Key learning points
- Chainlink is the leading cryptocurrency decentralized oracle network, known for providing pricing data to DeFi applications.
- The network plans to launch a token staking and node delegation system.
- The updates could make Chainlink more secure and decentralized, potentially sparking renewed interest in the project.
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Plans to expand Chainlink’s Oracle network and strengthen security through a new token deployment system could revive the project in the second half of 2022.
What is Chain Link?
Chainlink is a decentralized node network that provides data and information from off-chain sources to blockchain smart contracts through oracles.
When a smart contract needs to retrieve 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 answers, and then a Chainlink Aggregation Contract takes all the data from the oracles and reconciles it 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 financial protocols that rely on off-chain price feeds, it also provides fast, accurate off-chain data reports for everything from the SWIFT payment system to AccuWeather.
Currently, only Chainlink oracles managed by professional teams of node operators, infrastructure engineers or companies that build infrastructure exclusively for Chainlink are allowed to provide data feeds and earn LINK. While anyone can start a node, only those who pass the Chainlink approval process are in charge of 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 in data centers around the world, making the network more resilient than other more centralized oracles.
By reliably connecting data from various off-chain sources to on-chain smart contracts, Chainlink has become an invaluable piece of blockchain infrastructure. According to Defi Lama Data, the Chainlink Oracle network secures approximately $15 billion in value across all protocols that use its data feeds. In May 2022, Chainlink co-founder and CEO Sergey Nazarov estimated that Chainlink has at least 60% of the market share in blockchain verticals such as DeFi and gaming.
Despite its position as the leading decentralized oracle network, Chainlink has been criticized for the security of its oracle’s price feeds. Under the current network configuration, there is no financial incentive to prevent node operators from colluding to feed incorrect oracle answers into blockchain applications that use Chainlink’s price feeds.
Ultimately, the accuracy of Chainlink’s price feeds rests in the hands of its trusted oracles. The network can be attacked if these entities receive a significant number of counterfeit prices from other nodes, compromised, bribed or otherwise dishonored. Eric Wall of Arcane Assets is one of Chainlink’s vocal critics and has previously argued that the security is not “crypto-conically secure” as the developers claim, and instead relies on a trusted system.
While Chainlink has never been attacked, its reliance on trust and a limited number of nodes can be cause for concern for major stakeholders, such as those securing billions of dollars in assets locked into 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 try to compromise its data feeds to take advantage of the ensuing chaos.
To strengthen the security of Chainlink’s Oracle network, the developers plan to: implement a stakeout system similar to those found in Proof-of-Stake blockchains. After staking is implemented, nodes must lock LINK tokens as collateral, which can be taxed or “cut off” if a node misreports data. The LINK tokens cut from dishonest validators are then redistributed to honest validators.
The network’s cryptoeconomic security should improve once the strike system introduces a penalty for dishonest nodes. The hope is that the cost of attacking Chainlink’s price oracles will be greater than the potential profit an attack could generate. In this way, the oracle network would benefit from the same game theory principles that discourage malicious actors from attacking blockchains such as Bitcoin and Ethereum.
In addition, staking will also promote community participation in the Chainlink network beyond those who are able or qualified to run their own nodes. The stakeout model allows anyone who owns LINK to delegate their tokens to a trusted node operator. In a blog post from June on the subject, the developers of Chainlink estimate that LINK token staking will generate an annual return of 5% from a combination of treasury reserve issues and fees paid by those using Chainlink’s data feeds. The end goal is for treasury emissions to stop once Chainlink usage grows, so that all wagering rewards come from fees paid by Oracle users.
The strike system will also increase network security through a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests prioritize their feeds over less reliable ones. When there is an excess of fast and reliable nodes for a particular request, the network will have to look at other metrics to decide which nodes will be used to generate Oracle data. In this case, the amount of deployed LINK each node has for their Oracle services also determines whether and how often they are chosen to provide data feeds. This helps improve security by aligning the incentives of the node operators with the Chainlink network. Nodes must contain a large amount of LINK to be selected to provide data feeds, which should discourage them from attacking the network as it would damage the value of the LINK tokens that support their node.
Combining these two principles should also help create more reliable and secure node operators. Since LINK holders who want to delegate their tokens to a node for staking want to avoid having part of their delegation lowered, the best and fairest validators are likely to attract the most tokens from LINK strikers. This should create a feedback loop in which fast and accurate validators are consistently selected, increasing the overall reliability and security of the network.
Chainlink aims to release a 0.1 version of its staking system later this year. Initially, staking nodes will only provide a price feed for the ETH/USD pair and start with limited functionality. However, if the 0.1 version launches without any issues, the developers will release version 1.0 with additional functionality such as lowering the stakes and including user fees in rewards. Further in the future, a full 2.0 release will extend Chainlink Strike to services other than providing price feeds and introducing loss protection. This service allows sponsors of Oracle services to insure against losses from Oracle networks that provide inaccurate data feeds.
The future of Chainlink
The launch of staking and node delegation marks the beginning of a new chapter in the LINK token economy. For the first time, LINK will gain additional utility in addition to facilitating payments for Oracle services. Node operators are incentivized to lock down their LINK tokens through staking so that they can earn a higher share of treasury emissions and user fees. In addition, many LINK holders will likely choose to delegate their tokens to nodes to receive staking rewards.
On a longer time scale, LINK staking could act as a form of cash flow income for holders. Once the Chainlink treasure chest has distributed all of its reserve tokens, the circulating stock will stop inflating. At that point, strike rewards depend only on fees from protocols that use the Oracle network. Just as holding and staking Ethereum after the upcoming network merger will produce cash flow based on network usage, LINK strikers 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. Despite it being previously suggested that LINK strike would come out at the end of 2022, the precise details about the implementation of the system, the timeline of token issues and the implementation of the full 2.0 strike system have been vague. Still, if Chainlink can implement staking and progress towards 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 post, the author owned ETH, LINK, and several other cryptocurrencies.