Nearly four years since the Chainlink protocol was created, it has established itself as the messenger of the real world for the blockchain network. Going beyond being just an oracle, Chainlink is a Decentralized Oracle Network (DON), allowing smart contracts to securely access off-chain data.
Over the last few months, the team unveiled its vision of Chainlink 2.0, outlining the future of DON’s. This article aims to introduce you to the project, its workings, and how you can potentially stake your LINK going ahead and what to expect from that.
Understanding Blockchain Oracles
Let’s begin by using an example to understand blockchain oracles. Let’s suppose you enter a bet with a friend on the result of an upcoming football game between England and France. You’re backing England to win the game. To stay trendy, you’ll decide to enter into a smart contract over the blockchain for this bet. Accordingly, the smart contract includes the terms of the bet and locks in the funds. Now, based on the outcome of the bet, the contract will release the funds to the winner. Sounds good? There’s one crucial element missing. How will the smart contract figure out the winner of the football game? Someone needs to input the result into the contract. This is where oracles come into play.
Using an API (Application Programming Interface), oracles feed information to smart contracts, thus becoming a bridge between the real world and the blockchain network.
Background to Chainlink, its working, and use cases
With that introduction to oracles, it becomes easier to understand Chainlink. Chainlink is a decentralized network of oracles (DON) that enables smart contracts to securely interact with real-world data and services that exist outside of the blockchain.
The origins of Chainlink can be traced back to 2014 with the incorporation of SmartContract Ltd., founded by Sergey Nazarov and Steve Ellis. The project was developed subsequently, and in 2017 the team raised $32 million by way of an ICO. Since then, the success of Chainlink and its dominance in the crypto industry can be gauged by its growth. For a start, Chainlink currently enjoys a market capitalization of $13.4 billion (as of 2nd September 2021) within the entire oracles space which has a market cap of $15.4 billion (Source: Coingecko).
Here’s a quick illustration of how Chainlink works:
A crucial player within the Chainlink ecosystem are the node operators. The node operators are entities running the oracle infrastructure (hardware and software) that powers and secures the Chainlink Network. Node operators are vetted by the Chainlink team to maintain Sybil resistance. Some prominent and reputable node operators include LinkPool, Simply VC, Secure Data Links, Chorus One. It’s worth highlighting here that LinkPool is a leading Chainlink service provider, providing tools and services that benefit the Chainlink ecosystem. One of their products is Chainlink Market, which provides a comprehensive and updated perspective around nodes, adapters and jobs.
Here’s a look at distribution of LINK to the top 10 node operators. While we touch upon the tokenomics later, it is useful to know that 35% (350 million tokens) of the total supply is allocated towards node operators. As of today, closer to 11 million tokens have been rewarded from this pool (based on data from Reputation Link).
The number of smart contract use cases for Chainlink has only grown over the years. This is possible because it goes beyond being a single oracle network, encompassing an ecosystem consisting of numerous decentralized networks of oracles running in parallel. Each oracle network can provide a number of different services without depending on other oracle networks.
The team has identified over 77 smart contract use cases enabled by Chainlink. Two worth highlighting include:
- Decentralized Finance (DeFi): DeFi applications can use Chainlink to price assets, access interest rates, verify collateralization, and more. This eases the building of the equivalents of traditional financial products like loans, payments, derivatives, asset equity, and more on the blockchain.
- Gaming & Non-Fungible Tokens (NFTs): Developers (Pixelcraft Studios of Aavegotchi, for example) have been building smart contract-based gaming applications that incorporate non-fungible tokens (NFT). Chainlink has built something called Verifiable Randomness Function (VRF), a source of randomness to generate random in-game scenarios.
Introduction to Chainlink 2.0
The Chainlink 2.0 upgrade lays out the roadmap for expanding the functionalities of Chainlink smart contracts, connecting them to off-chain data. This vision sees oracle networks as:
- Complementing and enhancing existing and new blockchains by providing fast, reliable, and secure universal connectivity and computation for hybrid smart contracts.
- Evolving to become utilities for exporting high-integrity blockchain-grade data to systems beyond the blockchain ecosystem.
The Chainlink 2.0 focuses on oracle technology advances in seven key areas, summarised in the chart below:
What’s particularly worth highlighting here is the vision of the Hybrid Smart Contract, one which combines on-chain and off-chain computation resources. A key benefit of the new update includes enabling scaling and security. The Hybrid Smart Contract and Off-Chain Computing can result in blockchains achieving higher scalability due to limited on-chain loads. Thus, DON’s will have higher throughput and low latency. Beyond that, the proposed staking mechanism discussed later, is expected to considerably improve security, making manipulation difficult.
The image below (Source: Chainlink) succinctly summarizes Chainlink’s decentralized services including the off-chain computation resources.
The LINK token and its utility within the ecosystem
Chainlink’s native token, known as LINK, is an ERC-677 token. LINK’s usage within the Chainlink ecosystem is two-fold:
- It is used to pay node operators for retrieving data for smart contracts
- and secondly, it can also be used for deposits placed by node operators as required by contract creators.
With a maximum supply of 1 billion tokens, LINK currently has 450 million tokens in circulation. Initial token allocation is detailed below. The team currently holds 25% of the tokens.
Staking is not currently enabled in the Chainlink Network. Currently, only blockchain node operators, called validators, are able to earn LINK tokens by performing tasks in the network. Interest from node operation generally varies. To give you a perspective on what node operators earn, here’s an example. LinkPool, a leading provider in Chainlink node services, generates a reward of 6.49 LINK per feed responses (the number of times that LinkPool posts new data to a feed) per day.
The team has outlined in its recently released Chainlink 2.0 whitepaper, details of what is coming, also known as “Explicit Staking”. Before we delve into understanding more about this, it can help to know that currently there are some secondary methods of staking LINK:
- Via a crypto exchange: Kucoin, for example, offers an APR of 1.72% on staking LINK. Staking on a crypto exchange is generally straightforward and easy to manage. However, please note exchanges may have a certain lock-up period.
- By lending on a DeFi or CeFi platform: As stated on our Chainlink resource page, you can deposit LINK tokens into a DeFi service, like Yearn or Aave, or deposit them into a CeFi lending institution, like BlockFi, for example, which offers a return of 3.49% over a year.
Essentially, staking on the network will adopt a two-tier system, which has been envisaged with a focus on preventing dishonest or malicious behaviour within the system:
- The first tier would consist of the oracle network of nodes staking LINK tokens. If a majority of nodes report incorrect values, a watchdog in the first tier is incentivized to raise an alert.
- If an alert is raised, the reporting decision of the network is escalated to a second tier, a high-cost, maximum reliability system.
Here’s a quick overview of the way staking LINK is expected to work:
- Node operators put up a security deposit, denominated in LINK for undertaking jobs. Failure to perform the task may see the deposited LINK slashed
- As a LINK token holder, staking will mean delegating your LINK to node operators, allowing them to undertake more jobs. Thus, returns earned from staking your LINK tokens will depend on the performance of the node that your LINK is staked with.
The team is yet to publish or communicate any kind of roadmap, timeline, or estimate for the launch of the LINK staking feature. When it does come out, be sure to see it first on Staking Rewards. Our tutorials are aimed to make your staking journey easy.
As for the returns that can be expected, it helps to look at what other oracle projects provide as rewards on staking. Band Protocol, for one, a larger sized oracle project, offers a current APR on staking of 11.61%. The complexity of staking BAND, as opined by Research Experts at Staking Rewards, is easy. Staking LINK, given the information so far, makes it seem moderately difficult. Hence, expecting a slightly higher APY may well be the case. Given this and the size of the project, an APR of 10-12% on launch might be on the cards.
At Staking Rewards, we keep a pulse on the DeFi ecosystem and are committed to bringing you the best possible passive income opportunities. To check the returns on some of the biggest crypto projects by market cap, click here.