Chainlink: The Crypto Market Could Soon 10x w/ Sergey Nazarov

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1:25Sergey Nagarov, co-founder of Chainlink. Welcome back to Real Vision Crypto Daily Briefing. Thank you for having me. Great to chat with you again. Always a pleasure. It's always a pleasure to have you back on the show. Looking forward to this one, talking about CCIP, among other things. New news to talk about in just one moment on Chainlink. But first, let's take a look at the price action. Bitcoin right now trading at$26 ,440. It's off about 1 % trailing 24 hours, off about 2.3 % trailing 7 days. Ethereum trading right now at$1 ,839, also off about 1 % trailing 24 hours, and off about 2.5 % trailing 7 days.

2:06Since we're talking to Sergey Nazarov, we should say Chainlink right now trading at my screen at about$6. Right now off about, let's call it 6 % trailing 7 days. Sergey, always a pleasure to have you back on the show. Lots to talk about today. We've got a little bit of news flow on CCIP that I mentioned at the top of the show. Give us the 50 ,000-foot overview, Sergey. What's new this week in terms of what you guys are doing with this rollout? Sure. So CCIP is a messaging standard for communication among chains and between chains and back-end systems. And what has happened this week was there was an announcement about SWIFT, DTCC, Euroclear, a number of top banks like BNY Mellon, BNP Paribas, Citi.

2:52So basically the world's largest market infrastructures and banks looking at using CCIP to do a set of three things. connect their existing systems into blockchains with the help of Swift messages as a way to communicate with blockchains, with CCIP doing the last leg of the communication with various chains, connecting various private bank chains with each other so that the assets put on any one bank chain gains a larger market by being connected to all the other bank chains, creating a kind of bank internet of contracts, and then also the ability to connect private chains to public chains, meaning that bank value can flow into the public blockchain world, which means that we're going towards a world of an internet of contracts across bank chains and public chains, which is really what CCIP is looking to accelerate with these collaborations with large market infrastructures and banks.

3:53So, Sergey, let's walk through the 50 ,000-foot overview here of what this actually means, what the goal is, and what the functionality you guys are creating or attempting to create with this project. Let's talk a little bit about what the goal line is. Give us some examples of the types of transactions and user experiences that you guys over at Chainlink believe that this development will foster in the future. In other words, if we were to come back one, three years in the future and the project were successful, what would users be able to do? What would the new functionality be? Sure. So of those three functionalities, the first one is the most simple, where you take your existing systems, if you're a bank, and you use Swift messages to conduct events and instructions like signatures, multi-signatures, even possibly the creation of assets or any number of other actions on a blockchain, but not just on one blockchain, on hundreds of chains.

4:46So the problem that banks face is that they have hundreds of chains that they'll need to integrate with, and Chainlink will connect them to those hundreds of chains through one integration. It's not called Chainlink by accident. Basically, that's the first property that I think this will create for banks is the ability to easily connect to hundreds of chains through one integration while still using their existing infrastructure, such as Swift messages, to conduct transactions on hundreds of chains. So that in and of itself should accelerate the adoption of blockchain technology, both in a private setting and in a public setting by banks by years, which is quite significant for the blockchain industry because banks, as you know, hold trillions and trillions of dollars in assets.

5:33And this is actually driven by demand from their clients. And so they are now looking at how do we properly connect with hundreds of chains that our clients might want us to transact on. And so that's the first development is the streamlining of how banks can connect to both private and public chains, both their own chain and other chains of others, of other banks and public chains. So let's walk people through what that means in practice, in terms of the connection of public and private chains. Maybe you could give a sample transaction just as a sort of toy model for people to understand exactly what type of functionality this would facilitate?

6:16Sure, absolutely. That's really the third value that's more advanced. That's for the participants that want to interact with public chains. And so what that means is basically the first stage is you want to interact with chains at all because you want to conduct basic transactions. The second stage is you probably want to interact with other private bank chains. And the transactions there are, for example, a client came to you and said, I would like to buy an asset from this bank that's issued by another bank. But they issued the asset on their bank chain. So bank A is on bank chain A. Bank B is on bank chain B.

6:59Bank A wants to buy asset from bank B on bank chain B. And then they possibly want to store it in custodian chain C for whatever collective reasons. So that's the next stage. The third stage, the one you asked about, is when banks become more advanced and decide that the public blockchain markets are the places where they see a market for their assets. So they'll be able to create assets that are offered to their other bank counterparties, that those transactions will happen through bank chains and custodian chains and settlement chains of various types. And connecting those will be a critical aspect of getting that to even begin.

7:39But then the large crypto market in the public chain sphere is still a big booming market, where you've already seen some banks start to put things out. For example, Societe Generale has put out a stable coin through their subsidiary, the Forge. And I expect many others to do the same, to basically provide assets onto public chains. So what this will mean is that banks will more easily be able to put their assets onto public chains, which will do a number of things. The first thing that it'll do is it'll create a large influx of value into the blockchain industry, which I personally expect to grow the industry well past$1 or$2 trillion to as high as$10,$20 trillion or more, because banks have that many assets.

8:24The second thing that it'll do is it'll diversify the collateral that's available in the public blockchain ecosystem. And this diversification of collateral will allow more advanced stable coins, more advanced DeFi products to get created. And then the third thing that it'll do is it'll bring these two worlds closer together. So I imagine that eventually we'll be in a world where crypto and the global financial system are all one thing. that's going to take more than one to three years. But I really expect it to just become one big thing where you just have different flavors of payment and financial products all interconnected, ideally through something like CCIP.

9:08Yeah. Sergey, I think examples like that are so helpful for helping people get their heads around what's actually the goal of projects like this. Because it can sound very abstract, but when you walk us through step-by-step what the potential future state looks like, what the functionality is, and what the goal line is. I think it's very helpful for people to understand this. Something that's come up a couple of times in this conversation is SWIFT. SWIFT messaging for people like me who've worked in the back office of a bank is the interbank messaging standard. It's an incredibly important part of the global backbone of the financial services infrastructure.

9:42Talk a little bit about the interoperability between Chainlink, CCIP, and SWIFT. RAOUL PAL, Yeah. So SWIFT is a very interesting organization. They're member-owned. And you're right that they power bank backends for message transmission and various key events around all the transactions. And they power over 11 ,000 banks. There's not many more banks than that, frankly. So basically, SWIFT powers the vast majority of banks. They're member-owned by their banks. And they're kind of a standard for how banks interact with transactions because they have a standard for Swift messages. And so what this looks like is you have an entire basically huge army of people that have been trained within banks to use Swift messages and use various interfaces, literally tens of thousands of people.

10:36And those people aren't going to get retrained on something else. Right. So you're taking the infrastructure that already exists, that already is secure, that already transacts quadrillions of dollars in value, and then you're connecting it to CCIP and the Chainlink network security model, which has itself processed over$7.7 trillion in transaction value. and you're taking the commands from banks in the SWIFT format, and then you're generating events based on those commands in the CCIP format on chain. So we don't need to integrate with 11 ,000 banks and SWIFT and their bank members don't need to integrate into hundreds of blockchains.

11:19And the benefit of this is that everybody can adopt hundreds of blockchains much faster, both private and public chains. And the reason that I think they're going with CCIP is because of the proven security model that we have around Chainlink Oracle networks, the value that has been secured there, as well as the quality and security of CCIP, which actually goes beyond moving value and moves on to also transmission of information and messages. So basically, CCIP and Swift messages go together very well. And this isn't even the first collaboration we've had with SWIFT. This is the second one. The first one was with a smaller group of banks.

11:55This is a much larger one, and in my opinion, a much more serious one that I think will eventually lead to something real. At least that's the plan. Yeah. So when we talk about messaging formats, we're talking about the structure of the information that gets inter-exchanged between different financial institutions. I guess if you want a real simple way to think about this, if you imagine addressing a letter, I don't know if anybody sends those anymore, but if you put the address that it was going to in the upper left-hand quarter where the return address was and swapped it with your own return address, that would cause, obviously, chaos in the postal system.

12:28Swift is a bank-owned entity that coordinates these messaging formats. And so it standardizes the way the message exchange takes place. So what you're saying is if you were to adopt a protocol that could talk between the bank standards for messaging, which is controlled and governed by Swift, and blockchains, you would essentially have a mechanism to allow banks across the world to communicate with different chains across the world seamlessly without having to write specific types of standards for interacting with all those chains. Potentially, this is a very big deal. Yeah, I think it's a very big deal.

13:05It's why we've been working on it for over five years. And it's been taking an immense amount of effort and collaboration with some of the smartest people in these organizations. And And DTCC and EuroClear are the largest market infrastructures. These are the largest banks like Citi and BNY Mellon, BNP Paribas. Let's talk about exactly that, Sergey. That's a very good and important point. I think a lot of people obviously have heard the names of the banks on this list who are participating right now in this testing phase, as you say, BNP Paribas, BNY Mellon, Citi. These are very well-known names.

13:37What is less known, we were talking about this before the show went live today, DTCC, the Depository Trust and Clearing Corporation. We were saying, I mentioned this idea that it's probably the most important organization that retail US equity investors have never heard of. Talk a little bit about what DTCC is, what they do, and why they're so critical to US equity market structure. They settle the equities. They're the infrastructure that basically manages the securities market in the US, the largest one, on a technical level, basically, for coordinating how the equities are resolved, settled, owned, and so on.

14:22Let's tell people what we mean by settlement. So when you have a trade, you go up to your Chuck Schwab or your E-Trade account, you enter a buy order at a limit for 100 shares, you see that trade being executed. After the trade is executed, it has to be cleared, which is the way that banks reconcile the transactions. And then it has to be settled, which is the actual exchange of money. DTCC is a critical part of the infrastructure in the United States for actually settling those trades. Talk a little bit about what you guys are doing with DTCC in this test and what functionality the new CCIP will enable with DTCC.

15:01Well, that's the interesting thing about this specific body of work, is that it doesn't just include banks. It includes the largest messaging standard for 11 ,000 banks to communicate and transact, basically. And one way to think about a message is almost like a blockchain transaction. They're really not that different. Blockchain transaction is on blockchains, and a message is assigned to be interpreted by other message interpreters. So you have the largest network for bank communication about financial transactions. You have the largest market infrastructure that settles and clears the securities of the largest global securities market.

15:39You have Euroclear, which is the same thing as DTCC for Europe. You also have the Hong Kong. You have a number of other basically participants that are also very large infrastructures. And you have a multitude of banks. So what this is actually doing is it's replicating the way the financial system works now by connecting market infrastructures with banks, with messaging systems. And it's wrapping that all up into this CCIP transmission to blockchains. So what this is basically doing is instead of just having one part of the global financial system adopt CCIP, this is looking to prove that the whole global financial system can adopt CCIP across the messaging standard, the market infrastructure, and the bank participants.

16:33So it's basically all of these, right? So we're basically seeing a huge amount of value among all these banks and these market infrastructures gearing up to connect to blockchains. And at the moment, the primary method they're looking at is CCIP as the way to connect not only to the private bank chains, but to the public chains. And that's a very specific part of this body of work. It's not just about connecting their own system using Swift messages to bank chains. And it's not just about connecting bank chains. It's about connecting bank chains to public chains. And that means that we're on a path where not only will banks interact with each other efficiently, which will massively skyrocket, in my opinion, the adoption of blockchain technology in the banking sector, but we're already creating a path for the value and the assets in the banking sector, in the capital markets, to flow into the public blockchain market as long as it meets all of their relevant requirements.

17:37RAOUL PAL, JR.: Sergey, as we talk about this new technology, how far away are we from the point where you see this being something that could become a part of the day-to-day architecture of the financial system to create and facilitate the type of integration that you're talking about here? That's very hard for me to say because bank adoption is to a degree cyclical. I've only ever seen them tie their level of interest to the crypto market. and its excitement, this is the first time that I'm actually seeing banks disconnect their adoption of blockchain technology from whatever's going on in the crypto markets.

18:16So historically, in the 10 plus years that I've been in this industry, I've seen them look at the crypto markets, say the crypto markets aren't doing well, we don't need to adopt blockchains. Now, even if the crypto markets are going through a rough patch, they are still very actively adopting blockchain technology, and that's only accelerating, which is, this is the first time I've seen that. So it's hard for me to say how quickly that'll happen, because usually I've only seen a kind of cyclical behavior from them. But now I'm seeing a new behavior, and that new behavior is new, so it's hard to predict.

18:46But I - What does that mean to you? What does that suggest in terms of moving away from this highly pro-cyclical view of investment in blockchain to a more secular view, that this technology is something that's important? What does that signal to you? I think it signals to me that their clients want to transact in what they call digital assets. So they don't call them cryptocurrencies. They don't call them blockchain things. It's a digital asset. And that's an asset class, just like equities or commodities or whatever. So basically, I think we're now at the point where digital assets as an asset class have reached a threshold where banks understand there's no going back.

19:27and they all have digital asset teams. They all have digital asset departments. They even have multiple layers now of people. So they have multiple digital asset teams, and then they have someone above those teams, and then they have a director above them. And now they also have subsidiaries that create various digital assets and put them out on their own chain or on another chain or eventually onto public chains. So the reality with this, I think, is that it's driven by demand. Banks are very driven by demand. I think they're going to continue to be driven by demand. And there is definitely demand for them to transact on blockchains between each other.

20:08And that demand, I don't think is necessarily related to the crypto markets. There is then a demand for them to create assets that they can put into the public blockchain markets as long as that meets all of their requirements, all of their internal requirements or their ideas about risk or whatever. And that is also a direction that is an act of discussions with many of them and that they are indeed excited about. because I think what happened also on the public blockchain side is that once the public blockchain market passed the trillion dollars, that was it. Basically, it was very hard for anybody to say that this is not a market that is real and that this is not a market that's going to persist.

20:51And the amazing thing about it, frankly, is that I think a trillion dollars is still relatively early. In my opinion, if you take even a small percentage of all the bank assets that could connect into blockchains, and you connect those assets into blockchains, you're looking at 10, 20, 30, 50 trillion plus for the value secured in blockchains. And so that's what I think this technology could enable and that we're working to enable in a very security-focused, gradual way, because that's the way in which banks operate is they need the security. And that's why I think they're also looking at adopting CCIP is because the chain link security model has successfully secured over$7.7 trillion in transaction value.

21:42And CCIP has many security features that other things just don't. And so our focus on security is in a certain sense, in my opinion, paying off and going to continue to pay off because it's a keystone for how things work in this industry. And if you think about our bank's going to send trillions of dollars or eventually maybe quadrillions of dollars over a set of rails, the security of those rails needs to be extremely, extremely high. And they can send that value using Swift messages, and they can send it using their existing systems. But the question is going to be, how do they send it to hundreds of places across hundreds of different private chains, one for each bank and hundreds of different public chains that are a market?

22:28And that's the really exciting thing, is can we create an internet of contracts, the next stage of which is actually just creating cross-chain smart contracts so that you can build a smart contract that doesn't just live on one chain, but it lives across multiple chains in separate pieces, similarly to how web applications live across multiple clouds in separate pieces. But that's farther into the future after the value begins to move across all these systems. Yeah. Yeah. To put the scope of some of these numbers into perspective,$1.1 trillion right now, the approximate market cap of the total cryptocurrency complex, looking at CoinGecko right now in front of me, the total market cap of Apple just shy of$3 trillion.

23:10So it does put into perspective the size of this market. And as you say, how relatively early we are in this process. Something that you mentioned earlier, the idea of working with banks, you know, Sergey, you've spoken on this show very passionately about your interest in true decentralization. What's your vision for how this decentralized world of digital assets, cryptocurrency interfaces with the centralized world of banks that, as we've noted here, control many orders of magnitude higher in terms of the total capitalization of these assets? What's your vision for how those two very different views of seeing the world play together in the future?

23:53Sure, absolutely. I think that decentralization is going to become the minimum standard for everybody because it provides superior security, it provides superior transparency, and it provides superior control of assets by end users. So these properties of decentralization are so desirable that they will be adopted and decentralization will be adopted over time. Now, you have different user groups that have different sensitivities and different demands for these properties about how they interact with financial systems and financial products. And in the crypto world, you're on one end of the spectrum where people understand what a multi-sig is.

24:40They understand how many nodes something has. They understand all these things. And so they are sensitive to these questions because they understand the difference. Then you have another part of the world where people believe that they have a password to a bank account. And because they have a password to a bank account, they quote, unquote, control their money. Now, things like SVB and First Republic and others make it very clear that that is not the case, right? You and me know that. You and me know that if we have a bank password, it doesn't mean we control our money. Now, more people realize that.

25:18And who are those people? Those people are the clients of the banks, whether they're institutional clients or retail clients or whatever clients. So basically, I believe that everybody will realize that the entire system that doesn't give them control of their assets, doesn't give them clarity about the risks taken with their assets, and doesn't give them an ability to know what's going on or to control risk or to control their assets or to be secure will be eventually viewed as legacy and suboptimal. Similarly to how the internet replaced lots of brick and mortar stuff and so on. So you just have different user groups that are going to realize this over time differently at different speeds.

26:05There are still people that they prefer to go and they prefer to buy stuff in person at a bookstore. That's fine. But they're not in the majority anymore. So there will be this spectrum. And the majority on the spectrum will shift towards the superior security, the superior transparency and risk management, and the superior control of their assets themselves. And this is what will drive decentralization. It won't be my ideological view or your ideological view or the bank's ideological view. It'll be the actual value of decentralization to end users, which is what we believe creates a better world, a better ideological kind of construct of how society can work.

26:54But at the end of the day, even if you don't understand the ideology behind it, you still get the value. Yeah, that's an important distinction. By the way, we should just say, And this isn't tinfoil hat stuff. This is just the reality of the way banks work. When you deposit money in a bank, they become the legal owner of those funds. They have that liability to you as the depositor. And in the event of an insolvency, you have the risk of becoming a creditor. Now, obviously, there's something called FDIC that most people know about that protects you to a certain threshold for deposits here in the United States.

27:28But the legal framework is exactly, as you say, this idea that the bank actually is the one that owns the funds. It's a liability to you, the depositor, but you no longer legally control those funds. A significant distinction with the decentralized world that we're talking about here, where users have the potential to self-custody their own assets and to maintain, at least in theory, and there hasn't been good jurisprudence throughout that. but legal ownership for themselves. Sergey, I want to ask you this because I know it's something that our viewers are thinking about. We've been talking about all of these new applications for CCIP that you guys are rolling out.

27:58It's been on your roadmap for some time. You announced this at SmartCon New York last year. I was there in the audience when you made that announcement. Talk a little bit about the role that the token link plays in this ecosystem. How does it participate? What are the tokenomics? What's the functionality with regard to the new types of structures that you guys are in the process of rolling out right now? Sure. So, yeah, SmartCon was great. We're going to have another SmartCon in Barcelona this year. There's going to be a lot of stuff going on there, so even more in my expectation. The economics and the token economics really can be defined in Chainlink Economics 2.0, and I suggest that everyone go there and look at that in detail.