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Understanding The Role Of Hybrid Smart Contracts In Building Web 3.0

The Chainlink 2.0 whitepaper outlines a framework for multiple interoperating decentralized oracle networks (DONs), each comprising a collection of nodes that can transfer data bidirectionally and perform trust-minimized off-chain computations. As such, DONs will enable increased confidentiality, randomness and scalability for hybrid smart contracts.

But what exactly are hybrid smart contracts and what do they mean for the future of decentralized systems and applications constituting Web 3.0? 

Recently, Chainlink Co-Founder Sergey Nazarov joined Andy Pickering, host of Brave New Coin’s The Crypto Conversation podcast, for an in-depth discussion about the true nature of hybrid smart contracts and the pivotal role they’ll play in the next stage of web development. 

In a nutshell, hybrid smart contracts are what smart contracts were always meant to be. Nazarov compared the initial conception of a smart contract seven or eight years ago to the new Chainlink 2.0 whitepaper’s concept of a hybrid smart contract. 

“I always viewed smart contracts as what we’re now calling hybrid smart contracts. In my mind, a smart contract always combined a codified agreement in a highly tamper-proof, reliable form on a blockchain with a system that proved something about what happened (in the real world),” Nazarov said. 

This combination of an agreement codified on-chain and equally reliable, tamper-proof data proving off-chain events (such as whether a shipment arrived, a market price changed or a trade occurred) is the key to making a smart contract truly “smart” through its connection to the real world.

“There was always this assumption that a smart contract would know that something happened – it would have proof and it would be able to interact with all the world’s systems in a meaningful, valuable, real-world outcome type of way,” Nazarov said. 

However, since its initial conception, “smart contract” has come to be defined simply as “the code that is run on a blockchain.” Without a connection to off-chain data, a smart contract can define conditions but cannot know whether those conditions have been met unless they’re about on-chain events.

The majority of the decentralized finance (DeFi) industry is already built using hybrid smart contracts, which input data from systems that are not part of a blockchain. For example, lending and derivatives protocols need a connection to the external world that must advance alongside advancing markets. 

In order for a hybrid smart contract to discern and prove what happened in the real world, it needs a DON to provide tamper-proof, decentralized guarantees. In order for hybrid smart contracts to become the world’s dominant form of digital agreement, DONs must be able to scale both in number and the advanced forms of computation they’re able to perform. 

“The reason that we’ve gone with that term (hybrid smart contract) in the whitepaper is we’re trying to define that conception of a smart contract that’s more holistic in terms of what it enables people to do and to build,” Nazarov said.

A DON is an off-chain collection of services, systems and connections that is made secure and decentralized through a method of consensus, as well as an on-chain contract that other contacts can consult for off-chain data and calculations. “What the Chainlink 2.0 whitepaper describes is a way to scale from hundreds of decentralized oracle networks to thousands,” Nazarov said.  

While today’s Web 2.0 consists of centralized applications run by big actors that have the power to exploit and manipulate user data, a decentralized Web 3.0 built on blockchain protocol offers individuals complete transparency and control over their assets. 

“People want to build more advanced decentralized applications the way they built them in the Web 2.0 world,” Nazarov said. The only real limitation he sees to realizing Web 3.0 is developers’ ability to access the thousands of services they’re used to accessing in Web 2.0.

With thousands of DONs capable of more advanced computation, the off-chain component of a hybrid smart contract becomes equally easy to build and provide conditions for as the component codified on-chain. A monumental improvement in the configurability of DONs will give developers a choice about how much computation should be accomplished on-chain versus off-chain. 

Ultimately, Nazarov said that the real technical advancement of Chainlink 2.0 is scaling the Chainlink protocol by both enabling the creation of thousands of DONs and increasing their robustness, feature-richness and ability “to aid a smart contract in literally any piece of data, any computation, any kind of additional trust-minimized service or computation that the smart contracts needs.”

Listen to Andy Pickering’s full interview with Sergey Nazarov on The Crypto Conversation:

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