Interest in decentralized finance (DeFi) is becoming mainstream. At the 2022 South by Southwest (SXSW) film festival, Chainlink co-founder Sergey Nazarov joined Real Vision host Ash Bennington for a virtual fireside chat about how Chainlink oracles are turning the dream of decentralized web3 systems into reality.
The conversation focused on distilling key concepts for SXSW attendees and the general public, beginning with Nazarov’s simple definition of web3 as “reinventing the relationship between people in terms of how they can rely on each other.”
Nazarov said that in order to understand web3’s true paradigm shift, it’s necessary to examine what people take for granted in the status quo. He highlighted how digitized paper-based agreements utilized by centralized banks, trading venues, and web systems fall short of decentralized smart contracts that provide cryptographic guarantees.
“This is important to understand before trying to understand DeFi and Chainlink,” he emphasized.
Cryptographic guarantees, he explained, “mean that as long as mathematics and physics work in the way they’re expected to work – which is pretty much the best guarantee any of us is going to get throughout our lives – then the agreement you have will work as expected.”
DeFi’s fundamental cryptographic guarantee means that users have complete deterministic control over their assets through private keys. In contrast, Nazarov explained, when users place assets in centralized entities, they ultimately and often unknowingly surrender control.
“When you have a login to a bank, you don’t really own anything,” he said. “The bank owns everything and the bank can decide to give it to you or not to give it to you and that’s pretty much at their discretion.”
He described a number of cases, such as the 2021 Robinhood trading freeze, where people learned the true nature of their relationship with trusted counterparties. “The problem,” he said, “is that relationship doesn’t exist.”
“Decentralization” denotes a number of important features such as reliability, tamper resistance, transparency, and user control.
“The core to understanding anything in our industry is really understanding that our industry is about reinventing the relationship that people have with entire portions of the economy,” Nazarov explained, “because the economy right now doesn’t work the way they think it works.”
He described the transition from a system of “probabilistic” paper-based guarantees to a system of deterministic cryptographically guaranteed relationships as a “more than order of magnitude improvement” that challenges this false sense of security.
“The reason people don’t cry out for this improvement is that in many verticals people already believe they have a high degree of assurance,” Nazarov said. But, however strong a centralized guarantee seems, he said, “it isn’t guaranteed in the sense that web3 guarantees it.”
As the industry-leading decentralized oracle network, Chainlink connects deterministic smart contracts running on blockchains to the real-world data and computation necessary for building use cases that change people’s lives.
“DeFi is a use case that brings that concept to life in the financial services sector and Chainlink is an infrastructure that allows DeFi to provide that concept of a cryptographically guaranteed financial product,” he said.
Nazarov believes the tipping point, which Chainlink’s Cross-Chain Interoperability Protocol seeks to enable, will happen when web3 systems achieve the speed, efficiency, and composability of web2 systems – and as more people become sensitive to inflation and the failure of centralized systems’ ability to uphold their promises.
At that point, he explained, there will no longer be any doubt as to which system is superior.
“Managing counterparty risk in a better way is always better,” Nazarov said.