can’t afford or don’t want to take on the additional risk of holding volatile cryptocurrency assets on their balance sheet. Besides, most businesses also don’t want the additional friction that comes from trading cryptocurrencies with fiat currencies.

Given the wide variety of payment options around the world, smart contracts need access to many types of payment options in order to adequately service global demand. This is possible thanks to Chainlink’s infrastructure, which is critical in order to connect smart contracts to external APIs.

Bank Payments

Chainlink can connect smart contracts to the existing banking systems in order to seamlessly integrate information and services such as consumer bank accounts, direct deposits, and other processes from leading global banks.

Retail Payments

Consumer applications like Uber and Airbnb offer popular retail payments to users. By using Chainlink external adapters, it is now possible for developers to give customers access to leading credit card providers and established payment networks like PayPal and Stripe.

Cryptocurrency Payments

As cryptocurrency rises in popularity, Chainlink bridges the gap and allows any smart contract platform to make payments on any other distributed ledger. This involves use cases such as making Bitcoin payments on the Ethereum blockchain.

Chainlink price feeds can be used to provide exchange rates at the time of transfer or point of sale to ensure that users are quoted fair market rates in a tamper-proof manner.

Alchemy and Paycoin are examples of hybrid crypto/fiat payment platforms that use Chainlink price feeds to determine exchange rates.

Employee Salaries

Legacy industries are often a source of inefficiency when it comes to making payments to employees and contracts. Most of the time, traditional payment rails introduce a delay when it comes to distributing payments in real-time. By using Chainlink-powered smart contracts, companies can stream salaries in real-time. This significantly reduces the accounting overhead costs for employers and provides access to earned wages for workers on a more immediate basis.

As a fiat on/off-ramp aggregator, Transak laid out the foundation for how this could work by using a work-tracking API like Wakatime to trigger payments for developers on a regular basis.

Remittances

Despite the latest developments, remittances are still a slow and expensive industry. Chainlink oracles can be used as an alternative to provide reliable data on foreign exchange rates to smart contracts as well as enable direct deposits upon transfers.

NFTs and Gaming

While DeFi is currently the largest market, developers are increasingly building more and more fraud-proof and crypto-economically incentivized gaming applications. One of the most popular and unique features of on-chain games is their ability to generate rare tokenized in-game items.

Minting rare items in a tamper-proof manner ensures that game developers and game products cannot manipulate rarity traits to their own advantage. This is possible by using Chainlink VRF and its secure and provable fair source of Random Number Generation.

Chainlink’s VRF provably fair randomness brings reliability to the rarity of items. For instance, this is critical for developing regulated gambling applications. Besides, Chainlink VRF can be used for in-demand giveaways or events where participants are randomly selected in a fair and unbiased manner.

Beyond randomness, on-chain games can benefit from real-world data, IoT data… to connect the physical and on-chain worlds.

Random Rewards and NFT

NFTs and in-game items provide users with special abilities or unique attributes that are issued in the form of non-fungible tokens (NFTs).

Aavegotchi is a well-known example of an on-chain game that uses Chainlink VRF to quickly and efficiently mint provably rare NFTs with randomly selected attributes. Another example is Ether Legends, a digital collectible trading card game that distributes rare NFT prizes to top-tier players at the end of each season.

Dynamic NFTs

Dynamic NFTs evolve and change over time as determined by real-world events. This data from the real world is brought on-chain by Chainlink oracles. Compared to static NFTs, which do not change after minting, dynamic NFTs can change in rarity and utility over time.

MLB star Trey Mancini and NBA Rookie of the Year LaMelo Ball are two examples of athletes who have minted dynamic NFTs powered by Chainlink on the Ethereum blockchain.

Random Gameplay

Fun games often have an element of unpredictability built into their logic. This creates excitement from not knowing what will happen next.

Developers can leverage Chainlink VRF to ensure the integrity of unpredictable in-game events. Some of these scenarios may include map generation, critical hits in battling games, matchmaking in multiplayer games, card draw order, random encounters/events…

Prediction Markets

Blockchain prediction markets enable users to bet on the outcome of specific real-world events. Due to their nature, prediction markets require Chainlink data feeds in order to provide a decentralized and tamper-resistant source of external data. Prediction markets are often created around sporting events, political election outcomes, and price predictions, etc.

Along with Chainlink data feeds, Chainlink Automation is being increasingly used to enhance the security and decentralization of prediction markets. Instead of relying on DevOps teams automating scheduled jobs, Chainlink Automation can automate the execution of smart contract function calls in a cost-efficient and decentralized manner. Not only does it save developers hours of work, but it also significantly enhances the security of prediction markets.

As an example, Everipedia, is an online blockchain-based encyclopedia that recently used Chainlink to relay election results on-chain to help settle prediction markets.

GameFi

GameFi is a subsector within blockchain-based gaming that enables players to participate and earn rewards through a series of economic incentives. Rewards include in-game tokens and NFTs that represent the non-custodial ownership of in-game assets.

Automation is critical for developing advanced GameFi experiences. Developers need to automate smart contract functions to start and end game rounds on time, distribute rewards to players based on game outcomes…

The gamified NFT platform Nifty Royale uses Chainlink Automation to help trigger its NFT-based battle royale games.

No-Loss Savings Games

PoolTogether is an example of an application where users deposit assets for a specified period of time and then a winner is selected to earn the yield that has been earned by all the accumulated capital from the pool. More specifically, users deposit funds in the pool, and then PoolTogether generates an interest on the aggregate deposits in a lending protocol. This interest is then given away to the winner.

Sports and Esports

Smart contracts provide integrity to the execution of online sports bets. With Chainlink oracles, it is possible to verify the outcome of sports events by aggregating data from reliable web APIs.

One example of a blockchain-based sports betting market is Augur, which uses Chainlink oracles and allows users to speculate on the outcome of sports events in the NBA, MLB, MMA…

Insurance

The insurance industry is an example of a business setting that operates in a low-trust environment. Policyholders have an incentive to falsely report positive metrics in insurance applications to reduce their monthly deductible and insurers have an incentive to delay payments and raise rates to account for misrepresented risk profiles.

Since insurance companies are responsible for processing claims and are much more capitalized than policyholders, they have more power to control the terms in which claims are settled. Using Chainlink-powered smart contracts it is possible to achieve a more objective data model that determines the outcomes and execution of events.

Parametric Insurance

Traditional insurance firms can leverage the benefits of blockchain technology by creating advanced insurance agreements whose logic is powered by smart contracts. This framework accepts a series of parameters that are fed into smart contracts to automatically trigger payouts and reduce the reliance on manual arbitration, avoid delayed payments…

Crop Insurance

Farmers in developing countries can rely on smart contracts to hedge their businesses against unforeseen weather conditions. One example of this is Arbol, a smart contract-based weather coverage solution that uses Chainlink oracles to fetch rainfall datasets from the National Oceanic and Atmospheric Administration (NOAA). This data is used to settle parametric crop insurance contracts that provide coverage based on the amount of rainfall in the region.

Flood Insurance

Flight Insurance

Due to a series of uncontrollable variables such as weather and maintenance, flights are often delayed, leading to inconvenience for business travelers. These are often covered by flight insurance policies, which often pay out compensation in the event of a delay.

One example is Etherisc, a decentralized insurance protocol that leverages Chainlink oracles to retrieve flight data in order to confirm whether or not a flight has been delayed. This removes the need for dispute periods and provides insurees with the guarantee that they will immediately receive a payment if their flight is delayed.

Car Insurance

The winner of Chainlink’s 2020 Virtual Hackathon, Link My Ride, used data points from internal sensors of vehicles to allow smart contracts to specify a rental period, unlock the doors of the car, record the length it has been rented, calculate the mileage, determine battery charge, and automate rental payments.

Home Insurance

As more sensors and advanced security features are added to smart homes, these sensors can be connected to smart contracts through Chainlink oracles in order to create parametric insurance products. This is especially useful for vacation homes or secondary residences. Insurance products could be wired for broken pipes, malfunctioning solar panels, or even home intrusions.

Life Insurance

Chainlink can use data from web APIs and official databases for determining death certificates, obituaries, cremation records, or police reports. Chainlink can be used to issue out payments and distribute assets amongst several parties for life insurance policyholders.

Health insurance

The recent developments in biotech and IoT wearables can be used by health insurance companies to offer discounts or trigger penalties based on a patient’s health data. Chainlink oracles can also sport data anomalies and trigger mandatory consultations in order to keep favorable policy rates.

Marine Insurance

Due to the uncertainty of weather and seaway conditions, hundreds of millions are wasted due to the temporary closing of major shipping seaway channels. Smart contracts can use Chainlink oracles to connect to an array of real-world sensors to issue parametric insurance coverage protections for things such as damages to shipping vessels, late shipments, thawing of frozen goods during transit…

Reinsurance

In a catastrophic event, insurance companies may be unable to cover all obligations, leading to default. When this happens, many companies “reinsure” their underwritten portfolio and offload a portion of their assets in case they cannot cover all claims.

By tokenizing reinsurance policies as smart contracts, it is possible to allow individual investors to back insurance policies by buying fractions of a policy. Chainlink oracles can be used in this process to denominate the current value of the insurance policy, route insurance payments to token holders, and autonomously trigger insurance payouts.

Asset Verification

To ensure the integrity and proper functioning of smart contracts, auditing firms like Hacken rely on oracles to perform penetration tests on centralized exchanges, bug bounties, etc., whose results can be verified directly on-chain.

Enterprise Systems

Smart contracts provide opportunities for enterprises to cut costs and improve the efficiency of their business processes due to the reduction in counterparty or intermediary overhead.

In order for companies to leverage smart contracts, they require additional considerations around privacy, scalability, legal requirements… Companies can use Chainlink as a gateway to sell their data and API services to blockchain environments and satisfy certain technical requirements like on-chain access to private data, offloading the computation logic of smart contracts, on-chain privacy…

Among the top companies using Chainlink, we find T-Systems, LexisNexis, AccuWeather, or Swisscom among others.

Blockchain as an Abstraction Layer

Just as the Internet is the gateway for connecting computers around the world, companies can use Chainlink as a middleware solution for connecting their APIs to any blockchain environment. Chainlink is blockchain agnostic and can reduce integration work to a minimum so that companies can focus on their core blockchain strategy (private key management, secure off-chain computation, trust-minimized software, permission controls…).

Monetization Data and APIs

Chainlink’s built-in flexibility and chain-agnostic features ensure it is fully compatible with existing legacy data infrastructure. Data providers can use Chainlink’s blockchain abstraction to sell their data to be used by smart contracts.

By selling data to the Chainlink Network, data providers don’t need to change anything about their current business model. This also means that back-end modifications are not necessary and they can accept payments in fiat currency. Alternatively, data providers who see the value in blockchain economies can start running their own Chainlink node to provide signed data directly to smart contracts. This way they can increase their revenue and build a reputation as a reliable data provider.

Node as a Service

Operating a node enables data providers to start selling their API connections to smart contracts. This experience of launching Chainlink oracle nodes can be offered by infrastructure providers as a Node as a Service solution.

Hybrid Cloud/Blockchain Applications

As smart contracts evolve, it is expected to see an increasing demand for more advanced decentralized applications that require expensive or complex computations that are not feasible on-chain.

Oracles can be used to attest off-chain computations that are processed within more scalable cloud computing environments. One example is NOAA Weather hosted on Google Cloud and brought onto Ethereum using Chainlink oracles.

Privacy-Preserving Data Queries and Credential Management

For many enterprises and institutions, data privacy is not an optional bonus but instead a strict requirement necessary to meet regulatory mandates such as GDPR. Chainlink is taking on this challenge through its recent acquisition of DECO, which allows for the transmission of data over HTTPS/TLS and attesting its confidentiality without ever revealing it on-chain.

On-Chain Transaction Privacy

In addition to the privacy of data inputs, many companies require privacy for their smart contracts logic and the outputs they produce. Chainlink solves this problem using Mixicles. This is a solution that works by separating on-chain data inputs from on-chain payment outputs. This is achieved by using an oracle and a transaction mixer as a bridge between the two components.

Instead of delivering raw data inputs on-chain, Chainlink Oracle posts an integer representation that is fed into a transaction mixer that will take the integer and produce an on-chain audit report to be used by users to meet regulatory requirements.

Private Off-Chain Computation

Using Town Crier, which is a hardware solution developed by Chainlink, oracle nodes can perform advanced computation in a Trusted Execution Environment (TEE) where data cannot be leaked. This allows for use cases such as handling private keys for cryptocurrency payments or using log in credentials for identity verification.

Solidity Computation

Chainlink oracle nodes are compute-enabled, which means that they can serve as validators for layer-2 solutions, such as Arbitrum Rollups. For instance, Chainlink oracle nodes can execute Solidity computation functions, generate fraud proofs, and stake LINK collateral to back their services without any modifications. The end result is that oracle nodes are not only used for data inputs but also for performing off-chain scalable computations. This helps to boost the throughput and lower the latency of decentralized applications while retaining the security guarantees of the underlying layer 1 chain.

Supply Chain

A supply chain starts from the sourcing of materials and ends with delivering goods to the end consumer. Along the route, smart contracts offer a way to automate payments, changes in ownerships, custom clearances, regulatory oversights… For instance, Chainlink oracles can connect supply chain smart contracts to web APIs, cloud networks, or real-world sensors such as GPS, temperature, humidity, velocity… to trigger payments and data transfers between parties.

RFID Tracking

Given that supply chains are starting to adopt RFID (Radio Frequency Identification) technology to track goods, RFID systems can be used to connect inventory items with tags that can be detected at a distance via a radio frequency. This is an efficient way to track store merchandise, shipping pallets, and many other common inventory goods. This data can then be brought on-chain to initiate payments upon the receipt of inventory at a warehouse, or to be used as autonomous insurance payouts for delayed shipments.

The Open Library Project created during a Chainlink Virtual Hackathon in 2020 built an RFID-tagged borderless book rental platform.

IoT Sensors

IoT sensors can be used to ensure that products in transit are properly maintained throughout their supply chain journey (keep food at certain temperatures, sealing containers…). Chainlink can be used to create blockchain IoT integrations  that connect IoT sensors to smart contracts in order to trigger payouts or issue fines depending on whether or not the IoT data confirms quality control standards.

An example of this is PingNET, a decentralized transmission network for IoT devices that uses Chainlink to enable automated payments between stakeholders based on data from IoT-enabled pallets. PingNET also brings on-chain IoT events data such as humidity, altitude, UV index, radiation…

Customs Clearance

When cargo is shipped across borders to countries with varying regulations, this often requires clearance from the receiving nation’s customs agency to prevent the shipment of illegal or dangerous goods.

Smart contracts can be used to automate agreements between countries that rely on trade finance contracts to determine the status of shipments in real-time. Thanks to Chainlink’s technology, this can be done in a privacy-preserving manner as well

Asset Management

With the rapid wave adoption in DeFi and increased institutional adoption of blockchain technology, smart contract based applications are the next stage for the Asset Management industry.

In a presentation at Fidelity Investments, Sergej Nazarov explored the state of modern asset management and explained the industry-wide applications of smart contracts, which are already being actively used to automate the workflows of traditional businesses.

Currently, there is a lot of fragmentation in the asset management industry. On top of that, there are middlemen technology companies that seek to impose standards with the expectation of extracting a monopoly rent. For instance, these companies want to make a messaging standard or an API standard of some kind in order to lock in a secured profit. However, this increases both the complexity of internal risk management processes and the management of assets. This increases the overall costs, which are then passed on to users.

By using smart contracts as a single source of truth, the industry can solve the problem where different parties keep their own records in different formats. If all participants rely on the same single source of truth that they can trust, all parties can then append any additional information that is needed. This way, blockchain technology does not act as a for-profit technology provider and can offer a public good solution for financial markets.

Taking the 2008 financial crisis as an example, people were going from one institution to another in order to generate records about their creditworthiness and gain access to loans. However, this lack of data transferability created a huge gap in the understanding of both credit risk assessment agencies and asset managers. Not having a single source of truth, created a huge systemic financial risk and losses for both asset managers and retail users.

A solution with smart contracts would have lowered the costs of the financial crisis asset management as well. A single, source-of-truth model based on smart contracts would make it easier for loan originators to have people come in and generate an individual smart contract for each loan holder, all of which would be automatically updated on an annual basis. Those individual records offer much greater efficiency and lower cost. They can be packaged up by investment banks that would securitize them and turn them into asset-backed securities. This reduces problems created by opaque baskets of hundreds or thousands of assets.

Going back to the example of the 2008 financial crisis, if each individual asset had its own smart contract, and that smart contract would have moved from the loan originator to the investment bank and to the asset manager, all credit scores and relevant data would have significantly helped to soften the market. This would have resulted in a credit cycle where asset managers would have been able to look into the underlying asset fundamental value with a very high degree of accuracy.

Chainlink enables existing enterprise systems to connect to any blockchain environment. Not only does it provide the Oracle network with the ability to put data on-chain and connect it to outbound payment systems, but also allows Chainlink to act as a bridge from an internal enterprise system into a public blockchain environment.

Instead of a multinational asset manager or any other large enterprise assembling a blockchain team for every blockchain they might want to integrate, they could integrate Chainlink and connect to any blockchain environment.

Real-World Assets (RWAs)

Asset tokenization is a term that describes the use of smart contracts and blockchain technology to represent ownership and property rights over a tradeable asset on-chain.  This often refers to the tokenization of financial or fungible assets such as the shares in a company, the quantity of gold, etc.

The tokenization of any material or nonmaterial thing possessing monetary value is one of the most promising use cases for blockchain technology. Major enterprises such as Deloitte, BNY Mellon, and EY have studied the scope of this use case and concluded that it has the capacity to disrupt multiple industries, such as the 9 trillion dollar annual global securities industry and the 9.6 trillion dollar global real estate industry. Similarly, big companies such as Microsoft, Vanguard, and Sotheby’s have announced their involvement with projects that tokenize industrial assets, securities, and real estate respectively.

In other words, digital asset tokenization is the process whereby ownership rights of an asset are represented as digital tokens and stored on a blockchain. In such cases, tokens can act like digital certifications of ownership that can represent almost any object of value, including physical, digital, fungible, and nonfungible assets.

Tokenization can allow for increased liquidity of traditionally illiquid assets; greater accessibility and ease-of-access for investment opportunities; greater transparency regarding ownership and ownership history; and a reduction in administrative costs associated with the trading of these assets, including management, issuance, and transactional intermediaries.

Examples of asset tokenization include:

• Tokenization of tangible real-world assets, like real estate, paintings, fiat currency, or commodities.
• Tokenization of intangible real-world assets such as intellectual property, licenses, or import quotas.
• Tokenization of digital assets such as governance rights.
• Tokenization of in-game assets such as skins, weapons, or in-game currencies.

In addition to offering a decentralized and trust-minimized alternative to a real-world product, investment vehicle, or service, there are other benefits such as:

• Improved liquidity. For example, due to their scarcity, pieces of fine art enjoy what is called a “liquidity premium” — the theory that low-liquidity assets yield higher returns over time. Due to this low liquidity, collectors often have difficulties attempting to sell pieces of art for a fair value. This leads to significantly higher transaction costs. Tokenization allows assets to enjoy the benefits of low liquidity without the transactional drawbacks. Besides, with tokenization it is also possible to have an asset represented by millions or even billions of tokens, creating fractional ownership. This eliminates the need for costly transactional intermediaries and expands the potential number of buyers.

• Accessibility and benefits are similar to those obtained from crowdfunding. This gives smaller investors a path towards investing in riskier but higher upside assets with relatively low capital requirements.
• Transparency and reliable information can be verified on-chain, thus allowing investors to make informed economic decisions. With tokenization, investors can see a record of ownership as well as the history of returns in interest payments or dividends depending on the smart contract logic of the asset.
• Composability within the DeFi ecosystem. Decentralized money markets around tokenized real-world assets enable users to earn interest generated from off-chain collateral. This enhances the liquidity of the wider DeFi ecosystem while simultaneously giving retail investors access to an investment class they would not be able to access otherwise.

While asset tokenization has several advantages and use cases, different assets will necessitate different oracle network structures and needs. Depending on the use case, Chainlink oracles can provide direct valuations to assets or serve as benchmarks for making decisions on them. Since Chainlink can interact with any API and off-chain system, its oracles are able to source data from multiple avenues, such as professional data providers, independent appraisers, OTC markets, or any customized aggregation of data sources. Once the ideal oracle structure is in place, there are a variety of ways that oracles can be used for valuing tokenized assets:

• Portfolio management, by making informed calculations about the current value of a portfolio, estimating the costs of trading assets….
• Collateralization tracking for applications that require Chainlink Data Feeds to price the underlying assets and come up with appropriate liquidation levels. Upon liquidation, users would also have access to on-chain verification of the price at which their collateral was seized, which allows for greater transparency.
• Token and interest distribution methods for verifying a prospective purchaser’s accreditation and legal compliance requisites. Additionally, tools like Chainlink VRF can be used to ensure a provably fair distribution of asset-backed tokens when there is an overflow of demand.
• Pricing baskets of assets to create tradable derivatives on-chain with links to real-world value. For instance, tokenized baskets might be represented as multiple stablecoins that require periodic price data in order to rebalance automated portfolios.

Stablecoins are the primary use case of real-world assets nowadays. Although they can rely on various stability mechanisms, the most widely used stablecoins are issued by centralized institutions to issue a token collateralized by US dollars held in custody off-chain. This results in the tokenization of the US dollar. Over the past 3 years, the supply of stablecoins has seen an increase of 2,222%.

Most people are not financial experts and do not care about the intricacies of how the financial industry operates, yet society still depends on financial assets for commerce and savings. Commodities are used for consumption and the manufacturing of goods, securities are used to raise capital and create businesses that provide goods and services.

The tokenization of real-world assets and their use in DeFi provides a number of advantages. To leverage the aforementioned benefits, RWAs can be generated in one of two token formats: 

• Non-native tokens, where the on-chain tokens are issued to represent RWAs that exist and are managed off-chain by a custodian
  • A bond that is tokenized on-chain but is held off-chain is an example of a non-native token
• Native tokens, where an on-chain token is issued and serves as the RWA itself, meaning it does not represent any type of off-chain asset. 

The potential market opportunity for RWAs has generated increasing interest. According to a 2022 Celent survey, 91% of institutional investors have signaled their interest in investing in tokenized assets. Below are a few examples of assets that have already been tokenized on public blockchains

• Singapore Central Bank’s Project Guardian, which exploited the use of DeFi for wholesale funding markets. Under the first pilot, DBS Bank, JP Morgan, and SBI Digital Asset Holdings conducted foreign exchange and government bond transactions against liquidity pools composed of tokenized Singapore government securities bonds, Japanese government bonds, Japanese Yen (JPY), and Singapore Dollars (SGD).
  • The pilot used a forked permissioned version of the Aave lending protocol and the Uniswap exchange operating on the public Polygon chain.
  • This resulted in JP Morgan executing its first DeFi transaction on a public blockchain, which traded $100,000 tokenized Singapore dollar deposit for tokenized yen issued by SBI Digital Asset Holdings.
• Siemens recently issued a $60M digital bond on Polygon mainnet with a 1-year maturity. The bond was issued in accordance with Germany’s Electronic Securities Act (eWpG) and was purchased by DekaBank, DZ Bank, and Union Investment. 
  • By issuing the bond on-chain Siemens was able to remove the need for paper-based global certificates and central clearing, allowing the bond to be sold directly to investors without directly needing a bank to function as an intermediary.
• MakerDAO has $680M worth of RWAs backing the DAI decentralized stablecoin. By introducing RWAs as collateral, the protocol was able to scale the amount of DAI issued into the market, harden its peg stability, and increase protocol revenue (~70% of its revenue in December 2022 came from RWAs).
  • The bulk of the RWA collateral comes in the form of US treasury bonds managed by Monetalis (MIP65). These assets provide the protocol with a source of chain on otherwise idle USDC. 

 

• A number of DeFi protocols have also made significant efforts to increase the adoption of RWAs
• Ondo Finance – a decentralized platform for RWAs – tokenized short-term US treasuries, investment grade bonds, and high-yield corporate bonds. Ondo also launched Flux Finance, a DeFi lending protocol for borrowing permissionless stablecoins against tokenized US treasuries
• Backed – a Swiss-based startup for tokenized RWAs – launched bCSPX, a product that represents tokenized S&P500 ETF shares. These shares are transferable across wallets and can be traded 24/7. 
• Maple Finance – a blockchain-based credit marketplace – is planning to expand to receivables financing, which can scale up to $100M in size, as well as add support for US treasuries and insurance refinancing.
• Centrifuge – an on-chain ecosystem for structured credit – is securitizing and tokenizing previously illiquid debt, with $298M in total assets that have been integrated in DeFi, including $220M of RWAs on MakerDAO
• Goldfinch – a decentralized credit protocol – has $101M in active loan value and allows for the creation of junior and senior tranches for assets focused on emerging markets.

Utilities

With Chainlink, it becomes possible to use crypto-economic incentives for the efficient functioning and management of utilities like water, energy, Internet…

• Internet, telecommunications, and cloud hosting that charge their customers on set pricing structures could use IoT sensors to monitor the uptime of utilities and use Chainlink feeds to measure their performance and rely on smart contracts to calculate monthly payments or issue reimbursements based on downtime.
• Energy providers can increase the efficiency of energy delivery by using Chainlink oracles to feed consumption rates into a smart contract that triggers penalties for over-consumptions, CO2 taxes…
• IOT sensors can track the consumption of water tables and issue regulatory fines, trigger autopayments, update supply tracking databases, or even trigger emergency funding to cities at risk of floods.

Authorization and Identity

• Chainlink oracles could give smart contracts access to leading e-signature companies like Docusign.
• Intellectual property from royalties, copyrights, trademarks, license fees, or patents can be turned into smart contracts. Chainlink can then be used to check IP databases to verify ownership and facilitate payments.
• FirmaChain, a blockchain-based digital signature solution, is using Chainlink oracles to allow its digital contracts to execute functions according to real-world data and events, like checking the authenticity of a driver’s license before approving a car rental.
• Account security can be enhanced by Chainlink oracles that allow for 2FA functionalities. Digital Bridge is an example of a project that brings 2FA security to smart contracts on the Matic Network.

• Social media identity and domain names can be used to tie a user’s Twitter social media account to their human-readable on-chain address in a verifiable and transparent manner.

• KYC/AML and Credentials can be used as a way to ensure full regulatory compliance. For instance, Coinfirm is using oracles to bring data from its Anti-Money Laundering program on-chain.

• Through biometrics, such as a fingerprint or a retinal eye scan, Chainlink oracles could deliver biometric data to smart contracts as a way to verify authenticity.

Government

Blockchains provide a new infrastructure for societies to track and execute government processes. These procedures would be safeguarded with smart contracts that offer tamper-proof guardrails on how governments are allowed to take action.

The enterprise’s use of smart contracts will require new forms of automated regulatory compliance. While it is possible to hardcode some restrictions directly into the code of smart contracts, governments can also use Oracle as a way to extract data from smart contracts or to require external approvals before broadcasting a transaction.

One example of a Compliance Oracle was outlined in the Project Whitney Case Study initiated by the Depository and Trust Clearing Corporation (DTCCC). This case study reported that a Compliance Oracle is a “Dynamic rules engine that enables issuers and investors to maintain compliance throughout a securities lifecycle by approving/rejecting transactions. When a transaction is approved, the stock record is updated, and the movement of tokens on-chain occurs”.

Other use cases include:

• Voting. Given the recent polarization around election results, there is an increasing demand for secure, tamper-proof voting solutions that can guarantee the integrity of the election process. One simple scenario could include an on-chain voting system using a private key whose ownership is verified by linking it to a person’s ID in a privacy-preserving manner. This is possible thanks to solutions like DECO, so that when a confirmation is published on-chain, an immutable record can be cryptographically verified by anyone.
• Deeds/Permits/Certificates. Smart contracts can be used to bring more transparency and efficiency to the issuance of government certificates, permits, and deeds. Oracles can be used to verify a person’s credentials before sending them a tokenized document such as a permit.

Sustainability

Regenerative Agriculture

Hybrid smart contracts that combine on-chain code and real-world data from IoT sensors and satellites can be used to create fully traceable, transparent, and automated incentivization systems that directly reward individuals, companies, and governments for engaging in sustainable practices.

The Green World Campaign is an example of a project using hybrid smart contracts to incentivize reforestation practices in collaboration with IC3 and funded by a Chainlink Community Grant. This project uses remote sensing data that is fed on-chain by Oracles that steward regenerative agriculture practices to help reforest degraded land.

Satellite Imagery and Drones

Satellite imagery, IoT sensors, and drones can be used to gather data on external activities like construction projects. Using AI, the data could be analyzed and cross-referenced with past projects to estimate the percentage of completion of the project. Next, Chainlink oracles could relay the information on-chain to issue completion-based payouts to construction companies.

For Investors

Business Model

Chainlink’s economic model revolves around the widespread use of the LINK token, which is mostly used to pay for the operation of the oracle services it can provide (data feeds, VRF, proof of reserves…).

The supply side of Chainlink economics involves launching new Oracle services as well as continuing to improve the existing ones in order to further the adoption of hybrid smart contracts.

On the demand side, users pay node operators in LINK tokens to access Oracle services. With the introduction of staking, both node operators and users will also be able to stake LINK as a form of service-level guarantee around Oracle performance.

Within Chainlink’s economic model, the increased adoption and availability of Oracle services opens up the doors for more fee opportunities that will be accrued by node operators supporting the protocol. This creates a virtuous cycle in which Oracle networks can sustain themselves on user fees alone by providing trust-minimized services, increasing security guarantees, and capturing new fee opportunities from growing adoption.

Revenue Streams

Chainlink’s main source of revenue is through node operator fees where LINK tokens are paid to Chainlink nodes to obtain access to real-world data and oracle services.

Chainlink did more than $6.9T USD in Transactional Value Enabled (TVE) in 2022. In comparison, it only did more than $75B TVE in 2021. TVE is the sum of all transactions enabled by a protocol.

Economics

Chainlink currently powers hundreds of leading dApps that generate a significant portion of DeFi revenue, Moreover, the Chainlink ecosystem has consolidated itself as a place where service providers can offer more security, speed, and quality data for major dApps across multiple chains.

Chainlink’s economic model aims to align the incentives of participating dApps with Chainlink oracle node providers. As Chainlink Staking expands to support a greater scope of Data Feeds and oracle services, dApps and services that rely on services will generate a greater amount of fees, where a portion of those fees will be accrued to the Chainlink ecosystems and be distributed with service providers through LINK staking.

Chainlink Economics 2.0

Chainlink Economics 2.0 is an initiative to further expand the monetization model of the network. This strategy encompasses a fee-sharing model, usage-based fees, and subscription models for dApps and protocols that use Chainlink services. In the future, additional economic structures may be explored to capture more value for the Chainlink ecosystem.

Enhancing the Chainlink Network Payment Model

Chainlink is currently in the process of architecting an enhanced payment model across all services. The goal of this initiative is to make payments easier to manage for developers and protocols who consume ChainLink services.

The initiative aims to lower the friction for the protocol to collect fees. As a result, Chainlink will accept payments made in LINK and, in certain cases, in other assets, but at a higher rate compared to LINK payments. This way, payments in other assets can then be converted into LINK. Following this cross-ecosystem economic model, Chainlink aligns its values with its consumers and increases the crypto-economic security of the dApps it supports across all ecosystems.

Chainlink BUILD Program

The Chainlink BUILD Program is an initiative by Chainlink Labs to accelerate the growth of early-stage and established projects within the Chainlink ecosystem. This will be achieved by providing enhanced access to Chainlink services as well as technical support in exchange for commitments of fees and other incentives that will be distributed to Chainlink service providers (and stakers).

The goals of the program are to follow a roadmap that goes from product ideation to finding market fit, all along the distinct stages of market strategy and product development. Rather than spending valuable development time and resources building Oracle infrastructure from scratch, protocols can integrate Chainlink and accelerate their go-to-market timeline.

As an example, Aave joined the Chainlink ecosystem during its pre-launch days and received technical support for integrating Chainlink price feeds.

Reasons for Joining Chainlink BUILD

• Technical support from service providers and engineering and product experts in the Chainlink ecosystem
• Priority access to services, even to alpha and beta releases
• Enhanced dApp security by providing incentives to Chainlink stakers
• Custom data feeds that meet unique use case requirements
• Monitoring and maintenance support

Among the projects that are currently participating in the BUILD program are Robodex, Robovault, Nuon, Bitcoin.com, ChainML, Cask, Dolomite, Mycelium, Galaxis, Interest Protocol, Krypton, Truflation, bitsCrunch, and Space and Time.

Apply to Chainlink BUILD: https://chainlinkcommunity.typeform.com/BUILD?page=build

Chainlink SCALE Program

Chainlink SCALE – Sustainable Chainlink Access for Layer 1 and 2 Enablement – is a program centered around increasing the economic sustainability of the Chainlink Network. Chains like Avalanche, Metis, Moonbeam, Moonriver… have confirmed their participation and will help to cover certain Oracle network operating costs. As the blockchain ecosystem of the participating chain scallions, the operating costs of Oracle networks can be passed down to be covered by dApp user fees.

The goal of this program is to build out an economic program that is more viable in the long term for its participants such that:

• Blockchains can grow their ecosystems and attract larger user bases.
• Chainlink helps grow blockchains via Oracle services so that the dApps in those ecosystems can power real-world value use cases.
• dApps have a runway to create sustainable fee-generator models based on real value-add services so they can eventually support the full backend costs of blockchain and Oracle infrastructure through user fees.

Why SCALE was Created

One of the most notable costs of Oracle networks is on-chain transactions. Specifically, node operators incur a fee that is paid out in the native asset of a given chain every time they deliver an on-chain report. Historically, these costs have been subsidized via Oracle rewards paid to node operators as well as user fees from dApps. Over time, as the amount of user fees surpasses the costs of running an Oracle network, oracle rewards can be reduced or completely removed to rely entirely on dApps revenue.

Formerly known as “Blockchain gas grants”, Chainlink SCALE is a complement to this economic model, where Layer 1 and Layer 2 chains can support the growth of their ecosystems with the goal of increasing the revenue of its major dApps.

Chainlink Staking

Staking is a new mechanism that will introduce a new layer of crypto-economic security to the Chainlink ecosystem. Thanks to this initiative, participants in the ecosystem have the opportunity to earn rewards in exchange for increasing the security guarantees and user assurance of the Oracle services that are provided.

By enabling LINK tokens to be locked up as a form of service-level guarantee around network performance. Through a series of rewards and penalties, the network will be able to further incentivize its protocol operations. This way, Chainlink will be able to settle itself as the foundational infrastructure for the smart contract economy supporting Oracle networks across major chains.

At the most fundamental level, staking helps to improve the security of the oracle network through economic incentives that disincentive malicious actions. Besides, users who participate in staking can earn rewards for securing the network and, in the future, for slashing and loss protection.

In the initial staking v0.1 pool, 22.5M LINK  is allotted to Community Stakers (on a first-come first-serve basis), and 2.5M is allotted for Node Operator Stakers. Staked LINK and rewards will be locked until the release of Staking v0.2, which is planned for release in approximately 9–12 months.

LINK token holders can stake their LINK using the staking.chain.link webpage. A step-by-step staking guide is also available at http://blog.chain.link/how-to-stake-chainlink-link

Long-Term Goals of Staking

• Increase economic security by enabling LINK tokens to be locked up as a form of service-level guarantee around network performance.
  • If an oracle fails to meet the obligations outlined in its on-chain SLA (Service Level Agreement), then a portion of the staked LINK will be slashed and redistributed.
• Enable community participation in the Chainlink network and empower community members to directly participate and support the performance of the Oracle network.
  • Stakers can raise alerts if they believe an Oracle service has not met predefined performance standards, with the opportunity to earn a reward for timely and valid alerts
• Generate sustainable rewards for real long-term use
  • Native token emissions of the LINK token supply will be used to create an initial base level of rewards for stakers, with the goal of tapering this off over time as other sources of rewards are explored.
  • The more users pay for Chainlink Oracle services, the greater the number of fees that can become available to reward stakers who help secure network services.
  • Chainlink’s Partner Growth Program is another source of rewards where other protocols and DAOs will provide various incentives to accelerate the growth of their ecosystem in collaboration with Chainlink services.
• Empower node operators to engage in higher-value jobs by staking. This will support the goal of Chainlink to establish a robust reputation framework for how nodes are selected to participate in a Decentralized Oracle Network (DON). As Chainlink improves its security and efficiency (as reflected in metrics such as uptime and accuracy), the next step will be to define a set of nodes that will be able to access a series of higher-value jobs within the network that will allow those operators to engage in services that accrue more fees.
  • A reputation and stake-based node selection mechanism can bring even more crypto-economic security to end users of Chainlink oracle services.

Staking Prerequisites

• Hold LINK tokens on Ethereum mainnet in a self-custodial Web3 or hardware wallet
• Have at least 1 LINK
• Have enough ETH to cover Ethereum transaction fees.

Staking FAQ

• How much LINK can each user stake?
  • In the beginning, there was a limit set at 7,000 LINK per participant. This seeks to promote greater inclusion and reduce the risk of having a few participants dominating the staking pool in the early stages. At the same time, the staking cap is set high enough to help ensure that a sufficient amount of engagement is generated.
• How much LINK can node operators stake?
  • Each active node operator will only have the opportunity to individually stake up to 50,000 LINK with a minimum requirement of 1,000 LINK. This limit mitigates potential centralization risks that could arise if one or a small number of nodes were to dominate the staking pool.
• What are the rewards for staking LINK in v0.1?
  • Node Operators Stakers are expected to have a baseline of 5% per year in LINK against their committed stakes, as well as rewards sourced from the 5% delegation fee derived from Community Staker Rewards. For example, assuming an entirely filled 25M LINK pool, Node Operator Stakers can earn an effective APR of 7%.
  • The community stake portion of the pool is also expected to have a 5% baseline per year in LINK. Out of those annualized rewards, a 5% portion of Community Staker rewards is expected to be directed to Node Operator Stakers as a delegation reward. The result is an effective reward rate that approaches 4.75% on an annualized basis.
• When will staked LINK tokens and rewards be unlocked?
  • Due to the security parameters of the Staking system, both Node Operators and Community Stakers will initially have their LINK tokens and accrued rewards locked up in a smart contract until a future release of Staking. Research and development are already underway for Staking v0.2, which is planned for approximately 9-12 months.
• Is Chainlink Proof of Stake?
  • No – Proof of Stake is a consensus mechanism used by some blockchain networks to validate transaction blocks. The goal of staking tokens in a decentralized oracle network, like Chainilnk, is fundamentally different. The reason is that the creation of a reliable and tamper-resistant oracle network must reflect the state of the external world and bring that information to multiple chains.
  • It is worth noting that, in order to participate in Staking, while it is in v0.1, it is required to execute an on-chain transaction on Ethereum mainnet.
• Can staked LINK be slashed?
  • Node Operator Stakers and Community Stakers will not see their committed stake slashed during v0.1 However, if a valid alert is raised for excessive downtime, then up to 3 months of accrued staking rewards can be slashed from node operators that are currently serving the ETH/USD data feed on Ethereum. Node operators who are not serving the ETH/USD data feed will not see their rewards slashed during v0.1
• What is the roadmap for staking
  • Staking v0.1 is a beta version that will set the foundation for future implementations by introducing a decentralized alerting system. This is planned to be supplemented in the future with additional functionalities such as user fee rewards, a more sophisticated reputation system, comprehensive stake-slashing mechanics, and other mechanisms to increase the security assurances of the network.

The Current State of Staking

Operating Expenses

There is an increasing adoption of Oracle services, and Chainlink is currently preparing to witness an economy of scale that, in an ideal scenario, will be followed by a significant decline in operating costs.

The costs for providing decentralized Oracle network services peaked in 2022 after the release of Off-chain Reporting (OCR). Since then, the network has scaled by improving its service offerings with OCR and VRF v2. This has helped the Chainlink network to continually see a decline in the cost of providing its services, from on-chain market data to verifiable randomness and off-chain computation.

Beyond the current reduction in costs, Chainlink is exploring ideas such as creating a fast lane for transactions related to public goods or partnering with blockchain ecosystems to provide grants that will eliminate the costs of putting Oracle requests on-chain.

Costs of Using Chainlink Automation

Chainlink automation only requires an execution fee for on-chain transactions. This fee includes the transaction cost, a percentage premium, and a small fixed gas overhead accounting for gas between the network and the registry.

• The premium is the compensation that the Automation Network receives for monitoring and performing the upkeep. This premium varies by chain.
• There is no registration fee or other fees for any off-chain computation.

Example of an upkeep transaction that is executed on Polygon (premium percentage set at 70%) using 1.16M gas at a gas price of 183.3 gwei and a MATIC/LINK exchange rate of 0.131

Chainlink Automation Funding

Upkeeps have a LINK (ERC-677) balance. Every time an on-chain transaction is performed, the upkeep’s balance will be reduced by the LINK fee. Automation upkeeps are expected to perform their job even when gas prices spike. Because of that, the minimum balance in LINK reflects the best estimate of the cost to perform upkeep when gas prices spike.

• If the upkeep’s balance does not exceed the minimum balance, the Automation Network will not perform on-chain transactions.
• To withdraw LINK balances, upkeeps must be canceled first
• Any upkeep that has not spent more than an aggregated amount of 0.1 LINK fees over the span of its lifetime is subject to a 0.1 LINK fee. This cancellation fee protects node operators from spammers who register automation jobs that never perform.
  • For example, if your upkeep has spent 0 LINK over its lifetime and it has a balance of 5 LINK, when it is canceled, it will receive 4.9 LINK.
• Automation nodes select the gas price dynamically based on the prices of transactions within the last several blocks. This optimizes the gas price based on the current network conditions.

The minimum balance is calculated using the current fast gas price, the limit chosen for the upkeep, the max gas multiplier, and the conversion to LINK

In Chainlink’s Automation, individual nodes do not compete with one another. Instead, they work together to ensure that all registered upkeeps are performed. This makes costs more predictable upfront, which enables node operators to estimate their costs based on the expected gas consumption.

Tokens

LINK

LINK tokens are required to pay node operators for retrieving data for smart contracts, as well as to be used as deposits for node operators.

The smallest denomination of LINK is called a Juel, and 1,000,000,000,000,000,000 (1e18) Juels are equal to 1 LINK, similar to how Wei is the smallest denomination of ETH.

The LINK token is an ERC677 token standard that inherits functionality from the ERC20 token standard and allows token transfers to contain a data payload. This payload allows tokens to be transferred to contracts and has the contract trigger logic for how to respond to receiving the tokens within a single transaction.

On EVM chains, the LINK token contract is supported in Ethereum mainnet, BNB Chain, Polygon, RSK, Gnosis Chain (xDai), Avalanche, Fantom, Arbitrum, Optimism, Harmony, Moonriver, Moonbeam, Metis, and Klaytn.

Chainlink’s ICO took place in September 2017.

There is a fixed supply of 1 Billion tokens:

• 35% for ICO
• 35% for node operators
• 30% for the team and future development

Governance

In Chainlink, governance is done through a process called validation. The ChainLink Validation System monitors on-chain oracle behavior and provides an objective performance metric that can guide users when selecting their oracles.

Availability

The Validation System should record failures by an oracle to respond in a timely way to queries. It will compile ongoing uptime statistics. Availability is somewhat trickier to monitor, as oracles of course don’t sign their failures to respond. Instead, a proposed protocol enhancement would require oracles to:

• Digitally sign attestations to the set of responses they have received from other oracles.
• The validation contract would then accept (and again reward) the submission of sets of attestations that demonstrate consistent non-responsiveness by an underperforming oracle to its peers.

Correctness

The Validation System should record apparent erroneous responses by an oracle as measured by deviations from responses provided by peers. Chainlink’s proposed approach would be to realize the validation service as a smart contract that would reward oracles for submitting evidence of deviating responses. In other words, oracles would be incentivized to report apparently erroneous behavior.

The data feeds will be managed by nodes that connect to external APIs and API aggregators like Fiews.io, CLC Group, and LinkPool.io.

Externally, Chainlink powers decentralized governance by offering a wide range of secure off-chain data and computation services that can help DAOs in scenarios such as:

• Solving Unreliable DAO Execution With Chainlink Keepers
  • DAOs are becoming more intricate in their functions.
  • Chainlink’s wide range of off-chain data and computation services help DAOs build truly automated and decentralized processes for end-to-end execution from proposal to action, for example:
  • DAO treasury rebalances.
  • Unstaking/staking of governance tokens.
  • Execution once a voting period ends.
  • Vesting governance token rewards.
• Awarding the Right Contributor With Chainlink Data Feeds
  • As DAOs become more integrated with the real world, there are opportunities to monitor and track off-chain behavior on-chain in order to create a robust token governance model that awards the right contributors.

• Random Sample Voting With Chainlink VRF (Verifiable Random Function)
  • Regardless of whether it occurs off-chain or on-chain, voting participation is a hard problem to solve.
  • Robust voter participation is a necessity for any democratic process, and DAOs are no exception.
• Leveraging Chainlink Any API and Keepers to Relay Off-Chain Votes On-Chain
  • Currently, many DAO members incur a transaction fee whenever they vote on a proposal on-chain.
  • When gas costs are high, voter participation can trend down and inhibit the DAO’s ability to make truly community-approved decisions.
  • Use Chainlink Any API to monitor off-chain votes and relay results on-chain in a secure and reliable manner.
• Reducing Proposal Spam Through Off-Chain Votes Using Chainlink Oracles.
  • Off-chain voting can also help solve the problem of proposal spam.
  • DAOs can use multiple layers of proposals, with an initial proposal required to receive a certain number of votes before it’s formally presented to the entire DAO, to filter undesirable proposals from the start.

Risks

Regulatory Concerns

The Securities Framework Asset Ratings of the Crypto Rating Council (CRC) attributed the score of 2 out of 5 to Chainlink and provided the below summary:

• Sale of the token or token interests were provided after the system had existing utility
• Absence of investment-like language or marketing
• Decentralized development and usage

The CRC is a member-owned and operated organization whose purpose is to assess if a crypto asset, or its development, issuance, and use have characteristics that make it more or less likely to implicate federal securities laws. According to the CRC framework, a score of 5 results when an asset appears to have many characteristics that are consistent with the Howey-test factors. A score of 1 results when an asset appears to have few characteristics that are consistent with the Howey-test factors.

Proof of Reserves Risks

Cross-chain Proof of Reserve feeds have different configurations. If the wallet address manager is self-attested, it is possible for these feeds to include reserve balances from on-chain addresses that have not been cryptographically verified to show ownership or control of the underlying assets. Because of this, there is a risk that token issues could manipulate the value of a Proof of Reserve fee by adding more addresses to the address list than they can directly control.

To mitigate this problem, Chainlink classifies its feeds into 5 categories:

• Verified feeds follow a standardized workflow:
  • Many data sources
  • Extensive network of nodes
  • Resilient to disruption
  • Highly liquid and well-represented on a large number of markets
• Monitored feeds refer to those feeds that are under review by the Chainlink Labs team:
  • The token project or asset is in early development
  • The project is going through a market event such as a token or liquidity migration
  • The token or project is being deprecated in the market
  • There is a high spread between data providers due to low liquidity in the market
• Custom feeds are built for a specific use case and might not be suitable for general use:
  • Single source feeds
  • Proof of Reserves (require Sybil-resistant node operators)
  • Technical feeds (gas costs, block difficulty…)
  • TVL (Total Value Locked) feeds
  • Custom index feeds where the node operators follow an agreed-upon formula
• Specialized feeds rely on contracts maintained by third parties and require an in-depth understanding of the composition methodology before they are used:
  • Off-chain single-source feeds
  • Off-chain Proof of Reserves feeds that require the surveillance of Sybil-resistant operators
  • LP token feeds
  • Wrapped calculated feeds for wrapped assets that are pegged 1:1 to the underlying token
• Deprecating feeds for specific feeds that are scheduled to phase out

Security

From a security perspective, an oracle should authenticate and verify the integrity of a request made to a trusted third party. In order to do this, the oracle would ingest from a smart contract a user request that specifies a target data source (trusted third party), then it would obtain the data by sending the query to the target source and, finally, it would return the response to the smart contract. Besides integrity, confidentiality, and availability of the data are two key properties as well. This will ensure that the oracle has 100% uptime and that it does not publish sensitive or harmful information (e.g. leak a trader’s portfolio). The oracle should single out particular smart contracts or deny their request.

However, the notion of a trusted third party is an ideal functionality.  There is no perfectly trustworthy data source, and data may be benignly or maliciously corrupted due to faulty websites, cheating service providers, or honest mistakes.To protect against faulty nodes, Chainlink’s decentralization approach will distribute both its data sources and its oracles.

Distributing Data Sources

In order to deal with a faulty Oracle source, Chainlink obtains the data from multiple sources. After receiving multiple responses from those sources, it will aggregate them into a single answer. This ensures robustness against erroneous data and allows for handling fluctuations in data values over time.

Distributing Oracle

Instead of relying on a single oracle, Chainlink uses a distributed system that accepts a collection of different oracle nodes, each of which will contact its own distinct set of data sources, which may or may not overlap with those of other oracles.

VRF Security Considerations

While it is possible to gain access to high-quality randomness on-chain with Chainlink’s VRF, it is still worth noting that miners and validators can still manipulate the random generation process. To avoid that, the following security considerations should be reviewed:

• Smart contracts that have multiple in-flight VRF requests simultaneously must ensure that the order in which the VRF fulfillments arrive cannot be used to manipulate the outcome. This is because miners and validators can control the order in which requests appear on-chain, and hence the order in which smart contracts respond to them
• It is recommended to choose a safe block confirmation time (which will vary between blockchains), since miners/validators could rewrite the chain’s history to put a randomness request from a smart contract into a different block, which would result in a different VRF output. This does not enable the miner/validator to determine the random value in advance. Instead, it only enables them to get a fresh random value that might or might not be to their advantage.
• After a request for randomness has been, it is advised against accepting bids/bets/inputs. For instance, in the case of a contract that mints a random NFT in response to a user’s actions, the contract should record the actions of the user to generate the NFT and then stop accepting further user actions once the request for randomness has been made.

Operational Best Practices

Restricting Access

To run a Chainlink node, the Operator UI port does not need to be open on the internet for it to correctly function. Besides the minimum requirement to keep port 22 open and grant access to the node via tunneling, it is recommended to use a VPN that restricts access to only those who are signed into the VPN.

Failover Capabilities

Failover capabilities are required on both the Chainlink and Ethereum clients so that if any of the servers fail, the service is still online with minimal downtime.

Chainlink nodes use a PostgreSQL database that is not in the same server as the Chainlink model. The minimum requirement is that at least 2 Chainlink nodes are running at any one time, with both of them pointing to the same database to ensure failover if one fails. In the case of both Ethereum and Chainlink nodes that are public-facing without a VPN, SSL is required to ensure that no communication between both can be intercepted.

Disaster Recovery

One of the main causes of downtime is caused in contest of fully corrupted Ethereum nodes that require a re-sync. Due to the challenge of recovering an Ethereum client with minimal downtime, it is recommended to:

• Take daily snapshots of the Ethereum chain on a separate server from what the Chainlink node is connected to
• Have in place an Ethereum client start-up process that pulls down the latest template of the chain and syncs it to the latest height.

Active Monitoring

Active monitoring is important for detecting any issues before or when they occur. It is advised to keep track of the following:

• ETH balance of the wallet address assigned to a node.
• Errors on job executions.
• Responsiveness of the Operator UI port.
• https and websocket ports.
• Ethereum client disk, RAM, and CPU usage.

Audits

• Nick Johnson – Chainlink Audit Report (3 years ago)
• Quantstamp – Chainlink Audit Report (3 years ago)
• SigmaPrime – Chainlink Audit Report (3 years ago)
• SigmaPrime – Chainlink Audit Report (3 years ago)
• LINK token contract audit
• Chainlink Staking Crowdsourced Audit (November 1-15, 2022)

Staking Contracts

The staking v0.1 smart contracts have undergone multiple audits from a number of independent and industry-leading auditors. Besides, the codebase has also undergone a time-limited competitive audit program on Code4rena.

Code4rena Competitive Audit Program

Code4rena’s competitive audit program started on November 1, 2022, and continued until November 15, 2022. It was a private contest that gave participants the opportunity to review and assess the security of Chainlink v0.1 staking contracts written in Solidity.

Dependencies and Access Controls

Multiple vulnerabilities related to oracles will be the result of developers’ practices that are out of the scope of Chainlink or any other oracle network provider. In order to work with Chainlink, developers should design their smart contracts to be resilient and mitigate risk that might result from the degraded performance of chains, oracle networks, volatile market conditions, or any other outage related to data providers or network operators.

Projects that integrate Chainlink as part of their dApp’s functionality must prepare for unforeseen market events and take additional steps to ensure that any custom or specialized data feed can protect the users of the protocol. Some examples of tooling that projects have put in place to mitigate extreme market events or third-party outages include:

• Circuit breakers, so that in the case of an extreme price event, the contract would pause operations for a limited period of time. This is achieved by using Chainlink Automation, a service that monitors data feeds to identify unexpected events.
• Contract update delays so that the contracts do not update until the protocol has received fresh input from the data feed.
• Manual kill switch, so that the projects can manually cease an operation and temporarily sever the connection to the data feed
• Monitoring alerts to allow teams to receive notifications about deviations in the data feeds they are using.

Chainlink’s community is growing exponentially due to how relevant its software is across multiple chains. While Chainlink continues to update and improve its tooling, any community member can deploy Chainlink nodes themselves or via the extensive network of node operators that support the supply of data on-chain. Because of that, Chainlink Labs Team does not monitor community deployments, and users should use best practices in terms of observability, monitoring, and risk mitigation techniques based on their use cases.

Furthermore, due to the open-source nature of Chainlink’s codebase, anyone can fork or modify the code requirements. Chainlink Labs and its development teams are not involved in any of these forks and do not track any of these releases. Since these forks can pose risk harmful to a project, users are responsible for vetting and validating the suitability of forked deployments.

Users are encouraged to subscribe to the data-feeds-user-notifications channel on Discord

Liquidity Risk

Projects that require price data for a specific asset must make sure that the asset has sufficient liquidity in the market, otherwise it will be subject to price manipulation. The volatility of assets with low liquidity might attract malicious actors to exploit their volatility and cause the smart contracts to behave in a way that they did not intend.

Single-Source Data Providers

•  Some data feeds obtain their pricing data from individual exchanges rather than from aggregated price tracking services that gather their data from multiple exchanges. For this reason, all integrations should check the integrity and quality of the data that the smart contracts of an application rely on. Any error or omission from the data provider’s data might negatively impact an application’s users.

Crypto and Blockchain Actions

• Liquidity migrations occur when a project moves its tokens from one liquidity provider (such as DEX, CEX, or DeFi application to another. This can result in low liquidity in the original pool, making the asset susceptible to market manipulation. It is recommended to coordinate all liquidity migrations with relevant stakeholders, liquidity providers, exchanges, oracle node operators, and users in order to ensure prices are accurately reportedly throughout the migration.

Market Failures From Extreme Events

• Feeds for assets with low market liquidity and where data providers exhibit abnormal price spreads may see the price oscillate between two or more price points within regular intervals. To avoid risks associated with these price fluctuations, users must regularly monitor and assess the quality of an asset’s liquidity to avoid erroneous trades.

Periods of High Network Congestion

• Since the performance of data feeds relies on the chain they are deployed on, periods of high network congestion might impact the frequency of updates in Chainlink Price Feeds.

Maintenance Periods

• Routine maintenance is carried out on Chainlink Data Feeds, including decommissioning on an ad-hoc basis. Their maintenance periods might require some actions to be performed by protocol teams, who will be notified as long as they have provided their contact information before utilizing data feeds.

Wrapped/Bridged Assets

When working with Layer2 chains and sidechains, LINK must be transferred to the target chain using a cross-chain bridge. Cross-chain bridges come with their own risks. Bridge attacks constitute some of the largest cryptocurrency hacks in terms of economic value at risk. Because of that, Chainlink Labs does not endorse any particular bridge. Ultimately, each user is responsible for assessing the risk being taken.

Since blockchains are not natively capable of communicating with each other, they require blockchain interoperability protocols to tap into each blockchain’s unique assets and features. A bridge is an example of a cross-chain interoperability solution.

Bridges enable cross-chain transfers of assets and information so that dApps can leverage the properties of different chains.

• Due to the support for wrapped assets, users should evaluate the tradeoffs between using a price feed specifically built for the wrapped asset (or bridged asset) or a price feed for the underlying asset. Decisions should be made on a case-by-case basis considering the liquidity, depth, and trading volatility of the underlying asset compared to its derivative.
• Chainlink Price Feeds are designed to provide market-wide prices of various assets as determined by a volume-weighted average across a wide range of exchanges. On blockchain networks where these assets are wrapped or bridged from another network using a cross-chain bridge, Chainlink Price Feeds built for the underlying asset will continue to report the market-wide price of the underlying asset as opposed to the price of the wrapped/bridged asset. This will reduce risks around market manipulation because wrapped/bridged assets are less liquid than the underlying token. However, users should be aware that certain extreme events may result in price deviations between the wrapped/bridged asset and its underlying counterpart.
  • For example, the exploit of a cross-chain bridge may cause a collapse in demand for a particular wrapped asset.
• An additional mechanism for securing protocols using wrapped assets is to incorporate a Chainlink Proof of Reserve. This will enable real-time reserve monitoring of off-chain and cross-chain assets, including those that have been wrapped/bridged. By comparing the wrapped token’s supply against the Chainlink Proof of Reserve feed, protocols can ensure that they are properly collateralized at all times.

When choosing a bridge there is no perfect solution, only trade-offs. Bridge designs must compromise between the following characteristics:

• Trust minimization: How many security assumptions does the bridge make beyond those of the underlying blockchains.
• Generalizability: How the systems enable the transfer of complex arbitrary data such as assets or funds.
• Extensibility: How hard it is to integrate a blockchain.
• Latency: How long it takes to complete a transaction.
• Costs: How much it costs to transfer assets across chains through that bridge.

In terms of risks, the following must be considered

• Smart contract risks and risks of exploits to the underlying logic of the contract
• Systemic financial risks are caused by locking tokens on the source chains and minting a derivative or wrapped asset on the destination chain that represents the locked tokens. A hack of the locked tokens or an infinite mint attack could turn all the wrapped assets worthless
• Counterparty risk due to the intervention of off-chain components in some bridges. Some bridges can act as custodians, which means that the underlying security is based on trust
  • Trusted (custodial) bridges require a third party to validate movements over the bridge.
  • Trustless bridges leverage smart contracts to store and release funds on either side of the bridge.
  • External verification methods typically require an honest majority assumption, where a majority of external validator nodes must behave honestly to maintain the integrity of the cross-chain interaction to be upheld.
  • Examples include the Binance bridge, the Polygon bridge, or the Nomad bridge.

• Local verification techniques rely on the local verification between two counterparties that verify the state of one another. This model has a high level of trust-minimization given reasonable blockchain assumptions, as the swap either happens or both transactions fail. This comes at the expense of tradeoffs like the inadvertent call option problem – a situation where the second party in an atomic swap can either act or not act on the swap.
  • Examples include Hop or Connext.

• Native verification delegates the responsibility for verifying the state of the source chain to the validators of the destination chain. This is typically done by running a light client of the source chain in the virtual machine of the destination chain or running them both side by side. This is the most trust-minimized form of cross-chain communication, although it is more expensive and less flexible than other alternatives. Because of that, it is more suited for blockchains with similar state machines, such as Ethereum and EVM-based chains or among Cosmos-SDK chains.
  • The Near Rainbow Bridge is an example of a natively verified bridge.

Trustlessness in bridges does not exist in absolute form (trusted vs trustless).

Front Running Risk

Front running occurs when a third party benefits from access to market information ahead of the rest of market participants

• Chainlink Data Feeds optimize for high levels of data quality and reliability over latency. Users building high-latency-dependent applications should be aware of this and assess whether the configuration of their data feeds meets their needs and requirements for speed and frequency.

Fas Gas Reliability

• Chainlink’s Fast Gas Data Feeds provides a simple way to determine the price of gas so that developers and users can estimate their expenses.

Project Investors

The launch date of LINK was on September 19, 2017, with an average price of $0.09.

Chainlink raised more than $32M in funding over 4 rounds. The last funding was raised on September 20, 2017 from an ICO round.

There have been 5 funding rounds for LINK:

• FJ Syndicates invested an undisclosed amount in the ICO Round on April 4, 2017.
• TGE Capital invested an undisclosed amount in the Seed Round on August 22, 2017.
• Richard F. Dulude led the Seed Round on September 1, 2017, followed by AlphaCoin Fund.
• $29M raised in the Private Sale on September 19, 2017 with an average price of $0.09
• $3M raised in the Public Sale on September 19, 2017 with an average price of $0.11

Investors include Fundamental Labs, Nirvana Capital, Limitless Crypto Investments, George Burke, Andreas Schwartz, 8Decimal Capital, Consensus Capital, Framework Ventures, One Block Capital, Outlier Ventures, and Anmi OECD.

Additional Information

Contributing to Chainlink

Chainlink is an open-source project and publishes code under the MIT License on Github

Both developers and community members can contribute their time and effort to help improve and grow Chainlink via the following methods

• Building and maintaining the Chainlink software and tools.
  • Contributing to the core code, or the various tooling found in the Github repository.
  • Raising an issue.
  • Requesting new features.
  • Submitting a Pull Request for a fix, improvement or new tool.
• Contributing to the documentation pages.
  • Improving the readability of pages.
  • Fixing typos or grammar errors.
  • Adding new guides or tutorials that you would find useful.
  • Translating the documentation into other languages.
• Creating Community Content, such as
  • Document your experience in using Chainlink as part of your project.
  • Do a deep-dive blog post or video on a Chainlink solution.
  • Write up technical tutorials showcasing Chainlink being used in various use cases.
• Becoming a Developer Expert.
  • Receive recognition in the community, previews of new Chainlink features, exclusive access to Chainlink events, and opportunities to level up your technical and soft skills.
• Joining the Chainlink Community Advocate program.
  • Designed to accelerate the awareness and adoption of Chainlink.
• Running a Chainlink Focused Developer Bootcamp.
  • Running your own developer Bootcamp.
  • Translating an existing Bootcamp and running it in another language.
• Running an In-Person Meetup or Watch Party.
  • Meet others also passionate about how hybrid smart contracts can create an economically fair world.
• Participate in a Hackathon.
  • Great way to learn how to use Chainlink.
  • It is also a great way to showcase your skills to the Chainlink team and the wider community.
• Applying for a Grant.
  • Encourages the community to create critical developer tooling, add high-quality data, and the launch key services around the Chainlink Network.

Partnerships

There are 1693 projects and 2019 integrations in the Chainlink ecosystem. For reference, Chainlilnk onboarded an average of 1.4 new partners each day during 2021.

Chainlink ecosystem: https://www.chainlinkecosystem.com/ecosystem

One of the most notable partnerships is the collaboration between SWIFT and Chainlink to enable cross-chain transfers. This partnership initially consists of a Proof of Concept project which would allow traditional finance firms to transact across blockchain networks. This project uses Chainlink CCIP in order to allow SWIFT messages to instruct token transfers and accelerate the adoption of blockchain technology across capital markets and traditional finance. This collaboration allows financial institutions to gain blockchain capability without replacing, developing, or integrating new connectivity into legacy systems.

For context, the SWIFT Interbank Messaging  System is the most widely used platform for traditional cross-border fiat transactions, connecting over 11,000 banks around the world. In August 2022, the system recorded an average of 44.8M messages per day.

Recent partnerships announcements:

• Aavegotchi uses Chainlink VRF to power dynamic NFTs on Polygon. Thanks to VRF, the protocol will mint NFT avatars and distribute rare attributes in a transparent and fair manner through on-chain raffles.
• Ampleforth uses Chainlink data feeds to adjust its total token supply daily based on market conditions.
• Cache Gold uses Chainlink Proof of Reserves to monitor physical gold reserves backing tokenized gold in real-time.
• COTI’s CVI (Crypto Volatility Index) uses Chainlink Automation to rebase its volatility tokens on a daily basis.
• Ether cards uses Chainlink VRF to generate provably rare NFT traits, fairly distribute NFTdrops, and introduce pure chance outcomes to its games.
• Hedge uses Chainlink price feeds to help secure interest-free loans on Solana
• Liquity user Chainlink price feeds to execute liquidations in the protocol and ensure that the LUSD stablecoin maintains a proper collateral ratio.
• The NBA uses Chainlink VRF for its NFT collection
• Polychain monsters uses Chainlink VRF to fairly distribute NFTs from its booster packs.
• Otonomi uses Chainlink data feeds to power supply chain parametric insurance products. This helps Otonomi to reduce contract settlement times, lower costs, improve risk-weighted performance metrics, and create a more transparent and reliable insurance experience.
• Pooltogether uses Chainlink VRF to gamify its no-loss prize pools
• Poundtoken uses Proof of Reserves to provide increased transparency into the Fiat Reserves backing its stablecoin.
• QiDao is a multi-chain borrowing protocol that uses Chainlink price feeds to secure collateral calculations
• RoboVault uses Chainlink Automation to power its automated DeFi strategies
• Swingby uses Proof of Reserves to secure its cross-chain bridge
• Thales uses Chainlink data feeds to offer real-world binary options
• WePiggy uses Chainlink price feeds to secure its lending markets
• Trader Joe uses Chainlink price feeds to secure its borrow and lending product, Banker Joe.
• Synthetix integration with Chainlink to allow anyone to build and run an oracle to obtain price feeds for synthetic assets (also called Synths) for the recently launched Synthetix.Exchange
• Partnership with Google to help developers access cloud data on public blockchains easily, promoting faster technological developments and use cases.
• Integrations with environmental/agriculture related real-world applications.
  • Tecnalia co-authored report on how blockchain and oracle technology can help combat the effects of climate change and accelerate the transition to clean energy via hybrid smart contract solutions.
  • The Lemonade Crypto Climate Coalition brings together industry-leading partners with expertise in various fields to work together, combining vast knowledge of blockchain technology to build highly accurate, fully automated weather insurance models.
  • Arbol’s deal with Chainlink will allow users a smart weather protection product for farmers and businesses.
• Integration with major data providers like 
  • Huobi – A cryptocurrency exchange company.
  • Truflation – Deconstructs and remasters the most popular inflation index in the world, Consumer Price Index (CPI), to reflect the real market price changes. better.
  • LexisNexis – Provides legal, regulatory, and business information and analytics.
  • Binance – One of the largest crypto exchanges by trade volume and one of the fastest in the world.

Grant recipients

The Chainlink Community Grant Program funds development teams and researchers building a more functional, accessible, and socially impactful smart contract economy.

Previous grants recipients include

• Coorest – To create a decentralized application for carbon trading and offsetting
• Gitcoin Grants Round 14 – Chainlink matched the $1M main prize pool.
• Bela Supernova – Support of development of public health data oracle to bring public health statistics to blockchains.
• Unicef – Empowerment of local communities using blockchain technology, cryptocurrencies, smart contracts and oracles.
• And many more 

FAQ

• What is a blockchain oracle?
  • A blockchain oracle is any system that provides an off-chain service to a smart contract. Therefore, oracles enable connectivity between the real-world and blockchains.
• Why do blockchains need oracles?
  • Thanks to oracles, smart contracts can bring real-world data off-chain to perform specialized computations, integrate existing payment rails, and automate processes.
• What is the oracle problem?
  • The oracle problem refers to the inability of blockchains to natively pull or push data from or to any external off-chain system, due to the strong security properties of on-chain consensus rules imposed by blockchains.
  • The oracle problem is also known as the “smart contract connectivity problem”.
• What is a decentralized oracle network?
  • A decentralized oracle network is a set of multiple blockchain oracles run by independent node operators that are chosen to retrieve and validate data from various off-chain sources. Each of the responses provided by oracles are then aggregated to form a single trusted data point that can be used by smart contracts.
• What is TVE (Transaction Value Enabled)?
  • TVE is a cumulative flow metric that measures the aggregate monetary value of transactions that have been facilitated by a protocol over a period of time.
  • TVE measures both volume and facilitated flow. In the case of Chainlink, this covers accurate price updates, swaps, lending deposits, assets rebalancing, automated yield farming…
• How long does it take to execute an upkeep or automation job once it has been broadcasted on-chain?
  • This depends on the network congestion, the amount of gas used by the upkeep job, and the gas price specified when the transaction is broadcasted.
• Where can I explore the performance and reliability of the network?
  • The Chainlink Price Feeds page offers good visualizations about the performance of each price feed. This provides transparency around how often fee updates occur, the gas price paid by each node, the users sponsoring each feed…
  • LinkPool’s market.link is a permissionless marketplace where node operators can display their historical performance and list the oracle services they offer. Users can use this data to filter and analyze each node’s revenue, gas costs, and response times.
  • Developers can also query Chainlink Market’s Metrics API to access raw data and build their own analysis framework using real-time data.

Community Links

• Website: https://chain.link/ 
• Docs: https://docs.chain.link/ 
• Data feeds: https://data.chain.link/ 
• Github: https://github.com/smartcontractkit/chainlink 
• Twitter: https://twitter.com/chainlink 
• Discord: https://discord.com/invite/chainlink 
• Telegram: https://t.me/chainlinkofficial 
• WeChat: https://blog.chain.link/chainlink-chinese-communities/ 
• Kakao: https://open.kakao.com/o/gWXAAf0b 
• Medium: https://medium.com/chainlink 
• Reddit: https://www.reddit.com/r/Chainlink/ 
• Youtube: https://www.youtube.com/channel/UCnjkrlqaWEBSnKZQ71gdyFA 
• News: https://chainlinktoday.com/ 
• Events: https://chain.link/community/events 
• Chainlink Tech Talks: https://chain.link/techtalks 
• Chainlink academy: https://www.chainlink.education/ 
• Community grants program: https://chainlinkgrants.typeform.com/to/efEbsq 
• Integration grants: https://chainlinkgrants.typeform.com/to/hXk0hruN 
• Social Impact program: https://form.typeform.com/to/pAL9WhQa