Oracles, Chainlink, and CCIP
Chainlink Summary
Chainlink is a decentralized oracle network that provides real-world data to smart contracts on the blockchain. LINK tokens are the native digital asset used to pay for services on the network.
Chainlink currently holds a lion’s share of Layer-1 volume, comprising over 80% of all engagements within the DeFi market and every leading chain making it the top oracle service provider by a wide margin in terms of usage and volume.
What is an Oracle?
Oracles are data feeds that connect Ethereum, or any other Layer-1 blockchain, to real-world information, thus enabling smart contracts to access data that exists off-chain.
This could be anything from price information, market capitalization & total value locked to applications such as weather reports. Oracles can be bi-directional, used to receive and “send” data out to the real world. This use case will prove undoubtedly necessary as the decentralized economy becomes more ingrained in daily life.
Why do we need Oracles?
With a blockchain like Ethereum, every node in the network needs to replay every transaction and end up with the exact same result. Nodes store spread and preserve data on the blockchain, thus it can be said that a blockchain exists on nodes and nodes represent the framework of a blockchain.
APIs (Application Programming Interface) introduce potentially variable data. If one were sending ETH based upon an agreed $USD value using a price API, the query would return a different result from one day to the next. The API could also be hacked or deprecated. If this happened, the nodes in the network wouldn’t be able to agree on Ethereum’s current state, effectively breaking consensus.
Oracles solve this problem by posting the data on the blockchain. So any node replaying the transaction will use the same immutable data that’s posted for all to see. To do this, an oracle is typically made up of a smart contract and some off-chain components that can query APIs, then periodically send transactions to update the smart contracts data.
The Oracle Problem
Ethereum is not limitless, as evidenced by often high gas fees and slow block times resulting from increased transaction volume. In addition to these limitations, Ethereum transactions can’t access off-chain data directly — this complicates things.
Oracle services are needed to provide updated data from off-chain but constrained Ethereum Virtual Machine transactions can’t access off-chain data. At the same time, relying on a single source of truth to provide data is insecure and invalidates the decentralization of a smart contract. This is the oracle problem in a nutshell.
How Chainlink Solves the Oracle Problem
Chainlink is a decentralized oracle, meaning that it pulls from multiple data sources. Therefore, if one data source is hacked or fails, the smart contract will still function as intended. This effectively solves the Oracle problem. Now, off-chain data can be processed by the EVM due to Oracle’s deliverance and it is decentralized because the data comes from multiple sources — a single tainted source won’t nullify the smart contract.
Oracles are critical to the functionality of decentralized finance, here are three key reasons why they will continue to play a larger role in the market.
- Decentralized Finance relies on accurate, verifiable data. Derivatives, leveraging, insurance, and trading all require external inputs to function. Oracles fuel smart contracts with the information they need to execute; converting the off-chain data into an accessible format.
- As the global economy becomes more digitized, I’m sure we can all picture several physical assets/ownership titles being transferred to the blockchain. Oracles can update the price of a used car, the insurance policy on a home, and even the weather forecast. While there are technical limitations to constantly updating the worth and value of real-world assets, overall oracle services are pivotal. As the digital asset ecosystem is built out, the demand for Oracles will increase.
- As adoption rates increase, Oracles will be forced to innovate and scale up to meet the demand for data queries. Therefore, oracles as a whole represent a concentrated medium for getting exposure to mass adoption.
Chainlink’s CCIP
The Cross-Chain Interoperability Protocol, or the CCIP, is a decentralized Oracle that is able to communicate data across multiple blockchains in a digestible manner. The CCIP pre-release already has $35B US dollars soft-committed by its early-stage customers; which is larger than the realized market capitalization of Chainlink’s native token LINK. CCIP has several new features that increase the stability of the DeFi ecosystem, here we will run through a breakdown of how CCIP operates.
The smart contract from the Chainlink source chain invokes Chainlink’s messaging router, which will leverage Chainlink DONs (Decentralized Oracle Network) to securely send the message to the destination chain, where another messaging router validates it and sends it to the destination smart contract. Here is an example in less technical terms.
The off-chain data, let’s say the change in $LUNA price, engages with the smart contract from the LINK source chain which then engages with the LINK messaging router to prompt the movement to another chain. The messaging router then uses the DONs (a transport system) to securely send its message to the destination chain (Terra, in this example).
Once at the destination chain, another messaging router validates that the information is all correct and then it sends the data to the destination smart contract, LUNA price feed on Anchor Protocol’s dApp.
The Five Pillars of The CCIP
- Efficient Off-chain Consensus with OCR 2.0: Chainlink’s enhanced off-chain computation protocol reduces gas costs for users by efficiently aggregating Oracle attestations from hundreds of off-chain nodes, securely validating cross-chain transactions in a tamper-proof way.
- Universal interface to build cross-chain apps: Standardized interface for smart contracts to send messages to any blockchain network. With a single method call, developers can communicate across any Chainlinked blockchain.
- Supports Any Generalized Message: Data sent across blockchain networks can be encoded and decoded in any manner, providing developers a large degree of flexibility while eliminating the complexity of building chain-specific integrations
- Reorg Protection and Mitigation: Blockchain reorganizations on the source and destination chains are preemptively mitigated through floor confirmation times. As a result, users are protected against disappearing messages, ensuring cross-chain messages are delivered.
- Expendable and Future-Proof: CCIP will continue to be updated over time to support more advanced features. As the value secured increases, additional defense-in-depth approaches would be deployed.
Future Catalysts
Chainlink currently secures over 80% of all blockchain transactions, giving the CCIP the unique opportunity to become the routing layer for most of the value transiting through all of DeFi, every chain, and every newly developed chain.
Staking is rolling out shortly. LINK could have implemented staking earlier, but the team is waiting for the Nodes on CCIP to be functional and extremely profitable.
The vast majority of volume currently is focused on the different L1 ecosystems, the projects being built on those ecosystems and the innovations being made. Behind these innovations is the need for accurate, decentralized data transfer.
The LINK infrastructure will be used in almost every aspect of our engagement with the digital asset economy and its innovations will continue to provide LINK with strong tailwinds.
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