Chainlink aims to provide a rich set of decentralized services for smart contracts and Web2 systems, creating a world that operates around cryptographic facts. Chainlink’s unique oracle consensus mechanism was originally used to provide decentralized data, but is now expanding to secure off-chain computation and cross-chain interoperability.
With the continuous development of smart contract functions and the gradual collapse of public trust in brand endorsements and institutions , more and more applications have begun to connect to the Chainlink Decentralized Oracle Network (DON) to minimize trust. This demand creates a huge fee revenue opportunity for node operators and ultimately allows stakers to be rewarded for securing the Chainlink oracle network and its applications.
Chainlink is about to launch a staking mechanism and usher in a new era of sustainable growth. This new phase of development will enable greater transparency as well as stronger cryptoeconomic security. The Chainlink 2.0 economic model will accelerate adoption through a series of services and continue to improve the economics of the network. This article analyzes the total addressable market (TAM) for trust minimization applications and the value of oracles; then sets out what growth strategies Chainlink will employ to capture value in this expanding new economic model.
Total Addressable Market (TAM) for Trust Minimization Applications
The application of trust minimization is a transitional stage to the final ideal state. The counterparty executes the agreement exactly, and the participants cannot manipulate the terms of the agreement or go back. Achieving trust minimization on a large scale can alleviate public distrust of institutions, using encryption as a safeguard, rather than relying solely on an institution’s brand endorsement or a costly and sluggish legal system. This new type of cryptographic assurance is based on decentralized infrastructure such as blockchains and oracle networks, and is often referred to as cryptographic facts . It is also a core element in building trust-minimized applications.
Trust minimization directly provides security for the key modules of the application through technical means, eliminates differences and asymmetries, and puts the counterparty in an equal position. This will effectively restore user trust in the app. Because mainstream chat software cannot protect user privacy, end-to-end encryption technology (E2EE) and new chat software such as Signal have been born. E2EE protects the privacy of users through encryption and does not rely on unverified simple statements from communication service providers.
Achieving trust minimization in more complex digital agreements such as finance typically requires a hybrid smart contract infrastructure, with smart contracts as the application layer and oracles as the service layer. The application layer contains on-chain logic, defining protocol conditions and value exchange methods; while the service layer is responsible for connecting to various interfaces and external dependencies, and ultimately enabling the application to run.
Chainlink provides an integral service infrastructure for trust-minimized applications, connecting applications to critical external resources, including verified real-world data, off-chain computing, and cross-chain interoperability. These services secure millions of dollars in value for hundreds of applications on more than a dozen blockchains, ultimately driving the growth of the hybrid smart contract ecosystem.
Decentralized finance (DeFi) is one of these verticals, leveraging Chainlink and the hybrid smart contract design model, which has rapidly grown from a niche use case to a sizable parallel financial industry. In 2022, DeFi’s total lock-up (TVL) peaks at around $250 billion. However, DeFi is only a small part of the multi-trillion dollar cryptocurrency market, and blockchain and oracle-related technologies have the potential to leverage the $867 trillion value in traditional financial markets .
At present, DeFi and the hybrid smart contract economy are still in the early stages of development, and there are still many real-world application scenarios to be developed, including international trade, insurance, real estate, and derivatives. In addition, hybrid smart contracts are only a segment of the trust minimization industry, and blockchain and smart contract technology can also guarantee objectivity, decentralization, and transparency for back-end processes running off-chain.
As a general decentralized off-chain computing protocol, Chainlink provides decentralized services for Web3 smart contracts and existing Web2 systems, achieving ultra-high reliability, verifiable security, and decentralized accuracy, creating the least trust applications and capture market value. Chainlink can implement the following functions:
- Allows any Web2 system to be upgraded to a trust-minimized version without rebuilding.
- Conduct secure off-chain computing to achieve privacy protection, scalability, and verifiability for on-chain smart contracts.
- Provides decentralized data to trigger settlement for high-value smart contracts.
- Provide proof for off-chain collateral, increasing its transparency.
- Output key data for smart contracts to trigger off-chain system processes.
- After the release of the Cross-Chain Interoperability Protocol (CCIP) , data and assets are transferred between heterogeneous blockchains based on user-defined logic.
Because Chainlink oracles are universal, Chainlink aims to build an oracle service layer that not only covers smart contracts on all chains, but also provides more and more decentralized services to traditional backend systems. So the key question is: how to develop oracle service? And how to make the economic model of oracle service sustainable?
Common practices for setting industry standards
Whether it’s a traditional industry or a Web3 industry, it’s common practice to set industry standards by investing money to support critical development efforts. Projects provide funding to develop innovative services and expand the functionality of existing services that are well suited to current and future market needs. In addition to this, projects often subsidize early users and service providers to aggregate network effects, consolidate current market share, and expand revenue streams by launching various competitive services.
In the Web3 industry, the blockchain will use block rewards as an economic incentive mechanism to start projects, and miners/verifiers (ie: block creators) who contribute to the network will receive the cryptocurrency minted by the network as a reward. In this way, the blockchain can establish a secure network of block creators and protect the network from attacks. Without block rewards, blockchain networks would fall into a “chicken or egg” problem, namely:
If the blockchain does not have a secure node network, users are reluctant to use blockchain services; but without paying users or economic incentives, the blockchain cannot establish a secure node network.
However, once the block reward mechanism is established and functioning properly, economic incentives are created to provide support for a secure network of nodes and buy time for the network to eventually transition to a sustainable economic model. Eventually, the network will be able to operate entirely based on user transaction fees.
How Oracle Rewards Can Accelerate Chainlink Adoption
Similar to the economic incentive model of blockchain, the Chainlink oracle network also provides early economic incentives through oracle rewards. Chainlink’s oracle rewards refer to the economic incentives paid to node operators in addition to user fees. For example, Chainlink Data Feeds are decentralized oracle networks that connect DeFi applications to high-quality financial market data. Chainlink Data Feeds can provide specific price feeds for a certain blockchain based on user needs (eg: BTC/USD price for the Ethereum blockchain). Data Feeds are maintained through user fees and oracle rewards in the early stages of launch.
Since Chainlink Data Feeds are public services, any number of users can contribute and access the same data. Each time Data Feeds adds a new paying user, the total amount paid by the user increases, thus offsetting more costs. Ultimately, once user fees exceed the cost of running the network, running Data Feeds will no longer rely on oracle rewards and thus become fully economically sustainable. In fact, several Chainlink Data Feeds have already achieved economic sustainability on high-throughput blockchains such as BNB and Polygon.
In order to accelerate the economic sustainability of Chainlink Data Feeds and other Chainlink services, we have introduced a number of initiatives to reduce costs and improve the efficiency of the use of oracle rewards. For example, we released OCR (off-chain reporting) , which effectively reduced the operating cost of Data Feeds by 90% and increased the amount of data transferred to the chain by 10 times, thus greatly promoting the number of Data Feeds. As the blockchain continues to expand , we are also developing more cost reduction solutions to further drive the growth of the Chainlink ecosystem, including:
- OCR 2.0 : The off-chain reporting protocol has been upgraded, driving Chainlink Data Feeds to improve the cost-effectiveness of data transmission, allowing more oracle networks to be deployed and generating higher user fees.
- Fast-Lanes : The blockchain will allocate a portion of the bandwidth for public services such as oracle networks, or establish prioritization of transactions. This will substantially reduce or eliminate on-chain costs associated with oracle updates, improving response times and improving reliability during blockchain network congestion.
- Blockchain gas fee reward : Blockchain projects promise to subsidize the on-chain gas cost of the oracle network. This solution is backward compatible and does not require any technical adjustments to the underlying blockchain network. In the near future, many top blockchain ecosystems will announce the release of gas bonuses.
As more and more Chainlink oracle networks achieve economic sustainability, oracle rewards will be redistributed to create new Data Feeds and other Chainlink services, provide node operators with new fee revenue opportunities, and provide community of stakers provide rewards in the future. The economic model of this oracle network ensures that users do not have to bear the full operating costs of Data Feeds and builds a strong network effect around Chainlink.
Backed by this mature economic model, more than 1,000 Chainlink oracle networks have been successfully deployed on more than a dozen blockchains to meet user needs. According to a recent Bank of America research report , Chainlink has played a vital role in promoting the development of DeFi, helping DeFi achieve a total lock-up volume of $203 billion, and will accelerate the future use of blockchain in finance, insurance and supply chains applications in various fields.
Chainlink will launch growth plan and equity pledge to create a 2.0 economic model
As Chainlink continues to achieve various key milestones such as widespread adoption of off-chain computing services, economic sustainability of oracle networks on multiple blockchains, and deployment of more than 1,000 oracle networks on numerous blockchains ), we will enter the next stage of development of the Chainlink network, which is the Chainlink 2.0 economic era.
To enable this major transformation, we formed the Chainlink Foundation to launch a comprehensive set of growth initiatives, many of which will be backed by newly issued LINK tokens. The core goal of the Chainlink Foundation is to support the long-term sustainable growth of the network through the following initiatives:
- Develop a LINK token issuance schedule to support key growth initiatives, including oracle rewards for node operators and staking rewards for stakers.
- Further develop technical standards, parameters and best practices for the open source developer and node operator community to help them better build and support Chainlink.
- Chainlink’s open source software is hosted, reviewed, and maintained for developers through platforms such as GitHub and npm.
- Organize and support Chainlink hackathons and encourage developers to develop using Chainlink and Web3 technologies.
- Drive the development of oracles, the Chainlink network, and related tools through the Chainlink bounty program.
The Chainlink Foundation expects to issue a total of no more than 5% of the total amount of LINK tokens (i.e. 50 million LINK tokens) over the next 9 months until the first quarter of 2023 to support the network growth plan, of which Including the staking mechanism that will be launched this year. This will be an important part of the Chainlink 2.0 economic model. It is expected that the equity staking mechanism will indirectly offset a portion of the token issuance, which will depend in part on whether the staking amount will reach the initial planned 75 million token cap. The Chainlink Foundation expects that the number of tokens issued in the near future will be relatively small, and will mainly focus on the oracle rewards that have been issued. From the third quarter of 2022 to the first quarter of 2023, if new key growth plans are to be implemented, adjustments will be made accordingly.
The non-circulating tokens in the genesis wallet will be migrated to other wallets this week to upgrade on-chain security. These tokens will be dispersed into smaller wallets with larger multi-signature committees and the latest security best practices. Transferring tokens from the Genesis Wallet will not affect the circulation and does not equal the issuance of tokens.
The following is a list of initial wallet addresses to which non-circulating tokens will be migrated. These tokens will be distributed among multiple LINK wallets, but only 50 million LINK tokens will be issued in the next nine months. These LINK tokens will mainly come from 7 wallets, each with 7 million LINK tokens . The issued tokens will be used for various purposes, including oracle network rewards, initial staking pools, and various growth plans mentioned below. Here are the new wallet addresses and the planned holdings for each wallet after the migration is complete:
In order for the Chainlink community to further understand the situation and clear up doubts, you can check the circulation of LINK tokens at * chain.link/ circulating-supply * to see the current circulation before and after the token migration. As mentioned above, migrating LINK tokens from the Genesis wallet to the new secure wallet will not increase circulation.
The LINK token issued for the first time after the wallet migration will be used for the oracle rewards that have been released to support the continuous operation of the existing oracle network. The LINK tokens issued in the future will gradually expand to the following areas, with the purpose of supporting the continuous expansion of the Chainlink network, launching more decentralized services for more blockchains, and strengthening the security of the crypto-economics by launching equity pledges:
- Distribute oracle rewards , reduce initial user costs, and enable strong network effects across all key verticals. Oracle rewards, combined with user fees, will drive node operators to provide more secure Chainlink services.
- Issue staking rewards to node operators and community members participating in Chainlink staking . This will further enhance the cryptoeconomic security and user assurance of Chainlink services.
- Release of a new oracle network to further improve the availability of on-chain datasets for developers to enrich existing Chainlink services . This will help improve the security and cost-effectiveness of new smart contract application development.
- Covering more blockchains makes Chainlink the mainstream oracle solution in the multi-chain ecosystem, covering L1 and L2 networks, including EVM and non-EVM blockchain networks.
- Develop new Chainlink oracle services to expand the capabilities of the smart contract economy. Develop Cross-Chain Interoperability Protocol (CCIP), Fair Ordering Service (FSS), DECO, and Enterprise Abstraction Layer.
- Launch other ecological growth plans to improve Chainlink’s application scope, security, service types, and user experience. Growth plans include the Chainlink bounty program, hackathon sponsorships, R&D programs, code audits, and a bug bounty program.
Through these growth plans, the Chainlink network can achieve economic sustainability, create a secure and rich ecosystem of decentralized services, and help develop next-generation smart contracts and trust-minimized Web2 applications.
Chainlink has grown into one of the most valuable, widely used and integrated systems in the blockchain industry. Chainlink has been able to achieve such incredible growth because of its extreme security and various key decentralized services for Web3 and Web2 developers. The Chainlink network has now reached a number of key milestones, including achieving economic sustainability on multiple blockchains and launching a network of over 1,000 oracles. With the launch of Chainlink’s 2.0 economic model, it will enter a new stage of development.
We are very excited to see that the Chainlink network can provide the services required by all Web3 developers as well as Web2 systems wishing to achieve trust minimization. All development is inseparable from the unremitting efforts of the Chainlink community and ecology. We have always been very grateful for the help and support of our community members in building a new world based on encrypted facts.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-the-chainlink-network-achieves-sustainable-growth/
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