The Present and Future of Chainlink

0:00People are going to lose their minds. This is a moment in history unlike anything humanity has gone through. It's a very different world for humans to come. Take a step back and see the broad picture, which is the way all these technologies are interlinked. Because this is all about exponentiality, and humans can't think in exponential terms. How consequential do you want to say machine intelligence is? It's almost certainly as consequential as writing. How long did writing take to disseminate through the human population? You know, hundreds, thousands of years. And we're dealing with it now on a scale of months.

0:33But in this kind of world, you're compounding 100 % growth every year, and the numbers become astronomical. AI is going to spot patterns in the world that were just completely invisible to us. Even if you think that the AI and the robots are your demise, you might as well bloody invest in them and make some money out of it. If not, you're just going to be angry man shaking your fists at the clouds.

1:08Hey, everybody. Welcome back to Real Vision Pro Crypto. I'm joined today by Sergey Nazarov, co-founder of Chainlink. Sergey, welcome back to the show. Great to see you. Thanks for having me. Well, it's always a pleasure to have you here. I always enjoy these conversations because you're not afraid to go deep in the technology. And I know our Real Vision Pro viewers love to get a sense of what's going on under the hood. Sergey, it's been a while since we've done this. I know we've covered a lot of this material before, but big picture for folks who are relatively new to the picture, talk a little bit about Chainlink and the role that you see oracles playing in the digital asset space.

1:43Sure, sounds good. So oracles are an infrastructure that create consensus about various things that blockchains do not create consensus about. So blockchains create reliable transactions through consensus, through the ability to agree across a number of different systems what that transaction is and to memorialize it across those systems. Blockchains create consensus on three things, private key signatures, token ledgers, and state machines called smart contracts. So those are the only things that blockchains create consensus and therefore cryptographic guarantees about. Everything else outside of blockchains, whether it's data, trust-minimized computation, cross-chain communication, connectivity with any existing systems, basically all data, all computation, all connectivity, both between blockchains and between blockchains and existing systems.

2:41If you want that to be as secure and reliable as a blockchain, you need a system to do that. And the main system to do that, really the only system to do that, is Oracle Networks. And decentralized Oracle networks is what Chainlink pioneered, which is basically an environment in which you can aggregate data that you feed into DeFi. You can do various computations that you can't do on a blockchain but still need to be decentralized and trust minimized. You can connect multiple blockchains to each other. You can connect existing bank systems to blockchains so they can use thousands of blockchains through one interface.

3:17All of these interactions need to be made as reliable as the blockchain itself because they fundamentally control what's going on on-chain. And so if you leave the thing that's controlling the on-chain state to insecure, easy to manipulate, easy for adversaries to access, then you break the security model and you break the guarantees of those on-chain things. And so that's why Chainlink so far has processed approximately$9 trillion in transaction value through these decentralized Oracle networks, because there are all these other things, whether that's data or computation or cross-chain connectivity, that on-chain contracts, on-chain things need in order to become more advanced.

4:04The parallel for the web world is that before you had the ability to connect applications to other systems, applications were very limited. So something like Uber couldn't exist until you were able to connect it to geolocation data about the user and the driver, or a text messaging system, or a payment system. You couldn't build Uber until you could connect it to all those other systems. That's what Oracle networks do. They make all of these other systems available to blockchains, and they do some of the computations themselves, and they create connectivity among chains for these more advanced applications like real-world asset tokens, more advanced DeFi, actually all DeFi, insurance, trade finance applications.

4:49all of these more advanced applications require Oracle networks because they need that data, that additional computation, and or that additional connectivity to other chains or to existing systems. Well, Sergey, I'm glad I asked. That's your simplest and most elegant explanation so far about what oracles do. You know, in the simplest sense, what I hear you saying is essentially this is about taking the security that exists on-chain and finding a mechanism for connecting it off-chain. I think most people know, for example, the Bitcoin network has never been hacked. But this is about finding ways of connecting off-chain data in a way that is cryptographically secured by the properties of mathematics and physics to things that are off-chain.

5:34And I think that really is the core sort of cornerstone of what you're talking about with Oracle networks. And also across chains. So basically, anything going into or out of a blockchain, which is a lot more things than people think, and anything that happens between a chain, between multiple chains, to create what we call the Internet of Contracts, to create this kind of globally connected Internet of multiple chains, so that applications can exist across multiple chains, not just in one chain. It's both the connectivity in and out, which includes all data, all payments, all systems interactions, and the connectivity between chains.

6:15So anything that ever touches a blockchain, whether it's another chain or whether it's a data source or whether it's a bank system or whether it's a payment system or whether it's a central bank digital currency system, all of those things need to be securely and deterministically connected and basically made to be as secure and as reliable as the chain itself. because they're a critical dependency. They become dependencies that if those dependencies break, the chain's ability to execute its more advanced functions like DeFi, like RWA becomes basically impossible. And that's why more advanced functionalities of blockchains only appeared after Oracle networks appeared.

6:58That's why DeFi was sub 100 million when Chainlink came into existence and it grew to over 200 billion. and Chainlink powered the vast majority of that and still powers the majority of that in different categories of DeFi. And so that's because you really can't make certain applications like DeFi without an Oracle network because, for example, financial products, which is what much of DeFi is, is basically the conditions of an agreement, the financial conditions and the data. So even your bank account that gives you a yield is basically the conditions under which you get the yield, and it's the data telling what yield to give.

7:40What is the current yield from the federal funds rate or whatever the data source is to decide the yield. And so all of that getting replicated on chain needs to happen at the high security standards of the chain so that you have this kind of holistic application, this verifiable application that can act in this way throughout its operation, not just in the on-chain part, but in every other part of what it does. Yeah, and for people who are relatively new to the technology, this has been something of the Achilles heel of blockchains outside of the Chainlink world. Virtually every major sort of cross-platform bridge attack or hack that we've heard about in the last two years here, we've been covering it on Real Vision Crypto and Real Vision Crypto Pro, has been about finding out the vulnerabilities that exist in cross-chain bridges, in smart contracts, and other mechanisms where you're actually working off-chain and the major protocols.

8:38Yeah, yeah, absolutely. All of these problems are actually the same problem. They're a consensus and security problem about different types of data. So Chainlink began with market data, then it evolved into being the largest provider of market data and proof of reserve, then providing identity data, then doing computation, and now also to cross-chain. And cross-chain is also a data problem because the movement of a token is basically data. You're moving data about this token goes from here to here. And our system can also add instructions as another type of data to the token so that when it arrives at the destination, it can actually trigger smart contract events without anyone having to integrate into that chain.

9:26And so the real challenge here is how to efficiently give smart contracts and verifiable applications, various types of data, various types of off-chain trust-minimized computation, various connectivity, maintaining the highest level of security. And we have five levels of security that I hope we can cover about the different levels of what defines the security of systems like this. And then also making it easy for existing systems to integrate with all of that so that you can accelerate the speed at which capital markets, asset managers, banks, trade finance, all of these existing sources of value can integrate with all of these chains together with all of this data, which is what they actually need to make their more advanced applications.

10:14Yeah, and this is what's really fascinating, what you guys are doing with CCIP and other technologies. I know folks' ears have just sort of perked up. If you're thinking about RWA, real world assets here in crypto, not risk-weighted assets. I know my fellow legacy finance people think of it that way. But in the crypto space, obviously, we're talking about connecting real world assets on chain, which I think has the potential to really bridge these two worlds between traditional finance and decentralized finance. Sergey, you guys are doing some interesting stuff with some of the infrastructure providers in the space.

10:46I'm talking here about DTCC. I'm talking here about SWIFT. Talk a little bit about what you guys are doing and how it fits into the broader vision that you have for integrating the digital asset space and traditional finance. I think RWA is the place where a lot of capital markets activity, banks, asset managers, many of which hold multiple trillions of dollars in value individually. So there are individual firms. Some of the firms that we work with, like ANC Bank in Australia, has over a trillion dollars in assets under management. And there are others that have multiple trillions in assets under management.

11:24And basically, that's the whole size of our industry, just in one participant, in one market participant in that part of the world. And those folks are very good at generating various financial products. That's what they've been doing for some of them for over 100 years. And basically, RWAs are a type of packaged financial product or asset of some kind. The main thing about RWAs is real world. And real world basically means connection to the real world, which necessitates data. Real world assets are actually defined by their ability to gain access to data reliably and to prove things about themselves.

12:02Like I'll give you an example from the proof of reserves part of what Chainlink does with gold coins. Gold coins necessarily need to prove, if they're good, that they have the gold, right? that every unit of gold coin, every single unit on chain, represents a corresponding unit of gold off chain. And ideally, you don't want to wait for an annual audit. You want that to happen in real time, which is what proof of reserves does. And Chainlink is the largest provider of that, of proof of reserves. So for real world assets, we're already the largest provider for the ones that exist, various gold coins and stable coins.

12:37And capital markets, banks and asset managers have a lot of experience with real-world things, with basically packaging various things into financial products. So it's a very natural place for them to start. It doesn't mean that they're making an advanced DeFi protocol. That's not the stage that that's at necessarily, but I think that that's where we'll all go, that they will eventually have their own DeFi protocols that they will work on together with the existing Web3 DeFi protocols. But if we just talk about RWA, I think you're right. That's a place where the intersection of this technology with capital markets is already happening and where it will be valuable to both the other capital markets participants and to the Web3 users.

13:21Because I think that collateral, the real world assets that are generated by banks and asset managers will be valuable collateral to Web3. So in that context, the market infrastructures that you mentioned, like SWIFT and DTCC, definitely see significant demand. And all of these infrastructures, as well as banks and asset managers and various institutions, they are fundamentally driven by demand. And this is what I've been saying on your show, I think, for years, and what I've been saying in many other places for years, is that the demand of their user base, the demand of their clients, will fundamentally drive them to adopt blockchains as a superior format for value and transactions of certain types.

14:06And RWA is indeed a place where that transition is actively happening and moving towards production readiness. And we're in multiple conversations with large banks and asset managers that are in discussions with us about production. So not POC, not pilot, but production. Real value transactional usage of the system on a consistent growing basis for significant asset classes. The role that the market infrastructures that you mentioned have is to enable banks and asset managers to do those transactions in efficient and legally compliant ways. SWIFT is a very widely used standard for banks and asset managers to define their relationship with each other through a set of messages and actually kind of a definitional standard for what is a bond, what is an equity, what is a cash transaction, what are the properties of that transaction, what are the features that we want in our transaction.

15:09And everyone is kind of speaking the same language. SWIFT is kind of like the English of the financial world, where most banks and most asset managers speak it. And so the work that we're doing with SWIFT is finding a way to use that widely accepted standard that's already defined what an equity is, what a commodity is, what a cash transaction is, and repurpose it and use it for blockchain interaction. And the benefit there is that the SWIFT system, the SWIFT private key signing infrastructure, the SWIFT infrastructure that's been around for over 50 years now, and has successfully processed quadrillions upon quadrillions of dollars, can continue to be used by banks for interactions with blockchains.

15:53And then the benefit to the blockchain industry is that those 11 ,000 plus banks that are on the SWIFT system, which is the largest collection of banks on any system, are accelerated in the way that they're able to interact with blockchains, which means that their clients, their assets under management, can reach blockchain sooner. Yes, they might reach private blockchains of that specific bank or of other banks that they're used to transacting with before they reach public blockchains. Yes, that will happen. But that is a critical incremental step. And the magnitude of the amount of money that we're talking about, you know, Swift settles quadrillions of dollars in value.

16:36DTCC on an annual basis settles quadrillions of dollars in value. DTCC is basically the settlement infrastructure for the entire U.S. securities industry. DTCC is also about efficiency, but it's largely around making transactions legally compliant so that those transactions can be settled and everyone can rely on their legal force. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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18:08So the basic difference here is for, you know, and I think this stuff is so critical for people to understand, to understand the existing infrastructure that we have in TradFi today and where we're moving in the digital asset age. So I think of SWIFT as essentially as a standards body that defines the messaging formats. These are the technologies that are used to handle the interchange of information between banks globally. DTCC, Depository Trust and Clearing Corporation here in the United States, settles something like 90 plus percent of U.S. equities and I think 85 to 90 percent of all securities transactions.

18:41We're talking, again, quadrillions of dollars, 10 to the 15. I mean, it's just an almost inconceivable magnitude, particularly relative to the size of the digital asset space. And building these infrastructure standards, while it may seem a little bit technical. This is about the fundamental basis of connecting the traditional finance system that we live in today to the blockchain-based decentralized system that many of us in this space believe we're moving towards. So it just, it could not be more important from a fundamental infrastructure perspective. Yeah, I think that's right. I think right now we have these two worlds.

19:17So we have the public blockchain world that we're more familiar with and we're longtime users of and believers in. And that has grown past the trillion dollars. It's continuing to go well past the trillion dollars. And I think it'll go to multiple trillions just off of a user base like you and me and other random people and hedge funds and whoever, right? And that'll happen. But realistically, there's an entire other world with hundreds of trillions of dollars, which has traditionally managed value, has traditionally managed equities, commodities, funds, all these other vehicles where value is held and transacted in.

19:52And that part of the world does have a huge benefit from blockchains. They just have to move slower because they have so many requirements. They have security requirements because when you manage trillions of dollars, you have security requirements. They have legal requirements because when you manage trillions of dollars for over 100 years, there's legal frameworks you have to abide by or else you get shut down. And so the amount of boxes that they need to check really is quite large. And the force that leads them to check those boxes is the client demand. The client demand has been very high, and it only continues to grow.

20:29And now I'm seeing multiple capital markets folks have dedicated digital asset teams. So the thing that I saw before, because I've been working with banks and asset managers and SWIFT for well over six, seven years now, and the people I was speaking with before were in the innovation group. And the innovation group is a kind of general launch pad for a number of ideas where ideas kind of begin. Now, the conversations we're having with every bank, asset manager, infrastructure, there are people with a digital asset title. So there's a head of digital assets. There's digital asset tech lead. There's digital asset product managers.

21:06There's digital asset managing director. So there are now dedicated teams. Some of these bigger banks, at this point, I think I've surpassed over 100 people across these multiple teams. And these teams are focused on digital asset adoption, digital asset products, digital asset implementation. And that is driven by the client demand that I mentioned a few years ago and even previously, I think, when we talked. And then the client demand that's driving the banks and the asset managers to invest in these digital asset teams to make these digital asset offerings is then something the financial market infrastructures like SWIFT and DTCC and others look at to say, okay, this is a trend that I need to service.

21:49Because the financial markets infrastructures view the banks and the asset managers as their user base. So what we're doing is we're working with all of those categories of folks with CCIP, with data, with identity, with all these key building blocks. And we're allowing them to reach the point of doing production transactions. So for example, with RWAs, you can't make an RWA without something like proof of reserves. Then you need to add identity data if you want another bank or asset manager to purchase it because they need to comply with AML KYC and therefore they need identity information attached to the asset.

22:30And then you need to settle the assets value daily through NAV or price or some other thing. So that's already three pieces of data just to have one RWA. So we enable them to generate that RWA. But then once they generate the RWA, their second problem is liquidity and access to the many different chains from which people could purchase the RWA. That's where CCIP comes in and allows the various other banks, asset managers, CSDs, all the other market participants to connect to that RWA. And because of the efficiencies created by how CCIP is designed to gain access to that in a way that can keep them on their own systems.

23:10So they can stay in their system. They can stay on their own chain. And they can still access your RWA, even purchase it and have it returned to them. And by lowering this integration burden by all the customers that you would want to buy your RWA, we can rapidly increase the size of the market that can access your RWA, which is the fundamental thing that RWA creators want. They want a market that will purchase that asset. And then the third problem that needs to be solved and is getting solved with our help is once the RWA moves from the chain where it is created into the chain where it is purchased, you want it to remain updated.

23:48You want the real world asset to remain real world. And because the real-world asset was created using a set of data standards that is compatible with the system that moved the asset, so namely you use the chain link data standards like proof of reserves to make the RWA asset, the chain link identity standard to comply with the MLKYC, the chain link price standards to create a daily settlement price for the asset. and then you also moved it over CCIP, which is compatible with all that, you're now able to get an asset that whether it goes to chain B and then it gets resold to chain C and gets resold to chain D, it will remain updated.

24:28It will remain what is known as a golden record. And so it's not just about making the better assets. It's about making them, connecting them to liquidity, connecting them to all the counterparties that want to gain access to them, and allowing those assets to remain connected to all the data, to all the systems, while they move across many, eventually hundreds of different chains, so that the asset can be resold and maintain its real world properties. Gosh, there's so much to talk about here in terms of the functional mechanics, but I want to talk a little bit about what's happening behind the scenes in these meetings and conversations that you're part of.

25:09I think often we hear about this sort of framed as a TradFi versus DeFi conversation. What you're saying is that there are significant teams on the ground at large banks in the standards-making bodies, in the clearing corporations that are connecting, running the financial plumbing. Talk a little bit about how you understand the status of those conversations and the framework that the people who are working at the world's largest financial institutions institutions think about this technology and how it's going to change the world that they live in, in terms of the actual mechanics of how these things work?

25:46Sure. Absolutely. Just to be super clear, my view is that TradFi is DeFi's biggest customer, eventually. That's just how the world's going to go, in my opinion. It's kind of an inescapable reality because the only thing stopping it now is lack of legal clarity for how TradFi could use DeFi. But that legal clarity is gradually appearing. And DeFi, because it's in the public chain world and because it has a different risk tolerance, will consistently have higher returns. You will consistently be able to get larger yields on the same dollar, on the same set of assets in DeFi because of the propensity to experiment, the ability to take risk and all this stuff.

26:30And in the TradFi world, you have a bunch of people that have a desire for more yield, even if there is more risk. And the size of that is, in my opinion, even on the high spectrum of what people are willing to take on risk for, is in the tens of trillions. So this DeFi versus TradFi thing doesn't really make sense because they're all just trying to do transactions. transactions they're actually very similar transactions and all the transactions are motivated by basic economic laws of yield and supply and demand and as long as the counterparty can be made reliable which is the point of defy right the point of defy is not to have any kind of bias thing toward you or me or anyone else it's to make the counterparty cryptographically reliable, cryptographically guaranteed in a way that's better than TradFi counterparties.