On a recent episode of the Empire podcast produced by Blockworks, Chainlink Co-founder Sergey Nazarov joined host Jason Yanowitz to talk about the stages of adoption leading to DeFi’s inflection point, what that inflection point will look like, and how banks and fintechs will fit into this new financial world order.
The Superiority Of Open Source
In Nazarov’s view, the inevitability of DeFi’s widespread adoption is a matter of history, which favors open-source technology, repeating itself.
“The open sourcing of technology has historically always ended up in a superior product to the centralized, closed-source alternative,” Nazarov said, pointing to Linux’s market dominance over Microsoft’s Windows Server as an example. He described DeFi as “the open sourcing and the permissionless innovation of the financial markets,” which will ultimately lead to an exponential increase in control, transparency, yield and user demand.
DeFi eliminates huge inefficiencies in the current centralized financial model, where global banks spend billions of dollars on building their own internal services that are essentially replications of each other.
“In DeFi, what happens is that a single team focuses on making that service for everybody – for the whole world,” Nazarov said. This singular focus on “polishing” one “highly reliable, globally accessible, best-of-its-kind” service, such as Aave’s lending protocol, is the foundation of what Nazarov called a “completely different collaborative and globally accessible model” for people to build and interact with the world’s financial system.
“Imagine if instead of all of the activity in the financial world being sunk into individual enterprises that replicate the same exact thing, all of that human effort flowed into one version of that service. And that one version of the service was then usable by everybody,” he said.
An Inevitable Inflection Point
DeFi is still in the early stages of creating this alternative model, but Nazarov said the numbers point to its fruition within the next decade. He argued that if only half of the current two trillion-dollar cryptocurrency market were invested in DeFi, the market would reach an inflection point.
“I think it’s an inevitable conclusion,” he said. “Even without external participation, DeFi is very clearly here to stay.”
Stages Of DeFi Adoption
He described DeFi’s adoption in three waves of users. Early adopters will, of course, be current cryptocurrency holders – a group that continues to grow as brand-based paper promises fail, as in the case of last spring’s Robinhood debacle.
Next will be general investors who understand blockchain and smart contracts have gone beyond tokenization to offer high yield on virtually any asset. “DeFi is the first use case that can take the world’s existing value and provide superior financial products to people all over the world as long as they have internet connectivity,” Nazarov said.
This, he believes, is the point at which banks and fintechs will begin to offer their users access to DeFi in the third wave of adoption. He described an essential paradigm shift. “Fundamentally, the financial markets are not based on relationships or brand or logos. They’re fundamentally based on returns and risk.”
A Perpetual Future-Proof Interface
Chainlink is an expanding global open-source framework for generating the decentralized services that hybrid smart contacts need to bring DeFi to users around the world. Currently, Chainlink consists of over a hundred decentralized oracle networks (DONs) providing market and event data, trust-minimized computation, smart contract automation, and the ability to send commands and tokens between different blockchains. Nazarov said Chainlink will eventually provide thousands of DONs to power the most advanced use cases for hybrid smart contracts.
He believes these advanced smart contracts will be a 10x improvement on existing systems that banks and fintechs simply won’t be able to ignore. By integrating Chainlink’s secure middleware, banks and fintechs can prepare to interface with hundreds of different blockchains to offer their users the most value and versatility. Nazarov said there’s a place for traditional banks in DeFi, as long as they move quickly enough.
“You don’t want to be the fintech or the bank that doesn’t know how to do this,” he said.
Watch Jason Yanowitz’s full interview with Sergey Nazarov on the Empire podcast.