At last week’s Ethereum Community Conference (EthCC) 4, the largest annual European Ethereum event focused on technology and community, Head of Integration at Chainlink Labs, Johann Eid, gave a compelling presentation that examined secure, trust-minimized oracle networks as a solution to financial censorship.
The talk illuminated several key reasons why people living in the developed world have taken the brand-based, paper-based guarantees of centralized financial systems and institutions for granted – and why faith in this system is waning.
Assessing Counterparty Risk
Eid defined counterparty risk as “the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.” In a centralized system of paper-based, brand-based guarantees, counterparty risk is high and intentionally opaque; in a decentralized system of math-based, cryptographic guarantees, counterparty risk is low and fundamentally transparent.
Web 2.0 Vs. Web 3.0
The Web 2.0 world of centrally-controlled applications like Facebook, YouTube, and Uber is desirable because it’s incredibly feature-rich. However, when creators and consumers contribute their intellectual work and personal information to these systems, they often overlook the fact that a centralized party becomes custodian of their information. This system demands an inordinate amount of trust in the custodian to act in the user’s best interest.
In the burgeoning Web 3.0 world of decentralized applications, consumers don’t need to trust that a brand’s opaque incentives align with their own. Instead, they only need to trust in math and cryptoeconomic incentives that are fundamentally and equally transparent to all counterparties.
The Decentralized Infrastructure Continuum
Transcending the centralized Web 2.0 world, which is feature-rich and highly scalable but untrustworthy, to a decentralized Web 3.0 world based on blockchains, which are highly trustworthy but have limited functionality because they cannot access real-world data, requires decentralized oracles networks that are trust-minimized, externally-connected and highly-scalable.
Information Censorship Vs. Financial Censorship
Eid noted that the explosive growth of DeFi during the Robinhood debacle this past spring was no coincidence. This is because the event was many Robinhood users’ first experience with financial censorship.
When people use a centrally-controlled platform like Robinhood, Eid explained, they mistakenly believe that their funds are theirs to use when and how they please. But when Robinhood cut users off to protect its own interests in unpredictable conditions, people quickly realized how little control they had over their assets.
Eid put it simply: “When you give your money to a [centralized] third party, that’s their money now.”
It’s easy for people in the developed world with social media access to recognize and rally against censorship when it pertains to information. “You see that you can be censored when you put something on YouTube or when you watch something on YouTube or when you go on Twitter,” Eid said. He argued that financial censorship is an underappreciated global issue.
While the financial censorship imposed by Robinhood might seem anomalous, Eid said, “We see this every day in developing countries, where people can’t get loans and can’t get mortgages.” Globally, and particularly in developing economies, financial censorship has serious consequences because it restricts the flow of capital and ultimately innovation.
Decentralized financial (DeFi) applications relieve the asymmetric burden of financial censorship because they give everyone equal transparency and control over their own assets, regardless of their local government or the geographic reach of centralized financial institutions and insurance providers. These DeFi applications rely heavily on off-chain pricing data – and that’s where oracles come in.
Eid described DeFi’s transformational impact on “a huge fragment of society” that has been censored from “day-to-day” financial transactions like taking out a loan or an insurance policy. “DeFi applications are allowing people to have access to stuff that they never had access to,” he said. “This wouldn’t be possible otherwise.”