Chainlink Staking: A New Chapter in the LINK Economy
- Chainlink is crypto’s top decentralized oracle network, known for providing price data to power DeFi applications.
- The network plans to launch a token staking and node delegation system.
- These updates could help make Chainlink more secure and decentralized, potentially sparking new interest in the project.
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Plans to grow Chainlink’s oracle network and enhance its security with a new token staking system could bring new life to the project in the second half of 2022.
What is a chain link?
Chainlink is a decentralized network of nodes that feeds data and information from off-chain sources to blockchain smart contracts through oracles.
When a smart contract needs to obtain external data, such as the USD price of Bitcoin, it can request it from Chainlink’s network of oracles. When a contract makes a request, an eligible oracle provides the answer, and the Chainlink aggregation contract fetches all the data from the oracle and verifies it for accurate results. Oracles will then be rewarded with LINK tokens for their efforts.While Chainlink is best known for providing oracle services to decentralized finance protocols that rely on off-chain price feeds, it also provides services from SWIFT payment system to AccuWeather.
Currently, only Chainlink oracles run by specialized teams of node operators, infrastructure engineers, or companies that build infrastructure specifically for Chainlink are allowed to provide data feeds and earn LINK. While anyone can start running a node, only those who go through the Chainlink approval process are responsible for providing data. Subsequently, Chainlink is not as decentralized as blockchains like Ethereum, and anyone with 32 ETH can run a full node and help validate transactions. However, it’s worth noting that Chainlink’s nodes are spread across data centers around the world, making the network more resilient than other, more centralized oracles.
Chainlink has become a valuable part of blockchain infrastructure by reliably connecting data from different off-chain sources to on-chain smart contracts.according to Defi Llama Data, the Chainlink oracle network secures approximately $15 billion in value across all protocols that use its data feed. May 2022, Chainlink co-founder and CEO Sergey Nazarov estimated 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 for the security of its oracle price information. Under the current network setup, there is no monetary incentive to prevent node operators from colluding to provide incorrect oracle answers to blockchain applications using Chainlink price feeds.
Ultimately, the accuracy of Chainlink’s price information is in the hands of its trusted oracles. If these entities receive large amounts of fake prices from other nodes, are compromised, bribed, or otherwise dishonest, the network could be attacked. Eric Wall of Arcane Assets, one of Chainlink’s outspoken critics, debated before Its security is not “cryptoeconomically secure” as its developers call it, but relies on a trusted system.
While Chainlink has never been attacked, its reliance on trust and 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 motivation to attack the Chainlink oracle network becomes too great and malicious actors seriously attempt to disrupt its data feeds to profit from the ensuing chaos.
To strengthen the security of the Chainlink oracle network, its developers plan to Implement a staking system Similar to those in proof-of-stake blockchains. After staking is implemented, nodes must lock LINK tokens as collateral, which may be taxed or “slashed” if nodes misreport data. The LINK tokens slashed from dishonest validators will then be redistributed to honest validators.
Once the staking system penalizes dishonest nodes, the cryptoeconomic security of the network should increase. It is hoped that the cost of attacking the Chainlink price oracle will outweigh the potential profit that the attack could generate. In this way, oracle networks would benefit from the same game-theoretic principles that inhibit malicious actors from attempting to attack blockchains like Bitcoin and Ethereum.
Additionally, staking will facilitate community participation in the Chainlink network in addition to those able or qualified to run their own nodes. The staking model will allow anyone holding LINK to delegate their tokens to trusted node operators.exist A blog post in June Covering the topic, Chainlink’s developers estimate that LINK token staking will generate a 5% annual return on emissions from treasury reserves and fees paid by those using Chainlink’s data feeds. The ultimate goal is that once Chainlink usage increases, treasury emissions will end and all staking rewards will come from fees paid by oracle users.
The staking system will also improve network security through a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests will prioritize their feeds over less reliable ones. When there are too many fast and reliable nodes for a given request, the network will need to look at other metrics to decide which nodes will be used to generate oracle data. In this case, the amount of staked LINK each node supports to support its oracle service will also determine if and how often they are selected to provide data feeds. This helps improve security by aligning node operator incentives with the Chainlink network.Nodes need to hold a large amount of LINK to be selected to provide data feeds, which should discourage them from attacking the network Damages the value of the LINK token that backs its node.
Combining these two principles should also help create more reliable and secure node operators. Since LINK holders who want to delegate tokens to nodes for staking want to avoid partial delegation cuts, the best and most honest validators are likely to attract the most tokens from LINK stakers. This should create a feedback loop where fast and accurate validators are always selected, improving the overall reliability and security of the network.
Chainlink plans to release version 0.1 of its staking system later this year. At first, staking nodes would only provide price information for the ETH/USD pair and launch with limited functionality. However, if the 0.1 version is released without any issues, the developers will release the 1.0 version, adding extra features such as slashing staking and factoring user fees into rewards. In the future, the full 2.0 version will expand Chainlink staking to provide services beyond providing price information and introducing loss protection. This service allows sponsors of oracle services to purchase insurance against losses caused by inaccurate data feeds provided by the oracle network.
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 the payment convenience of oracle services. Node operators will be incentivized to lock up their LINK tokens by staking, so they can receive a larger portion of the treasury emissions and user fees. Additionally, many LINK holders may choose to delegate their tokens to nodes for staking rewards.
On longer time horizons, LINK staking can serve as a form of cash flow income for holders. Once the Chainlink Treasury has allocated all reserve tokens, the circulating supply will stop inflating. At that point, the staking reward will be completely determined by the fees of the protocol using the oracle network. Similar to how holding and staking Ethereum after an upcoming network merger will generate cash flow based on network usage, LINK stakers will also be rewarded based on demand for Chainlink oracle services.
However, how long it will take Chainlink to reach this point on its roadmap remains unclear. Despite previous hints that LINK staking will be released in late 2022, precise details on system implementation, token issuance timelines, and deployment of the full 2.0 staking system have been murky. Still, if Chainlink can implement staking and move toward its 2.0 roadmap, it should benefit from a new wave of interest in the cryptocurrency space in the coming months.
Disclosure: At the time of writing this feature, the author owns ETH, LINK, and several other cryptocurrencies.