Insights from Chainlink Co-Founder on Blockchain's Evolution

Sergey Nazarov, the co-founder of Chainlink, recently engaged in an insightful conversation with Ash Bennington, Senior Host at Real Vision.

The Role of Oracle Networks

Nazarov explained that blockchains inherently generate consensus on transactions, private key signatures, token ledgers, and smart contracts. However, they do not extend this consensus to external elements like data, computation, and cross-chain communication. This is where Oracle networks, particularly decentralized ones pioneered by Chainlink, play a crucial role. They ensure the security and reliability of data fed into decentralized finance (DeFi), computations outside the blockchain, and connectivity among various systems.

Chainlink’s Oracle networks have processed transactions worth approximately a trillion dollars, underlining their significance in the blockchain world. These networks enable advanced blockchain functionalities by providing secure and reliable external data and computations. Nazarov compared this to the evolution of web applications, which became more sophisticated as they could integrate external data and systems.

Nazarov also highlighted the security aspect of Oracle networks. He pointed out that the security model of a blockchain can be compromised if the external data controlling the on-chain state is insecure or easily manipulated. This security is crucial for the execution of advanced functions like DeFi and real-world asset tokens.

Discussing the broader implications, Nazarov touched upon the integration of traditional finance with blockchain technology. He mentioned working with significant financial institutions like ANZ Bank in Australia, which manages over a trillion dollars in assets. This collaboration aims to bridge the gap between traditional financial products and the blockchain ecosystem, leveraging Chainlink’s Oracle networks to enhance the functionality and security of these integrations.

Integration of Real-World Assets

In the second segment of the interview, Nazarov continued to elaborate on the integration of real-world assets (RWAs) with blockchain technology. He emphasized the importance of reliable data access and the role of Chainlink in providing proof of reserves for assets like gold coins.

Nazarov explained that RWAs are defined by their connection to the real world, necessitating accurate and timely data. For instance, gold coins on the blockchain need to correspond to actual gold reserves, a verification process facilitated by Chainlink’s proof of reserves. This process ensures real-time validation rather than relying on annual audits.

He also discussed the natural progression for banks and asset managers in packaging various real-world elements into financial products. This progression is leading towards the development of advanced DeFi protocols and the integration of RWAs with capital markets. Nazarov highlighted the potential of RWAs as valuable collateral in the Web3 ecosystem.

Nazarov then shifted focus to the role of market infrastructures like SWIFT and DTCC in this integration. He noted that these institutions are driven by client demand, which is increasingly favoring blockchain as a superior format for value and transaction management. He detailed Chainlink’s collaboration with SWIFT, aiming to repurpose its widely accepted standards for blockchain interactions. This collaboration would enable banks to continue using SWIFT’s infrastructure, facilitating a smoother transition to blockchain technology.

Discussing the Depository Trust & Clearing Corporation (DTCC), Nazarov emphasized its role in ensuring legally compliant transactions in the U.S. securities industry. He pointed out that while these infrastructures may seem technical, they are fundamental to connecting traditional finance with the blockchain-based decentralized system.

Nazarov also touched upon the current state of the blockchain industry, noting its growth past a trillion dollars and the potential to reach multiple trillions. He contrasted this with the traditional finance world, which manages hundreds of trillions of dollars and is gradually adopting blockchain technology. He highlighted the increasing establishment of dedicated digital asset teams within banks and asset managers, driven by client demand for digital asset products and implementations.

Convergence of TradFi and DeFi

In the third segment of the interview, Nazarov continued to discuss the integration of blockchain technology with traditional finance. He focused on the concept of a unified global internet of contracts and Chainlink’s role in this transformative process.

Nazarov emphasized that traditional finance (TradFi) is, in his view, destined to become the biggest customer of decentralized finance (DeFi). He believes this is an inevitable outcome, driven by the gradual legal clarity emerging around how TradFi can utilize DeFi. Nazarov pointed out that DeFi, due to its public chain nature and higher risk tolerance, offers higher returns, making it attractive to TradFi entities seeking higher yields.

He addressed the misconception of a DeFi versus TradFi dichotomy, explaining that both sectors are fundamentally similar in their transactional motivations, governed by basic economic principles like yield, supply, and demand. The key, according to Nazarov, is making the counterparty in DeFi transactions cryptographically reliable, surpassing the reliability of traditional counterparts.

Nazarov outlined Chainlink’s strategy, which involves creating widely adopted standards in the public blockchain world and extending these standards to capital markets for data, computation, and cross-chain communications. This approach aims to ensure that whether in Web3 or capital markets, entities would rely on the same secure and reliable standards for transactions.

Discussing the future, Nazarov envisioned a world where institutional-grade financial products are accessible to all, facilitated by blockchain technology. He anticipates a market where individuals can access tokenized assets like private equity, carbon credits, and insurance cash flows. This vision is predicated on the idea that blockchain can simplify the complexities associated with these assets, making them more accessible and appealing to a broader market.

Nazarov compared the evolution of this global internet of contracts to the development of the internet of information. He drew parallels between the early, disjointed stages of the internet and the current state of blockchain technology. Just as the internet evolved to become a unified platform for information exchange, Nazarov sees blockchain evolving into a global internet of contracts, where standards like Chainlink’s Cross-Chain Interoperability Protocol (CCIP) play a crucial role in connecting different blockchain networks.

Chainlink’s Strategy and Vision

In the fourth segment ofthe interview, Nazarov took a closer look at the future of Chainlink and its role in unifying traditional finance (TradFi) and decentralized finance (DeFi). He discussed the convergence of these two worlds into a single global internet of contracts, emphasizing the importance of security and trust in this transition.

Nazarov explained that the goal is to have a world where high-value transactions and computations are settled and automated through Chainlink. He envisions two parallel worlds of contracts – one in the public blockchain domain and the other in traditional finance – eventually merging into a unified global system. This convergence will depend on the security provided by systems like Chainlink, which go beyond what’s inherent in blockchains.

He highlighted that Chainlink has processed transactions worth approximately a trillion dollars, a figure he considers low compared to the potential value flow through various tokens, real-world assets (RWAs), and DeFi protocols. Nazarov sees the industry in its early to mid-stages, with significant growth expected as more capital market participants adopt standards like Chainlink for data and cross-chain transactions.

Addressing the legal and regulatory challenges, Nazarov acknowledged that these are hurdles in integrating TradFi with blockchain technology. He suggested that the pace of integration would correlate with the clarity of legal frameworks in different regions. Chainlink, he noted, is working on solutions like Deco, which can verify identity information while maintaining privacy and legal compliance.

Nazarov also touched on the cultural differences between the DeFi/blockchain space and TradFi, particularly regarding Anti-Money Laundering (AML), Know Your Customer (KYC), and Office of Foreign Assets Control (OFAC) compliance. He believes there will be a market for protocols and assets that don’t require such compliance as long as they adhere to local laws and personal preferences.

Blockchain as a Solution During Times of Economic Crisis

In the final segment of the interview, the Chainlink co-founder shared his thoughts on the future of blockchain technology, particularly in the context of potential economic crises. He discussed how blockchain could become a key technology in creating a more transparent and reliable economic system.

Nazarov expressed his belief that the blockchain industry will increasingly decouple from the larger tech sector due to its unique attributes as a failure-resistant technology. He sees blockchain as not just a luxury in times of economic stability but as a crucial solution during economic crises. According to Nazarov, the world is potentially heading towards an economic crisis due to complex and significant economic decisions made by major global actors.

He anticipates that blockchain technology will be adopted for its substantial benefits, such as transparency and reliability, especially in a market where people seek to interact with a wider range of assets. Nazarov also believes that in the event of an economic crisis, blockchain will be the solution to many problems, offering a system that relies on cryptographic proof rather than traditional brand-based trust.

Nazarov envisions a world where ownership is not just a password to a database but is controlled by private keys on personal devices. He sees a future where reliance on insurance companies is based on cryptographically verifiable mathematical truths, ensuring that policies cannot deviate from their promises.

He acknowledged his tendency to be pessimistic about the current global financial system’s sustainability, expressing surprise at its continued functioning. However, Nazarov remains convinced that there will be a global correction back to reality, and blockchain technologies will play a crucial role in addressing issues like solvency and asset control.

Featured Image via Pixabay

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