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Speaker 1

00:00

The following is a conversation with Sergei Nazarov, CEO of Chainlink, which is a decentralized Oracle network that provides data to smart contracts. He and his team have done seminal research and engineering in the space of smart contracts. Check out the Chainlink 2.0 white paper that I found to be a great overview of their technology and vision. It's 136 pages, but very accessible.

Speaker 1

00:24

Quick mention of our sponsors, Wine Access, Athletic Greens, Magic Spoon, Indeed, and BetterHelp. Check them out in the description to support this podcast. As a side note, let me say that externally connected smart contracts that combine the ocean of data out there with the security of the blockchain are fascinating to me, both technically and philosophically. Data is knowledge and knowledge is power.

Speaker 1

00:51

I think the more reliable data sources we integrate into our decision-making, especially when those decisions are executed by programs, the more efficient and productive our decisions become. There are interactions between humans that should not be formalized digitally, like love, for example, but for all the others, there's no reason for smart contracts not to automate away the menial parts of life. Making more room for good conversation over brisket and maybe some vodka with old and new friends. This is the Lex Friedman Podcast and here is my conversation with Sergei Nazarov.

Speaker 2

01:33

Is that Jozhek there?

Speaker 3

01:35

So I gave away everything I own a few times in my life and he accidentally survived and I don't like stuffed animals. What I really liked about him, I got him in a thrift store, what I liked about him is cause I'd never seen a stuffed animal that looks pissed off at life. Like they're usually smiling in the dumbest of ways and this guy was just pissed.

Speaker 2

01:56

Yeah, I got to tell you that's actually pretty funny.

Speaker 3

01:58

I like this guy. If you had to live only in the digital world or the physical world, which would you choose?

Speaker 2

02:06

So I think this is actually a question more about what the fidelity of the digital world would be versus the physical world. I think this type of question, this whole simulation thing actually comes from papers about 20, 30 years ago in the philosophical world where people tried to make this thought experiment of would you be comfortable if everything that was happening to you happened in a simulation? What they were trying to do is they were intuitively trying to understand is, is there some kind of intuitive personal connection we have to something being the real world, right?

Speaker 2

02:40

And then the Matrix movie actually came out of these papers and then these ideas made their way into the public consciousness. I personally think that if I had the choice to be in the digital world at the same fidelity as the real world with immortality, I would absolutely go with the digital world.

Speaker 3

02:57

Wait, wait, wait, wait, wait. How'd you add the immortality part? That's a, you don't get immortality.

Speaker 2

03:02

If you think about how we would go into the digital world, right, our brain patterns would be mapped onto some kind of probably virtual machine, right? And that would mean immortality, right? Because the virtual machine has no limit to how long it can exist.

Speaker 3

03:16

Well, don't you think there would be like a versioning system? Like there'd be, this is a soft fork versus hard fork question. Whether Sergey version 2.0 would be different from Sergey version 1.0, there would be an upgrade.

Speaker 3

03:30

So that's a mortality. Sergey 1.0 would die in the digital world. You get like a software update and then that's it.

Speaker 2

03:38

Well yeah, when people go into the Star Trek transporter, are they killed or are they transported? I don't really know. I haven't read any papers on this.

Speaker 2

03:46

I haven't really thought about it too much.

Speaker 3

03:47

There's no white paper on the transporter.

Speaker 2

03:50

Not at this point, so.

Speaker 3

03:51

Well, what does fidelity mean exactly to you? Is it like strictly, so the fidelity of the physics world, the physical world is maybe now questions of physics, quantum mechanics, what is at the bottom of it all? Or do you mean the fidelity of the actual experience?

Speaker 2

04:07

Like the richness of the experience? It's just perception. It's just perception.

Speaker 3

04:10

The human, but that's limited by human cognitive capabilities.

Speaker 2

04:14

It is, but I don't really have anything else, right? I think all of these papers that brought up these questions of a simulation, they were in epistemology and metaphysics. And what they were trying to do, I think, was they were trying to put people through a thought experiment where they would come out on the other end and say, the reality of life is really worth something.

Speaker 2

04:35

And ignorance isn't bliss, which is that consistent statement in the matrix, right? Ignorance is bliss. That's what 1 of the guys says when he's doing something wrong and trying to get back into the matrix. And the question is, is ignorance bliss?

Speaker 2

04:47

And it's like a different version of that. I think from a perceptual point of view, if my perceptions aren't in any way different, so fidelity is very good, it doesn't matter. I don't know. So if I don't know something, it doesn't really exist.

Speaker 2

05:04

And if it doesn't exist in my perception or my consciousness, then it doesn't exist, period, for me, at least. And then whether it exists in some more metaphysical version of things, I personally never really got into the metaphysics stuff because I I could never really I Couldn't understand what the point of it was right it it it's 1 of these things where I couldn't really get what? What what the practical application of it was. And this is from those realm of questions, right?

Speaker 2

05:34

Like if there was something about the world, but you didn't have a capacity to perceive it, would it matter to you? To me, it wouldn't matter.

Speaker 3

05:43

Right. To me, by the way, the simulation thing is a really interesting engineering question, which is how difficult is it to engineer a virtual reality, a digital world that is sufficiently of high fidelity where you would want to live in it? I think that's a really testable and a fascinating engineering question because my intuition says like, it's not as difficult as we think. It's not nearly as difficult as having to create a quantum mechanical simulation that's large enough to capture the full human experience.

Speaker 3

06:14

It might be just as simple as just a really nice Quake game. Like with a nice engine, with just creating all the basic visual elements that trick our visual cortex into believing that we're actually in a physical environment. And I think that if that's true, then that's quite, you know, a high fidelity digital world is actually achievable within, you know, a century. And that changes things.

Speaker 2

06:44

Yeah, yeah, Maybe in our lifetime. I'm really hoping for that. I'm hoping somebody can copy my brain waves onto a virtual machine and allow that consciousness to continue to exist.

Speaker 2

06:55

Whether that's death or not, I don't know. But I think it's actually going to require some serious leaps. Even the VR headsets, they don't work if they go below 90 frame rates. People start getting freaked out.

Speaker 2

07:11

So you have to go from 1 gaming screen of 60 frames per second to 2 screens of 90 frames per second. And so the people's hardware today can't even handle that. And that's for these 2 little screens by your eyeballs. What it's going to take to completely trick my consciousness into not knowing the difference in terms of like, you know, all the sensory inputs.

Speaker 2

07:35

My, I'm keeping my fingers crossed. Whoever, whoever, whoever does that and is close to doing that, they should contact me. I want to have my brain waves turned into a virtual machine.

Speaker 3

07:46

Would you in that context, if Morpheus came to you, would you take the blue pill or the red pill? Meaning, would you be happy just living in that world and not knowing that you're living inside that virtual world that's running a computer, or would you want to know the truth of it?

Speaker 2

08:06

Well, actually, I think that's a very different question. There's a actually moral ethical question there about whether you should allow a bunch of people to get manipulated and killed and slaved because in the matrix, they're all enslaved as a AAA battery to turn a human being into the battery. So I think the moral and ethical question of that, fascinating enough, isn't actually different than the moral and ethical questions we face today in modern daily life.

Speaker 2

08:37

But I probably have given the choice of just completely going along or going against it. I would probably go against it if I had to make this kind of binary choice. Because going along with it, I think at that scale of scary stuff happening to people is probably something really, really, really difficult.

Speaker 3

09:00

But for your individual life, it's way more fun to go along with it. So you're saying you value the opposing a system that includes the suffering of others versus just for yourself and enjoying the ride? I mean, if there is such a binary choice, why choose the opposite system?

Speaker 2

09:21

I think it's the nature of kind of the ethical dilemma that you face in that situation. There's kind of some, you know, this is obviously not something that's happening now, right?

Speaker 3

09:29

We don't know this, right?

Speaker 2

09:33

At the end of the day, at that scale of something like that happening, yeah, at that scale of people being manipulated and harmed, then I think pretty much almost all people have an obligation to go against it. Probably that's what that looks like in my opinion.

Speaker 3

09:53

So you've talked about the concept of definitive truth. What is it? And in general, what is the nature of truth in human civilization?

Speaker 3

10:01

And just talking about the digital age, the nature of truth in the digital age.

Speaker 2

10:09

So the interesting thing about definitive truth is that it actually exists on this, at least in my mind, on this spectrum between objective truth and just somebody made something up and nobody else agrees. So what I think definitive truth is, is it's somewhere in the middle on that spectrum where if you and me define what truth is, like If you and me have an agreement of some kind, and we say, as long as the weather is sunny or the weather isn't, there is no rain on that day, then there will be an insurance policy that results. And you and me both agree that as long as 3 sensors, 3 weather monitoring stations all say that, then the definitive truth for us and for that agreement is the result of those systems coming to consensus about what happened out in the real world.

Speaker 2

11:02

I think the objective truth definition from the philosophical world is really, really stringent and very, very hard to attain. And that's not what this is. And that's actually not what commerce or the ability for people to interact about contracts needs. What I think the world of commerce needs is an upgrade from someone can unilaterally decide what the truth is, to there can be a pre-agreed set of conditions where we define what the truth is under those conditions.

Speaker 2

11:37

And then you and me basically say, if these 20 nodes or of these 30 data sources come to consensus within this method of consensus with this threshold of agreement, then definitive truth has been achieved for you and me in our relationship for this specific agreement. And the specificity and our shared agreement to that kind of truth or that definitive truth being acceptable to both of us is probably what's kind of necessary and sufficient for everything to move forward in a better way. In any case, much better than, I'm a bank or an insurance company, I'm gonna unilaterally decide what happens. It's definitely an upgrade from that.

Speaker 3

12:18

Do you think it's possible to define formally in this way, a definitive truth for many things in this world? Like you talked about weather, basically defining that if 3 sensors of weather agree, then that we're going to agree that that is a definitive useful truth for us to operate under. So how many things in this world can be formalized in this way, do you think?

Speaker 2

12:42

A huge amount. So there's actually 2 things going on here. 1 thing is the amount of data that already exists, right?

Speaker 2

12:51

And the pieces of data coming off of markets, IOT, shipment of goods, any number of other things. Like even your YouTube channel has a certain amount of likes or a certain amount of clicks or a certain amount of views and even that's quantifiable, right? So even to a certain degree what we do here today you and me right now can be quantified as far as the amount of views, the amount of clicks, the amount of any number of other things.

Speaker 3

13:15

You, the viewer, have power of data in your hands by clicking like or dislike right now, or the subscribe button, or the unsubscribe button, which I encourage you to do. Anyway, okay, so there's data flowing into all interactions in this world, there's data.

Speaker 2

13:30

There's more and more data, right? More and more data. More and more data.

Speaker 2

13:33

That data is more and more accessible to everybody. And that accessibility and the fact that there's more of it means we can form more definitive truth proofs. We can form more and more proofs. And as we form those proofs, well, we can provide them to these blockchains and smart contract systems that consume them and then they're tamper proof, right?

Speaker 2

13:52

So they can't be manipulated. And so now we've combined a system that can prove things with a system that guarantees a certain outcomes. And we have a better system of contracts, which is actually an unbelievably powerful tool that has never existed before.

Speaker 3

14:08

Can we talk about the world of commerce and finance, decentralized finance? What is it? What's its promise from both the philosophical and technical perspective?

Speaker 3

14:20

If we just zoom in on that particular space of the digital world.

Speaker 2

14:24

Sure. So the centralized finance is the instantiation of a specific type of smart contract, right? Or what I call hybrid smart contracts, which are these contracts that combine the on-chain code together with the off-chain proofs that something happened. They're called a hybrid because they basically use both of these systems, right?

Speaker 2

14:43

The blockchain and the proofs about what happened. And what DeFi is, is 1 specific type of hybrid smart contract that is taking on the contractual agreements you traditionally find in the global financial system. And that's basically the world of lending, the world of yield generation for people giving me or giving whoever their money and somebody giving back them yield back to them, which is what bonds do and what treasuries do and what a lot of the global financial markets do, as well as the ability to gain exposure and protection from different types of events and risks. That's a lot of what derivatives do.

Speaker 2

15:24

Derivatives allow us to say, hey, something's going to happen, and I'm either going to protect myself by getting paid if it happens, or I'm going to benefit from it happening by basically saying it's going to happen, putting money down on that, and that prediction will get me a return. Now that's a very large part of the global financial system, excluding all the stuff for global trade and letters of credit and all the stuff that facilitates international trade. So excluding that at least for now. So if we look at what decentralized finance does, it takes all of those agreements about generating yield, lending, and all of these types of things you find in global finance and the world of derivatives and a few other types of financial products.

Speaker 2

16:03

And it basically puts them into a different format. So the format you have for centralized financial agreements is that you go to a bank, even if you're a hedge fund, even if you're like the richest people, You go to a bank, they make a product for you, and you hope that they honor the product that they made for you. Or you do a deal with another hedge fund or whoever, some counterparty, and you hope that that deal is honored. And then a number of very freaky things start to take place.

Speaker 2

16:33

1 of them is people don't have clarity about what the agreement is. So a lot of people don't know exactly what the agreement is between those parties because they can't actually see it. Sometimes agreements are kept very private or parts of them are kept private and that keeps other counterparties, other people in the system from understanding what's going on. This is actually partly what happened with the mortgage crisis.

Speaker 2

16:58

The mortgage crisis in 2008 was Basically, there were a lot of agreements, there were a lot of assets, but because the centralized financial system worked in such an opaque way, it was so unbelievably difficult to understand what was going on. And so that lack of understanding for the global financial system basically led to a big boom and then correspondingly, very, very big bust, which amazingly enough had a huge impact on everybody, even though they didn't participate in the boom part of the equation. In any case, what decentralized finance does is it takes these financial contracts that power the global financial system. It puts them in this new blockchain-based format that basically at this point provides 3 very powerful things.

Speaker 2

17:39

The first thing that it provides is complete transparency over what's going on with your financial product. So this means when you use a financial product in the DeFi format, you, and you as a technical person actually can drill down very, very, very deeply. And you can understand where the collateral is, you can understand how much collateral there is, you can understand what format it's in, you can understand how it's changing, you can understand this on a second to second or block to block basis. So you have complete transparency into what's going on in the financial protocol that you have your assets in, which is because blockchains and infrastructure, all of these things are built on force that transparency.

Speaker 2

18:19

Whereas the centralized financial system is very, very good at hiding it. It's very good at hiding it and packaging things in a glossy wrapper, creating a boom, then a bust. The centralized finance is built on infrastructure that forces transparency such that everyone can understand what the financial product does from day 1. And in fact, escaping that property is practically impossible.

Speaker 2

18:41

Or if someone tries to escape it, it becomes immediately obvious and people don't use their financial product. So that's number 1. Number 2 is control. So if you look at what happened with Robinhood, everybody thought the system worked a certain way.

Speaker 2

18:55

Everybody thought I have a brokerage account, I can trade things under a certain set of market conditions. And then the market conditions changed within the band of what people thought they could do. And everybody was fascinated to find out that, oh my God, I thought my band of market conditions in which I can control my assets is X, but it is actually Y. It's actually much, much smaller band.

Speaker 2

19:20

And the reason it is a much, much smaller group of market conditions is that the system doesn't work the way people think it works. The system was wrapped up in a nice glossy wrapper and given to them to get them to participate in the system because the system requires and needs their participation. But if you actually look at how the system works underneath, you will see that it does not work the way people think that it works. And this is actually another reason that DeFi is so powerful because DeFi actually, and these blockchain contracts give people the version of the world they think they already have, which is why they don't beg for it.

Speaker 2

19:56

So everybody thinks they're in a certain version of the world that works in this reliable way, transparent way. They're not. They don't realize it. And so they're confused when you tell them, I'm going to make the world work this way because they think they're already in that world.

Speaker 2

20:09

But then things like Robinhood make it immediately painfully clear that that's not how the world works. So the second real property of DeFi is control, which means that you control your assets, not a bank, not a broker, not a third party, you. You control your Bitcoins, you control your tokens in the finance protocol. If you don't like how something's going in that protocol, you can remove it.

Speaker 2

20:31

You can send it to another protocol, or you can use a feature of the protocol to do something it's supposed to do. And guess what? Nobody can just say, oops, that feature that isn't so good for my friends over here, that feature is actually, we're just going to pause that feature in the critical moment when you need it to execute your strategy, which is why you took all the risks to begin with. And then the final reason, the final thing to know about DeFi is that DeFi is inherently global, and actually right now provides better yield globally.

Speaker 2

21:02

So if you go to a bank right now with the US dollar, you get 1% or less. If you go to DeFi with the US dollar, you get 7% or 8%. So if we think about that In a world where there's a lot of inflation coming down the road, and we think about, well, a lot more systems might be failing soon, and they might be highlighting these types of problems that were there for, or as a result of the type of control that you see in Robinhood, and people are more and more concerned about both transparency and control, and they're looking for yield to combat inflation. I think that's what DeFi is about in a practical sense.

Speaker 2

21:46

It is this clarity about your risk. It is control over your assets. And amazingly, at the same time as having those 2 unbelievably useful properties, it is actually superior yield, Which just leads me to the very obvious conclusion that the only reason DeFi is more used is because more people don't know about it. And by virtue of this long kind of explanation here and elsewhere, more people will know about it.

Speaker 2

22:15

And it's just such an obviously superior solution that I haven't heard a single explanation as to why. No, no, don't earn 8% and take less risk and have more transparency with your assets. Earn 7% less, take more risk and give people the ability to change the rules on you at their discretion, go do that. Who's going to do that?

Speaker 3

22:37

And in general, on the first 2 of transparency and control, first of all, I do think maybe you can correct me, but from my perspective, they're like deeply tied together in the sense that transparency gives control.

Speaker 2

22:50

Transparency creates accountability. And there's this kind of game being played, game theoretic game, where if I know, if you know I'm gonna discover your deviation, you're not gonna deviate.

Speaker 3

23:02

Yes. This could be a whole nother conversation, but just as a small aside, on the social network side of things, which I've been thinking deeply about in the past year or so of how to do it right there, how to fix our social media. And I tend to believe that human beings, if they're given clear transparency about which data is being stored, how it's being used, where it's being moved about, just all a clear, simple transparency of how their data is being used and them having the control at the very minimum level of being able to participate or to walk away. And walk away means delete everything you ever known about me.

Speaker 3

23:48

That will create a much, much better world. That currently there's a complete lack of transparency on social media, how the data is being used for your own protection. I mean, there's a lot of parallels to the central bank situation. And there's not a control element of being able to walk away.

Speaker 3

24:04

Like being able to delete all your data, delete your account on Facebook is very difficult. It doesn't take a single click, which I think is what it should take. There should be a big red button that says, delete everything you've ever known about me, or like forget me. So I think that couple together can create a very different kind of world and create an incentivization that will lead to like progress and innovation and just like a much better social network and a really good business for the future social networks.

Speaker 3

24:37

But so I tend to see like control as naturally being a sort of an outgrowth from the transparency. It should all start at the transparency, which is why the smart contract formulation is fascinating. Because like you're formalizing in a simple, clear way, any agreements that you're participating in. And as a side comment also, what's really inspiring to me is that I think there's a greater, I don't know if this is always the case, but it seems like from having talked to people on the psychological element, there's a hunger amongst people for transparency and for control.

Speaker 3

25:23

Like transparency, another word for that is authenticity. If you look at the kind of stuff that people hunger for now, they want to know the reality of who you are as an individual. So that means you can create businesses, you can create tools that are built on authenticity, a transparency. And then the same, I'm inspired by the intelligence of people, if you give them control, if you give them power, that they would make good choices.

Speaker 3

25:52

That's really exciting. Of course, not everybody, but that means that decentralized power can create effective systems. So couple that, there's a hunger for transparency so we can move to a world where everyone's being just like real, conveying their genuine human nature. And people are sufficiently intelligent that if they're given power in a distributed mass scale sense that we're going to build a better world to that as opposed to centralized supervised control or only a small percent of the population know what the hell they're doing and everybody else is clueless sheep.

Speaker 3

26:30

So those 2 coupled together is really, to me, inspiring.

Speaker 2

26:35

Just to really quickly comment on the stuff that you just said, which I think is super, super, super fascinating. I think that's all exactly right. I think everything that you said is right.

Speaker 2

26:44

And I think it's actually gonna be the same for social media and banking and every other type of contract is that all of those systems that house people's value for them and take control of either their social media value or their financial value or whatever for them, all of that is going to be made available to people in this autonomous piece of code that does the same thing that the centralized entity used to do. So they get all the features, but the autonomous piece of code gives them the ability to have control while getting all the features. So banks give you features, social media sites give you features, whatever other system that you use online gives you features, and then it takes your data and it takes control of your assets from you in return for those features. I think the whole big difference here, partly in line with the definition of smart contracts and its evolution, is that there's this autonomous piece of code that's giving you all those features without requiring the ownership and lock-in and control and unilateral ownership of your data or your value or whatever it is that you're giving it.

Speaker 2

27:58

And I think what this will lead to fundamentally is just more of a free market dynamic among how people make... I think with the social media folks, you should just make some kind of law or something where you can just export all your data from them. Everyone should be able to get their data exported by another application. And then the network effect of all these social media sites will kind of crumble because people will just combine your Twitter data with your Facebook data with everything else into an application that you control.

Speaker 2

28:28

And there will just be thousands of different interfaces competing for how to consume all the social media data because it isn't locked in in 1 centralized actor's control. And so this is just the recurring pattern of what I think all of this will do is it'll give people a better deal, right? It gives them features without ownership of data, without ownership of value. And, and, and that's really the difference.

Speaker 3

28:53

So I think this is a good place to talk about smart contracts then. Can you tell me the history of smart contracts and the basic sort of definitions of what is it?

Speaker 2

29:02

Sure. So I think smart contracts as a definition has actually gone through some kind of changes or small evolution. Initially, I think it was actually a conception of a digital agreement that was tamper-proof and could know things about the world. So it could get proof and it could define that something happened and it could conclude an outcome and release payment or do something else.

Speaker 2

29:24

That's actually the definition of smart contracts that I began working in this industry with 7 or 8 years ago when I started making smart contracts. That is the conception that I had of a smart contract. Then what happened was that was really hard to do, right? Building that type of tamper-proof digital agreement that could also know things about the real world and release payments back to people about those events that were codified in this tamper-proof format was actually a very tall order.

Speaker 2

29:51

Turns out it's consistent of 3 parts. It's consisting of the contract, the proof about what happened, and you know, the release of value. The way things have evolved so far is that the definition has now come to mean on-chain code. So it's come to mean the codification of contractual agreement on a blockchain.

Speaker 2

30:11

So there's some code somewhere on some blockchain that defines what the agreement is. Now that eliminates the part of the definition that's related to knowing things about the world, and it partly eliminates the definition about payments and stuff like that. But basically, it's on chain code. We in our recent work on a second white paper have actually put out a different definition that we call hybrid smart contracts that actually tries to go back to the initial definition that I started with 7 or 8 years ago, which basically says that There's some proof somewhere that's proven to the contract and the contract can know that and the contract can gain proof.

Speaker 2

30:51

Then it can use that proof to settle the agreement that's codified on a blockchain. So you both need a mechanism to provide proof, you need a mechanism to codify the contract in a tamper-proof way on something like a blockchain. And then as with all contracts, there's a presumption that there's some kind of release of value. So I think a smart contract in our industry right now means on-chain code, which limits it to whatever can be done on chain only.

Speaker 2

31:19

And then in our internal definition for us, and for us at Chainlink and for me, it's hybrid smart contracts, which is actually the original definition. It's the idea that a contract can both know what happened and automatically resolve to the proper outcome based on what happened.

Speaker 3

31:37

So you're referring to the Chainlink 2.0 white paper, which is a paper that I recommend people look. It's a very easy read and very well structured and very thorough, so I really enjoyed it. Very recently released, I guess.

Speaker 3

31:52

Can you dig in deeper? What is a hybrid smart contract? You mentioned sort of this idea of data or knowing about the world and on-chain and off-chain. So what are the different roles in this?

Speaker 3

32:07

So hybrid, by the way, refers to the fact that it's on-chain and off-chain contracts. So maybe digging deeper of what the heck is it and what does it mean to know stuff about the world? How do you actually achieve that?

Speaker 2

32:23

Yeah, absolutely. So the on-chain part is where the agreement itself is. That's the smart contract itself.

Speaker 2

32:32

And that's where you codify certain conditions such as the conditions under which an interest payment is made or the conditions under which the contract pays out the full amount that it holds to someone based on a derivative outcome or something like that. Now, what the on-chain code is very good at is creating transparency about what the core conditions of the contract are. It's very good at taking in money from other private keys that send it tokens and send it value to hold. And then it's also very good at returning money or returning value back to other addresses or other private keys.

Speaker 2

33:07

It can also be involved in governance. It can be involved in a few other private key signature based operations. But primarily the on-chain part of a hybrid smart contract, from what I've seen so far, defines the agreement, takes in value and returns value based upon the conditions codified in the agreement on a blockchain. The second and equally important off-chain part is where the term an oracle comes in or an oracle mechanism or a decentralized oracle network, as we describe it in the paper.

Speaker 2

33:39

And this is another decentralized computational system that has a different goal, right? So blockchains have the goal of packaging transactions into blocks and connecting them in a cryptographically unique way to create security and assurance about that chain of transactions. Oracles and decentralized Oracle networks achieve consensus and they achieve decentralization about the topic of what happened. So blockchains structure transactions.

Speaker 2

34:11

Some of those transactions might be the state changes in different pieces of on-chain code. And then those on-chain pieces of code require input. I think the thing that people get a little bit thrown by is despite being called smart contracts, the on-chain code on a blockchain cannot actually speak to any other system. So blockchains are valuable and useful as far as they're tamper-proof and secure.

Speaker 2

34:40

And to be tamper-proof and secure, they're made this kind of walled garden that is able to know and interact only with the highly reliable information that's within that system, which is basically tokens and private key signatures. All the other world's information is not available in a blockchain inherently. And a smart contract or a piece of on-chain code can't just say, hey, I'm going to go get some data from over here because the API they would get it from creates a whole bunch of security concerns for the blockchain itself and a whole bunch of consensus issues about how to agree on what that API said or what the truth of the world is, right? Because it's not even agreeing on what 1 API said.

Speaker 2

35:22

It's more so creating a reliable form of decentralized computation that can give you a definitive proof of what happened and not just what 1 API said. So for example, some of our most widely used networks have well over 30 nodes and well over 10 data sources that are all providing information about the same type of data. And then there's consensus on that 1 piece of data, which is then written in and essentially given back into the on-chain code to tell it what happened. Because you can't really make an agreement unless you know what happened.

Speaker 2

35:53

If you and me were to make an agreement and set some contractual conditions, but our agreement could never know what happened, It would be completely useless. However, if you and me made an agreement and there was another system called an Oracle mechanism or decentralized Oracle network that proved what happened definitively, and you and me pre-agreed that whatever this mechanism says is what happened, then we can achieve an entirely new level of automation. We can suddenly say there's this piece of on-chain code that's highly reliable. We can give it millions, billions, eventually trillions of dollars in value.

Speaker 2

36:27

And it is controlled by this other system over here that's also highly reliable under this configurable set of definitive truth and decentralization conditions, which we all agree are sufficiently stringent to control that much value. And therefore, the combination of this tamper-proof on-chain representation of a contract and this mutually agreed upon definition of a trigger or a proof system combined is a hybrid smart contract, which as you can see probably already does a lot more than just a contract on chain, right?

Speaker 3

37:03

Can you talk about this consensus mechanism, which by the way is just fascinating. So there is the on-chain consensus mechanism of proof of work and proof of stake. And then there is this Oracle network consensus mechanism of what is true.

Speaker 3

37:23

So how do you, can you compare the 2? Like how do you achieve that kind of consensus? How do you achieve security in integrating data about the world in a way that's definitively true, in a way that is usefully true, such that we can rely on it in making major agreements that, as you said, involve billions of trillions of dollars.

Speaker 2

37:48

Right, so this is the challenging question, right? This is the challenging problem that Oracle Networks, Oracle's, we at Chainlink that we work on in order to create this definitive truth to trigger and create hyper automation in this more advanced form, more advanced form of hybrid smart contracts. The reality I think of this problem is that it is very specific to each use case.

Speaker 2

38:17

And this is actually how we've architected our system is in a very flexible way. So for example, you need an ability for an Oracle network to grow in the amount of nodes that it has relative to the value it secures. So if you have an Oracle network that secures $100,000 in a beta of a financial product, maybe it can be fine with only 7 nodes and only 2 or 3 data sources, because the risk to that Oracle network is relatively low based on the value it secures. So the first question is actually how do you scale security relative to value secured by that Oracle network?

Speaker 2

38:59

Because it wouldn't be very efficient to have a thousand nodes securing a hundred thousand dollars worth of value. So 1 of the first questions is how do we properly scale and how do we compose ensembles of nodes in a decentralized way where we can know that, okay, we're going from 7 nodes in a network to 15 to 31 to 57 to 105 to a thousand, right? So that's 1 dimension of the problem. So you

Speaker 3

39:26

have to be scaling the number of nodes relative to the value that's derived from the truth integrated into those nodes?

Speaker 2

39:34

Well, that's not the only problem, right? The other side of this is that you're trying to create a deterministic result, a deterministic output from a set of non-deterministic disparate systems, data sources, or places that prove things.

Speaker 3

39:47

Can you also just as an aside, what is an Oracle node? What is the role of an Oracle node?

Speaker 2

39:53

Sure. So an Oracle node essentially exists in both places. It exists in both worlds. It exists as an on-chain contract that represents either an Oracle network or an Oracle node.

Speaker 2

40:07

So there's an on-chain interface in the form of a contract that says, I exist to give you this list of inputs. You can request weather data for me. You can request price data for me. You can ask me to send a payment somewhere.

Speaker 3

40:20

Like an API. So it's a pointer to a API that provides truth about this world.

Speaker 2

40:29

It's an interface. So just like an API is an interface for web 2.0 engineers, Oracle networks and the contracts that represent them or individual nodes are the interface of web 3.0's use of services. And services includes all services, data, payment systems, messaging systems, whatever web 2.0 or any kind of computing service that you can conceptualize needs an interface on chain in the form of a contract that says, here are the services I can provide for you.

Speaker 2

41:04

Here are the transactions you need to send me to get back this data or that computation or this result. And then what you actually see is that decentralized Oracle networks, because they're uniquely capable of generating their own computations in a decentralized way around the data that they have access to, you actually see decentralized Oracle networks generating a lot of these services. So for example, we have a randomness service, a verifiable randomness function service that basically provides randomness on chain. And that randomness is then used in lotteries and various other contracts that need randomness.

Speaker 2

41:40

But that randomness, it's not a piece of data that comes from somewhere else. We don't go to another data source and get it. We generate it within an Oracle node that then provides it over into Oracle node or Oracle nodes that provide it into the contracts themselves.

Speaker 3

41:54

So why do you say Oracle nodes are non-deterministic?

Speaker 2

41:58

Well, they are as far as they come to consensus, but there's this kind of different problem here, right? The blockchains are very focused on generating blocks of transactions within a smaller universe of transaction types, a certain block size and a certain set of conditions. And then they have an economic system that says, I will perpetually generate blocks of this size with these transaction types in this kind of limited set of transaction types, whether those are UTXO transactions or scripted Solidity or whatever it is.