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Chainlink (LINK) Update: On-chain vs. Off-chain Reporting... Big Deal?

By Michael @ CryptoEQ | CryptoEQ | 7 Mar 2023


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Chainlink 2.0

Chainlink published a new whitepaper in April 2021 outlining ongoing design improvements for DONs, primarily aiming at ensuring network security as Chainlink scales and ensuring node operators continue to be adequately incentivized to support oracle services, among others. While Chainlink 1.0 described DONs, Chainlink 2.0 describes DONs bidirectionally communicating with one another and periodically syncing with blockchains to leverage their security, similarly to Layer-2 solutions. The vision is that these networks of connected DONs will enable off-chain computational power and other scalability benefits. 

Chainlink has also rolled out “Keepers” which went live on the Ethereum Mainnet in August 2021. Keepers is a decentralized service that allows developers to automate regular smart contract triggers through secure ‘hybrid’ on/off-chain technology. Chainlink keepers are off-chain, though still decentralized, and can manage computational activity off-chain, thereby mitigating chain bloat while saving on gas fees. Keepers run computation off-chain, check specified conditions are met, and then trigger on-chain functions. Keepers can be interacted with by any LINK holder through the security operations platform OpenZeppelin Defender. The benefit of Keepers is smart contracts can outsource regular maintenance tasks in a trust-minimized environment without nodes competing with each other. Examples of such tasks include rebasing token supply for stablecoins to maintain their peg or triggering yield harvest functions at optimal times.

Chainlink VRF stands for Verifiable Random Function, a fair and reliable random number generator that enables smart contracts to access random values without compromising security or usability. Chainlink VRF requests across blockchains generate one or more random values and cryptographic proof of how those values were determined. The proof is verifiable on-chain and ensures the results can't be tampered with by a single entity, including oracle operators, miners, or developers. The use cases for VRF include the creation of novel in-game dynamics, generative art creation, lotteries, event ticketing, random sampling, and more

Chainlink VRF operates by combining block data that is still unknown at the time the request is made with an oracle node's pre-committed private key to produce both a random number and a cryptographic proof. Each oracle node utilizes its own private key during this process. Once the result is published on-chain with its proof, it is verified on-chain before being sent to the targeted smart contract. The primary advantage of Chainlink VRF is verifiable randomness. Even if a node is compromised, it cannot manipulate or provide biased responses because the on-chain cryptographic proof would fail.

If a node fails to provide a response or refuses to supply randomness with a valid proof, users would no longer rely on those nodes, and compromised nodes can only withhold a request by providing no response. Such nodes would be penalized using Chainlink's upcoming staking capabilities and excluded from future queries. Another benefit of VRF is that as more users employ it, the fees paid to node operators increase, incentivizing them to provide additional security guarantees.

On-Chain Reporting 

The core technology of Chainlink depends on a two-part process: on-chain and off-chain. On-chain, Chainlink is simply a series of smart contracts that respond to requesting contracts demanding data. Off-chain, the Chainlink architecture is a network of oracle nodes that connect to public blockchains. The Chainlink DONs support two ways of delivering off-chain data to smart contracts on-chain. The most common method is the Decentralized Data Model, which features a regularly updated smart contract representing a piece of data that can be queried on-demand in one single transaction. The second method is the Basic Request and Receive Model in which a user’s smart contract requests data directly from Chainlink nodes, and the reported value is received in the subsequent transaction. The latter model can be used to fetch random values or unique datasets, whereas the former model is used to fetch specific pieces of data. The Decentralized Data model is powered by Chainlink nodes that use the OCR. Data is fetched and aggregated off-chain before a single transaction is submitted on-chain, which contains each node’s signature and data point.

The oracle network contains a collection of nodes with specific job specifications that facilitate specific job executions coordinated by on-chain smart contracts. Theoretically, there's no limit to how many Chainlink nodes may exist, as anyone’s free to participate in the network based on the vision of the project. Nodes operate independently of each other and can't communicate with one another. Instead, nodes communicate with the blockchain node to which they're “attached” and listen for job requests. Each node sells the use of specific data feeds, off-chain payments, and APIs directly to the smart contract.

Chainlink’s nodes are reliable and secured by independent, Sybil-resistant oracle nodes run by large enterprises and data providers. Chainlink’s data feeds are decentralized at three levels: the data source, oracle node, and network, which eliminates central points of failure in sourcing and delivering external data to smart contracts. Data feed performance can be verified and audited in real-time using data analytics tools such as reputation.link and market.link.

The Chainlink on-chain smart contracts are “externally aware,” meaning they carry a piece of data that helps them integrate with non-blockchain applications. This is unique to Chainlink’s smart contracts and instills the working of oracles into their own contracts. This enables a decentralized oracle data feed that's aggregated into the smart contract off-chain and then converted into on-chain data. Chainlink’s infrastructure on-chain assists in oracle selection and maintaining an oracle reputation record.

The on-chain workflow has three steps: 1) oracle selection, 2) data reporting, and 3) result aggregation. The order-matching smart contract collects proposed bids from oracle providers. It then selects bids using a reputation contract and aggregates the oracle providers’ responses. It then calculates the final collective result of the Chainlink query and feeds the oracle provider metrics back into a reputation contract. 

For operations off-chain, Chainlink consists of a network of nodes connected to the Ethereum network. These nodes listen independently for off-chain requests. Eventually, individual responses to smart contract queries are aggregated and returned to a requesting contract. The off-chain architecture is equipped with external adaptors and subtask schemas. Adapters are external services that enable programs in any programming language to be easily implemented. Subtask schemas ensure compatibility between adapters, even in an open-source environment.

Chainlink has three checkpoints in place for preventing inaccurate data and reducing vulnerabilities or manipulation. To safeguard against single points of failure, data sent through the network is curated and verified through a decentralized majority voting system of Sybil-resistant nodes. Smart contracts are only executed when the same data is authenticated by multiple nodes. The network also cycles through oracles and, as of May 2020, leverages Verifiable Randomness Functions (VRF), providing a verifiable tamper-proof source of randomness within the oracle selection process. This helps preclude malicious node operators from coordinating an attack because they don't know when or if their data will be selected.  

Additionally, users of Chainlink nodes (smart contract creators) can choose the level of security deemed necessary amongst the participating oracles. Some use cases require high decentralization, while others can sacrifice decentralization for assured quality. In either scenario, the smart contract creator can optimize for their individual preference. Data providers who operate their own Chainlink node also cryptographically sign their data at the source, which provides smart contracts with security guarantees of its authenticity.

Finally, Chainlink uses a reputation and certification system for oracle performance, with community monitoring playing a role in creating the reputation system and associated node slashing mechanism. The reputation contract within Chainlink keeps track of oracle-service-provider performance metrics. When a smart contract requests data, nodes in the network submit their data plus their LINK tokens as a stake. If a node is determined to have submitted faulty or inaccurate data, its LINK tokens are distributed to the other nodes that submitted accurate data. This punishment system incentivizes a continuous stream of honest data from decentralized sources. If a node submits bad data, it not only loses its stake but affects its reputation within the system as well.

As of 2023, Chainlink has 1,000+ price oracles which are used as an aggregate pricing network for DeFi applications. Chainlink also secures over 3 billion on-chain data points as of the end of Q2 2022, with over $20 billion in total value secured. The on-chain infrastructure within Chainlink can be updated at any time and is already compatible with other blockchains. 

Off-Chain Reporting (OCR)

In February 2021, the Chainlink team announced Off-Chain Reporting (OCR), which provides efficiency improvements to how data is processed and moved across Chainlink oracles, resulting in a ~90% reduction in oracle operating cost. The Chainlink team stated that with this upgrade, DeFi users will have a 10x increase in the amount of data that can be put into their smart contracts, broadening the surface area of DeFi and allowing for more data to be brought on-chain. 

OCR accomplishes all of this by allowing nodes to communicate off-chain, enabling them to aggregate data without the cost of gas. The new process for nodes involves each node fetching data from multiple sources, signing it via their private key, and broadcasting it to the rest of the oracle network off-chain. Once enough of the oracle network has responded, only a single transaction containing all the node's attestation is processed on-chain. The signatures are then validated on-chain by a smart contract, thereby providing the security, transparency, and tamper-resistant properties inherent in the main chain.

LINK is an ERC-667 token that inherits functionality from the ERC-20 token standard and allows token transfers to contain a data payload.that offers the standard transfer, approval, and transfer from operations. It also implements an ERC-677 interface to allow payment and invocation to be executed within a single transaction.

The Chainlink project has had one of the most active development communities for years, as measured by GitHub commits. LINK users can follow development progress using tools provided by the team. 

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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