- Chainlink is the best in crypto decentralized oracle network, known for providing price data to power DeFi applications.
- The network plans to launch a staking token system and node delegation.
- The updates could help make Chainlink more secure and decentralized, which could spark renewed interest in the project.
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Plans to grow Chainlink’s Oracle network and enhance its security through a new token storage system could give the project a new lease on 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 an external data source, such as the price of bitcoin in US dollars, it can order it from Chainlink’s oracle network. When a nodes makes a request, a qualified oracle provides answers, then the Chainlink aggregation nodes takes all the data from the oracle and straightens them to get an accurate result. Oracles are then 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 also provides fast and accurate off-chain data reporting for everything from Swift payment system to AccuWeather.
Currently, only Chainlink oracles operated by professional teams of node operators, infrastructure engineers or companies that build infrastructure exclusively for Chainlink are allowed to provide data feed and LINK earning. While anyone can start a node, only those who pass Chainlink’s approval process are charged with providing the data. Thus, Chainlink is not as decentralized as block chains like Ethereum where anyone with 32 ETH can run a full node and help validate transactions. However, it should be noted that Chainlink nodes are distributed in data centers all over the world, which makes the network more resilient than other more centralized monsters.
By reliably linking data from various off-chain sources with on-chain smart contracts, Chainlink has become an invaluable part of the blockchain infrastructure. according to Data of Divi LlamaThe 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 Chainlink holds at least 60% of the market share in blockchain sectors such as DeFi and gaming.
Despite its position as the leading decentralized network oracle, Chainlink has faced criticism over the security of its oracle price feeds. With the network’s current setup, there is no financial incentive to prevent node operators from colluding to feed incorrect oracle answers into blockchain applications that use the Chainlink price feed.
Ultimately, the accuracy of Chainlink’s price feeds rests in the hands of its trusted oracles. The network can be attacked if these entities are fed a large number of fake prices from other nodes, hacked, bribed, or otherwise made dishonest. Eric Wall of Arcane Assets is a vocal critic of Chainlink and he has previously argued That its security is not “digitally secure” as its developers say, and instead relies on a trusted system.
Although Chainlink has never been attacked, its reliance on trust and a limited number of nodes can be worrying. For large stakeholders, such as those securing billions of dollars in 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 try in earnest to hack their data feeds to take advantage of the ensuing chaos.
To enhance the security of Chainlink’s oracle network, its developers plan to Implementation of a staking system Similar to those in the Proof of Stake blockchain. After staking is executed, the nodes will have to lock the LINK tokens as collateral, which can be subject to tax or “cutting” if the node misreports the data. The LINK tokens truncated from the dishonest validators will then be redistributed to the honest validators.
The economic security of the network’s cryptocurrency should improve once the caching system imposes a penalty on spoofed nodes. The hope is that the cost of attacking the Chainlink price oracle will be greater than the potential profit that the attack can generate. In this way, the Oracle network will benefit from the same principles of game theory that discourage malicious actors from trying to attack blockchains like Bitcoin and Ethereum.
In addition, staking will also enhance community participation in the Chainlink network beyond those who are able or qualified to operate their own nodes. The staking model would allow anyone with LINK to delegate their tokens to a trusted node operator. in June blog post Covering this topic, Chainlink developers estimated that storing LINK tokens would generate an annual return of 5% from the pool of emissions from treasury reserves and fees paid by those using Chainlink data feeds. The ultimate goal is to end treasury emissions once Chainlink usage grows, leaving all staking rewards to come from fees paid by oracle users.
The caching system will also increase network security with a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests will have priority for their feeds over the least reliable ones. When there is an excess of fast and reliable nodes for a given request, the network will need to consider other metrics to determine which nodes will be used to generate oracle data. In this case, the amount of LINK stack supported by each of its Oracle Services node will also determine whether and how often it is chosen to provide a data feed. This helps improve security by aligning the incentives of node operators with the Chainlink network. Nodes will need to maintain a large amount of LINK to be selected to provide the data feed, which should discourage them from attacking the network as it is It hurts the value of the LINK tokens that support its node.
The combination of these two principles should also help create more reliable and secure node operators. Since LINK holders who wish to delegate their tokens to a node for staking will want to avoid cutting a portion of their authorization, the best and most honest validators are likely to attract the largest number of tokens from LINK agents. This should create a feedback loop where fast and accurate validators are constantly selected, which increases the overall reliability and security of the network.
Chainlink aims to launch a 0.1 version of its staking system later this year. Initially, the staking contract will provide a price feed for the ETH/USD pair and launch with limited functionality. However, if version 0.1 is released without any problems, the developers will release version 1.0, adding additional functions such as lowering the bet and integrating user fees into bonuses. Moreover, in the future, the full 2.0 will extend Chainlink’s service to other services beyond providing price feeds and providing loss protection. This service allows Oracle service sponsors to purchase insurance against losses from Oracle networks that provide inaccurate data feeds.
The launch of staking and node authorization will mark the beginning of a new chapter in the LINK cryptocurrency economy. For the first time, LINK will gain an additional benefit 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 portion of treasury emissions and user fees. In addition, many LINK holders will likely choose to delegate their tokens to the nodes to receive staking rewards.
On a longer time scale, LINK can act as a form of cash flow revenue for its owners. Once Chainlink’s treasury distributes all of its reserve tokens, the circulating supply will stop inflating. At this point, the accrued rewards will depend solely on the fees from the protocols that use the Oracle network. Similar to how holding and storing Ethereum after its upcoming network integration produces cash flow based on network usage, LINK customers will also receive on-demand rewards on Chainlink’s oracle services.
However, it is still unclear how long it will take for Chainlink to reach this point in the roadmap. Despite earlier hints at the late 2022 release of LINK staking, the exact details of the system’s implementation, the timeline for token emission, and the deployment of the full 2.0 storage system were murky. However, if Chainlink can implement the consolidation process and move towards its 2.0 roadmap, it should benefit from the wave of renewed interest across the crypto space over the coming months.
Disclosure: At the time of writing this feature, the author owns ETH, LINK, and many other cryptocurrencies.