Hey Edge readers,
In this edition, we’re breaking down the importance of decentralized oracles, starting with the leader Chainlink, why it’s critical for DeFi applications to function properly, and exploring how its staking mechanism works.
Here's what we're covering this week:
1. What is Chainlink staking? 📘
We break down Chainlink oracles and how staking LINK tokens can benefit you.
2. New on Exponential: stake.link LINK Staking 🔗
Earn up to 7% yield in our newest LINK pool.
3. Chainlink could fix NYSE glitch 🗞️
Hyperliquid surpasses dYdX, Base activity surging, Uniswap delays fee switch decision.
Stay sharp. 🫡
- The Exponential team
What is Chainlink staking?
Chainlink is a decentralized oracle network that enables smart contracts on blockchains to securely interact with real-world data and services outside of the blockchain. This is crucial because blockchains and smart contracts are inherently isolated and cannot directly access external data, which is often required to execute the logic programmed into contracts.
Chainlink bridges this gap by providing reliable data feeds to smart contracts, making them more versatile and practical for real-world applications.
What are oracles? And why are they critical for blockchains?
You can think of blockchains as similar to a computer with no internet connection. Oracles are third-party services that provide smart contracts (that live on blockchains) with external information. They act as a bridge between blockchains and the outside world. Without oracles, smart contracts would be limited to the data available on the blockchain, severely restricting their functionality.
For example, a smart contract designed to trigger a payout based on the weather would need access to weather data. Even something as simple as getting the price of ETH requires pulling the price feed from external sources like a centralized exchange. None of this information is generated or inherently stored anywhere within the blockchain. Oracles must fetch this data from external sources and feed it into the blockchain, allowing the smart contract to execute based on real-world data.
The importance of Chainlink in DeFi
Chainlink has become a cornerstone in the DeFi ecosystem not only due to its reliable data feeds, but also because it addresses the critical concern of centralized oracles. Just as blockchains are designed to avoid single points of failure, the same principle applies to oracles. Relying on a single centralized oracle for all data inputs undermines the decentralized nature of blockchain applications. A centralized oracle can introduce various risks, including the potential for bad actors, downtime, hacks, and human error, all of which jeopardize users’ funds.
Chainlink solves this centralization issue with its network of decentralized oracle networks (DONs). Instead of relying on a single data source, Chainlink aggregates data from multiple independent oracles. Each oracle retrieves the requested data from different sources, ensuring that no single point of failure exists. The data collected by these oracles is then aggregated to produce a single data point. This process involves using algorithms that can detect and discard outliers, ensuring that the final data provided to smart contracts is both reliable and accurate.
You may not know it but the majority of DeFi applications today rely on Chainlink oracles to function properly, including:
- Lending protocols: Chainlink provides asset prices to ensure accurate collateral valuations. This is critical for money markets like Aave and Compound, which require precise data to prevent under-collateralization and untimely liquidations.
- Collateralized Debt Positions (CDPs): Protocols like MakerDAO use Chainlink oracles to determine the value of collateral assets backing their stablecoins. Accurate price feeds are crucial for maintaining the stability of these systems and ensuring that collateral is sufficient to back the issued stablecoins.
- Perpetual exchanges: Platforms like GMX and dYdX use Chainlink oracles to get real-time price feeds for various assets, enabling traders to open and close positions confidently.
- Liquid staking protocols: Chainlink’s price feeds determine the internal redemption rates for staked assets (e.g., wstETH/ETH) within protocols like Lido. These exchange rate feeds are crucial for ensuring that users redeem the correct amount of their underlying asset.
- Derivatives markets: Protocols offering synthetic assets or derivatives, like Synthetix, rely on Chainlink oracles to provide accurate and tamper-proof data feeds, ensuring that the prices of synthetic assets are correctly pegged to their real-world counterparts.
The role of staking in the Chainlink network
Staking in the Chainlink network involves participants locking up their LINK tokens (the native token of Chainlink) to ensure the network’s reliability and security.
Why stake LINK?
Chainlink node operators are the entities that maintain the hardware and software that powers every oracle running on the Chainlink network. They are responsible for monitoring the blockchain for new incoming data requests, fetching the requested off-chain data, and delivering the data on-chain to be consumed by a smart contract.
By staking LINK tokens, Chainlink node operators provide a form of collateral. This guarantees that they will deliver accurate and reliable data, as they stand to lose their staked tokens if they act maliciously or experience downtime. Node operators are rewarded with LINK tokens for their services, a financial incentive to perform honestly and efficiently.
Where do Chainlink staking rewards come from?
In the current version of Chainlink staking, rewards are primarily sourced from network emissions. This means that new LINK tokens are minted and distributed to stakers as an incentive for securing the network and providing reliable data.
Node operators play a crucial role in the Chainlink network by providing accurate data feeds. They are rewarded with LINK tokens for their services, earning an effective annualized rate of approximately 7% in LINK per year. Community stakers, who support the network by locking up their LINK tokens, can expect an annualized rate of 4.75% in LINK per year. These rewards serve as an incentive for their participation in maintaining the network’s security.
While the current version relies on network emissions, the long-term goal for Chainlink staking is to shift towards a more sustainable model where rewards come from actual network fees generated by the services Chainlink provides. This includes fees from data requests, cross-chain transactions, and other oracle services.
What are the risks of staking LINK?
Similar to staking in a Proof-of-Stake (PoS) blockchain, Chainlink staking involves certain risks that participants should be aware of.
- Slashing risk: If a node operator experiences excessive downtime or provides incorrect or malicious data, they can be penalized through slashing. This means that a portion of their staked LINK can be forfeited as a penalty for failing to meet performance standards.
- Lock-up risk: When you stake LINK, your tokens are locked up in a smart contract for a specified period. During this time, you cannot transfer, sell, or otherwise utilize your staked LINK. Additionally, any rewards accrued during the staking period are also locked up until they are claimable.
Is liquid staking available for LINK?
Yes, currently there is one liquid staking service available for Chainlink staking through the stake.link protocol.
stake.link (Staking)
stake.link is a delegated liquid staking protocol built specifically for Chainlink staking
exponential.fi/protocols/b6bda1af-0ec0-4489-bd77-b0b9500da1e5
Users stake their LINK tokens through stake.link. In return, they receive wstLINK tokens, which represent their staked LINK and accumulated rewards. The staked LINK tokens are used by professional node operators to secure the Chainlink network and provide oracle services. These node operators earn staking rewards, which are then distributed to wstLINK holders.
When users want to unstake, they can redeem their wstLINK tokens through stake.link. The redeemed wstLINK will include the original LINK amount staked plus any accrued rewards, minus any applicable fees. Alternatively, users can exit back to LINK by swapping on a decentralized exchange at current market rates.
Conclusion
Chainlink is a critical component of DeFi, ensuring the security of various DeFi applications. By understanding the basics of Chainlink, oracles, and staking, you can appreciate the role of this technology in the broader DeFi ecosystem and explore the potential benefits of participating in Chainlink staking.
Stake.link is now available for all Exponential users.
Start earning up to 7% yield on LINK today.👇
In the news
- Chainlink oracles could have fixed the recent NYSE glitch - Read
- Hyperliquid perp exchange surpasses leader dYdX in TVL - Read
- Activity on the Base Layer 2 network surges to new all-time high - Read
- StarkWare reveals new plan to scale Bitcoin following their success on Ethereum - Read
- Uniswap delays vote on ‘fee switch’ proposal - Read