On a recent episode of the Exponential View podcast presented by Harvard Business Review, Chainlink Co-founder Sergey Nazarov joined Azeem Azhar to discuss a world where “Banking without Banks” is the new status quo. Nazarov outlined four reasons why banks should take DeFi seriously and described the fundamental shift between “making agreements with logos” and trusting in loyalty cards to making math-based agreements that are dependent only on encryption and the laws of physics.
Hybrid smart contracts combine code running on a blockchain with decentralized oracle networks (DONs) that deliver tamper-proof, real-world data on-chain. “It’s not dependent on my choice or your choice,” Nazarov said of blockchain-based agreements. “There’s actually even nobody running a system where they could make a choice not to honor the agreement.”
“This is what is meant by blockchains being tamper-proof or hyper-reliable. Fundamentally, what all of these properties really talk about is the ability to give people a guaranteed outcome – not guaranteed by a brand or a logo, but guaranteed by code that is executed according to the laws of physics and according to encryption,” Nazarov said.
“We carry a loyalty card because we know that we’ll check into the same hotel and we’ll get a similar experience, and now you’re saying there is a new architecture of trust that emerges from a fundamental physics,” Azhar said. He asked Nazarov, “How do we know we can trust that physics?”
“There are obviously conditions,” Nazarov said. “You have to have encryption that works, but encryption underpins so much communication and email and everything that if encryption is broken, there’s probably bigger problems than this.”
Nazarov pointed to open-source code which “forces” a new level of clarity around agreements, and therefore a new level of guarantees. “Code has to be very clear in order to operate properly. Code will have been written by somebody else as a template and then that template will be reused by you and millions of other counterparties,” he said.
Open-source software (OSS) is the backbone of decentralized applications (dApps) that utilize hybrid smart contracts. OSS derives its enhanced security from, as Nazarov put it, “thousands or millions of eyeballs that have touched that code” to evaluate its effectiveness. “The inherent openness that is forced by this infrastructure forces a guarantee,” he said.
Access to hybrid smart contracts’ enhanced security and guarantees is critical for those living in emerging economies. In regions of the world where traditional insurance providers do not and likely will not exist in the foreseeable future, a blockchain-based insurance policy provides self-evident guarantees according to the volume of value that has successfully passed through its code.
“You know that there’s been a trillion dollars that has passed through that piece of code and that a million other counterparties have all used it successfully,” Nazarov said.
In this way, DeFi’s transparent infrastructure works like an immune system that protects both emerging and developed economies. “There’s actually no way to make a smart contract right now that will give opaqueness of the kind that is in the existing system,” Nazarov said. “And if you were to try to obfuscate something, it would be immediately apparent, and you would need to explain it or else nobody would use your contract and it would never grow to the size of being so widely used and widely reviewed.”
Listen to Sergey Nazarov’s full conversation with Azeem Azhar on the Exponential View podcast.