A New Chapter in the LINK Economy: Chainlink Staking

The decentralised oracle network's future is examined by Crypto Briefing as Chainlink token staking prepares to go live later this year.

Key points:

·       In order to fuel DeFi apps, Chainlink, the leading decentralised oracle network in the cryptocurrency industry, provides pricing data.

·       The network intends to introduce a node delegation and token staking system.

·       The upgrades may contribute to Chainlink being more secure and decentralised, thus reviving interest in the venture.

What is Chainlink?

According to Mark Tencaten Chainlink is a decentralised node network that uses oracles to deliver data and knowledge to blockchain smart contracts from off-chain sources.

A smart contract can use Chainlink's oracle network to get the external data it requires, such as the price of Bitcoin in US dollars. When an eligible oracle responds to a request from a contract, a Chainlink Aggregation Contract gathers all the information from the oracles and reconciles it to produce a correct result. LINK tokens are then given to Oracles as compensation for their work. Chainlink offers timely, reliable off-chain data reports for anything from the SWIFT payment system to AccuWeather. However, to date it is most recognised for serving as an oracle to decentralised financial protocols that depend on off-chain pricing feeds.

Currently, the only Chainlink oracles that are permitted to offer data feeds and earn LINK are those that are managed by expert teams of node operators, infrastructure engineers, or businesses that construct infrastructure specifically for Chainlink. Although anybody can build a node, only those who have been approved by Chainlink are charged with delivering data. Chainlink is therefore more centralised than other blockchains like Ethereum, where anyone with 32 ETH may host a complete node and provide transaction validation. Positively, Chainlink is more robust than other more centralised oracles due to the fact that its nodes are dispersed throughout data centres all over the world.

Chainlink has evolved into a crucial component of the blockchain architecture by securely fusing information from various off-chain sources to on-chain smart contracts. According to Defi Llama statistics, all protocols that employ the Chainlink oracle network's data feeds safeguard almost $15 billion in value. Sergey Nazarov, co-founder and CEO of Chainlink, predicted that the company holds at least 60% of the market share in blockchain verticals including gaming and DeFi as of May 2022.

Chainlink has come under fire for the security of its oracle's price feeds despite being the top decentralised oracle network. With the current network configuration, node operators have no financial incentive to refrain from conspiring to provide false oracle replies to blockchain apps that rely on Chainlink's price feeds.

The reliability of Chainlink's trusted oracles ultimately determines how accurate its pricing feeds are. If these entities are compromised, bribed, fed a large number of bogus prices from other nodes, or jeopardised in any other manner, the network may be attacked. One of Chainlink's most outspoken detractors, Eric Wall of Arcane Assets, has previously asserted that the system's security is not "cryptoeconmically safe" as its developers claim and instead depends on a trusted system.

Despite the fact that Chainlink has never been attacked, significant stakeholders (ie those guarding assets valued at billions of dollars) that are locked in DeFi protocols, could find its reliance on trust and a small number of nodes unsettling. It could only be a matter of time before bad actors seek to hack Chainlink's data feeds in order to take advantage of the resulting instability and the motivation to attack its oracle network becomes too great.

Link Staking

Chainlink's developers intend to build a staking mechanism similar to that seen in Proof-of-Stake blockchains, in order to strengthen the security of the oracle network. Following the implementation of staking, nodes will be required to store LINK tokens as collateral, which may be taxed or "slashed" if a node produces false information. Then, honest validators will get a redistribution of the LINK tokens that were stolen from dishonest validators. Once the staking system imposes a penalty for dishonest nodes, the network's crypto-economic security should increase. The idea is that it will be more expensive to assault Chainlink's pricing oracles than it would be profitable to do so. The same game theory ideas that deter bad actors from trying to attack blockchains like Bitcoin and Ethereum would thus apply to the Oracle network say’s Mark Tencaten.

Staking will also encourage community involvement in the Chainlink network outside of individuals who are competent or qualified to manage their own nodes. Anyone who has LINK will be able to assign their tokens to a dependable node operator thanks to the staking concept. Chainlink's creators predicted LINK token staking will provide a 5% yearly return in a blog post on the subject from a mix of emissions from the treasury reserve and fees paid by users of Chainlink's data feeds. Once Chainlink's adoption increases, the ultimate aim is for treasury emissions to cease and all staking rewards to come from fees paid by oracle users.

The staking system's new reputation foundation will also improve network security. Here, feeds from nodes that consistently respond to data requests quickly and accurately will be given precedence over those from less trustworthy nodes. The network will need to consider other parameters to determine which nodes will be utilised to create oracle data when there are too many quick and dependable nodes for a particular request. In this instance, when and how often a node is selected to give data feeds depends on the amount of staked LINK supporting their oracle services. By coordinating the node operators' incentives with the Chainlink network, security is enhanced. It will be necessary for nodes to retain a significant quantity of LINK in order to be chosen as data feed providers, which should deter nodes from assaulting the network, as doing so would reduce the value of the LINK tokens supporting their node.

Combining these two ideas should result in node operators who are more dependable and secure. The greatest and most trustworthy validators will likely draw the most tokens from LINK stakers as LINK holders who wish to delegate their tokens to a node for staking will want to avoid having part of their delegation clipped. The selection of quick and precise validators should become automatic as a result, improving the network's overall security and dependability.

Later this year, Chainlink plans to deploy a 0.1 version of its staking mechanism. Staking nodes will first debut with a restricted feature set and simply offer a price feed for the ETH/USD pair. If the 0.1 version launches without any problems, the creators will release version 1.0, which will include new features like stake reduction and user fee inclusion in rewards. In the future, a full 2.0 version will provide loss protection and broaden Chainlink staking to include more services in addition to price feeds. With the use of this solution, providers of Oracle services can protect themselves from financial harm caused by erroneous data feeds from Oracle networks.

The Prospects for Chainlink

The LINK token economy will enter a new phase with the implementation of node delegation and staking. For the first time, LINK will be more useful than just a means of processing oracle service fees. In order to receive a larger share of treasury emissions and user fees, node operators will be encouraged to stake their LINK tokens. In order to gain staking incentives, many LINK holders will probably decide to assign their tokens to nodes.

Longer term, LINK staking may function as a source of cash flow for holders. The circulation supply will stop growing once the Chainlink treasury has released all of its reserve tokens. At that moment, the sole source of staking rewards will be fees charged by protocols utilising the Oracle network. Stakeholders in LINK will also get incentives depending on the demand for Chainlink's oracle services, much as how owning and staking Ethereum following its impending network Merge would provide a cash flow dependent on network usage.

It's unknown how long it will take the Chainlink ecosystem to reach its intended vision and use-case, however, there have been prior hints that LINK staking will launch in the latter half of 2022. To date, specific information on the system's implementation, the timing of token emissions, and the rollout of the whole 2.0 staking system has remained hazy. Even so, Chainlink should profit in the coming months from a surge of rekindled interest throughout the cryptocurrency ecosystem if it can integrate staking and move on with its 2.0 roadmap.