Articles
TL;DR:
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Chainlink is the flagship decentralized oracle network that brings reliable real world data to several blockchains, such as Ethereum, Avalanche, and Polygon.
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This week marks the introduction of a new staking functionality that improves the economics of LINK, the network’s utility token, and strengthens the economic incentives for oracle node operators to provide accurate and reliable data to on-chain applications.
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The so-called super-linear staking is a major step for Chainlink, strengthening the goal it purports to achieve, and improving the investment case for LINK.
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Chainlink is part of several indices followed by Hashdex products, including the Nasdaq Crypto Index1 and the Decentralized Finance2 and Digital Culture3 thematic indices.
What is Chainlink?
Contrary to what some might think, blockchains don’t necessarily have access to real world data such as the Federal Funds Rate, or even market prices of digital tokens like bitcoin and ether. This is because they are maintained by decentralized consensuses devoid of trust. Posting data from an external source on the blockchain, which in principle should be verifiable by anyone at any point in time, demands a decent degree of trust for the quality of that data and that the corresponding provider is constantly available. This so-called “oracle problem” is exactly the kind of challenge tackled by Chainlink, a decentralized oracle network that coordinates data feeds operated by nodes across the globe. These data feeds furnish trust-minimized, reliable real world information that is aggregated and validated by a distributed network prior to being sent to on-chain decentralized applications (DApps) on major blockchains like Ethereum.
The Chainlink network has been establishing itself as the go-to solution for most DApps in crypto today, ranging from decentralized finance (DeFi) to NFT marketplaces, where reliable price feeds are indispensable. As of early December 2022, Chainlink oracles have been responsible for the provision of more than 5.6 billion data points to on-chain applications in multiple blockchains (Ethereum, BNB Chain, Avalanche, Polygon, etc.), have provided data used in applications that transacted a total value of US$6.7 trillion, and are encompassed by ~1,000 total oracle networks delivering real world information to blockchains. Even companies from the traditional off-chain world are already starting to integrate Chainlink services into their operational infrastructure. There has been a particular focus on proof-of-reserves (PoR), a service that recently gained a lot of attention after the FTX fallout. PoR is an initiative to bring more transparency to the centralized crypto service providers that store, manage and secure client funds.
LINK staking is activated
This week marks a major release in the Chainlink network with the introduction of its Economics 2.0 and the enabling of staking5 of the oracle network’s token, LINK (the unit of exchange used by DApps to pay Chainlink oracle nodes for data provision). With this new staking functionality, referred to as super-linear staking, Chainlink network operators will be able to deposit LINK as collateral attached to a staking pool for a data feed they participate in, as a further commitment that the data they provide is reliable. In case that Chainlink feed doesn’t operate according to predefined performance standards (which is flagged by other stakers through an alert on the network), stakers in the staking pool of that feed incur the risk of being punished by having part of their stake subtracted—similar to the process of slashing in Proof-of-Stake blockchains. On the other hand, if the feed provides good and reliable information, in addition to the fees paid to its oracle nodes whenever a data request is made by a DApp, operators will be further rewarded with new LINK tokens in proportion to their deposited stake.
Super-linear staking was released on December 6th in an early access dedicated to community members satisfying previously established eligibility criteria. General access took place on December 8th, enabling staking to any node operator or LINK holder. The first staking phase will focus on the ETH/USD price feed, and rewards to node operators and community members will be locked up in a smart contract until a future upgrade, expected to happen 9-12 months after the launch of staking.
Why should investors care?
This new Chainlink upgrade demonstrates the project’s continued efforts to innovate and provide solutions needed for the integration of blockchains to the traditional economy. This is particularly important when we consider the tokenization of real world assets and think of real data that needs to be fed into a blockchain to trigger smart contract functions such as a margin call in a lending protocol, the payment of a premium in decentralized insurance, or even finishing an on-chain auction for fine art tokenized in the form of NFTs. With staking, Chainlink brings more robustness of its trust-minimized cryptographic assurances, increasing the reliability of the data it provides to applications through stronger economic incentives to oracle nodes. In turn, the demand for LINK as the unit of exchange for oracle4 services is likely to increase given the additional layer of security introduced by staking, with its liquid supply potentially decreasing due to stakers locking their LINK holders as collateral to participate in Economics 2.0. We believe this is a major step for Chainlink, further improving the investment case for LINK.
[1] See https://indexes.nasdaqomx.com/index/Overview/NCI for more information about the Nasdaq Crypto Index.
[2] See https://www.cfbenchmarks.com/data/indices/CFDFMWBRT_RR_TR for more information about the Decentralized Finance Index.
[3] See https://www.cfbenchmarks.com/data/indices/CFDCMWBRT_RR_TR for more information about the Digital Culture Index.
[4] A blockchain oracle is a secure piece of middleware that facilitates communication between blockchains and any off-chain system, including data providers, web APIs, enterprise backends, cloud providers, IoT devices, e-signatures, payment systems, other blockchains, and more. Source: https://blog.chain.link/what-is-the-blockchain-oracle-problem.
[5] Staking is the process through which a blockchain network user 'stakes' or locks their cryptocurrency assets on a network as part of the consensus mechanism, thus ensuring the security and functionality of the chain. Staking is a core feature of Proof-of-Stake (PoS) blockchain protocols, and each blockchain project which incorporates a staking feature has its own policies for staking requirements and withdrawal restrictions. Source: Cryptopedia.
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