Chainlink

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23 Jun 2024
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The blockchain (public chain) world and the real world are two completely separate entities. A blockchain system can be seen as a deterministic system where all nodes follow the same rules and protocols to execute transactions and reach consensus. During this process, each node must perform deterministic operations, meaning that with the same input data, all nodes will achieve the same output results. This deterministic operation ensures the effectiveness and security of the decentralized consensus process.
However, when it comes to receiving external data, the situation becomes uncertain. External data can vary due to different sources, timing, and other factors, leading to nodes facing uncertainty in obtaining and processing this data. This uncertainty can cause data inconsistencies among nodes, affecting the consensus process. Therefore, blockchain itself cannot actively obtain external data.
Despite the revolutionary potential of blockchain in many areas, especially programmable blockchains like Ethereum, it cannot achieve its full value if it remains a closed system without external links, much like a computer not connected to the internet. To truly bring blockchain technology to life and enable smart contracts to access and respond to real-world data, connecting with the external world is essential for Web3 to become mainstream.
Oracles serve as the bridge connecting blockchain with the real world, enabling data exchange between the two. Oracles securely, accurately, and reliably introduce external data into the blockchain system. Through oracles, blockchain systems can obtain and utilize external data while maintaining deterministic operations, thus enabling broader applications and functionalities.
Applications of Oracles
As the bridge between blockchain and the real world, oracles can be applied in any scenario involving real-world data, such as insurance, supply chain, prediction markets, IoT, stablecoins, gaming, and DeFi.
Here are some typical oracle applications:

  • Decentralized Finance (DeFi): Oracles play a crucial role in DeFi, providing real-time financial market data for lending, derivatives trading, insurance, and RWA applications. Projects like AAVE and Synthetix rely on oracles for accurate price data to ensure correct asset valuation and risk management.
  • Insurance: Oracles can provide real-world event data, such as weather conditions and natural disasters, to trigger payout terms in on-chain insurance contracts.
  • Prediction Markets: Oracles provide real-time results data, allowing users to place bets and trade predictions on events like political elections and sports matches.
  • Internet of Things (IoT): Oracles can relay data collected from IoT devices to smart contracts, enabling automated data exchange and decision-making. For example, supply chain management systems can use oracles to obtain real-time tracking information, enhancing efficiency and transparency.
  • Stablecoins: Oracles provide real-time forex data to ensure stablecoins maintain stable exchange rates with their pegged fiat currencies.
  • Gaming and Non-Fungible Tokens (NFTs): Oracles provide random number generation services for gaming and NFT projects, such as Chainlink's VRF (Verifiable Random Function), ensuring fair and transparent probabilistic events.
  • Cross-chain: Oracles support data and asset exchange in cross-chain applications, facilitating interoperability between different blockchain networks, including asset transfers, data sharing, smart contract triggering, and identity authentication and privacy protection.

With continuous evolution and innovation in blockchain technology and oracles, oracles will expand to more application areas, providing reliable real-world data support for various emerging scenarios. This will better integrate blockchain technology into our daily lives and solve a range of real-world problems.
Evolution of the Oracle Market
Oracles, as the bridge connecting blockchain and real-world data, have become a critical component, evolving from early single solutions to a diversified oracle ecosystem. Reviewing the oracle market's development, by May 1, 2023, Chainlink, Chronicle Labs, and WINLink occupied over 90% of the oracle market.
Before Chainlink's inception, 100% of the oracle market share belonged to Chronicle Oracles, an internal oracle funded by MakerDAO. However, since Chainlink's launch in 2019, particularly after the "DeFi Summer" of 2020, the oracle market experienced significant changes, with Chainlink emerging as the leader. Other oracles like WINkLink, Band Protocol, and Pyth also emerged, though their market shares remain relatively small compared to Chainlink's dominance.
Why Chainlink Leads the Oracle Race
Chainlink is a decentralized oracle network that currently holds a significant share of the oracle market, with major partners like SWIFT, FedEx, and Intel. Several factors contribute to Chainlink's leadership:

  1. Decentralized Oracle Network: Chainlink is composed of many nodes forming a decentralized oracle network (DON), enhancing data security, reliability, and resistance to tampering. Chainlink's decentralized structure ensures data from multiple independent nodes, reducing the risk of manipulation and single points of failure.
  2. Data Feed Service: Chainlink's Data Feed service, one of its most widely used features, provides secure, reliable, and decentralized off-chain data sources for smart contracts. This service uses a multi-layered data aggregation mechanism to ensure data accuracy and quality.
  3. Market Trend Insight: Chainlink's success is partly due to its foresight and understanding of market trends. Its timely launch of features like Data Feed and VRF coincided with the explosive growth of the DeFi and NFT markets, establishing Chainlink as the preferred oracle for many projects.
  4. Developer Relations: Chainlink places significant emphasis on developer relations, providing comprehensive documentation, support, events, and incentive programs to attract and retain developers, fostering a thriving ecosystem.

Chainlink Functions and Future Innovations
In March 2023, Chainlink released Chainlink Functions, a serverless developer platform allowing smart contracts to connect with any Web2 API using Chainlink's decentralized oracle network for custom computation. This platform aims to lower the barrier for connecting smart contracts with Web2 APIs, ensuring data integrity and security, and fostering innovation in blockchain applications.
Chainlink Functions addresses issues such as the difficulty of connecting smart contracts to Web2 APIs and the centralization of nodes, providing a scalable, customizable, and secure solution for developers. This new functionality is poised to drive further innovation and adoption in the blockchain space.

Oracle Application Scenarios

As a bridge connecting blockchain and real-world data, oracles have a wide range of application scenarios wherever real-world data is relevant. Examples include insurance, supply chains, prediction markets, IoT, stablecoins, gaming, and DeFi. Here are some typical application scenarios for oracles:

  1. Decentralized Finance (DeFi): Oracles play a crucial role in DeFi, providing real-time financial market data for lending, derivatives trading, insurance, and Real-World Assets (RWA). Projects like AAVE and Synthetix rely on oracles for accurate price data to ensure proper asset valuation and risk management within the system.
  2. Insurance: Oracles provide real-world event data, such as weather conditions and natural disasters, to trigger insurance contracts' payout clauses on the blockchain.
  3. Prediction Markets: Oracles supply real-time results data to prediction markets, enabling users to place bets and trade based on the outcomes of political elections, sports events, etc.
  4. Internet of Things (IoT): Oracles transmit data collected by IoT devices to smart contracts, enabling automated data exchange and decision-making. For example, supply chain management systems can use oracles to obtain real-time tracking information of goods, enhancing efficiency and transparency.
  5. Stablecoins: Oracles provide real-time exchange rate data to stablecoin projects, ensuring stablecoins maintain a stable exchange rate with their pegged fiat currency.
  6. Gaming and Non-Fungible Tokens (NFTs): Oracles offer random number generation services for gaming and NFT projects, such as Chainlink's Verifiable Random Function (VRF), ensuring fair and transparent probabilistic events.
  7. Cross-Chain: Oracles support data and asset exchange in the cross-chain field, facilitating interoperability between different blockchain networks, including asset transfers, data sharing, smart contract triggers, and identity verification and privacy protection.

As blockchain technology and oracles continue to evolve and innovate, they will gradually expand to more application areas, providing reliable real-world data support for various emerging scenarios. This will help blockchain technology integrate better into our daily lives and solve a range of real-world problems.

Evolution of the Oracle Market Landscape

Oracles have become a crucial component, connecting blockchain with real-world data. The market landscape has evolved significantly from early single-solution offerings to a diverse oracle ecosystem. As of May 1, 2023, the oracle market shows a three-pronged pattern, with Chainlink, Chronicle Labs, and WINLink occupying over 90% of the market.
Initially, Chronicle Oracles held 100% of the oracle market share before Chainlink's advent. Chronicle Oracles, funded by MakerDAO, was an internal oracle dedicated to serving MakerDAO. However, with Chainlink's emergence in 2019 and subsequent technological innovations, the oracle market began to transform significantly, especially after the "DeFi Summer" of 2020, positioning Chainlink as the market leader.
New oracles like WINkLink, Band Protocol, and Pyth emerged, along with various projects' internal oracles. However, a significant market shift occurred in May 2022, with the internal oracle market's total value locked (TVL) plummeting following the Luna collapse. This event highlighted the vulnerabilities of internal oracles during extreme market conditions, leading to a decline in their adoption.
Besides Chainlink and Chronicle Oracles, WINkLink, the decentralized oracle project within the TRON ecosystem, has established its position leveraging TRON's user base and application scenarios. Despite Band Protocol and Pyth ranking fourth and fifth, respectively, their market shares are relatively small. Consequently, Chainlink maintains a dominant position in the general-purpose oracle market, demonstrating overwhelming market advantage and barriers to entry.

Why Chainlink Leads the Oracle Market

Chainlink is a decentralized oracle network currently dominating half of the oracle market share. It boasts the largest ecosystem among oracles, partnering with major entities like SWIFT, FedEx, and Intel. Several factors contribute to Chainlink's leadership:

  1. Decentralized Oracle Network: Decentralization, security, and tamper-resistance are crucial in the crypto market. Centralized oracle networks, relying on a single or few data provider nodes, are vulnerable to manipulation and attacks, posing a single point of failure risk. Chainlink mitigates this by operating a decentralized oracle network (DON), composed of numerous globally distributed nodes with extensive operational experience and security guarantees.
  2. Market Trend Foresight: Chainlink's success is also attributed to its foresight and accurate market trend anticipation. Every new feature launch has seemingly sparked a new wave of ecosystem growth. For example, the launch of Chainlink's Data Feed service in 2019 coincided with the burgeoning DeFi market, and its widespread adoption during the 2020 "DeFi Summer" solidified Chainlink's leadership in the DeFi sector.
  3. Developer Relations: Developer relations are crucial for the success of any technology platform and ecosystem. Chainlink has heavily invested in supporting developers through comprehensive documentation, educational resources, technical support, and incentive programs. This focus on developers has been key to growing the Chainlink platform and ecosystem.

Chainlink Functions: Potential for New Innovation Waves

In March 2023, Chainlink introduced Chainlink Functions, a serverless developer platform allowing anyone to easily connect smart contracts to any Web2 API using Chainlink's decentralized oracle network for custom computations. Chainlink Functions enable the following for developers:

  • Extensive Connectivity: Smart contracts can connect to any data source, from public or password-protected APIs to IoT devices and enterprise systems.
  • Customizable Computation: A serverless runtime environment offers robust scalability and customization, allowing data aggregation and processing.
  • Minimized Trust Security: Chainlink's decentralized infrastructure has been battle-tested, securing billions of dollars in value for numerous Web3 applications.
  • Self-Service in Minutes: The serverless solution can be set up within minutes, complete with a CLI, starter kit, and debugging environment.
  • Serverless Runtime Environment: JavaScript code can run without servers, allowing developers to focus on core application development instead of infrastructure.

Chainlink Functions address several issues:

  • Development Threshold and Node Centralization: Before Chainlink Functions, developers faced challenges connecting smart contracts to Web2 APIs. With this new tool, developers can easily connect their smart contracts to any Web2 API, significantly lowering the entry barrier.
  • Custom Computation and Data Integrity: Chainlink Functions enable custom computations on data, ensuring the accuracy and reliability of data inputs used in smart contracts.

With Chainlink Functions, the potential for innovation is vast. This tool empowers developers to create more complex and versatile decentralized applications (dApps), further solidifying Chainlink's role as a leader in the oracle market and expanding its influence across various blockchain ecosystems.

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