September 27, 2022


Basic Takeaways

  • Chainlink is crypto’s leading decentralized oracle network known for providing price data to power DeFi applications.
  • The network plans to launch a staking and node allocation system.
  • The updates could help make Chainlink more secure and decentralized, potentially sparking renewed interest in the project.

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Plans to develop Chainlink’s oracle network and strengthen its security through a new staking system could give the project a new lease of life in the second half of 2022.

What is Chainlink?

Chainlink is a decentralized network of nodes that provides data and information from off-chain sources to blockchain smart contracts via oracles.

When a smart contract needs to supply external data, such as the price of Bitcoin in USD, it can request it from Chainlink’s oracle network. When a contract makes a request, eligible oracles provide responses, and then a Chainlink Aggregation Contract takes all the data from the oracles and reconciles them for an accurate result. Oracles are then rewarded with LINK tokens for their efforts. While Chainlink is best known for providing Oracle services to decentralized finance protocols based on off-chain price feeds, it also provides fast, accurate off-chain data reporting on everything from SWIFT payment system on AccuWeather.

Currently, only Chainlink oracles run by professional groups of node operators, infrastructure engineers, or companies building infrastructure exclusively for Chainlink are allowed to provide data streams and earn LINK. While anyone can start running a node, only those who pass Chainlink’s approval process are tasked with providing data. Next, Chainlink is not as decentralized as blockchains like Ethereum where anyone with 32 ETH can run a full node and help validate transactions. However, it’s worth noting that Chainlink’s nodes are distributed across data centers around the world, making the network more resilient than other more centralized divination.

By connecting trusted data from different off-chain sources with on-chain smart contracts, Chainlink has become an invaluable piece of blockchain infrastructure. According Defi Llama data, Chainlink’s oracle network secures approximately $15 billion in value across all protocols using its data streams. In May 2022, Chainlink co-founder and CEO Sergey Nazarov is appreciated that Chainlink has at least 60% market share in blockchain industries such as DeFi and gaming.

Despite its position as the leading decentralized oracle network, Chainlink has faced criticism regarding the security of oracle price streams. Under the current network setup, there is no monetary incentive to stop node operators colluding to feed false Oracle responses to blockchain applications using Chainlink’s value streams.

Ultimately, the accuracy of Chainlink’s price streams lies in the hands of its trusted oracles. The network can be attacked if these entities are fed a significant number of false values ​​by other nodes, hacked, bribed, or otherwise made dishonest. Eric Wall of Arcane Assets is one of Chainlink’s most vocal critics and has previously supported that its security is not “crypto-secure” as stated by its developers and instead relies on a trust system.

Although Chainlink has never been attacked, its reliance on trust and a limited number of nodes can be a concern for large stakeholders such as those securing billions of dollars worth of assets locked in DeFi protocols. 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 undermine its data streams to profit from the ensuing chaos.

CONNECT Bet

To strengthen the security of Chainlink’s oracle network, its developers plan to do so implement a staking system similar to those found in Proof-of-Stake blockchains. After the staking is applied, nodes will have to lock LINK tokens as collateral, which can be taxed or “clipped” if a node misreports data. LINK tokens cut by dishonest validators will then be redistributed to honest validators.

The crypto-security of the network should improve once the staking system penalizes dishonest nodes. The hope is that the cost of attacking Chainlink’s price oracles will be greater than the potential profits an attack could generate. In this way, the oracle network will benefit from the same principles of game theory that discourage malicious actors from attempting to attack blockchains such as Bitcoin and Ethereum.

In addition, staking will also promote community participation in the Chainlink network beyond those who are capable or able to operate their own nodes. The staking model will allow anyone holding LINK to assign their tokens to a trusted node operator. In a June blog post covering the issue, Chainlink developers estimated that staking LINK tokens would generate an annual return of 5% from a combination of emissions from the fund’s reserve and fees paid by those using Chainlink’s data streams. The ultimate goal is to end Treasury emissions once Chainlink usage grows, leaving all staked rewards to come from fees paid by Oracle users.

The staking system will also increase the security of the network through a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests will have their streams prioritized over less reliable ones. When there is a surplus of fast and reliable nodes for a given request, the network should consider other metrics to decide which nodes to use for Oracle data generation. In this case, the amount of staked LINK each node has that supports its Oracle services will also determine if and how often they are chosen to provide data streams. This helps improve security by aligning the incentives of node operators with the Chainlink network. Nodes should have a large number of LINKs to be selected to provide data feeds, which should discourage them from attacking the network as they would damage the value of the LINK tokens that support their node.

Combining these two principles will also help create more reliable and secure operator nodes. As LINK holders who want to commit their tokens to a node for staking will want to avoid cutting some of their agency, the best and most honest validators will likely attract the most tokens from LINK players. This should create a feedback loop where fast and accurate validation devices are consistently selected, increasing the overall reliability and security of the network.

Chainlink plans to release a version 0.1 of its betting system later this year. Initially, staking nodes will only provide a price feed for the ETH/USD pair and will launch with limited functionality. However, if version 0.1 goes smoothly, the developers will release version 1.0, adding additional features such as staking trimming and integrating user fees into rewards. Further, in the future, a full version 2.0 will extend Chainlink staking to other services beyond providing price streams and introduce loss protection. This service allows oracle service providers to purchase insurance against losses from oracle networks that provide inaccurate data streams.

The future of Chainlink

The launch of staking and node delegation will mark the beginning of a new chapter in the LINK token economy. For the first time, LINK will gain additional utility beyond facilitating payments for Oracle services. Node operators will be incentivized to lock their LINK tokens through staking so that they can earn a larger share of Treasury emissions and user fees. Additionally, many LINK holders will likely choose to allocate their tokens to nodes to receive staking rewards.

On a longer time scale, the LINK stake could act as a form of cash flow income for holders. Once the Chainlink fund distributes all its reserves, the circulating supply will stop inflating. At that point, staking rewards will depend solely on fees from protocols using the oracle network. Similar to how holding and staking Ethereum after its upcoming network merger will generate a cash flow based on network usage, LINK participants will also receive rewards based on demand for Chainlink’s Oracle services .

However, how long it will take for Chainlink to reach this point in its roadmap remains unclear. Although a late 2022 launch for LINK betting was previously hinted at, the exact details of the system’s implementation, the timing of contract issuances and the development of the full betting 2.0 system were unclear. However, if Chainlink can implement the bet and move towards its 2.0 roadmap, it will 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 many other cryptocurrencies.

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