Chainlink is a household name in the blockchain industry. Many developers agree that Chainlink’s decentralized oracles are among the most reliable and forward-thinking around. However, even the best projects must adapt to stay on top. The Chainlink 2.0 update aims to build on the industry-leading oracles that power much of the decentralized finance (DeFi) ecosystem. But what is Chainlink 2.0 exactly?
In this article, we dive deep into Chainlink and the Chainlink 2.0 update. We explore the number one provider of decentralized oracles and what the future holds in store for the project. Also, we discuss how Chainlink is adapting to meet the needs of the shifting Web3 landscape. Plus, we analyze why so many crypto projects use Chainlink’s oracles.
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What is an Oracle?
Before addressing the “what is Chainlink?” and “what is Chainlink 2.0?” questions, let’s first take a look at oracles and how they benefit the blockchain landscape. A blockchain oracle is a third-party service that brings off-chain data onto the blockchain. Because blockchains and smart contracts can’t access real-world data on their own, oracles are essential for maximizing the utility of Web3 protocols and decentralized applications (dapps).
Smart contracts are trustless, automated agreements between two or more parties. Often, these agreements pertain to events that occur in the real world. This is where oracles come into play. A dapp may rely on many types of external data, such as token prices, payment confirmations, or weather reports. As such, oracles help developers to maximize the potential of dapps and smart contracts. Also, they enable them to function in more advanced use cases.
Smart contracts can request real-world data from oracles by expending network resources (i.e., paying a fee). Furthermore, various oracles exist to cater to the many needs of smart contract developers in decentralized finance (DeFi), Web3 gaming, and beyond. Moreover, some oracles allow data to be brought on-chain and off-chain, while others only allow linear communication.
To get an idea of how oracles work in a real-life scenario, let’s imagine a scenario where you and a friend bet on a sports event using a smart contract to automate the process. Each of you bet $20 and deposit your stake into a smart contract. The smart contract can be programmed so that if team A wins, you win; if team B wins, your friend wins.
So, in order for the smart contract to accurately automate the bet, it needs to access real-world data. So, using an oracle, the smart contract can fetch data from sports websites at the end of the game to determine the winner. Once the game’s outcome is reported to the smart contract, the winner receives their earnings! If you want to learn more about oracles, save our “Explaining Decentralized Oracles” article for later reading.
What is Chainlink?
Before we address the question of “what is Chainlink 2.0?”, let’s first discuss the Chainlink project more broadly. Chainlink is a “decentralized meta layer of oracle networks”. As the number one oracle provider throughout the Web3 landscape, Chainlink’s oracles accelerate the development of decentralized applications (dapps). Plus, they rev up cross-chain smart contracts that connect the blockchain ecosystem.
Chainlink’s oracles are the industry-standard method for bringing real-world data on-chain. Although many other successful oracle projects exist for various use cases, it is widely acknowledged that Chainlink provides some of the most reliable and innovative decentralized oracles on the market. What’s more, Chainlink is home to a thriving ecosystem of open-source developers and engineers, all working towards a shared vision of providing the highest possible utility to smart contracts and Web3 applications.
Chainlink’s hybrid smart contracts augment the abilities of traditional smart contracts using the secure composition of on-chain and off-chain computing resources. The project eliminates unnecessary complexities from the development process and provides first-in-class decentralized oracle networks that scale to meet the demands of the thriving Web3 industry. Also, the underlying architecture of the Chainlink network facilitates crypto-economic security by utilizing attractive incentives for nodes to behave honestly and in the interest of the network.
Furthermore, Chainlink helps to minimize trust between systems by creating a robust, confidential support layer for smart contracts and oracle-dependent systems using sensitive data. Also, the project facilitates order fairness by sequencing transactions in a way that prevents front-running and value extraction.
What is Chainlink 2.0?
So, what is Chainlink 2.0? Chainlink 2.0 is the next step in the evolution of decentralized oracle networks. This update will take the project beyond its initial vision and create new utility for decentralized oracle networks in new and existing applications. Also, the Chainlink 2.0 update will facilitate “fast, reliable, and confidentiality preserving universal connectivity and off-chain computation for smart contracts”.
Additionally, the Chainlink 2.0 update will pave the way for the evolution of decentralized oracle networks (DONs). Furthermore, DONs are oracle networks overseen by a committee of Chainlink nodes. This committee can opt to deploy any number of oracle functions for a DON, serving as an abstraction layer that enables smart contracts to interface with off-chain resources and computing power within the DON. Moreover, DONs will enable Chainlink to advance oracle developments in several specific areas.
What is Chainlink 2.0 Bringing to the Table?
Chainlink recently published a 136-page whitepaper titled “Chainlink 2.0: Next Steps in the Evolution of Decentralized Oracle Networks“. This whitepaper outlines the long-term roadmap for the project. According to the whitepaper, Chainlink will continue to advance the industry-standard framework for the augmentation of smart contract utility and functionality.
The project will achieve this via the secure composition of both on-chain and off-chain computational resources into “hybrid” smart contracts. Also, the Chainlink 2.0 update will further enable the project to abstract away complexity for Web3 developers by removing the need for them to understand multiple different protocols and system quirks. Instead, developers gain access to straightforward functionality that expedites the development process.
Additionally, the update will minimize latencies throughout the Chainlink network and maximize throughputs to optimize scalability. This update will also enable Chainlink to address scaling issues without compromising security or decentralization. What’s more, Chainlink will seek to increase confidentiality throughout its oracle networks using innovative protocols and next-generation technologies. Further, the Chainlink 2.0 update will increase fair order sequencing to minimize front-running and mempool exploitation. Plus, it will further help to minimize trust between systems.
The Chainlink 2.0 whitepaper also states the intention to redefine blockchain oracle networks as “general-purpose, bidirectional, compute-enabled” interfaces for external blockchain data. This will allow the project to bring new types of data onto the blockchain and pave the way for the next wave of innovation in Web3 development. In addition, Chainlink’s Partner Growth Program (PGP) initiative will incentivize Chainlink-powered protocols and projects to accelerate the cross-chain growth of Chainlink.
As Chainlink continues to evolve and scale to provide more integrations, it will require a robust security framework to safeguard the value transferred via oracles in Chainlink-powered applications. The Chainlink 2.0 roadmap begins with staking in the second half of 2022. Furthermore, staking aims to create a new layer of crypto-economic stability for the Chainlink ecosystem. Participants will be able to earn crypto rewards by locking up the native LINK token to secure the network by incentivizing honest behavior. This reward mechanism aims to ensure that nodes are incentivized to improve oracle integrity and efficiency in the years to come.
Because Chainlink oracles power so much of the dapps throughout the Web3 ecosystem, Chainlink staking may help improve the security of cross-chain smart contracts and the blockchain industry as a whole. Furthermore, Chainlink staking will facilitate additional security guarantees and user assurances while allowing nodes to earn a passive income.
The locking up of LINK tokens will act as a guarantee for oracle performance. If oracles perform below the level users expect, oracle providers may lose the LINK tokens that serve as a guarantee. What’s more, Chainlink staking will help maintain the decentralization of oracle networks by significantly increasing the number of community members that participate in securing the network. Community members will be able to participate on various levels. This includes monitoring and reporting as part of the Chainlink community reputation system.
The goal of Chainlink staking is to generate sustainable rewards for the long-term use of Chainlink oracles. The initial token emissions from Chainlink staking will help to establish a base level of staking rewards. These rewards will reduce over time as rewards gather from other parts of the ecosystem. Furthermore, oracle service providers will be able to charge a premium for providing additional assurances and security over oracle call requests.
The Chainlink staking mechanism will evolve over time. However, the first implementation will introduce a reputation framework and a system for alerting those who stake. Following this, a v1 release will introduce further functionality, such as “stake slashing”, to enhance crypto-economic incentives. Plus, a v2 release will explore loss protection for underperforming oracles.
The initial reputation and alerting systems will track the performance of the ETH/USD price feed on the Ethereum mainnet. During this phase, stakers will be able to monitor the feed and raise alerts if the service-level agreement (SLA) conditions are not met. Any staker who raises an alert promptly will receive LINK token rewards for their efforts. Furthermore, the results from these reports will lay the foundations of the reputation scoring system. In time, this system will expand to cover more metrics.
Moreover, the initial staking pool will have a cap of 25 million LINK tokens. However, this will increase to 75 million in the month following the launch. Also, the LINK staking pool will increase as more data feeds and oracle services support staking. Projections for token emissions suggest staking rewards will target a base level of 5% APY during v0.1. After this, rewards will fluctuate according to commitment periods.
What is Chainlink 2.0? – Summary
Smart contracts are one of the key pillars of the blockchain industry. The integrity of the data these smart contracts use is paramount to the well-being of the Web3 ecosystem. As the blockchain industry continues to scale, projects will require increasingly robust decentralized oracles to bring data onto the blockchain for the coming generations of smart contract applications. Also, because oracles do not play a role in the consensus and security of a blockchain network, they need to be trustless and decentralized to avoid them becoming compromised.
Chainlink is at the forefront of decentralized oracle innovations. Many Web3 projects use Chainlink oracles as a badge of legitimacy, making it the go-to oracle provider for blockchain developers. If you’re a blockchain developer and want to learn how to incorporate Chainlink oracles into your next project, check out the Chainlink 101 course at Moralis Academy. This course teaches students how to use advanced Solidity programming tools to create bespoke smart contracts. Plus, we show you how to create a decentralized lottery by making API calls using Chainlink oracles.
If you’re looking for inspiration for your next dapp, check out the free Web3 projects from Moralis Workshops. Here, we show you how to create decentralized alternatives to some of the most popular Web2 applications. As such, take your smart contract programming game to the next level today with Moralis Academy! Also, don’t forget to follow us on Twitter @MoralisAcademy. We’d love to hear your thoughts about the upcoming Chainlink 2.0 update. Additionally, check out our “Rust & Solana” article to learn about smart contract development on the Solana blockchain!