Important Notice: If you do not understand the basics of blockchain, distributed ledger technology (DLT), smart contracts, and oracles then it might be helpful to first read the following article, as it will help you better understand the contents of this article. It also provides a very in-depth look at Chainlink (LINK) for those who want to learn more.
While your average person today recognizes Bitcoin as a digital currency, many still don’t understand that it was only made possible through a technological innovation in distributed computing called a blockchain, which was nothing short of revolutionary. Blockchain was groundbreaking because it introduced the first trustless triple entry accounting protocol to the world, all powered by a distributed network of computers able to reach consensus about the ledger by running the same open source software. No longer did strangers need trusted third parties to facilitate and document trade between one another, but instead could rely on a decentralized protocol to enable transactions directly peer-to-peer (P2P) and store the results in a shared ledger where all parties could verify it as being 100% accurate. While this was profound, the problem was that blockchains were limited to singular functions, such as with Bitcoin only being used as P2P money.
Ethereum took the functionality of blockchains to the next level by giving them smart contract capabilities, meaning that its blockchain could perform a variety of functions using code, which can consist of if/then parameters to create transactions, such as, if “x” input happens, then produce “y” output. This meant that a blockchain wasn’t limited to simply being a cryptocurrency, but could digitize many types of assets on the same chain, such as physical assets (products, property, food, etc.), data, and securities, and then have contractual conditions applied to their transfer. These contractual conditions could be triggered by external data, such as a sports bet that’s dependent on the outcome of a sports game or bond payments dependent upon the current interest rates at top banking institutions. Essentially, people could enter into a wide variety of contractual obligations with people they didn’t know and still trust that the contract was going to execute as planned, as long as the smart contract received the proper data.
The problem is that smart contracts can’t reliably get the data inputs they need, nor can they connect to any external system outputs that exist. This leads to the first crucial use case for Chainlink: connectivity.
Using the if “x,” then “y” function from above, what is “x” and what is “y”? “X” represents inputs into the contract, which is always going to come in the form of some type of data source. This data could be sports data, market data, events data, data from some backend system database, or really data from anywhere. The data is fed into the smart contract, which then triggers the smart contract logic to spit out some output “y”. “Y” represents some type of action, which is usually going to come in the form of a payment, a transfer of data, access/permission granted or denied, or simply storing a record of something happening. Putting these two together means that smart contracts can use external data to interact with their logic and then produce outputs that trigger some type of action.
One of the limitations of blockchains, in terms of the way they reach consensus on a distributed network, is that they’re only able to reach consensus on mathematically deterministic problems based on the data available, which is data already present within the blockchain (on-chain). For this reason, blockchains are limited to transactions using their native unit of account, such as in Bitcoin, where the blockchain determines if an address has enough unspent BTC transactions (similar to is there enough BTC in their account to cover the transaction); if yes, verify the transaction of BTC from one address to another and update the ledger; if no, deny the transaction. This works for smart contracts too, particularly ICOs, where if someone gives “x” amount of coins (ETH), they receive “y” amount of a different token. It’s possible because both coins and tokens, and the fixed exchange rate are already stored in the blockchain.
However, this doesn’t work when the smart contract needs to utilize non-deterministic data, which is data that exists outside the blockchain’s database (can be referred to as external data or off-chain data). Interacting with non-deterministic data makes it hard for blockchain nodes to reach consensus because external data isn’t black and white (True or False), but instead colorful, meaning it could form many states of truth on the ledger.
For example, if someone created a derivative smart contract based off the market price of some asset, the outside world could feed the smart contract five different prices, since not all exchanges list the asset at the same price. This would confuse the consensus mechanism of the blockchain since the blockchain cannot mathematically determine which data source is correct since it came from outside the blockchain. This is referred to as the oracle problem and its shortcomings limit smart contracts to a niche market of simply sending tokens already programmed into the blockchain back and forth.
The other major limitation to blockchains and smart contracts is that they publish the results of their processes on-chain, but don’t push data on to other networks, such as triggering actions on external systems, like generating a payment on another blockchain or generating a transaction on a traditional payment system like PayPal or SWIFT.
This is why people often say that blockchains are disconnected from the outside world, akin to a computer disconnected from the Internet. It results in smart contracts that are unable to reliably get external data into the contract and smart contracts unable to produce outputs on other systems. It places huge limitations on smart contracts since most contracts rely on external data and need to push data onto other systems once the smart contract is completed.
Chainlink solves the oracle problem by introducing a middleware solution that creates a decentralized network of oracles that connect to the outside world using APIs and then has the nodes feed their answers to a smart contract, which aggregates the data into a single weighted answer that can be fed into the requester’s smart contract without interfering with the consensus of the blockchain.
Chainlink also gives nodes connection to outside systems, such as other blockchains or backend systems, by the use of external adapters that connect different networks through the use of APIs. These external adapters can be custom built for any system and written in any programming language, meaning Chainlink can be used on any blockchain (public, permissioned, or private) and can be connected to any external system, as long as the node operator has access to the API. With this new functionality, smart contracts are now able to access a variety of resources that were previously out of their reach, such as smart contracts in fiat currencies, smart contracts on credit cards, and smart contracts based off any piece of data that exists. This is ultimate connectivity.
While most blockchain based projects aim to uproot and replace the legacy systems of today, Chainlink takes a different approach by offering a bridge between old legacy systems (off-chain) and new blockchain systems (on-chain). This is crucial because most of the data needed to trigger smart contracts is located in old legacy systems, as well as a plethora of resources people rely on in their daily lives, particularly payment systems that deal in local currencies.
The reality is that the legacy world isn’t going away anytime soon, so it’s critical that blockchain projects are able to interface with them, while at the same time equally advantageous for legacy systems to integrate with new DLT technology to enhance their capabilities, such as allowing two Fortune 500 companies to engage in a smart contract with one another that’s denominated in fiat currency. By allowing connectivity between systems, they both leverage the advantages of each other and ultimately work synergistically. The most exciting part about it all is that it can be achieved without having to do a complete overhaul of current backend systems, which is both costly and risky to implement.
The feature of connectivity is central to making smart contracts usable in the real world, but this only happens if their security is paramount, bringing about the second biggest use case for Chainlink: security.
World Class Security
The reason blockchains became so popular was because they are incredibly secure compared to current database systems. Distributed computing took away a central point of attack, since the blockchain operates by running on thousands of computers at once, each giving power to the system and each storing a copy of the shared ledger. If an attacker were to go after a node on the network, the other nodes would simply reject it because their consensus was stronger than the one bad node.
Since smart contracts reside within blockchains, most people believed that they were going to become a superior form of digital agreement. The problem is that current oracle solutions are centralized, either through a third party oracle service provider like Oraclize or an in-house oracle built by one of the entities using it. This nullifies the security features offered by the smart contract since centralized oracles create a single point of attack for someone looking to tamper with the contract.
Imagine creating a smart contract worth a billion dollars, only for it to execute to the wrong person or for the wrong amount because it received bad data as a result of the oracle itself being hacked, or failed to execute at all as a result of the oracle going down. What’s the point of having decentralized smart contracts when they have a centralized trigger for execution? The above conundrum is why there is a pressing need for decentralized oracles, especially for high value/high importance contracts. Without them, smart contracts are no better than the current digital agreements of today.
Chainlink offers a more reliable and secure solution to centralized oracles by allowing the requester (smart contract creator) to choose as many oracles as they want to service their contract (distributing oracles), as well as the ability to select what and how many data sources to use (distributing sources). For example, someone could have 100 nodes service their sports bet smart contract, with 50 retrieving data from ESPN, while the other 50 get data from Fox Sports News. The results can then be aggregated however the requester likes, such as producing an average, and the outliers can be thrown out, with nodes getting punished for providing outlier data by being issued a payment penalty and receiving a strike against their reputation, similar to a bad review on Yelp.
The penalty payment will act as collateral put up by nodes to service the contract and insurance for the requester in case they provide the contract with outlier data or fail to respond in time. The amount of collateral that has to be put forth by the node is ultimately up to the requester and agreed upon by the node, depending on how much insurance they desire. All these features keep nodes honest since their monetary interests are at stake, but also protect against bad data since the majority would overwhelm the outliers.
However, sometimes there is only one data source and therefore the only method of ensuring reliable execution of the smart contract is to have a bunch of nodes all retrieve the same data. While it won’t insure against the data source providing bad data, given there is only one data point, it will protect against faulty nodes, malicious nodes, or introducing another central point of attack. This alone will decentralize the lines of communication between systems, but there is still one problem, the lines are not confidential.
Possibly Chainlink’s most impressive feature is their approach to privacy, which branches their functionality out past simply being oracles, but also allows Chainlink nodes to perform off-chain computation. In its standard form, the public is not able to see the functions that happen off-chain, but the individual nodes servicing the smart contract can see the inputs coming in, the outputs going out, and who requested the service. For some projects this isn’t a problem, since they have no incentive to hide their activity, but for large companies with sensitive data, it’s simply unacceptable since company secrets could spill out to the public. There is also the risk of a node acting maliciously if it is in its best interests to do so, such as being bribed by a competitor to feed the contract faulty data.
Chainlink offers an ideal solution to the problem by allowing requesters the option to choose nodes that utilize trusted hardware, such as Intel SGX, to create what’s called a trusted execution environment (TEE) or secure enclave. The ingenuity of trusted hardware is that it creates a secure environment for the oracle to perform its functions that is disconnected from the rest of the computer, such as the operating system. This creates an incredibly small attack surface for any type of malicious actor and protects against the administrator of the hardware, which in this case would be the node, since not even the node can see what’s running in the trusted hardware. Essentially, the node can’t see any details about the service it’s providing because the hardware receiving, processing, and sending out the data remains confidential within the enclave. Additionally, the requester or node can confirm the TEE is working correctly using a remote attestation that authenticates its hardware and software configuration to a remote system.
TEEs have the added feature of allowing low-overhead computation to be done inside the enclave before settlement on the main chain, such as on Ethereum. This is crucial, especially for computational intensive contracts, because although public blockchains bring great security to databases, the negative side effect is that they are very slow, specifically due to their key feature of decentralization. This makes computation on the network slow and expensive since there is a bottleneck of transactions wanting to get verification. It’s basically like a slow computer that only works fast by feeding it a lot of money, which no business is going to do when their current systems are much cheaper.
Before going further, it’s important to first understand asymmetric encryption, which is a method of encryption that involves using a public key to encrypt something and a private key, generated at the same time and given to the same person, to decrypt it. This would happen off-chain, either by the requesters themselves or inside the TEE, which is off-chain. It’s important not to confuse off-chain encryption with the blockchain, which is on-chain and also has a public and private key, with the public key being the address to receive funds and the private key being the one that gives someone the ability to send their funds.
Chainlink offers an additional layer of security by allowing requesters to encrypt the communication lines in and out of the TEE. If the requester wants to send an encrypted query to the node, it does so using the enclave’s public key. The input query is then decrypted inside the TEE with the corresponding private key, which only resides inside the enclave, keeping details about the query entirely confidential. The node can send encrypted information out of the TEE by supplying another public key sent to it from the requester, which can only be decrypted outside the TEE off-chain with the corresponding private key that the requester possesses.
Another way the node could send a response back out without sending in a separate public key is to request that the node send back a zero knowledge proof (ZKP), which is basically proof that a node made a transaction without actually revealing any details about it, such as the sender, the receiver, and the amount. Zcash, a private cryptocurrency, is based off these principals. The same concept can be applied to oracles too by having the node send a ZKP response, which signals to the requester that the node performed its function, but doesn’t reveal details about how that function was done. Nodes that send out ZKPs can do so on public chains without anyone knowing the details of what happened.
A good real-life example would be someone proving to the smart contract that they know their own social security number (SSN) without actually revealing to anyone what it is. This could be necessary because proof that someone knows their SSN is essentially like identity verification, which could be needed for the smart contract to release something like a payment. Effectively, the oracle nodes could retrieve confidential information from within the enclave and send a ZKP to the smart contract, which proves the SSN was retrieved without revealing it, and that proof could reside on a public blockchain without anyone being able to determine the details of the SSN.
Another way a TEE could perform off-chain computations is by running a WebAssembly (WASM) program within the secure enclave. Although WASM is very new, essentially what it allows for is the enclave to send outputs to all types of systems even without external adapters. This is appealing from a security perspective because currently external adapters work outside the enclave, making the data and code visible to the node operator.
WASM is also very appealing from a scaling and functionality perspective too because it allows a node to run its own smart contract logic, which includes any program logic from any programming language inside the TEE, in addition to the smart contract logic of the native blockchain. This could allow a whole range of functionality to happen off-chain in TEEs, meaning highly functional, low overhead computation at fast speeds, as opposed to on-chain computation that’s likely to be costly, slow, and limited. The only thing that needs to happen on-chain is a final settlement, which could be as simple as a proof of computation or a receipt from an off-chain system.
Finally, one of the last ways a TEE could offer secure outputs is by using a one-time pad (OTP) in combination with a random number generator (RNG), which leverages asymmetric encryption (public/private key) and randomness to form virtually unhackable encryption, on par with government and military level security.
An easy way to think about one-time pads is a one-time method of encryption that changes the way it encrypts something after each use. The reason behind it is that in the real world hackers can reverse engineer someone’s encryption if they figure out how they’re encrypting something or how their method is changing. Good encryption methods change based on randomness, but pure randomness is impossible to recreate since it’s derived from some process, such as measuring radioactive decay or the change in lava lamps. Therefore, if someone knows how another person is creating randomness, then they can reverse engineer their algorithm and potentially crack the encryption. By placing an RNG within a TEE, no one will be able to tamper with how the randomness is being generated, which means it’s possibly the most secure form of encryption in history, assuming the TEE is trusted.
Putting it all together, Chainlink offers what they refer to as, “a defense in depth approach,” meaning they provide smart contract creators with all the options they need, such as TEEs, multiple nodes, multiple data sources, penalty deposits, reputation systems, asymmetric encryption, ZKP, WASM, and OTP + RNG, which offer varying degrees of confidentiality and costs, depending on someone’s budget and security needs.
Offering safe lines of communication to the outside world, as well as secure, low cost, and quick processing of contracts, solves the two of the most fundamental problems in blockchains today: confidentiality and scalability. These new features will undoubtedly allow public companies to leverage public smart contract technology since they can now protect their sensitive data, as well as process data at the speeds needed to remain cost competitive and efficient. This shouldn’t go understated and paired with Chainlink’s connectivity, offers a surplus of possibilities for Chainlink’s third use case: secure, scalable, confidential, and highly functional data driven smart contracts.
Data Driven Smart Contracts
Now that it’s understood that Chainlink allows smart contracts to connect with all the resources they need, while also leveraging maximum security and acceptable scalability, smart contracts can finally come to life. The main use case everyone is excited about is smart contracts driven by data, which essentially means automated contracts executed by off-chain data inputs, instead of human arbitration or interference.
What’s likely to happen is that over time, smart contract developers will be able to use existing on-chain contracts that represent their off-chain data sources. Smart contract developers shouldn’t need to know how each API functions, they only need to know what kind of data they want. Since these on-chain representations of external APIs are Chainlinks, they have been thoroughly tested for security flaws and have a performance history showing their reliability. Essentially, simple industry standard smart contracts will develop, which model basic agreements/processes in the real world that can be automated, while over time more complex agreements/processes are transformed into smart contracts. In many ways, smart contracts are comparable to robots.
They will eradicate a ton of redundant paperwork, the need for many data entry jobs, and the costs spent on establishing trust in contracts, such as hiring lawyers to handle disputes, using third parties for custodial/clearing services, paying accountants to reconcile accounts, and staffing whole departments just to deal with regulatory bodies. Obviously it won’t cut out all human workloads because that’s impossible, as automation still needs people to oversee it, but it could cut costs by potentially 60–95% over the long-term according to some estimates, which has a lot of social ramifications that can be the feature of another article.
Most of these smart contracts are going to need data and will obtain it from the following sources: IOT data, e-signatures, web APIs, existing backend systems, other smart contracts, satellite imagery, software applications, or even pure randomness like RNGs. Let’s take a more in-depth look at them.
The Internet of Things (IOT) is the web of interconnected devices, including appliances, transportation vehicles, robots, medical devices, RFID tags on physical products, etc., all connected to the Internet allowing them to interact with the world around them, such as receive data, collect data, produce actions, and send data out to other devices/systems.
IOT devices produce data almost exclusively through some type of sensor, which senses the surrounding environment and records the findings in either its internal storage or sends it to some external device. Different types of sensors include GPS for location, accelerometers for speed/velocity, temperature, pressure, photos, humidity, heartbeat, blood chemistry, air quality, spatial awareness, and RFID chips for giving physical objects unique digital identities. These devices are placed anywhere data can be extracted from, such as embedded in electronics, placed in the environment, put inside or on the body, or tagged to physical objects.
The data can be sent directly to the smart contract, either passively, meaning the sensor only gathers data on request, such as a specific time of day, or actively, meaning it streams constant data to the contract for a specified period of time. There are also dynamic IOT applications that allow IOT devices to talk to one another, like one triggering an action on another one, which could then send the data to the smart contract. IOT devices are a huge part of the future.
E-signatures are simply data that represents a digital signature, whether it is a handwritten signature on a device, such as a point of sale system, or a biometric signature using a number of biometrics, such as fingerprints, eye scans, and facial recognition. The main idea is that some entity/person deemed qualified to sign off on something can then use their signature of approval to trigger some type of action from the smart contract, such as a payment, transfer of ownership, or renewal of inventory.
Web APIs are mere technological interfaces for other systems to access the information contained on websites, such as market data from Bloomberg or political news derived from Reuters. There are all types of web APIs that exist, but not all websites contain APIs and not all websites with APIs have all their data accessible to the public. Ultimately, it will be up to the smart contract creator to see what data is available and choose what websites they want to derive data from.
Existing Backend Systems are nothing more than the current databases of today, which house information going back decades or even centuries. This includes companies with their own in-house servers within intranets and companies using external cloud providers/SaaS companies. The bulk of the world’s data is here, so it’s especially important that smart contracts are able to interact with that data.
Other Smart Contracts can trigger smart contracts. Basically, the result of one smart contract can trigger the execution of another smart contract. For example, a building inspector giving an e-signature for the completion of a building can trigger a payout to the construction company, which then triggers an automatic adjustment to the lending budget of a bank, which results in a rejected loan to a fringe worthy candidate. In the future, there could be chains of smart contracts, where the execution of one could set off numerous other ones. This could be especially prevalent in finance, because markets often react quickly based off the moves of others, which have rippling effects across other industries.
Satellite imagery could be used, especially in conjunction with photo scanning technology, to trigger smart contracts based off their findings. This has a lot of potential as it pertains to military applications based off intelligence gatherings. It’s pretty fascinating to think how geospatial information can interact with if/then smart contracts, especially in robotics and moving objects like drones. It could also be used in conjunction with something like machine learning algorithms to heighten its understanding of the surroundings, potentially making the data more reliable.
Software Applications can help refine data by taking raw input, such as from IOT devices, and run analytics on that data based off some type of pre-defined algorithm or cross-referenced with past data, like that sitting in backend systems, which could then produce a more sophisticated result for the smart contract to use. Smart contract creators are not always going to want the raw data, but instead might want to run software processes on the data first before it enters the smart contract. This could be achieved in the future by some combination of advanced analytics, machine learning, and artificial intelligence.
Randomness is sometimes needed as a data trigger in and of itself. While its been established that RNGs are particularly appetizing for manufacturing titanium encryption, RNGs could also be used to trigger smart contracts that desire randomness like a lottery, gambling, or maybe even an ICO offering.
Now that it’s been established where the data is coming from and what kind of information is available to smart contracts, it’s time to start looking at some more detailed use cases categorized by different industries.
Insurance is one the main industries ripe for disruption by data driven smart contracts. Using data to automatically trigger insurance payouts will not only save insurance companies a ton of money by cutting the costs of claims processing, but it will reshape trust relationships between insurance companies and consumers, since customers won’t have to rely on the good faith of insurers when it comes to payouts, but can put their trust in tamperproof smart contracts triggered by tamperproof data inputs that neither party controls. Obviously not everything can be automated, but simple claims should come to market sooner than people realize, while more advanced concepts are developed over time. Here are some examples:
Auto Insurance — One of the ways auto insurance could change is by placing IOT sensors inside cars that calculate data such as driving metrics and crash data. In fact, Teslas already have a black box inside them that records data, which could be used by smart contracts to trigger insurance payouts. IOT sensors could also calculate driving metrics, such as average distance/time driven per month, braking/speed limit patterns, and maintenance records of the car, to issue out automatic discounts for good driving behavior. This is often termed as usage insurance.
Life Insurance/Wills — Using death certificates, obituary websites, and cremation records, life insurance companies can trigger automatic payouts for deceased clients, as well as auto-execute someone’s will that was held in a smart contract. The recipients of the will could be automatically paid out without the need for any third party interpretations. It could even work for someone’s cryptocurrency portfolio, where it’s dispersed to family members if there is sufficient records of their death.
Health Insurance — IOT devices like Fitbits, Peloton bikes, and weight scales could be used by health insurance providers to issue discounts for clients maintaining their health goals, such as getting a certain amount of exercise a day or staying within a certain weight range every month. Although it’s more of a futuristic use case, being able to measure food intake and internal functions such as someone’s heartbeat, blood chemistry, and sleep patterns could be key for receiving health discounts, triggering the renewal of prescription medications, or simply initiating preventive appointments with a doctor.
Disability Insurance — Using wearable IOT health devices with GPS capabilities, mixed with employee time clock data, an insurance company could easily confirm that someone was injured while clocked in at work, as well as where it happened. They could then manage the progress of someone’s recovery by checking their IOT devices, as well as monitoring their GPS data and patient records to see they are compliant with rehabilitation protocols. Physical therapists could even send e-signatures to the smart contract confirming their patients attended scheduled appointments.
Flight Insurance — Using open web APIs like FlightStats, an insurance company can use a smart contract to issue flight insurance to a customer by using a website’s data about the flight status. This takes away the need to trust the insurance provider, but instead is driven by reliable data. The insurance giant AXA has already built a working product of this called Fizzy.
Home Insurance — Using IOT sensors in homes, as well as environmental sensors, insurance providers could both issue out automatic payouts, like in the case of a fire detected, or simply obtain better ways to calculate the costs of insurance for homes/properties. This includes sensors giving information about the foundational structure of the building/toxicity of the building, like mold buildup, and whether timely maintenance records were done in response to these alerts. They can also use environmental sensors like weather data, seismic activity, and wind sensors to automatically re-budget expenses and update policy prices for the month given the new circumstantial data.
Reinsurance — Heavy duty equipment like cranes or manufacturing facilities with a lot of interconnected technology are not only extremely expensive to fix, but can lose a company a lot of money due to missing out on potential profits while their equipment is out of service. In this case, having real time monitoring of facilities and equipment through embedded IOT sensors, which can alert companies, insurers, and third party inspectors of problems, can not only save all parties involved money, but brings substantial trust back to their relationships. They could calculate breakdowns before they happen, help insurance companies recalculate budgets, and offer dispute resolution data to determine who’s at fault, all of which can be fed into a shared ledger for all parties to see.
Since reinsurance is a market dealing with large amounts of money and risk, derivatives products can also be constructed that take the projected value/output of something and price it against the actual value/output of something using IOT data to derive the actual value/output. For example, a reinsurer for a solar/wind generation energy company could hedge themselves by taking a position in a derivative that trades actual output vs. the projected output. This would be great for budgeting since the reinsurer has a fixed cost paid out, but can hedge against the company under producing or gain if they overproduce.
There are many moving parts when it comes to global trade, but the three dominant industries are supply chain, trade finance, and regulation. The supply chain industry alone has several sub industries such as manufacturing, transportation, and retail, while trade finance deals with banking, insurance, and markets. Then take into account regulation, which brings in governments, legal firms, and accounting teams for audit.
Reconciling accounts so everyone is in agreement about everything is currently extremely complex and wasteful because everyone manages their own accounts. It not only leads to a ton of process redundancies, but it’s prone to numerous errors and leads to countless inefficiencies. However, putting the entire process on a blockchain(s), where every entity can send their information to the same ledger, can drastically cut overhead costs associated with maintaining individual ledgers, eliminate disputes between parties, and essentially streamline the whole process, which could open up new business models. The blockchain allows everyone the ability to monitor the products in near real-time throughout the life cycle, which not only enhances trust in business-to-business relationships and business-to-government relationships, but end consumers should also benefit from higher quality products.
Supply Chain — The life cycle of most products start with manufacturers who gather the raw materials before sending them on to quality control where they process and package them. The completed products then get sent to warehouses where they’re stored until the transportation companies pick them up and deliver them to the retails stores for the consumers to buy. Each stop along the route needs to send data to the blockchain, which should trigger various smart contracts between entities such as automatic payments based off that data, as well as trigger the transfer of ownership along the way. The blockchain keeps track of it all and gives everyone receipts for it.
They can also do more advanced things like place sensors in transportation vehicles to monitor the quality of the product (food, medicine), the temperature of the storage environment, and the quality of the air in the storage environment. This is important not only for quality purposes, but is essential for dispute resolution, such as who is at fault for damaged goods and who receives compensation, which the IOT sensors could detect, such as where the products went bad along the supply chain route and issue payments from one party to another based off that data.
Another potential application is to place RFID tags on physical goods to track the location of the product throughout the life cycle, with each party involved in the process making a verifiable, time stamped record of their involvement. It can be as easy as scanning the goods at their location or sending an e-signature upon completion of a task. There is promise that customers and retailers will soon be able to scan products with their phone, which gives them a detailed history of the entire life cycle of a product, sourced all the way back to the manufacturer. RFID tags are especially lucrative for food to source their origins and luxury goods to protect against counterfeiting.
Trade Finance — While some exporters might require the importer to pay up front, the vast majority of domestic and international trade today is financed by banks and financial institutions. The reason being is that the importer might not trust the exporter; so to reduce their risk, the importing bank will issue a letter of credit to the exporting bank until goods arrive, which can usually be reconciled with a bill of lading from the carrier moving the goods. Exporters can sometimes take out loans based off bills of lading if they need liquidity now.
Fortunately, the process can be streamlined by using data like the bill of lading to trigger payments from the importer’s bank to the exporter’s bank. In fact, the financier can monitor the shipment of goods along the whole supply chain route using DLT tech, which should bring more trust back into the relationship between financiers and tradesmen, especially since the financier owns the goods as collateral on their loan. Data from the ledger could even lead to automatic readjustments in lending budgets, given they can monitor what’s going on more effectively.
Regulation — Across the world there are varying sets of laws and regulatory requirements that companies must abide by, which often leads to delays in global trade due to mix-ups over compliance. However, shared ledgers allow regulators to monitor what’s going on in near real time, resulting in less time being spent dealing with regulations since everyone involved with global trade, including the regulators, have access to the same ledger. Regulators can send stamps of approval or denial to the blockchain every time an entity passes customs successfully or unsuccessfully and even issue quicker expedition through customs for entities with good standing. They could also run algorithms on the ledger that trigger alerts when something doesn’t seem right or even issues automatic fines through smart contracts.
Finance and Securities:
Similar to global trade, the financial system spends an enormous amount of money each year reconciling accounts with one another and paying intermediaries to establish trust in multi-party transactions. Getting two entities to agree and act fairly when big capital is involved is especially difficult in a capitalist system when money and careers are on the line. It’s safe to say that the financial system is a very low trust environment, which is why middlemen currently exist to facilitate most of its activities. There is also regulation that takes a good chunk of company resources and leads to many disputes since the regulators and company don’t always agree on the company’s ledger.
Blockchains could completely overhaul the infrastructure of the financial system by putting it on shared ledgers, which substantially increases trust, therefore reducing the need for error prone overhead spent on trust, such as on accountants, lawyers, and data entry positions. Blockchain will also reduce delays and enrich the quality of data that companies have access to since there is a golden source of truth, instead of a bunch of isolated entities making guesses about what is the correct source of truth, then fighting about it since they didn’t come up with the same answer. This will improve budgeting, minimize risk, and free up capital for new ventures.
Smart contracts on top of the blockchain will allow entities the ability to directly transact with each other on the blockchain, almost mirroring escrow services, which cuts out middlemen for post trade processing like clearing houses, third party custodial services, and potentially even banks. They can also model derivatives extremely well, since oracle nodes are able to feed constant data about the price of the underlying asset to the smart contract, without either party tampering with the process.
Bonds — A smart bond can be created as a smart contract that uses market data, such as the interest rates of specified banks, to feed into the smart bond and trigger interest payments directly to the holders bank account in whatever currency that is desired. Chainlink already demonstrated their ability to create a smart bond in a proof of concept with SWIFT where they built a self-executing bond based off the average interest rate of five top banks, which then created a payment message on the SWIFT network.
Derivatives– Any type of data can be used as the underlying asset in a derivatives product. Obviously derivatives are driven by speculation from traders, but they can also be used to budget and minimize risk, especially when someone has too much exposure to something. The ability for smart contracts to hold parties in escrow until data is delivered to the smart contract is very powerful in high value/low trust environments. It’s especially lucrative for something like a credit default swap, where the CDS seller and bond issuer will go to great lengths to delay payment to the CDS buyer. This wouldn’t be possible in a data driven smart contract.
Post Trade Processing — Anything between the trade data and the settlement date is considered post trade processing. Having an accurate data stream, the ability to transact directly, and a golden source of truth, the post trade process can be drastically reduced and eventually even transitioned to near real time. It also cuts a lot the need for third parties, like clearing houses, especially since a smart contract can replicate escrow. There will still likely be need for liquidity providers, especially payments on credit, but accounts with sufficient capital could trade without them.
Banking Settlements — Connecting APIs of different banks, remittances and bank-to-bank settlements could be made a lot cheaper and easier. Almost every bank has an API and those APIs can interact with each other confidentially through a system like Chainlink without the need to change institutional backend systems. The smart contract could use near real-time exchange rate data to make cross border payments simple and quick. The information could even be sent to an exchange where currencies are swapped out for one another or banks could build up accounts with each other, which are automatically updated, and when they hit a certain threshold or time limit are reconciled automatically by software data triggers.
This use case could come into play in 2019, when the new PSD2 law goes into effect across Europe, which mandates that every European Financial Institution must provide API support for payment initiation and account enquiry made by all the upcoming Fintech companies. Chainlink is uniquely positioned to facilitate communication between Fintech companies and legacy payment systems since it can plugin to Fintechs using an API and plugin to the SWIFT system, as it demonstrated with its POC where it made a payment in the specific ISO 20022 XML format. Since SWIFT handles most of the infrastructure for interbank payments around the world, it’s possible to trigger a fiat banking system payment via Chainlink based on the outcome of the contract. This will require the use of TEEs in order to maintain strong privacy standards for customers.
Performance Based Contracts:
Construction — Using data from e-signatures, digitized pictures from independent auditors, and analytics on everything from past projects to current market data of materials, construction companies could potentially get automatically paid out based on progress made on the building. These same metrics could also be used for automatic budget changes and updates to completion dates, which could trigger other events like scheduling of future work flow for the building or adjusting budgets for new projects. They could also use some type of data for automatic renewal of inventory too, such as an e-signature that releases payment to a manufacturer who then ships the products over.
Sports — Utilizing a web API like ESPN or a backend system like official league stats, athletes could get paid contracts based off all kinds of metrics, like real time game checks based off games played or minutes played, performance bonuses based off certain statistical accomplishments, and even a self-running competition where a smart contract collects all the money and then issues out prize money based on data fed into the contract, like an IOT device that senses the winner of a race or uses the scoreboard to calculate the winner.
Entertainment — Anyone on the entire film set could get paid based off the producer’s e-signature, which could represent certain accomplishments like a percentage of the movie certified as done or IOT metrics like time spent on set. They could also receive bonuses based of web APIs that calculate box office earnings and awards won. Finally, a smart contract could be used in place of a film contract between all the moving entities that issues out ownership rights and salaries dependent on some type of data like revenue earned.
Payrolls — Collecting IOT data or biometric data from time clocks, employees could potentially get paid out in near real-time for services completed or based off minutes worked. It could work to the businesses advantage too if they paid someone upfront, but they didn’t end up working as long as previously budgeted, so the system could use that time clock data to perform real time corrective billing. The OpenLaw project recently completed a demoutilizing Chainlink for paying out cryptocurrency in a smart contract based on the current asset price.
Intellectual Property/Royalties — A smart contract could be used in the place of a royalties agreement, whereas every time that particular song or patented product is used, data is sent to the smart contract, which makes a payment to the patentee. The same logic could be used with intellectual property too, where anytime someone wants access to it, it triggers a payment to the patentee. Someone could potentially even embed a sensor in the intellectual property itself, such as in software that could send out a notice if someone has breached the contract.
Utilities — With utilities like the Internet or cable, users often pay fixed amounts on a monthly basis for access to them. However, they receive no benefits if the services go down for any amount of time. Using uptime services that feed into smart contracts between utility providers and customers, customers could get refunds from utility companies based off network data that showed downtime in their services. This model could actually apply to all types of service industries, like SaaS and customer services, which should incentivize service providers to stay honest and efficient in their processes because they automatically lose money if they don’t.
Using some type of identification card that can be scanned or biometric data, citizens could vote for politicians or ballot measures, which can be used as data to determine the outcome of elections or the passing/rejection of new laws. It’s even possible to release public money needed to fund different initiatives based on voting data or external statistics like approval ratings. If done in a highly secure and trustworthy manner, trustless smart contracts could greatly enhance democracy and force accountability from lawmakers.
Although probably not very popular, the IRS could tax people in real time based off payroll data. They could also use different metrics like IOT data and e-signatures from regulators to measure compliance within industries or simply get alerts when something isn’t up to par with the law.
As described above, implanting a RNG within a TEE could allow any smart contract to access pure randomness, which could facilitate lotteries, gambling, and ICOs where pre-signup participants were placed in order by chance instead of by first come first serve or how much money they spent on gas costs. Gambling smart contracts don’t even have to be driven by pure chance either, but their odds could be open source and stored in a TEE to guarantee no one could tamper with it. This would establish a lot of trust between customers and online gambling sites.
There is also the possibility to create any type of bet with anyone else, even multiple parties, using a smart contract and trustless data. There are all types of possibilities here such as wagers based off gaming, trivia, and sports, and all participants can be assured that no one person can tamper with the outcome, since they all decide up front where the smart contract will derive its data from to determine the results.
One of the more interesting use cases from the Chainlink whitepaper (Page 23) is support for trading on the Steam gaming platform. Utilizing TEEs, oracle nodes “can securely ingest user credentials (passwords) to check that game ownership has been transferred from a buyer to a seller. It can thereby create a secure marketplace that would be otherwise unachievable, with high assurance fair swaps of cryptocurrency for digital goods.”
Another potential gaming use case, involving TEEs + RNG, is having multiplayer online games run by the users in an almost masternode like structure, while still maintaining the integrity of the game, since no one can tamper with the nodes running the game. Nobody can gain an unfair advantage due to the hidden nature of TEEs and the game server can’t go down if the users continue to run their nodes; a problem that occurs today when games can no longer afford server costs, yet people and developers still want to keep it going. The game could even monetize nodes by giving them some bonus, like bronze/silver/gold coins. While this use case isn’t likely to happen anytime soon, primarily due to the costs of running nodes, it’s something to think about for the future, as the costs of computation decreases over time due to technological advancements.
Since many stablecoins or asset-backed coins will need constant data feeds in order to maintain a correct price, oracles will be necessary to feed market data into its pricing smart contract. In reality, there can be all kinds of stablecoins in the future, such as coins backed by physical assets like gold or real estate, coins backed by a multitude of currencies similar the SDR, or even a coin backed by a basket of different assets like currencies, metals, real estate, stocks, etc. all into a weighted average value for ultimate stability.
One of the other advantages is that these stablecoins can be decentralized, such as a stablecoin backed by gold, which could be appealing considering the price of gold was being manipulated for some time. Asset backed coins derived from quality data could bring a ton of stability to financial markets and especially cryptocurrency markets.
Now that it’s been established that data driven smart contracts are a huge part of the future, the natural realization is that data it going to become a hot commodity, which leads to the fourth use case for Chainlink: data monetization.
The word is starting to spread that “Data is the new oil,” and judging by the importance of oil throughout the past century, data is going to be the most valuable resource of the future. Much of the current research and innovation happening in the economy, especially in tech, is being driven by data, whether it’s IOT devices finding new ways to collect data, new analytics algorithms pouring through data for insights, inefficiencies, and potential opportunities, AI/ML using data to increase their baseline logical capacities, and smart contracts moving value all around the world based off data. Data is going to be the main driver of automation, which the world is increasingly moving towards. Just look at how everything is trying to be smart: smart cities, smart cars, smart phones, smart appliances, smart grids, and eventually smart humans, albeit this might not be to the liking of everyone.
As a result, data will increasingly be a monetized resource, which is why Chainlink is so special given that it creates a marketplace/registry for data, specifically data needed to trigger smart contracts. Given that smart contracts will be needed for not only business-to-business (B2) transactions and business to consumer (B2C) transactions, but it will also be needed for machine-to-business (M2B) transactions, machine-to-consumer (M2C) transactions, and machine-to-machine (M2M) transactions, which could be the biggest market of all.
As a result, data providers will continue to multiply, given the economic opportunity available for those possessing quality data. The competition in this field will only increase too, as individuals start to enter the market with their own datasets, which they can directly monetize using an API endpoint. The data is usually purchased by subscription services based on time periods like monthly, but it’s possible that data driven smart contracts reshape the market to include one-time API calls to eliminate the needs to purchase subscriptions to every data provider a node wants access too.
The thought of systems all over the world being able to effortlessly connect and transfer value with each other in a provably secure manner is highly appealing. However, the idea of having systems so automated that their communications can be driven by data, instead of human arbitration, which is prone to error, bias, and inefficiency, is nothing short of a fourth industrial revolution.
Chainlink has the potential to be front and center in the move towards automation, making it attractive from an investment standpoint, especially since early innovators are currently the only ones with the vision to see how smart contracts could become a foundational piece of our social fabric. So many processes today can be replaced by technology, which has far ranging effects from both an economic perspective and an ethical perspective that will need to be discussed in future articles.
Despite the drawbacks, which exist in every new technology, the move toward automation has too much acceleration to be stopped at this point, so the best thing people can do is start to understand it, so it can be steered toward the use cases that best serve society. If harnessed to the fullest potential, smart contracts can create a frictionless world economy that directly monetizes the value of each entity and individual, freeing society from the monotony of meaningless labor.
As they say, every era comes to an end and in this case it’s the end of centralized value exchange. But from every end, rises a new beginning, and that beginning is decentralized value exchange through the use of smart contracts. Connection, security, data driven, and monetization are features that will be vital to the future ecosystem of smart contracts, which is why Chainlink is in a prime position to be the centerpiece of it all.