Fireside with Sergey Nazarov, Chainlink, and Kartik Talwar, ETHGlobal I Pragma Singapore 2024

[Music] you too thanks for having me I'm excited that you're able to join us yeah my pleasure it's always a pleasure to be with the ethereum community it's a great Community well we all love channeling too thank you uh one of the things that I think is super exciting to me is that it's been seven years now since uh the original channeling white paper came out and uh obviously we've seen so many new things come out in terms of kind of how blockchains have evolved just new just all new entirely new Concepts uh to just black cryptography get better and better and my kind of first question to you is um walk us through kind of what the very first version of channeling was to you and uh and is this the same future that you imagined seven years ago or and if not kind of how has it changed yeah so the chain link white paper 7 years ago was released uh this month in September and then the token sale happened a couple of weeks later also in September on September 19th I don't know what day it is today is the 19th so seven years from from the tokens for the public token sale the the the first uh version of chain link was a single Oracle Network that verified uh the ethusd price that was the first one uh so it's been always in Grain then in in helping you know smart contracts in the ethereum community and that ethusd price was then used to replace a lot of the homebaked centralized internal oracles that the early defi teams were doing where they had to make a market around eth on chain right and the basic problem was and we had been working on oracles for a few years before that point was that the centralized Oracle in the defi context doesn't make sense right because you're not really generating decentralized Finance if the Oracle is centralized you're generating partly decentralized Finance but really controlled from a centralized resource so it's not a big enough Improvement to justify people putting money into it or taking risk and so on so this is that this was the fundamental problem ethusd for the ethereum community for the defi protocols literally you could count them on two hands that were any good like a was up here it was called eth lend back then oh yeah and there were a few others and not many you could literally count them on two hands so eusd comes out and a is able to launch uh because they were in the process of building their own Oracle but it had all these trust assumptions all these issues that got solved by chain link now you have truly decentralized Finance you have the smart contract part of the D5 application now you have an oracle Network that isn't centralized it's truly decentralized you have independent node operators coming to consensus but they're not coming to consensus about block production they're coming to consensus about external data in this case aggregating all of the fragmented eth prices into a single authoritative price the ethusd price right that that can then be used to create these def5 markets so it's one Oracle Network one what you could call decentralized microservice focused on this one price and from there it kind of just took off because you the D5 protocols don't want to stop at one market they don't want to stop at e USD they want to go and make a btcusd market which is the next feed and then another pair and then another pair and then another pair and then it grew to over a thousand Oracle networks not in the same year did it a couple of years so like let's say in two three two three years so it experienced massive growth you know massive uh scale kind of growth and scaling issues and since then basically the system has become more and more scalable and then added more types of data so now chain link is the largest provider of price data the most widely used Oracle Network powering the majority of defi on ethereum and other chains but it's also the largest provider of proof of Reserve it's now the largest provider of nav data to tokenized funds and identity and a whole bunch of other pieces of data and so it started in data right but but the whole thing with Oracle Network works is that they're not a data thing they're a Computing environment that was applied to data aggregation as the first use case right Oracle networks generate consensus about non-blockchain things and the first non-blockchain thing that it generated consensus about was creating a global market price that's immune to manipulation immune to flash loan attacks and then over five years in production uh no flash loan attacks no money lost from users kind of Highly reliable service which is why it Powers the majority of Defi and once protocols within defi reach a certain level of value they start getting attacked and they ask themselves well how do I actually secure the protocol in a way that does work and they basically migrate to chain link right which is why it continues to have the majority of the market share and then since then the Oracle network computing environment has been expanded to generate other computations automation computations computations about getting to Identity now you want you want to use mine switch I was going to say can you give us an example of uh what is it Computing on as an orle look like and walk us through that yeah sure so one good example would be random number generation for gaming which has a similar pattern to defi where without a good random number generation system system you can't trust the blockchain game because somebody could be controlling the random number just like they could be controlling the price in defi application that was the first form of computation on chain link then we went on to automation tasks which are simple offchain computations that need to be reliable so like automation is cron jobs smart contracts don't know it's uh what time it is so they need to be triggered then we moved on to computations in the form of what's called chain link functions which is the ability to call any API at then do a computation about around it so it's a lamb the like system which can just do arbitrary computation and that system has evolved really really far now we'll be announcing more about that at smartcon that' be really cool stuff there and then another form of computation is actually cross-chain bridging so cross-chain bridging is just a data transmission problem it's a data transmission problem not from an offchain set of data feeds or an identity service or a proof of Reserve feed it's an a data transmission problem between two chains but it's fundamentally the same security issues of how do I validate and generate consensus uh now the the way the computational system really looks is let me get a few data points from a few different apis and let me do some pre-processing and some computation on them in an oracle Network that I don't want to do on a blockchain for privacy reasons or just cost yeah for cost reasons or because the blockchain you know doesn't do those computations another really interesting direction is that Oracle networks are uh the interface to all external resources including AI models so let's say you wanted a smart contract to utilize an AI model to do evaluation of an asset or to evaluate a situation you know whatever AI models end up doing well and really what AI models do in my opinion for the Oracle Network space is they take a lot of what's called unstructured data that historically wasn't in an API wasn't in a kind of definitive form and they turn it into structured data right so the constant question that I've got over the years about chain link was well what can you really verify with an oracle Network what about this thing that's unstructured data that's a bunch of weird data that like no one can really make sense of and now with AI maybe you can turn all of that unstructured data into pretty reli structur data that is then fed into a smart contract expanding what the smart contract can be about right so that's another example of the Oracle Network just effectively make it offchain accessible and you can have information outside the system partly but but but good example AI models have hallucination they have different um there's not many different models basically they all use Transformer so right now decentralizing them isn't as valuable but I think we'll be at a point where if you ask the same question to five different AI models Oracle networks are very natural way to ask that question right so you run five different AI models one AI model on three nodes each and then you you aggregate the response similarly to how you aggregate the response from multiple a apis about crypto prices across a few hundred different exchanges and you get an authoritative result that's more reliable than anyone's single response from anyone's crypto Exchange in the price problem or any one AI model in the AI problem and so what once again what Oracle networks do is they're a Computing environment to do consensus on non-blockchain things maybe you want to do consensus on price related non-blockchain things maybe you want to do consensus on weather related non-blockchain things maybe you want to do consensus on AI related non-blockchain things maybe you want to do consensus on proving identity with zero knowledge proofs proving something about the identity without all the IDE like who knows what what all the cool stuff you could do non-blockchain consensus on to expand you know what's possible that's kind of what it's evolved to at this point and kind of let's kind of bridge directly that into maybe learning more about what ccip is and um I guess in the last six months since we last chatted uh what's happened in the world of ccip development so there's been a lot of adoption there's been a number of Canon canonical Bridge announcements where a number of really technical teams have evaluated the protocol as the reliable way to do cross-chain bridging um there's a lot more adoption in the Trad five world so ccip seeks to be a messaging and value transfer mechanism um across both web 3 Defi and trafi capital markets to get them to interact with each other in useful valuable ways because the value trafi Capital markets will be the biggest user base of web 3dy because web 3dy will have risk appetite to create bigger yield than the traditional world and if even a very small percentage of the multi hundred trillion dollar traditional Finance World which believe me that world is full of people that want to take more risk for more yield want to gain access to that defi yield how are they going to do that so there's a lot of progress on canonical usage of ccip as the official Bridge the native Bridge technology of chains because chains don't want to make bridges chains make chains chain teams want to make a good chain just like Chains Don't Make Oracle networks because they have good Oracle networks from chain link about data and identity they they made native Bridges because there wasn't a good way to have a reliable bridge and they had to hack it together and make it like Waits seven days and takes 10 days and like it's a it's an it's it's a it's a secure MVP with some scalability and a lot of security with a lot of compromises and a lot of those Canon those native chain bridges are now switching to ccip because they do an evaluation process and then a lot of adoption of ccip and trafi so I I think the next stage in all this is actually getting all the trafi uh users of ccip to proactively become users of the public chain Bridges and public chains that are also on ccip that's that's a big deal and I think the security of ccip has continued to hold up uh I think a number of other Bridges have gotten hacked and basically when I when I look at the bridging space I still see a lot of very weird security compromises many bridges are basically still two of two multi sakes often controlled by a single entity which makes it very confusing when they call it decentralized on their website so and it's just like the same pattern again and again so I I think the pattern of of security in the bridge space is is not improving and so ccip has has this very very large Advantage once you actually look at how the security works and it's very similar to the advantage it had when you you were early in the Oracle data space and the Oracle data space was like oh yeah uh I made a defi thing and my team runs the Oracle want to give me a billion dollars and it'll be good like no we don't want to give you a billion dollars because we don't know how this thing runs that like controls every important aspect of the contract security and then chain link appears and says hey here's a truly decentralized way to do this that's secure and reliable and lo and behold we we reach a new level of Define a new level of people being able to rely on it so I I think we're we're on track to that in the in the bridge space awesome um I'm sure a lot of people ask you what are Trends you're seeing in this space so we're not going to ask a version of that and the question I have for you is what are you seeing from the traditional Finance World when they think about whether it's working with chain link or just kind of their perspective of uh Defi and crypto it's super positive it's the most positive I've ever seen it you sure about that yeah okay it's extremely positive and I'll good news I I'll explain why there's there's two concrete reasons why um one is that the asset management industry which is known as the buy side in the capital markets world is basically the purchasing power of that thing and they have a lot of Leverage on people because they buy stuff right they're they're the demand of that world this is Black Rock Fidelity Franklin Templeton these people right historically in the capital markets new technology adoption that is driven by buy side demand from the asset management industry has a much higher rate of success because they are the Demand right so they want to do something there's some technology to let them do it there's a sell side of the market which wants to sell things which is the private banking sector and you know a few other asset issuance kind of models um but they're at the be they're they they have to run around and and meet Demand right so so one really positive sign is this is not driven by the people that want to sell things this is now driven by the people that want to buy things which is a really really powerful High leverage position in that industry and you know that's been kicked off by Black Rock and Biddle very well Fidelity is doing stuff on chain we power some of CH Fidelity's production live funds on chain already awesome with with nav data um and the the second really really positive thing is that the demand from their point of view is there so like the bidle fund as a fund based on the basis points that it charges based on how it's performing is a successful fund it's viewed as a successful Financial product that makes significant revenue for its issuer the the Black Rock folks right so it's a success that's great so this thing is successful why is it it successful because the Crypt bro defi money is Big it's big enough to make it successful like this is the best thing you could ask for you you have somebody make a financial product it is successful their their competitors look at it and go wow that's a success that I would love to replicate and they start doing it too right so so now the question is how far can that success go how much Crypt bro defi money is there to make ble more successful make Franklin Templeton successful make Fidelity successful and the more of that money that flows into those things which it will because in certain ways those products have yield have various Superior qualities and now they're on chain so they're portable and they have all these nice onchain properties people like um the more successful they are the more everybody in the tra five industry can point at them and say listen like you like D5 you don't like D5 we're here to make money right everyone's like uhhuh that's why we're here okay they made a lot of money like why are we ignoring this and there's not really much that people in you can't debate that there's not much debate right it's like we're here like you you don't want to make money okay like don't work in my my digital Assets Group right and and that's the third thing that's actually really positive is now you have dedicated digital asset teams so I've been working with these people with with the banking sector for over 8 years years so even even longer than chain link so Swift for example we've been working with for like I think over eight years seven eight years um second public pilot with them worked with many banks and asset managers over that time and historically I would be dealing with the quote unquote Innovation people right so then like let's do an experiment let's think about it let's try something out let's do a pilot P whatever now you have people who only do digital assets the dedicate you have a dedicated digital asset product manager you have a dedicated digital asset engineering leader you have a dedicated digital asset you know so on and so on do that make sense this is um really really big because those people have kpis performance you know payouts all this stuff based on what do they generate so I I personally think that if you just look at the amount of money that you're talking about in the traditional Financial world it's way way more than our industry like personally I think the rwa industry will overcome the total value in cryptocurrencies and then our industry say that one more time I feel they didn't catch that so rwa rwa okay stable coins gold coins real estate coins um whatever coins tokenized funds that will surpass the value of cryptocurrencies and then our industry will not be about cryptocurrencies they it will be about blockchain technology being used for all assets not just for this crypto cryptocurrency will be a part of it be a few trillion dollars of value but there will be more trillions in value in this other format of rwa tokenized funds all this stuff and for that to happen you don't even need 1% of that to go on chain it's sub 1% % you know so you you you really don't have to be that right about this because because the sub one% is still multiple trillions and yeah it's especially Global markets in total we're talking about hundreds of trillions so you just need sub one% like how far can spe interest in cryptocurrencies go we can go from two to five trillion we can go from two to 10 trillion 5x maybe that's a that'd be nice that'd be like wow what a success this other thing is hundreds of trillions right depends who you talk to between 400 to 800 trillion depending on how you value the derivatives market right I was going to say derivatives themselves are like 100 plus but so it depends just how you value derivatives notional value this value that value but sub one% of that is well over 10 trillion and you have the biggest people in that industry starting to say hey why don't we migrate all this value onto a blockchain and like they're doing it because happening so yeah our industry is it's kind of like right you know the internet started out with email great and everyone was like email is going to kill the US Postal Service that's what the internet is like yeah at a certain point in time that's what the internet is but what the internet really is is information technology information technology is images credit card numbers for you know combine those you get e-commerce video calls all this stuff right so the internet really changed as from like being defined by email I feel like the early days of tokenization in cryptocurrencies is like the email Days of our industry the e-commerce days have just started with dii but the real version of our industry is is going to be when all of this value flows into it and it's going to flow in from this rwa fund tokenization traditional world at like let's imagine it's not sub 1% let's imagine it's 2% like still double digit trillions it's like holy 2% two getting 2% of something is that I mean yeah that's hard is that achievable 2% like 2% is achievable you can get 2% market share of something you know chaining has well over 50% market share of something much smaller than the hundreds of trillions but 2% you know imagine it's 3% like it's simple arithmetic here it's it's it's it's it's happening and it's going to be the way it is so I think the people building rwa stuff getting that synchronized with defi are really really uh in the right place I think both Defi and the RW world are really going to connect and chain link creates kind of the standards for that to happen you know how does the trafi community the defi Community agree on a settlement price how do you send a stable coin from the trafi user on the City Bank chain to the ethereum defi protocol to use it and get the additional 2% in yield on the stable coin right how does that all happen like how does that get sent in a secure way that both you got to facilitate that whole transaction yeah right by ccip then you need identity data guess who can provide identity data in a in a privacy preserving way Oracle networks Deco so on and so on so it's kind of just helping build bu this endtoend uh set of transactions that are going to Define what our industry is about that's kind of the project I I feel myself and you know the the chaining Community is is working on now so maybe to conclude um if you were to make any predictions on what timeline do we see a lot of these things happening at scale um how far out is that from from your perspective so this year we're already on production with uh things like Black Rock and Fidelity on production using us and tle Templeton on production so you see a lot of this really key part of the capital markets on production I think all of their goals in line with all those digital asset employees I just told you about is to scale that I know they're trying to scale that I know they're looking for more sources of you know defi money Crypt bro money all this money you know crypto VC money whatever and I think they'll be moderately successful at that so you'll see a moderate amount of scaling of of those kind of asset management folks that came in early during next year and I know that a number of institutional users are starting to go to production next year that we're working with and that you know we're in the process of of helping get ready for that so I think you'll see early production of the institutional side next year and then once they go to production the question will naturally be okay we're live with this thing we have this institutional grade a tokenized fund with like a minimum of 20 million from another institutional buyer on some L2 we made or whatever um how do we scale that how do we turn the how like we did it we launched it guys your ass is now on the line to make it a success hope you can do that or else you probably get fired welcome to banking um so then the next year they're going to have metrics of like okay we launched the thing you wanted to launch last year like what happened so 2025 they launched institutional stuff 2026 they look at like the numbers on that growth if that growth is solid the part is really on and then 2027 they probably have invested in in the growth of that and so the growth really gets going uh and chainin kind of is in the position to help facilitate all that so that's that's the optimistic timeline that I see um for for the institutional side but the web3 trafi thing is already happening uh and it's actually really good for for web 3 because one of the reasons web 3 has some some really horrible failures like Tera is because they haven't diversifi the collateral of something so if Tera was even 20 or 30% some treasury token or something it very possibly wouldn't have failed at all because what really gets Le you would know what the back stop would be you would have a back stop of 20 30% the thing that really makes things crashes like the zero right like am I going to go am I going to hit the zero if you're at 20 30% you can basically assure I think a certain part of your depositor base of of some safety and I I think that the terror likee kind of Crash thing is is still a risk for many crypto protocols like you have a bad day in crypto and it just gets worse and worse and worse because my God how much crypto exposure did all this really get man it got a lot more than we thought and then their failure leads to even worse crypto prices there's like Spiral of death right but imagine if you you had a thresh you had like a floor on that spiral of death which is like 30 to 50% of this thing is uncorrelated with crypto okay fine just resembles a crash and you know exactly kind of what this is a bad thing but at least there's recovery we had three bad days but you're never going to go to zero 50% of the collateral is is in various forms of RW ways we had three bad days you know every year crypto has three really bad days and like a week of really good days welcome to crypto if you didn't know if if you want to be part of it you can stay if you don't you can go but for the people that know how crypto works you know you're not facing the the ominous zero so you're you're you're not going to bank run the thing and and create another Tera that's like a real thing for for the crypto industry so this is good for everybody just to be clear it's good for the crypto industry in many ways and it actually I think helps the crypto industry grow into what I would see as its full potential which isn't just more cryptocurrencies isn't just more mcoin you know let's make pump that fund meme coins until we drop it's like how do how does blockchain Technology power the way the world works right like let's not forget what we're doing here we're making technology that will power how the world works that's what this is supposed to be about right it's not supposed to be like speculative Funhouse time that's a nice thing and it gets a lot of money into the ecosystem to people to build things but I'm not sure if that's what you know I signed up for 14 15 years ago casino is not the goal yeah that's not that's that's nice right it's like there's a lot of value and it attracts usership and attracts people to build early versions of things it funds great projects it gets things going but like the point is blockchain technology Powers how all value is created managed and transacted globally right like it's not about hey we're in this nice cottage industry worth2 trillion do which is a great cottage industry like it's like the maybe the biggest cottage industry ever like wow what an what a nice Cottage that's like the nicest Cottage I've ever seen but that's not the point right the point is how does this become the way the world works that's at least what I'm what I'm working on Amazing well Serge it's always a pleasure to have this discussion with you you always end up uh giving also Me A New Perspective and I want to thank you for taking the time and telling us about how you're thinking about the future my pleasure thank you for having me good to see you [Music]