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How Oracle Networks Could Democratize Economic Destinies Around The World

Recently, Chainlink Co-Founder Sergey Nazarov joined Real Vision Crypto editor Ash Bennington on the Ground Floor Consensus podcast to discuss the nuts and bolts of smart contracts powered by decentralized oracle networks, as well as current and future use cases with the potential to change how the world works. It was a fascinating conversation and essential listening for both crypto novices who want to learn more and those looking toward a horizon full of new technologies and use cases.

Here are some prominent concepts and key takeaways from the episode.

Understanding Brand- vs. Math-based Models of Trust

In order to understand how smart contracts work, one first needs to understand the real world problems smart contracts have the potential to solve. This process begins by deconstructing the faith most people have in traditional financial institutions. Faith is fundamental to brand-based agreements, which stake trust on a brand’s reputation and history of solvency.

“Brand-based agreements or contracts rely on a level of trust in a logo or a brand that says I will adhere to the contract,” Nazarov explained. “But these brand-based agreements are foundationally based on much less than people think.”

People typically enter into brand-based contracts believing that they have an array of rights and a high degree of control over the safety, transparency and risk associated with their assets. In countries like the U.S., people trust that brand-based contracts will always be honored – your insurance company will always pay out claims and your bank will always allow you to withdraw and transfer your assets. But, Nazarov pointed out, there haven’t been enough failures in the U.S. to make Americans sensitive to the risk of failure that has played out in other parts of the world.

“People think they have no choice but to have a brand-based guarantee,” Nazarov explained, but blockchain technology has spurred a foundational shift in how people think about risk. Now, people can choose other systems that guarantee certain outcomes – “Not because someone gets up at a press conference and promises everything will be fine, but because they promise it through mathematics and physics,” he said.

In math- and physics-based models of trust utilizing smart contracts, people always have complete knowledge of the solvency of their financial institutions and insurance providers. In this model, physics guarantees that contractual obligations will be fulfilled and mathematics proves the terms of fulfilment in a tamper-proof, incorruptible environment that’s secure against any one party’s interference. “You have decoupled the interests of an institution from the way that a contract should properly operate,” Nazarov said.

Arriving at Definitive Truth

There are two parts of a digital agreement. First is the digital agreement itself, which is codified in a tamper-proof environment like blockchain. The second part is the oracle component, which  tells the contract when something important happened – a good was delivered, weather occurred, markets reached a certain price, etc. Oracles are a game-changer because they connect smart contracts to the real world.

When smart contracts are continuously computed on many different oracle systems, they are protected from being violated by a single counterparty. Decentralized oracle networks like Chainlink perform this hyper-validation to generate what is regarded as “definitive truth.” “It creates an accurate picture of the world to the maximum degree possible, which can then be used by a smart contract to decide what happened,” Nazarov said.

“It’s all about reliability, and reliability boils down to truth and truth, in the case of blockchain, boils down to redundancy.” Smart contracts arrive at their full potential when they are hyper-validated by as many nodes and data sources as possible. For example, oracles arrive at definitive truth about cryptocurrency pricing from an aggregation of hundreds of different exchanges, data providers and nodes so that no one participant in the system can deviate to their benefit.

Another example is crop insurance composed of oracle-powered smart contracts that protects farmers against drought. In this instance, claims would ultimately not even require a conversation with the insurance company, because the smart contract would know whether or not it rained. “Even if the insurance company says they don’t want to pay you, they can say it to themselves and you would still get paid,” Nazarov said.

Democratizing Economic Destinies

Our relationship with contracts underpins a lot of our daily lives; Nazarov foresees oracle technology improving people’s relationships with contacts in a way that will be as life-changing as how the internet changed everyone’s relationship with information. This goes for people in developed markets, who will polish this technology, as well as those living in emerging markets, for whom this technology can take an economy “from zero to one” in terms of contracts.

In many places around the world, people don’t have the ability to save their money in a way that combats inflation or a means to protect their livelihood from events beyond their control. Nazarov said that oracle-powered smart contracts have the potential to foundationally change how people all over the world can pursue their “economic destiny.” Once people can independently generate economic output, there will be a globally accessible internet of contracts allowing them to sell that value all over the world – without the need for traditional financial institutions.

Nazarov predicts a future where “we arrive at a world where monopoly and rent-seeking institutions are either gone or have shifted to this internet of contracts model.” In this future, everyone will have complete control over everything about them, including their financial risk, personal data and how ethically their money is spent – which will create a whole new level of competition that directly benefits consumers.

Nazarov painted a bright future, just a few decades from now. “If you don’t have a guarantee that your institution is reliable, then your system will be viewed as unreliable and therefore not used for very much.”

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