Fireside Chat With Sergey Nazarov by Sergey Nazarov

Transcript

all right how you doing today doing good doing good beautiful day as it is every day here it's beautiful day every day is beautiful uh well hi everyone uh thank you for joining us today uh for those of you who who don't know uh Serge is the co-founder of chain link and you know chain link is the leading uh decentralized Oracle network uh you know I think for for the people that either haven't built on chain link or Arn is familiar you know could you give an overview uh of you know how has the platform evolved from you know the pricing oracles to kind of what you guys offer now yeah sure so I think the security model of our Industries there's

independent nodes that come to consensus on something and that makes it more deterministic and reliable than the traditional system so blockchains generate consensus on transactions packaged into blocks that have relatively Limited scope there's not that much data you can put in there there's some computation that can happen and primarily it's used to create like a token Ledger in most cases and then use those tokens for voting or for value or for any number of steps um Oracle networks decentralized Oracle networks which chain link invented use consensus to prove things about systems that are external to the blockchain and the reason that's important is because if you're providing

the value of a smart contract as something that's deterministic and guaranteeing outcomes and then you connect that deterministic guaranteeing kind of agent or piece of code to another system that controls it your real risk is now in that other system right so your total risk for the thing you've created boils down to how that other system that controls the contract or is connected to the contract is secured and it turns out that all the other systems around contracts whether they're Data Systems identity Systems payment systems or even other chains in many cases are not able to interface with contracts and Beyond not being able to interface they're not able to guarantee

certain security and manipulation resistance that is necessary for making a more advanced smart contract so the initial kind of body of work of Shane link was to apply consensus to market prices using using decentralized oracal networks and that that being done successfully led to defi so defi was a sub 100 million industry with 10 to 15 total protocols when we started and it grew to over 200 billion with chain link consistently powering somewhere between 60 to 90% of all of Defi and today chaining coo Powers the majority of it and the reason um that basically defi came into a

greater stage of growth and existence in my opinion is because Oracle networks came into existence and allowed both parts of the application to become reliable and deterministic and guaranteed through consensus right so blockchains generate consensus about the contract code and the token ledgers and Oracle networks generate consensus on everything else now that world of everything else is a very big world because it's everything else and it turns out that Oracle networks can generate consensus about a lot of things Beyond price data so then um initially we expanded Oracle networks to come to consensus about things like proof of reserves

identity data weather data all kinds of different data sets then uh there was a question of can Oracle networks generate computations unrelated to data that have value the first uh thing that that was put forward in the chain link system was the random number generator which clearly had a lot of value because well it's very widely used in gaming and nfts and and various other smart contracts and what that actually showed us Beyond uh data was that the pattern of making more advanced smart contracts is onchain code defining the conditions of the contract Oracle networks allowing those

conditions to operate so if you look at defi you have the onchain conditions of the contract and then you have Oracle Networks feeding in price data to allow those conditions to operate if you look at gaming you have the onchain conditions of the contract and then you have the random number generator which allows those conditions to operate and both of those things need to be secure and reliable and done in a decentralized consensus driven way in order for people to trust and put value into that application because it's reliable so after random numbers we expand it to automation automation is basically the ability to kick smart contracts when needed you know various other key basic tasks then we moved on to functions which is a a way to put generic

computation into an oracle Network and then after successfully um basically providing the most data on chain and successfully launching computation based or decentralized oracles that are the most widely used for the most value securing applications um we moved on to also applying decentralized Oracle networks to the cross-chain connectivity problem through some called ccip and so ccip is using the centralized Oracle networks in the chain link framework that have already enabled over $10.5 trillion worth of transaction value for over four years approaching 5 years without value lost and we've we've kind of arrived at a

place where you can build an advanced application that's multi-chain that's connected to multiple pieces of data and that has addition computation surrounding it that the chain doesn't do all powered by Oracle networks with a single set of security guarantees in a single kind of security model that your user base can trust and rely on right so the way to think about decentralized applications is here's the smart contract code here's the piece of data I need here's the automation I need here's the cross-chain connectivity I need if any of those three things fail or are manipulated your application fails your application loses money your

application goes down if you write high quality smart contract code that's audited then you connect it to a reliable decentralized Oracle Network like chain link to get the data you need then you connect it to a reliable decentralized Oracle Network for automation then you connect it to a reliable decentralized Oracle Network for a cross-chain connection to a source of liquidity or another set of contracts you want to use then you have a featur secure more advanced smart contract so that's kind of the place we we've arrived now basically because decentralized Oracle networks can generate highly reliable consensus on many many things and I actually expect them to generate consensus on on even

many more things including you know things like AI models and all those types of things um even the interaction with AI I think will happen through Oracle networks got true um question for you we we're in this you know uh Universe where seemingly endless amounts of new chains are are launching we have this massive FR fragmentation seemingly wallets are are not getting better what do you think it's going to take to stabilize uh kind of the the multi-chain universe uh and you know what's what's kind of chain Link's role in that um I think the the way to sorry just like ran over here basically

um so I think it's not going to get stabilized in the sense that there's going to be a huge increase in the amount of chains like the amount of chains out there is only going to increase because every blockchain L2 framework every L1 framework everything is just being made to generate more chains right the model before was let's get a Singleton let's get a single instance where we have native composability everybody has a wallet or an address in that instance and we get kind of native composability and connect it between all the wallets that was the old model that is really not the model the vast majority of blockchain technology companies are pursuing the new model is let's simplify the creation

of replicas and do load balancing right let's make everybody have l2s let's make have people have l3s yeah so if that's the technical Direction then and and it continues to become cheaper and easier to make your own chain as a bank as an insurance company as a gaming company as whoever so in terms of stability there's just going to be even more fragmentation even more chains frankly the other big Dynamic feeding the creation of more chains is VC money as long as VC's can make money by flipping the token of a new blockchain there will be new blockchains there's a very large incentive you know I made a new blockchain technology yay for me you know I got my VCS the VCS flipped the

token they were successful guess what the amount of VC money willing to invest in that just 10x do it again do it again that's kind of you know the big incentive for new blockchain going to be new technologies and more fragmentation on a on an individual kind of user level so the one of the only things that can bring um some measure of of of an ability to manage that is a single interface and a single protocol that can connect all of those chains and allow easy interaction with all of those chains through one integration so what what ccip does is is really two things the first thing it does is it has something called the blockchain abstraction layer through which um this is more for traditional Enterprises a

traditional Enterprise that doesn't want to deal with hundreds of blockchains can interface with ccip and through ccip use hundreds of different blockchain Technologies efficiently and they become future proof they don't care about the next blockchain technology that VCS want to flip a token for or the next blockchain technology that the bank counterparty wants to do so that's one of the first things that ccip does for the traditional world for the traditional world and for the web3 world it creates cross-chain connectivity with a number of features that abstract the complexity abstract away the complexity of chains so one of those features is programmable token transfers where you can basically wrap instructions around the token such that those instructions can be executed for that token when it

reaches the destination chain which means your system does not need to go to the destination chain and integrate and generate wallets and have a relationship with that chain because the ccip system will wrap whatever value you send there in instructions that are executed once it reaches that chain right so at the web 3 level and at the traditional level ccip is basically a data transfer and a value transfer protocol together and one of the big pieces of value there is that if you tightly couple data and value you can actually wrap the value in instructions that get executed when the value reaches its destination right so ccip is both data transfer and value transfer like very tightly coupled generating all kinds of very cool

features like programmable token transfers got you um you know not all VCS are that evil uh but in in general since we kind of broach the subject of of Finance you know we' we've had this pretty interesting shift this year where you know finally we had we went from kind of defi Universe being kind of all all the finance you know in the space to asset managers moving material capital on on change uh is is there something where you know that has happened recently you know in in the space or that's really driven the shift is it the ETFs is it something on the kind of technical side that is all of a sudden pushing asset managers to move the capital over because if we were having a conversation you know with the

black rocks of the world several years ago we would have you know all thought that they're crazy uh or we were crazy for you know for saying that we should have large you know again material assets on chain but that's changing very quickly now yeah even even two months before before the Bitcoin ETF if you asked people in the crypto Community what do you think of Black Rock of the 20 or 30% of people that knew what that was they would tell you I hate them that's the man I'm against the man you know fight the man all day long right but then two months after the black rocks of the world make the Bitcoin price go up everyone's like you ask them what black rock is 90% of people know and they're like wow what a great group of people let me tell you all about them Larry

finot a nice man right like it's very simple you know this a word for this is called economics right and the economics of the traditional system is very very large right that's very large economics and what all of this ETF stuff is is like a very very very small shadow of what it even is right it's like a ve it's an unbelievably small minuscule percentage of the amount of value in the traditional markets like the traditional markets have hundreds of trillions of dollars hundreds of trillions personally I think all of that value will eventually be reformat reformatted into the blockchain format and I think the

crypto Community through this Bitcoin ETF now the EF wow what an unexpected outcome um now the EF and then like you know 15 other ETFs and like 500 other ETFs later I think people are going to be like it turns out that once you do enough market penetration in all over the world in consumer markets and the retail hedge funds and the prop Traders kind of get the industry to $10 trillion what's next like where does the other $490 trillion that this industry is going to secure come from Well turns out it comes from the place where it is which is the traditional Financial system right and so the challenge is how

do you convert and transfer all of the value in the traditional Financial system into the blockchain format of value what what are the things that need to happen and eventually we'll we'll be in a world where the way a defi protocol is successful is by allowing all the users in various large asset managers and Banks to use that defi protocol because those users will just keep their money in those places and those places will generate onchain wallets for those users and the question will be how did those onchain wallets for generated for those users interface with the web 3 defi thinks and the answer not surprisingly and like a very self- serving way is chain link right and I'll

explain why so the the reason is uh transactions right so how do transactions work transactions work on the basis of the creation of an asset you're not going to really create an asset in the real world asset sense which is the industry I think you're talking about without data right real world assets are generated only through data going on chain to be attached to the asset whether that's a real estate asset or a carbon credit asset or money market funds or tokenized funds or private Equity each of them needs different pieces of data then you actually need additional data like identity data to even move those assets in in a way that the banks and all these asset managers can do that and then after you actually agree that you want to move it you know I send you a stable

coin you're going to send me you're going to send me a carbon credit you need a system to send it right you need a system to send the stable coin you need a system to send the carbon credit between chains because once again as we said a minute ago there's going to be a ton of chains everyone's going to have their own chain like making a chain is going to eventually as cheap and easy as making a database and that's where ccip comes in on the data side there's the chain link data side and there's a whole bunch of other computational around that that we don't like have the time to go into but the way I view all of this now is what is needed for a transaction to happen what's needed for a defi transaction to happen is unregulated defi price data that's enough what's needed for a defi

transaction to happen across chains price data and a cross chain correction uh Co cross chain connection that's it that's all that's needed what's needed for a transaction to happen between the unregulated defi thing and the regulated Capital markets thing where we literally have users that we work with that have a single bank that we work with would have like a trillion assets under management like a single user has pretty much half the amount of money in the whole industry so it's like it's it's insane um so there there's like a lot more data right you need the same price data you need the cross chain connection you need identity data you need some nav data to comply with some accounting rules you need all this stuff so what chain link is basically doing at this point is generating all the data all the

computation all the cross chain connections that are needed for people to generate assets generate smart contracts and generate transactions and it's really the measure of transactions that that I'm looking at how many transactions can be generated between Bank chain a bank chain B and public chain C what is needed to do that how does Central Bank digital currency as a form of payment fit into that and does that increase the amount of transactions how does the creation of more real world assets generate more transactions more value in our industry and just to be super duper clear the capital markets the banks the asset managers as they make chains initially they will put that value and that form of payment on their own chains

but eventually that value will also interact with public chains and that's another big thing we're doing is we're just creating the standards for both of those worlds simultaneously you we've been we've been talking as an industry about you know real war assets and tokenization for such a seemingly long time but now that the seal you know has been broken you know with uh with the ETFs what do you think is going to be you know the next big potion in terms of assets that get tokenized and and how you guys look at that as chain link it's very very hard for me to say it fundamentally depends on the emergence of a secondary market for that asset so if there's a secondary Market with a lot of liquidity a lot of Market depth a lot of uh people wanting that

asset I am positive that there's a lot of people that are going to generate inventory and pump pump it into that market so the real question is what secondary Market will emerge first for real world assets there are really like two groups of assets two ways you can think about it one is a core set of financial assets like treasuries like core Financial products that make up the majority of the financial system money market funds treasuries are good examples very core very fundamental assets nothing new about them extremely the most widely used thing in the financial system to store value and gain an interest on on value um then you have assets at the edges these are new assets that have not existed in an easily

transferable fractionally ownable uh form right these are things like tokenizing private Equity Funds tokenizing real estate tokenizing carbon credit tokenizing gold tokenizing things that it was previously hard and complex to own and hard and complex to have smaller individual pieces of ownership which of those I can't even tell which of those two categories is going to emerge the argument for the core um money market fund real world asset thing is that it's a stable asset that a lot of people want the interest rate on these assets is very high now and it's a very good form of collateral that eliminates risk so I imagine that I I know that there's a lot of onchain dii

protocols that want to diversify their Risk by having collateral in the form of onchain treasuries and money markets because it is so different from crypto right the failure mode of many protocols like terara and others in in our industry has been you are backed by crypto you have a fantastic day 364 days out of the year and then you blow up in that one day because you are like so indexed towards crypto and that like happens again and again that's the case I think for from the web three point of view from the trafi point of view it's collateral management which probably this group is not interested in so we won't get into that um for the assets at the edges it's really anyone's guess if

I had to guess right now I would say carbon credits are are probably a leading um a leading option because it's a big industry it can function without regulatory Clarity and there's just this big Trend in the banking sector of like carbon credits carbon credits green generate more carbon credits and the carbon credits also have a big fraud problem where basically they can be double spent basically like you cannot tell if a carbon credit has been redeemed and if you cannot tell if it has been redeemed you can fraudulently sell it to someone else so it's like a very basic data problem and if you just verify that the carbon credit has has not been redeemed and is still valid and you write that

data into an rwa about that carbon credit you've seriously put a dent in that fraud problem which is another reason I feel blockchains and smart contracts can be very applicable to the carbon credit Market um so probably I would say carbon credits well since I have you on the hook talking about talking about the future uh you know lots of Builders developers in the room you know what are what are what is some advice that you can give folks in terms of you know building the next breakthrough breakthrough thing you know on whether it's on chain or it's on chain like in general you know what is you know what are areas that are left unturned or unexplored or where you're seing really interesting work that really hasn't been

overly financialized yet uh and there's kind of interesting computer science happening I I mean the first thing that I would say just for my own experience is you should work on something that you find interesting now that doesn't doesn't mean that you can't change what you work on so if you find defi interesting go from doing one thing in defi to another thing in defi what I wouldn't do is I wouldn't just work on something to make money basically because it's going to be very hard and if you don't find it inherently interesting in some way you're going to become depressed and quit and that is the most common failure mode in the first 5 years of doing anything is people get depressed about the thing they're working on because they don't

have any kind of real interest in it so my first if you're asking for advice my first piece of advice is regardless of what anyone tells you is hot this is a great way to make money you know I got into the bit blockchain industry in 2010 back when it was Bitcoin only and Bitcoin was on the news about being used for dark markets as a form of payment so everyone I would go to and talk to about Bitcoin they would ask me what are you doing now Sergey what do you the people I knew and I would say I work on bitcoin stuff now and they would say that drug Mark that drug thing and like I just found it interesting right so my first very very strong piece of advice is no matter how hot something sounds if you're not at least somehow interested

in what it actually does do not work on it because I have I have yet to meet a person who is able to overcome all the friction and pain over the five plus years that it takes to make something if they are not somehow interested in what they're making like that's the really the first thing Beyond any technical decision now the thing that you could think about being interested in I just want to couch it in that sense right like these are the things you might want to think about being interested in defi definitely um this is going to be another big wave of defi for sure real world assets the tokenization of things in the real world is a and and connection back to the real world with a data driven way uh gaming blockchain

gaming is is is a real thing and the the incentives and unit economics of gaming can be really changed with blockchain things so like gamey and the interaction of gaming and defi is an interesting kind of an interesting intersection because you can create all kinds of incentives for people around games that have never existed in games before um it's also getting easier and easier to build games so you know maybe there's something there and then other than that I I wouldn't go into Trad I wouldn't go into trafi I wouldn't go into Capital markets even though I've talked to you a lot about that CU that costs a lot of money to do and like many many years to get right I mean I've been for example working with swift for over 7 years so like you got to really be

interested at that point so you know Capital markets go work go work with banks make technology for banks takes a lot of money a lot of time and you actually probably already have to know something about that or like get get really really lucky and have enough time to learn it in the way I have been lucky um so those those would be my recommendations but I know this is a hackathon and people are kind of think thinking about what they want to do and the first thing is really the most important thing if you're if you're not interested in it just at some level I really wouldn't uh I really wouldn't continue makes sense um and you know I think first time visiting Dubai um and you know save for you know some of our challenges uh with with the weather how

have you found the community here in in terms of crypto adoption and Builders so Builders I have haven't interacted with as many Builders during this week because it's been a lot of more um kind of senior meetings and presentations to to to all kinds of actually Capital markets folks once again but um sorry so I don't know enough about the Builder Community this looks pretty good I would say so I I I I recognize some of the people that I know that build things so they're here so I would say uh just my cursory understanding on the Builder side is is very positive generally be beyond that I think this place has a very big future as a hub for our industry I think

there's going to be three very big hubs for our industry Singapore Hong Kong and Dubai and eventually they'll also do transactions between each other which is kind of what I'm trying to work through at this point um but I think Dubai is definitely up there I don't know where it is in that top three list but it's definitely in that list so it's definitely one of the top places in the world to to build all this stuff both because of the regulatory Clarity the amount of smart people here the amount of money that can invest or use the product uh and also the the whole place seems to really be on the upswing like this place seems to really be going up and to the right growth you know that's always a positive Dynamic um it's a neutral it's a neutral

place there's not that many neutral places in the world and it seeks to it seems to seek to be genuinely neutral which is actually in line with the the ethos of the technology we build in this industry and so I think that's also very compatible final question you know what's what excites you most over over the next year or two in in the space um in the whole in the whole space in the whole Space not Capital markets related not Capital markets related okay um that elimates like half of my answers um so I guess in the D5 web3 space What

excites me the [Music] most I mean I think it's the things that I said that you folks might want to work on frankly it's that same list basically defi is going to have Resurgence real world assets is a is is something that's growing rapidly there's a lot of great firms building that blockchain gaming and game Finance game f like the interaction between gaming and and defi I think has a lot of very powerful Dynamics all three of those all three of those things since I can't mention Capital markets I won't mention how there could be hundreds of trillions of dollars eventually flowing into our industry from there so won't mention

that but other than that yeah these other these other things um are um I I I think the thing that I'm excited about seeing and and have not seen enough of is usability so I know a number of people working on usability and I know a number of people on solving that's another thing you might want to work on that's a very valuable problem um is how to make private keys and blockchains and defi protocols more usable without people having to remain remember a seed phrase or like all this stuff right like the usability of our industry is still nowhere near web 2 which leaves it being

not too competitive in some in some categories of assets and and apps so usability I think if I were to see more more more scalability from blockchains better usability generally and um more high quality assets generated in the web 3 space that would really you know up up the whole thing over here on this side of the equation yeah build better wallets guys um Sergey thank you so much for for your time today uh and hope you enjoyed the rest of your stay in our humble Village By the Sea thank you I I think I will thank you very much thanks for having me