How Oracles Unlock the Value of DeFi

Transcript

[Music] hello everyone edcon i'm alan jo i'm super excited to be here today with you all to share with you how smart contract oracles are unlocking the value of the d5 revolution so first we're all in this industry because we're excited about how the blockchain will revolutionize supply chains insurance finance and countless other services however there's a fundamental challenge for blockchains to fully fulfill this vision the blockchain is an isolated database

and it's separate and unaware of what is happening in the real world the world that you and i live in the blockchain cannot communicate directly with the real off-chain world and this is what we call the oracle problem blockchains gain the security from a distributed network of independent miners or node operators and the blockchain's decentralized nature though prevent it from directly accessing off chain information real-world information such as financial market data from bloomberg or the new york stock exchange or vent data from iot devices or gps locations cannot be fed into the blockchain

similarly decisions made by smart contracts on the blockchain cannot be communicated off-chain to trigger payments in other actions what we're missing is a communication layer between the on-chain and off-chain world because of this missing on-chain off-chain bridge the majority of historical smart contract use has centered around tokenization this is because issuing and tracking changes in token ownership is contained to on-chain movements for example if you gave me one bitcoin all that information of you handing that bitcoin to me is tracked on the bitcoin blockchain

however the data around token transfer is all kept on chain yet tokenization is only one really small percent of smart contracts for what their possibilities can be cut yet the true power of smart contracts is when we integrate them into existing legacy systems in infrastructure it's when we connect these contracts to the real world that we build universally connected smart contracts that's when we really really see the power of smart contracts to change the world we're all witnessing the recent meteoric rise

in decentralized finance otherwise known as defy in just the last few months we've seen the value locked in d5 soared to almost 4 billion dollars unlike traditional you know tokenization d5 applications need to connect to off-chain data they need to understand the price of an asset from multiple data sources including both on-chain ex dexes and off chain centralized exchanges we at chain link are working with many of the top d5 projects including synthetics ave nexus mutual and many others to provide them with this price data

for example ave a popular borrowing and lending platform needs to know the price of eth to usd to calculate the collateralization rates on their loans that eth to usd rate is off chain in our previous tokenized environments you only needed one part of the contract the token generation contract all that information to track token movement is on chain there was no need for external data but now with d5 products and all the other blockchain use cases that we all want to see realized

your smart contract has a new part an option part this option part encompasses external data enterprise systems traditional payments methods and so much more in order to provide the same trustless securities though guaranteed by the blockchain which is why you want a smart contract to begin with you need to have end to end reliability within your entire smart contract system what we do at chain link is provide the secure and reliable mechanism to bring data on chain as well as off chain this requires a number of new approaches through something called

an oracle we focus on creating a decentralized oracle system that validates inputs provides access to payment outputs and connects to various existing infrastructure and systems we enable smart contracts regardless of what chain they're on to get all the inputs and outputs they need so let's talk about how we approach this in creating secure oracles for web3 first we do this through decentralization we have countless independent civil resistant nodes in our oracle network similar to the blockchain decentralization is at the core next these nodes provide security

through various cryptodoctric systems in addition to having the top industry node operators we also have indus enterprise node operators we recently welcomed deutsche telekom one of the world's largest telecommunications providers as a node operator to the chainlink ecosystem high quality data is another key component as the saying goes garbage in garbage out thus our oracle system focuses on connecting smart contracts with high quality credential data we also provide crypto economic security guarantees based on staking to ensure that node operators behave

honestly and reliably then we couple all of this with defense and debt practices we layer on trusted execution environments zero knowledge proofs and other secure approaches to ensure that the oracle system is secure and finally all this is supported by a large open source community of trusted developers node operators academic researchers and security auditors we are proudly built on ethereum and have been working with the top ethereum d5 applications ethereum is where we have the largest variety of data products available today we also make chain link oracles

available across all types of chains we do this because by supporting more chains we grow the overall demand for off-chain data and when you have more demand for data that becomes a greater market opportunity for data providers this incentivizes data providers to provide more data into the blockchain ecosystem overall and this benefits everybody it's a win-win situation because now developers and smart contract creators can have access to more high quality data theoretical problem is how to bring data into a blockchain right we talked about that however just

as decentralization is important to the blockchain decentralization is also critical to the oracle mechanism that's why i was the number one point that i mentioned earlier in this example you see here a centralized oracle becomes one node and is a single point of failure even if your smart contract is built on a decentralized blockchain using just a single oracle centralizes your entire smart contract it puts your entire smart contract at risk your smart contract is only as secure as its weakest link and if it's a centralized oracle then that becomes the weakest link so just as your blockchain that your

smart contract is built on is decentralized your oracle system needs to be as well we address the decentralization challenge by having fully independent sybil resistant nodes we focus significantly on the quality of the node operators and we also make node networks of no fewer than seven nodes our typical networks have many more nodes some as many as 30 or more as a user you also have the ability to see the quality of these node operators which make that information extremely transparent and all the data that's generated is open invisible on chain it's something that anyone can analyze

so we're very transparent about that some of our awesome community members also created the website called reputation.link and it features a tons of great charts and graphs that allow you to review node performance history you can compare them against a variety of metrics such as transactions numbers completed response times and more another super critical part about oracle's is data quality as mentioned garbage in garbage out even if you have the most centralized oracle system with the best security guarantees if the data that you're feeding into the system is junk

then you will get garbage coming out as well so this is a serious problem that people need to understand and it's one that creates a significant risk for defy applications if the data that you're using is not right and not good then it's triggering the wrong contracts and triggering things incorrectly credential data is a must like absolute must for any contract of value chain link was built from day one to access this high quality credential data and we've baked that ability to access credential paywalls into our original architecture many of the other oracle systems out there do not have

this ability to access premium data instead they rely on free quality data pulled through complementary free apis but this isn't doesn't work it's as if you know you're trying to watch a great movie but instead you're watching a pirated version that someone filmed on a camcorder in a dark movie theater with heads bopping around right that's not the way to watch a good movie and that's not good quality similarly when you have good high quality data you need that into your oracle system and so in our price reference contracts we only use premium data sources we don't perform any single exchange nor any free open

apis we work with professional experience data providers we also provide a lot of customizable customizability to their user here you can see a node job id that defines a specific work that a node will be providing as well as the actions it's taking to assure the quality of the data this level of definition is important because as your contract increases in value which you hope it does you will need to prove this to users users want to understand how you're triggering their contract other thing oracles need to do to maintain their security and reliability is through the use of service agreements we use on-chain agreements that define all parameters under which a node will

be delivering data to it as more data and usage flows through the chainlink system you also gain additional information about the reliability and performance of nodes in the system of a web trust where node operators have a history of performance you can start understanding how trustworthy a node operate is by its past history and finally cryptoeconomic security from staking so crypto economic guarantees are deposits that the nodes will perform as promised link tokens are used to guarantee that the data is properly delivered and if that data is not delivered under the right conditions that are set in

initial contract then the operators will lose their stake this is very clear motivation for them to maintain the security of that chain link node finally chain link is incredibly customizable we've discussed how you can decentralize the nodes you can also decentralize at the data source level you can decide on the number the type and the sources of data that you want to pull from all that is up to you and with that this is how chain link is able to power the growth of d5 we create that bridge for that off chain data from exchanges and dexes to bring that on chain into your

favorite d5 dap and most apps find it easier to use a pre-built oracle system like chain link rather than build it from scratch as we mentioned there's so many components around security reliability and research that goes into thinking about how to create a solid secure oracle system and by just using the plug-and-play system of chain link we greatly reduce the amount of time it takes for a d5 developer to take adapt to market and by doing so we allow them to build faster and build great products for end users so if you're interested you can check

out some of the feeds um live if you go to feeds.chain.link there's tons of different price reference contracts that are already out there being used live in production by some of your favorite d5 apps d5 is just the beginning we're super excited to see where this industry goes and we can't wait to see what else we can create with connected smart contracts thank you [Music]