Most of the blockchains you know were designed to be completely independent systems. They weren't built with the ability to directly access information outside their networks, such as weather data, market prices, or data from other blockchains. But many smart contracts and decentralized applications (dApps) need this data in order to function properly. So, how do they do it?

They use oracles, or applications that gather real-world data and send it to the blockchain network in real time.

One popular decentralized oracle network that connects different blockchains with external data and applications is Chainlink. Its native cryptocurrency is LINK.

How does Chainlink work?

First, a smart contract sends a request to the Chainlink network specifying the type of data needed and any specific requirements for handling the data. Chainlink uses a reputation-based system to choose oracle nodes that can fulfill the request. Once chosen, these oracles connect to external data sources such as websites or other platforms to retrieve the information.

To keep the data secure and accurate, Chainlink doesn't rely on a single data point. Instead, it uses multiple oracles, or sources of data, to find the most accurate and reliable information. Once the data is verified, the network sends it to the smart contract that made the request.

Through Chainlink, smart contracts can use real-world data to perform complex tasks across different industries. For example, one smart contract can use information from Chainlink to adjust loan interest rates based on changing market data, while another can adjust the prices of vegetables sold on a decentralized app (dApp) depending on current transportation costs.

To make sure that the data sent by the oracles is accurate, Chainlink uses a reputation system that penalizes oracles for providing incorrect information and reduces their chances of being selected in the future.

What are the advantages of using Chainlink?

Flexibility: Since Chainlink is compatible with different blockchains, it can get data from other networks depending on a smart contract’s specific needs.

Scalability: It can scale efficiently even if more dApps tap into the network or existing dApps end up needing more more data in the future.

Chainlink and other oracle networks help improve the blockchain ecosystem by connecting blockchain networks and supplying them with data from the real world. This gives smart contracts and decentralized apps the power to automate all kinds of tasks in different industries, making blockchain technology even more practical for our daily lives.