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Chainlink

Chainlink Insights: an analysis of Oracle's revenue and performance

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Intro

Everyone is always looking for ways to improve their finances and we often hear that staking in crypto can't be profitable and stable during the bear market. At P2P we think that it depends on how effectively your staking provider uses the infrastructure.

Today we want to share the story of how we became a successful Node operator (NOP) on Chainlink by continuously improving our performance metrics. We will also talk about Chainlink’s oracle network, its current state and how NOPs can get a stable revenue even during a bear market.

Chainlink is the market-leading decentralised oracle network providing real-world data to smart contracts on any blockchain. Currently, Chainlink supplies data for DeFi consumers across 14 networks:

  1. Ethereum: Mainnet, Goerli, Kovan, Rinkeby, Ropsten
  2. Avalanche
  3. Binance SM
  4. Optimism
  5. Arbitrum
  6. Fantom
  7. Harmony
  8. Moonriver
  9. Moonbeam
  10. Metis
  11. Heco
  12. Polygon
  13. xDai
  14. Solana

Ethereum registered the highest number of working oracles during 2022.

Within each network, oracles can provide different types of data:

P2P currently provides more than 2000 unique data feeds on different chains. While most of these data feeds are shared across multiple chains, some of them are unique to a specific chain, for example, the METIS-USD data feed is present only in the Metis network. Here’s the distribution of data feeds per network:

These data feeds are distributed between node operators in every blockchain. This is the first side of Chainlink’s decentralisation.

A few technical details:

Oracles generate reports for data feeds continuously by sending requests to data providers (APIs) and aggregating them (median). Every time consumers need data, Chainlink asks one of the oracles, that is assigned to that data feed, to write that data to the blockchain. The session data recording is called the Round and the chosen oracle is called the Leader of the Round. The Leader gets data from other oracles (who are also assigned to this data feed), calculates the median value and writes it to the blockchain. If for any reason the Leader couldn’t do it - the next oracle becomes the Leader and has to do it.


It is not enough to just attract a large number of oracles, it is also important to ensure that the oracle’s data is decentralised. This is achieved by using different data sources for different oracles.

For example, the price feed for ETH-USD in Fantom is distributed between oracles and data sources (APIs) as follows:

Note: A 1 means that an oracle gets the data from the API, 0 means that the oracle doesn’t get it from that source

The degree of decentralisation can vary as it depends on the number of data sources that provide the price data and the number of oracles. We only need the fact that different oracles send requests to different API services to proceed with the data when Chainlink needs it for understanding Chainlink’s decentralisation.

P2P joined the Chainlink oracles network in 2018. We first started as a NOP in Ethereum on several data feeds and we haven't stopped growing since that time. Today we are present in 6 networks and we provide data for more than 150 feeds.

This level of growth was a serious challenge for us as a company. Looking back it seems that it would be impossible to become a successful Node operator without a data-driven approach. Luckily, in 2020 we had already understood that we needed to collect and analyse data about NOPs’ performance in Chainlink. In this article we will walk you through our path and go through it from the beginning.

We provide 4 steps for a successful data-driven approach to node management:

  1. Define key metrics. You can’t control anything without measuring it, but first, you need to understand what you want to measure.
  2. Extract all the necessary data. It seems obvious but we had to work hard to collect all the data from different networks, make indexers and transform it so that they are usable for analytical purposes.
  3. Determine who is a good node operator. When you’ve collected all the metrics you should understand what you can do with them: what is under your control and what is not. You need to also keep in mind Chainlink's main mission - to provide accurate off-chain data to the blockchains.
  4. Decision making. Develop analytic tools to transform the data into knowledge that can be used in decision-making.

Let's start with the first step.

Key metrics

The main purpose of the Chainlink protocol is to provide data for users. As we have previously mentioned, “Round” is the act of writing data to the blockchain by an Oracle.

Here are the number of rounds for the Ethereum mainnet in 2022.

This is how we compare the consumption of Chainlink’s data by different chains (for example Avalanche, Fantom, Harmony, Moonriver and Ethereum). You can notice there is a peak in the number of rounds in May (Terra collapse), June (Celsius) and November (FTT/FTX collapse). This is true for every chain:

We can track the number of rounds to measure the consumption of data supported by Chainlink for any chain/feed/oracle. For example here is the number of rounds for ETH-USD (dark blue), FTT-USD (green) and ATOM-USD (bright blue) on Ethereum’s mainnet:

It is not enough to just provide data, our purpose in Chainlink as a NOP is to provide accurate data. For that, we need an estimation of the quality of the data that is calculated based on the oracles’ answers every round. We call this “Deviation”. It is calculated by comparing a particular oracle’s answer for that Round to the Round’s final value (the median of each oracle's answer). This way, we can track the variance of each oracle every Round. This can also be used to calculate the average value of each oracle’s deviation. Here is how we can compare the data quality for different chains:

It is important to mention that the most popular deviation threshold for data feed defined by Chainlink is 0.5%. There are a lot of feeds with even a 5% deviation threshold.

It is also interesting to compare the performance of different NOPs by their ability to write Chainlink data on-chain. We use the Transaction success rate (TSR) for this. This is the ratio of the number of successful transactions to the number of unsuccessful transactions.

Data extraction

This is not the main subject of the current article. We plan to talk about this a bit more in a future post. Today we will only mention the main architecture of the ETL (Extract, transform, load steps of data uploading pipeline) process:

The first 3 sources are:

  1. On-chain data
  2. Chainlink repo
  3. TheGraph: our subgraphs are available here:

Stay tuned if you want to know more about data and indexation in the future.

Who is a good node operator?

Every NOP is a company first. The main target of every business is to be profitable. Let’s look deeper into Node operator economics.

Oracles get rewarded in LINK for every report to the blockchain, regardless of who was the Leader of the round. The Leader gets additional rewards for writing data to the blockchain.

The main expenses of an Oracle are gas costs, infrastructure costs and human resources. Oracles should pay the gas cost to write data to the blockchain when it was chosen as Leader of the Round.

We can track rewards and gas costs to estimate the revenue of the oracle's performance. Here is Chainlink on Ethereum financial metrics:

So the total net revenue for all of the oracles in Ethereum is 37.3 mil $ during this year.

Now we know the Chainlink mechanics. We also know that a Bear market in Crypto leads to smaller amounts of revenue for every project. But 2022 has also brought us a lot of activity from scandals involving multiple projects: Terra, Celsius, FTT and so on. What if we want to understand how stable an oracle’s revenue can be during an unusual event ? We will definitely want to know what the gas spending value was and how many rewards the oracles got. It will also be great to see deviations to understand the consensus about price data between oracles.

Let’s see what was happening with an oracle's net revenue during 2022 across 6 networks: Ethereum, Solana, Fantom, Moonriver, Harmony and Avalanche:

Here's what was happening with revenue during April-may ‘22 to understand how the Terra event influenced Chainlink NOPs:


We can see that everything went up: Costs, Rewards and Net Revenue. So during this commotion around Terra, we see a peak in the number of rounds as we mentioned earlier. It led to an increase in network utilisation and higher gas costs. But it also brought more rewards to node operators and higher Net Revenue as a result.

A slightly different situation was the FTT/FTX collapse. We’ve already seen that there were way more rounds for FTT data feeds. If we dig deeper we can also see that it happened to every asset associated with FTX such as Solana. But what about net revenue?


It was the same during September and October, with no significant differences. But what about P2P:

Our revenue hasn't changed much during the last 3 months.

Besides revenue, every NOP should care about its reputation in the Chainlink network. As we previously mentioned, we track reputation by 2 key metrics:

  1. Deviation
  2. TSR

Here’s the Deviation stat for 5 networks:

The two red vertical lines mark the Terra and FTT/FTX events.

It is expected that during a big market event, the consistency of oracles decreases. We can see the huge deviation in Avalanche and Moonriver during the Terra collapse.

During the FTX event we can observe a deviation, although much smaller when compared to the earlier one:

We can also compare oracles based on TSR to estimate how successful oracles are in writing data to the blockchain. For example, here is the TSR for Ethereum’s mainnet:

We can observe that during November and for most of 2022, P2P had a TSR ranging between 90-100% in every network except Fantom and Solana (and Moonriver in April). This is because those chains use a different transaction execution mechanism compared to most EVM chains. You can make sure that this is quite a good metric value by comparing us to others.

Here is the distribution of different NOPs TSR for the Fantom network:


We can observe that even at its lowest point P2P was among the top NOPs.

The median TSR or all Nops on Solana was 6.07% and the median TSR for P2P was 6% for the same period.

Decision making

In this section, we will discuss how we solve business problems by using a data-driven approach.

On August 2021 Ethereum released EIP-1559. A significant aspect of this proposal was how it overhauled the transaction fee system. For P2P it meant that we could now use EIP-1559 to prioritize transactions. We weren’t sure how this would affect the transaction success rate, in other words, did miners have a preference for one type of transaction?

We’ve decided to run an A/B test. The design was to switch the priority fee algorithm from Standard to 1559 every 15 minutes and set the configuration of both algorithms. As a result, we’ve got the same transaction success rate and significantly different cap fees as can be seen in the picture below:


This is how data analysis and data-driven approaches are applied in decision-making.

Staking

Chainlink Staking v.0.1 launched on December 6, 2022. During this first version there are two ways to stake Chainlink:

  1. Community staking: you need to satisfy three criteria and the APR is around 4.75%
  2. Staking through a NOP: when a NOP stakes from 1000 to 50k LINKs as a self-stake. APR is 7%.

If you want to see the details you can read this post in our blog or on Chainlink's official website. But as you may see the community staking pool is already full and won’t be expended till v.1.0 (9-12 months):


That is why we are glad to provide our clients with a custodial solution to get a higher APR through P2P with a 10% fee. Through P2P you need a minimum of 10k LINK and can stake up to 50k LINK.


About P2P

P2P Validator is a world-leading staking provider with the best industry security practices and proven expertise. We provide comprehensive due diligence on digital assets and offer only top-notch staking opportunities. At the time of the latest update, more than 1,5 billion USD is staked with P2P Validator by over 25,000 delegators across 25+ networks.








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