Chainlink Staking: A New Chapter in the LINK Economy

Plans to expand Chainlink’s oracle network and strengthen security through a new token staking system could give the project a new lease of 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 to retrieve external data, such as Bitcoin’s price in USD, it can request it from Chainlink’s oracle network. When a contract sends a request, qualified oracles provide answers, 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 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 operated by professional teams of node operators, infrastructure engineers or companies building infrastructure exclusively for Chainlink are allowed to provide data feeds and serve LINK. While anyone can start running a node, only those who pass Chainlink’s approval process are tasked with delivering 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 is worth noting that Chainlink’s nodes are distributed in data centers around the world, making the network more robust than other more centralized oracles.

By reliably connecting data from various off-chain sources to on-chain smart contracts, Chainlink has become an invaluable part of the blockchain infrastructure. According to Defi Llama data, the Chainlink oracle network secures around $15 billion in value across all protocols using the data streams. 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 faced criticism over the security of the oracle’s price feeds. Under the current network setup, there is no monetary incentive to stop node operators from colluding to feed incorrect oracle answers into blockchain applications using Chainlink’s price feeds.

Ultimately, the accuracy of Chainlink’s price feeds rests in the hands of their trusted oracles. The network can be attacked if these devices are fed a significant number of fake prices from other nodes, compromised, bribed or otherwise made dishonest. Arcane Assets’ Eric Wall is one of Chainlink’s vocal critics and has previously argued that its security is not “cryptoeconomically secure” as the 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 a concern for large stakeholders, such as those securing the billions of dollars of value 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 compromise the data streams to profit from the ensuing chaos.

LINK Staking

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

The crypto-economic security of the network should be improved when the staking 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 will benefit from the same game-theoretic principles that prevent malicious actors from attempting to attack blockchains such as Bitcoin and Ethereum.

In addition, efforts will also promote community participation in the Chainlink network beyond those capable or qualified to run their own nodes. The staking model will allow anyone holding LINK to delegate their tokens to a trusted node operator. In a June blog post covering the topic, Chainlink’s developers estimated that the LINK token stake will yield a 5% annual return from a combination of emissions from the treasury and fees paid by those using Chainlink’s data streams. The end goal is for the emissions from the treasury to cease when Chainlink’s use grows, so that all stake rewards come from fees paid by oracle users.

The deployment system will also increase network security through a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests will have their feeds prioritized over less reliable ones. When there is an excess of fast and reliable nodes for a given request, the network must look to other metrics to decide which nodes to use to generate oracle data. In this case, the amount of staked LINK each node has in support of their oracle services will also determine if and how often they are selected to provide data feeds. This helps improve security by aligning the incentives of the node operators with the Chainlink network. Nodes must have a large amount of LINK to be selected to provide data streams, which should prevent 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 wish to delegate their tokens to a node for staking will avoid having part of the delegation cut, the best and most honest validators will likely attract the most tokens from LINK stakers. This should create a feedback loop where 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, stake nodes will only provide a price feed for the ETH/USD pair and launch with limited functionality. However, if the 0.1 version launches without problems, developers will release version 1.0, adding additional functionality such as reducing stakes and including user fees in rewards. Further in the future, a full 2.0 version will expand Chainlink efforts to other services beyond providing price feeds and introducing loss protection. This service allows sponsors of oracle services to purchase insurance against losses from oracle networks that provide inaccurate data streams.

Chainlink’s future

The launch of staking and node pooling will mark the start of a new chapter in the LINK token economy. For the first time, LINK will have additional benefits beyond facilitating payments for oracle services. Node operators will be incentivized to lock their LINK tokens through stake so that they can earn a larger share of treasury emissions and user fees. Additionally, many LINK holders will likely choose to delegate their tokens to nodes to receive stake rewards.

On a longer time scale, LINK staking can act as a form of cash flow income for holders. Once the Chainlink treasury has distributed all of its reserve tokens, the circulating supply will stop inflating. At that point, stake rewards will depend solely on fees from protocols using the oracle network. Similar to how holding and staking Ethereum after the upcoming Network Merge will produce a cash flow based on network usage, LINK stakers will also receive rewards based on the demand for Chainlink’s oracle services.

How long it will take for Chainlink to reach this point in the roadmap remains unclear. Despite earlier hints of a late 2022 release for LINK staking, exact details of the system’s implementation, token emission timeline, and deployment of the entire 2.0 staking 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 across the cryptocurrency space in the coming months.

Disclosure: At the time of writing this feature, the author owned ETH, LINK and several other cryptocurrencies.