One of the major uses in blockchain technology is smart contracts, these allow people to enter agreements that are automatically executed when predetermined conditions are met. These agreements act and are validated on the blockchain, making them safe from manipulation. However, problems arise when smart contracts need to access external data, outside the blockchain, as part of their automated function. Blockchains do not have such a built-in mechanism for retrieving external data, e.g. information about pricing, weather data or other events. Another problem is that data from third-party APIs is not always accurate.

Chainlink solves the above through a technical solution with decentralized nodes, so-called oracles, where they collect external and accurate data from outside. A smart contract is linked to the source of information, i.e. is connected to a centralized oracle and via Chainlink's oracles, the information can be entered into smart contracts and then distributed on the blockchain.

A participant in the network who wants to run an oracle must first use LINK as a form of security. The oracles that provide data must be as accurate as possible, within an approved deviation interval, to obtain LINK as a reward. Oracles, therefore, need to agree on which information is the most reliable and current. Any oracle that enters incorrect data will be penalized by receiving a reduced share of LINK or by a limited amount of LINK deposits.