Chainlink 2.0 - Building The Future Of Decentralized Oracle Networks
Feature enhancements, additional security and higher earning potential is on the way
The basic proof-of-stake (PoS) consensus model is relatively straightforward: to join a blockchain network for the opportunity of earning rewards as a validator (which simply means providing computational power to add blocks to the chain), one must first provide a financial “stake”—a sort of security deposit to ensure one’s commitment of upholding the network protocol.
The size of one’s stake is proportionate to the likelihood of being selected more frequently to validate blocks. The system thus incentivizes validators to increase the size of their stake to be able to earn more—but at the same time, it also motivates them to perform their functions accordingly, as poorly performing or malicious validators risk getting their stakes “slashed”, resulting in a financial loss.
This setup works quite well for PoS blockchains like Cardano (ADA) or Solana (SOL) as the nature of the data that passes through their validator nodes are mostly homogenous—made up mostly of user requests for transferring assets from one wallet to another. Simply put, conventional blockchains like these are only preoccupied with validating one block after another to maintain their public ledger of who had how many of their tokens at any particular time. In fact, once properly set up, validator operators can simply leave their computers running to fend for themselves and start earning rewards.
However, some blockchains deal with other kinds of data which make staking a little more complicated. One notable example is with oracle networks such as Chainlink.
Unlike simply keeping a ledger, oracles perform a wider range of functions and deal with a diverse range of information. This is because oracles are third party “bridges” to the outside world that allows data to be fed onto the blockchain so that decentralized applications (dApps), which rely heavily on these data, are able to carry out their functions.
Data may range from current market prices of fiat currencies, stocks and commodities, or even weather reports or football scores. But ensuring that only truthful information is able to make its way onto the blockchain is not a straightforward task, requiring an altogether unique approach—and thus an altogether unique staking system.
What is Chainlink?
Chainlink is a decentralized oracle network established in 2017 which since then has become the industry standard for the oracle service industry and the most widely used especially in the decentralized finance (DeFi) sector. Chainlink’s role in the cryptocurrency space simply cannot be overstated, as the need for verifiable real world data is a prerequisite for smart contracts to be able to operate.
For those in need of a reviewer, “smart contracts” are self-executing programs that are built onto a blockchain to carry out numerous applications autonomously. For instance, a dApp could be programmed to carry out a trade once bitcoin hits a certain target price; a stablecoin could be minted and pegged to the value of a real world currency which it needs to match in real time; or a sports betting app could be set up to deal out winnings to bettors as soon as the results of a game are in—all of these taking place without human intervention.
But for all of these functions to happen on their own, a constant stream of outside information is needed to trigger the smart contracts’ algorithms. This is where oracles come in to provide the missing data in their equations.
But for a decentralized network to have an oracle is a conundrum in itself. Since the blockchain becomes dependent on the information they provide, in essence—they cancel out the decentralized nature of the network by becoming a possible single point of failure. Unreliable or malicious oracles can wreak havoc on the entire chain, or they can become inviting targets for hackers. This is what is otherwise known as “the oracle problem” and which is what Chainlink was designed specifically to address.
How does Chainlink work?
Chainlink oracles are basically validator nodes that are required to put up a stake to be able to earn from the network, similar to the usual PoS setup. The difference is instead of contributing processing power to add blocks to the chain, oracles accept “jobs” from smart contracts to provide reliable and accurate off-chain data. Rewards are earned every time the data provided is accepted in consensus with other validators, and penalties in the form of slashing one’s stake are also dealt out for providing inaccurate information.
Chainlink itself is not one single network, but rather “a network of networks'' wherein users are free to use Chainlink’s open-source code to build their own oracle networks that run independently from one another. This setup thus establishes a free market economy within the blockchain, wherein oracles compete with one another to be able to accept jobs.
Chainlink allows users a high level of flexibility, from determining how many nodes it wants to be involved in a query, the reputation rating required of those nodes, as well as which data sources it wants the validators to use.
Once a query is posted, an “order contract” is placed to process the request. After which Chainlink’s reputation scoring system selects the validators that pass the reputation threshold set by the requestors. Nodes with clean track records are prioritized for the job while those with poor performance ratings may find it difficult to be included in the pool.¹
This is followed by an “order-matching” contract wherein the system selects which nodes are best suited for the job based on the kind of data they deal with. Not all Chainlink oracles are the same—in fact, node operators can choose their specializations and take only the jobs that are suited, or those to which they have access to the corresponding data feeds. Some nodes may focus on giving stock market prices while some may focus on weather reports, or generating random numbers.
This also sets it apart from the usual PoS or proof-of-work (PoW) configuration wherein all the nodes in the chain take part in the validation of each block. In an oracle network, since data is heterogenous and non-deterministic, having all nodes participate in validating is not at all practical or even economically feasible. Chainlink instead employs aggregating contracts that are able to weigh averages of data from single and multiple sources to arrive at the “definitive truth” about real world events.¹
Chainlink has seen massive growth with the increase in dApp adoptions requiring oracle services.
Since its inception, Chainlink’s formula has been a massive proof-of-concept, with over 800 oracle networks having served over 600 million data points and with over $75 billion secured within the smart contracts of dApps that currently avail of their services. Being blockchain agnostic, Chainlink’s adoption also spans across ten blockchains, all major networks included.⁶
In fact, Chainlink’s massive growth has breached a threshold wherein some node operators are able to profit from dApp fees alone, which previously, only accounted for a minute percentage of the total income from operating a node. In most PoS setups, as much as 98 percent of profits are derived from the network rewards with only 2 percent coming from user fees. But due to the massive adoption that has been taking place with dApps and the high efficiency that oracle nodes have been incentivized to attain, it is now possible for dApp fees to surpass earnings from the network itself.
As much as this is a huge milestone for Chainlink, this also presents a unique problem for the network since the nodes can now arrive at a point of diminishing returns: If nodes are already able to earn sufficiently from dApp fees, this means that the incentive provided by network rewards is effectively weakened—if not canceled out, posing a security issue over how to maintain trustworthiness within the network.
This unusual outcome requires some significant changes, which is why Chainlink 2.0 was proposed, outlining the development of a second metalayer over the existing blockchain to enhance its features, increase earning potential, and introduce further scalability to keep up with the rapidly expanding dApp market. The improvements are scheduled to be rolled out within 2022.
With node operators' high-efficiency best practices, a profit plateau is reached wherein nodes are earning more from dApp user fees rather than from network rewards.
In a broadcast presentation, Chainlink co-founder Sergey Nazarov outlines the major changes that will happen with the network upgrade with regard to node staking, focusing on two key points: 1) the introduction of node reputation rewards to increase the payout of oracles who consistently provide low latency services, accurate reports, and are able to maintain service level agreements; and 2) innovating the staking system to increase the crypto-economic security of the network, and giving it the capability to resist a broader range of attacks.
As outlined in its whitepaper, Chainlink 2.0 will introduce a number of innovations that will greatly improve the capabilities of its decentralized node operators (DONs) and push the possibilities of what can be done within an oracle network, most notable among them:
Hybrid smart contracts - a hybrid contract combines on-chain programming with off-chain data and computation provided by DONs. By combining the immutability of a blockchain with the flexibility of oracle networks, hybrid smart contracts will be able to provide a greater degree of scalability, security, confidentiality and connectivity with data sources.⁴
Hybrid smart contracts are able to combine these features while retaining decentralization. This is achieved by the architecture which keeps the functions of the ledger, settlements, and disputes situated on the blockchain, while oracle functions of fetching, validating, and relaying data are kept isolated on its own layer, while also providing decreased latency.
Explicit staking - unlike conventional staking systems, “explicit” staking is a super-linear staking mechanism designed to scale the crypto-economic security of a network to maximize the cost of any potential attack on the network.²
A typical PoS blockchain is theoretically susceptible to a 51 percent attack, which happens when at least more than half of the network nodes have been controlled by a malicious actor, or have colluded to act maliciously. Though the financial requirements to conduct a 51 percent attack are enormously high (one must stake enough funds to attain majority influence), such an attack is somewhat more feasible on an oracle network that is relatively smaller in scale.
To counter this, explicit staking will require malicious actors to have a budget not only larger than 51 percent of the stake—but even greater than the combined deposits of all nodes within a DON, thus exponentially increasing network security and reliability of oracle reports.³
Explicit staking will greatly increase the stake required for malicious actors to mount a successful attack.
Two-tier oracle design - an additional 2-step measure will be imposed to guarantee that service agreements are met: a first-tier DON takes on the responsibility of aggregating oracle reports, followed by a higher security second tier DON which will be used to settle disputes that may be generated with the first tier, and to hold any first-tier oracle accountable for any mistakes.
LINK is Chainlink’s native utility token that runs the Chainlink economy. It has the following main utilities: 1) it is used by validators for staking deposits to secure a place within the network; 2) it is used for network rewards for successfully accomplishing job queries and; 3) it is used by oracles to bid for jobs queries.
LINK has a maximum supply of 1 billion tokens, all of which were already issued during Chainlink’s inception in 2017. The current circulating supply however is at 467 million while 35 percent of the total supply (35 million) are still held in reserve as incentive rewards for node operators.⁵
Reports indicate that the supply of LINK tokens grows at an average of 1.4 percent every month⁵, leaving a lot of room into the future before the total supply is eventually diluted, especially with the prospect of more LINK being locked up in staking pools with the full implementation of Chainlink 2.0.
The integration of Chainlink’s 2.0 features started in 2021 and will continue to be developed in the next few years. If successful, this upgrade will resolve the issues surrounding the profit plateau encountered by high-functioning oracle nodes and provide operators with further increases to their cumulative revenue, contributing overall to a more robust and highly responsive oracle network.
Chainlink 2.0 will likewise fuel more growth in the dApp development sector, as faster, more secure and more accurate oracle services are provided as a result of network improvements. All in all, Chainlink seems securely on path to continue as the industry’s gold standard, and add momentum to the global adoption of blockchain technology for everyday applications.
¹What is Chainlink? LINK Explained with Animations
²Explicit Staking in the Chainlink Network
³Chainlink 2.0 and the Future of Decentralized Oracle Networks
⁴Chainlink 2.0: Advanced Decentralized Oracle Networks
⁵Tokenomics Review, Chanlink (LINK)
⁶Chainlink now secures over $75 billion on supported dApps