key takeaways
- Chainlink is crypto’s top decentralized oracle network, known for providing price data to power DeFi applications.
- The network is planning to launch a token staking and node delegation system.
- The updates could help make Chainlink more secure and decentralized, potentially sparking renewed interest in the project.
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Chainlink’s plans to grow the oracle network and enhance its security through a new token staking system could give the project a new lease of life in the second half of 2022.
What is Chainlink?
Chainlink is a decentralized node network that provides data and information from off-chain sources to blockchain smart contracts via oracles.
When a smart contract needs to receive external data, such as the price of bitcoin in USD, it can request it from Chainlink’s oracle network. When a contract requests, qualified oracles provide the answer, and then a Chainlink aggregation contract takes all the data from the oracle and collates it for accurate results. Oracles are rewarded with LINK tokens for their efforts. While Chainlink is best known for providing oracle services for decentralized finance protocols that rely on off-chain price feeds, it provides instant, accurate off-chain data for everything from SWIFT payment systems to AccuWeather. Also provides reports.
Currently, Chainlink oracles run by professional teams of node operators, infrastructure engineers, or companies specifically building infrastructure for Chainlink are allowed to provide data feeds and earn links. While any node can start running, only those that pass Chainlink’s approval process are tasked with providing the data. Next, Chainlink is not as decentralized as blockchains such as Ethereum, where anyone with 32 ETH can run a full node and help validate transactions. However, it is worth noting that Chainlink’s nodes are distributed in data centers around the world, making the network more flexible than other more centralized oracles.
By reliably connecting data from different off-chain sources to on-chain smart contracts, Chainlink has become an invaluable part of the blockchain infrastructure. According to DeFi Lama data, the Chainlink oracle network secures approximately $15 billion in value across all protocols that use its data feed. In May 2022, Chainlink co-founder and CEO Sergei Nazarov estimated that Chainlink has at least 60% market share in blockchain verticals such as DeFi and gaming.
Despite its status as the leading decentralized oracle network, Chainlink has faced criticism over the security of its oracle’s price feed. Under the current network setup, there is no monetary incentive to prevent node operators colluding to feed incorrect oracle answers into blockchain applications that use Chainlink’s value feed.
Ultimately, the accuracy of Chainlink’s price feed lies in the hands of its trusted oracles. The network can be attacked if these entities are fed a large number of false prices from other nodes, are compromised, bribed, or otherwise dishonest. Arcane Assets’ Eric Wall is one of Chainlink’s outspoken critics and has previously argued that its security is not “crypto-financially secure” because its developers are state-owned and instead rely on a trusted system.
Although Chainlink has never been attacked, it has a reliance on trust and a limited number of nodes it can relate to. For large stakeholders, such as those who have acquired the billions of dollars in assets locked in the DeFi protocol. It may only be a matter of time before the incentive to attack Chainlink’s oracle network becomes too great and malicious actors seriously attempt to compromise its data feed to profit from the ensuing chaos.
link staking
To enhance the security of Chainlink’s oracle network, its developers plan to implement a staking system similar to that found in the proof-of-stake blockchain. After staking is implemented, nodes must lock LINK tokens as collateral, which can be taxed or “cut” if a node misreports data. Link tokens deducted from unscrupulous validators will then be redistributed to honest validators.
The cryptoeconomic security of the network should improve once the staking system introduces penalties for unscrupulous nodes. Hopefully the cost of attacking Chainlink’s price prediction will outweigh the potential benefits that an attack can generate. In this way, Oracle Network will benefit from the same game-theory principles that discourage malicious actors from attempting to attack blockchains such as Bitcoin and Ethereum.
Additionally, staking will also foster community participation in the Chainlink network beyond those able or qualified to run their own nodes. The staking model would allow anyone holding the link to hand over their tokens to a trusted node operator. In a June blog post covering the topic, the developers of Chainlink estimated that LINK token staking would produce a 5% annual return from a combination of emissions from Treasury reserves and fees paid by those who use Chainlink’s data feed. Once Chainlink usage grows, the ultimate goal is to eliminate Treasury emissions, with all staking rewards coming from fees paid by Oracle users.
The staking system will also enhance network security through a new reputation framework. Here, nodes that provide quick and accurate responses to frequent data requests will have their feeds prioritized over less reliable ones. When there is an abundance of fast and reliable nodes for a given request, the network will need to look at other metrics to decide which nodes oracles will be used to generate the data. In this case, the amount of stake links each node has supporting its Oracle services will also determine how and how often they are chosen to provide the data feed. It helps improve security by aligning the incentives of node operators with those of the Chainlink network. Providing the data feed would require the nodes to hold a large amount of LINK, which should discourage them from attacking the network as it would The links backing their nodes hurt the value of the token.
The combination of these two principles should also help create a more reliable and secure node operator. Since LINK holders who want to hand over their tokens to a node for staking will want to avoid reducing their delegation share, the best and most honest validators will draw the most tokens from LINK stakers. This should create a feedback loop where fast and accurate validators are continuously selected, increasing the overall reliability and security of the network.
Chainlink aims to release version 0.1 of its staking system later this year. Firstly, staking nodes will only provide a price feed for the ETH/USD pair and launch with limited functionality. However, if version 0.1 launches without any issues, developers will release version 1.0, adding additional functionality such as stake reduction and user fees to rewards. Furthermore, in the future, a full 2.0 version will expand Chainlink staking to other services beyond providing price feeds and providing loss protection. The service allows sponsors of Oracle services to purchase insurance against damage caused by the Oracle network providing incorrect data feeds.
future of chainlink
The staking and node delegation launch will mark the beginning of a new chapter in the LINK token economy. For the first time, LINK will gain additional utility in addition to the convenience of paying for Oracle services. Node operators will be incentivized to lock their LINK tokens through staking so that they can earn a substantial portion of Treasury emissions and user fees. In addition, multiple LINK holders can choose to hand over their tokens to nodes in order to receive staking rewards.
On a long-term scale, cash flow can act as revenue for LINK staking holders. Once Chainlink Treasury has distributed all of its reserve tokens, the circulating supply will stop increasing. At that point, the staking rewards will depend only on fees from the protocols that Oracle Network uses. In the same way that LINK stakers will receive rewards based on demand for Chainlink’s oracle services, how to hold and stake Ethereum after its upcoming network merge will generate cash flow based on network usage.
However, how long it will take for Chainlink to reach this point in its roadmap is unclear. The exact details on the implementation of the system, the timeline for token emission, and the deployment of the full 2.0 staking system have remained unclear, despite previously indicating a late 2022 release for LINK staking. Still, if Chainlink can implement stakes and progress toward its 2.0 roadmap, it should benefit from a wave of renewed interest in the cryptocurrency space in the coming months.
Disclosure: At the time of writing this feature, the author owned ETH, LINK, and several other cryptocurrencies.