Orchestrate all the Things - Chainlink 2.0 brings off-chain compute to blockchain oracles, promotes adoption of hybrid smart contracts. Featuring co-founder Sergey Nazarov

Episode Date: April 15, 2021

A new whitepaper just released by leading blockchain oracle service Chainlink lays the foundation for new capabilities for application and smart contract developers. Chainlink provides an oracle service, enabling smart contracts to interoperate with the world. Today, Chainlink released a whitepaper outlining what they dub Chainlink 2.0. We connected with Chainlink co-founder Sergey Nazarov to discuss what this means. Article published on ZDNet

Welcome to the Orchestrate All the Things podcast. I'm George Amadiotis and we'll be connecting the dots together. A new white paper just released by leading blockchain Oracle service Chainlink lays the foundation for new capabilities for application and smart contract developers. Chainlink provides an Oracle service enabling smart contracts to interoperate with the world. Today, Chainlink released a white paper outlining what they dub Chainlink 2.0. We connected with Chainlink co-founder Sergei Nazarov to discuss what this means. I hope you will enjoy the podcast.

If you like my work, you can follow Link Data Orchestration on Twitter, LinkedIn, and Facebook. Thanks a lot, Sergei, for making the time for today's chat. I'm here today with Sergey Nazarov, who's the co-founder of Chainlink. And the occasion is the release of their latest white paper, which marks a significant step in the evolution of Chainlink and Oracle. And Sergey is here today to talk to us about a number of things that the white paper introduces and to introduce the concepts as well.

So we're going to be talking about hybrid smart contracts, how does Chainlink enable those, and how will Chainlink 2.0 expand what people can build. So, Sergey, the floor is yours and let's take it away. Great. Thank you, George. Thanks for having me here with you on the podcast. I think the big first idea here is really around something called hybrid smart contracts. I think it's important for people to conceptualize what's going on in the blockchain ecosystem from the point of view a token and moving it between different owners,

or private key voting, which basically means people can vote on things using their private key or cast their votes using a token. I think these were the initial capabilities that you saw from a blockchain and a smart contract. And that's what initially came to define what a smart contract does. Now, we really see something we call hybrid smart contracts, which are a combination of both the on-chain code that's tamper-proof and operating in a smart contract platform like Ethereum, and an oracle, which is essentially a trust-minimized, highly reliable connection and off-chain computation resource

that provides the additional functionality that a hybrid smart contract needs to achieve its specific outcomes. So if you think about some of the smart contracts that are already starting to redefine our industry, such as decentralized financial products, lotteries, decentralized insurance, you'll see that in each of those categories, over 90% of them are really hybrid smart contracts, which basically means that they are made up of two equal components.

They're made up of some on-chain code that defines the contract itself, which is where the conditions of the contract are defined, where it receives payment, from where it sends payment, and where it proves certain things about the state of the agreement. But then you also have decentralized financial products relying on data, right? They're relying on market data about the value of an asset or some kind of market event in order to actually determine what the decentralized financial product will do or what it will pay out the user. And at the end of the day, this kind of architecture of a hybrid between

on-chain code and off-chain code and off-chain services and data is really what I think is going to be defining the more advanced use cases in the blockchain industry and which are going to be going on to define what our industry is really all about. And I guess the notion of off-chain data to begin with, and you also introduced the notion of off-chain compute in your latest release, which was in late February, if my memory serves me right. Would you like to expand a little bit on that

and say a few words about how the off-chain and on-chain worlds come together? Sure, sure. I think this is really what's defining the next shift in our industry, from being about tokenization and private key voting to being about these more advanced agreements. And what we're really seeing right now is more and more use cases being built in these various categories of contracts

that are more advanced in terms of actually affecting real world outcomes. So in the case of decentralized insurance, you have information like weather data, and that data can be evaluated by a smart contract as long as it's given to the contract through an Oracle like Chainlink. And then that can create decentralized insurance products. important off-chain computation resources like randomness being generated by an Oracle network and being provided to a smart contract about a lottery or about making an NFT and being able to prove to users that the NFT or the lottery was fairly executed and generated. I think what you're also seeing is that just like web developers build more and more advanced use cases once they get access to more services, as Chainlink provides more and more decentralized Oracle networks with more and more advanced services, we see a very important shift in how developers build smart

contracts towards this hybrid model. And I think it's really the acceleration of that shift, which is what this white paper is about. It's really about how do we go from hundreds of individual decentralized Oracle networks to thousands or even millions of decentralized Oracle networks that all represent individual services, which can then be composed into advanced hybrid smart contracts by developers that want to provide a more advanced capability to their users. Well, there's something of, well, how can I frame it? There's a bit of a philosophical question there, if you will. It seems that you're elevating actually the role of oracles and within that the role of off-chain compute.

But maybe we can return to that later because actually the main point that we're here to discuss today, I guess, is the new white paper that you're here to discuss today, I guess, is the new white paper that you're about to release and which you aptly named Chainlink 2.0. So maybe it's better if we start by you summarizing what is the new element that Chainlink 2.0 brings to the table. And I think actually off-chain is a big part of that. Yeah, that's right. I think at the end of the day, what Chainlink 2.0 is about,

and it's something we've already started moving towards and already started building towards with releases like Chainlink OCR and VRF and other kind of variants that basically utilize an Oracle network to do more and more advanced computations, is it's really about creating an additional resource for smart contract developers in terms of off-chain computation, as well as data delivery. And we've done this because we've seen a continuing trend in how developers build smart contracts, where they want more and more advanced smart contracts, but a blockchain, due to its security and its inherent kind of native security model, isn't giving them all

the features that they need. Two of the primary features are really just the initial starting points for what a more advanced suite of decentralized Oracle networks and collection of decentralized services looks like. And what the more advanced collection of decentralized Oracle networks looks like is that you're partly computing portions of the smart contract on chain. And that's usually the portions that you want to make sure are reliably going to be available to everybody and will take payment and will guarantee certain transparency. And then you have a large amount of computation that you might want private or that might be related to computing the data into a new state that it could prove something useful to the contract or it's about maybe doing a certain amount of computation that you don't want to do on-chain for certain scalability reasons

and that as long as you have a zero knowledge proof or as long as you have some proof from a decentralized oracle network that it was done in that Oracle network, you can accept the result as triggering the contract anyway. And so what this is really about is providing a greater breadth of different decentralized services in the decentralized Oracle network format, as well as creating greater depth about what somebody can do with a decentralized Oracle network together with a smart contract. And I want to emphasize that Oracle networks and decentralized Oracle networks are, in my opinion, an augment, they're a complement to smart contracts, enabling them to do much more. I think you will continue to need a smart contract on-chain, and you will also continue to need a smart contract on chain and you will also continue to need a suite of decentralized

services run on various decentralized oracle networks to augment that smart contract and provided the ability to know things to make real world events happen to do more advanced uh versions of itself to do all kinds of you know various permissioning and any number of other other key key capabilities that you want the smart contract to have, but that you're not going to be achieving on-chain at this point. Okay. Well, what you just said kind of confirmed, let's say, the grounding of the philosophical question that was beginning to form.

And that basically is that, well, in some ways, it sounds like what you're describing is a kind of a parallel chain, if you want to call it that. Well, maybe not technically, maybe, you know, you don't use a chain per se, but it does have some of the properties that make blockchains interesting. So you just referred to how you can you can have executables for example and that's a property that you can find in Ethereum for for example and so there is a kind of parallel and you also mentioned how people developing

these hybrid smart contracts that you enable what you introduce enables them to do will basically have a choice as to whether they want to have their compute happen on on-chain or off-chain in this new environment that you're bringing forward. So what I was wondering was well what is a good set of criteria for people to decide where exactly do they want their computation to take place? I think at the end of the day, it'll vary greatly between different smart contract use cases, the properties of the chains people are using and their own decisions about how much they want to pay in fees and how much they want to provide transparency around.

I think the main properties of what a smart contract will offer people and will continue to offer people is the ability to make the state of the smart contract transparent and highly reliable and to inform people about what the state is at the moment. And so if there's other systems that need to be driven off of the smart contract state, you're going to need a public ledger that's immutable and persistent and has great availability and is going to consistently provide that information about the state of the contract. I think that is one of the core properties of a smart contract. And that goes back to what level of transparency do people want to provide about their smart contract and its state. Beyond that, I think it'll come down to being able to control value. So I think the smart contract is already very well known and widely used for controlling value and for also

taking in value from private keys. So I think what you're going to continue to see is a network effect in networks like Ethereum and maybe one or two others where you end up seeing more and more value put into the network through various private keys holding value, and then them putting that value in the crypto format into various smart contracts that then hold it as a decentralized financial product, as an insurance product, as any number of other kind of on-chain contracts. And then also, I think, codifying the conditions under which value is released back to users or sent to someone or the conditions under which interest is paid or the conditions under which a derivative settles or the conditions under which insurance is paid out. And actually controlling the output of that is another key part of what smart contracts, on-chain parts of the smart contract will continue to do. I think at a minimum, all of that will continue to remain on-chain and should remain on-chain and should continue to be managed

through these on-chain environments, as well as the anchoring of certain proof about what's going on out in the real world through Oracle reports that go on chain and the anchoring of certain proof about how a computation was done in something like a L2 roll-up scheme, which the Oracles and the centralized Oracle networks will also provide additional services to. So I think what this is really about is expanding the scope of what people can build in the smart contract ecosystem. It's about providing them greater and greater amounts of data. It's about providing them greater and greater amounts of services. And in some cases, you will see people want to do certain amounts of off-chain computation that they want to either keep private or do for certain scalability reasons, or they want to

combine that computation with a piece of data in a private way because that's required by the data itself and is then generating the final derivative result and trigger into the contract. So what we're seeing is just more and more cases where in order to use high quality data, in order to make some more advanced smart contracts, you're able to put and people want to put certain amounts of data delivery, computation, randomness generation, any number of other computations into a smart contract that serves those primary purposes of transparency, controlling value, taking in value from users, and creating a lot of clarity about how that value is controlled and dispersed back to users under a certain set of conditions. And so I think those will be the basic criteria, but I also think it'll evolve from use case to use case and that oracles and oracle network and decentralized oracle networks will continue to complement what blockchains do on an ongoing basis.

And I want to be very kind of clear about the fact that a decentralized oracle network doesn't do what a blockchain does. A blockchain and a smart contract platform has its own specific goals. And I think those are absolutely necessary for our ecosystem to work the right way. And then a decentralized Oracle network is its own focused service. And that's why there's thousands

or eventually millions of them, right? Because you have a decentralized Oracle network about achieving one specific piece of data being put into a smart contract. Or you have a decentralized Oracle network about achieving one specific piece of data being put into a smart contract, or you have a decentralized Oracle network about generating randomness in one specific way, or you have a decentralized Oracle network about validating weather data about one specific set of locations. And all three of those decentralized Oracle networks can then be used by one smart contract and actually repeatedly used by other contracts as well.

And so it's really an important distinction in that you don't have a chain link main chain. There is no chain link blockchain. There's a kind of meta layer, what we call a decentralized meta layer, which is a large collection of decentralized services, which are then combined, many of them at the same time we're seeing now are combined into the use of a smart contract on chain, which thanks to those decentralized services is able to achieve a lot more than it would just through on-chain code. And that's really what decentralized Oracle networks and decentralized services are focused on achieving. They're focused on doing the decentralized

services aspect very well and leaving the blockchain on-chain code aspect to the blockchains. And I think that's a very important distinction and a very important focus. Well, one thing that you also mentioned earlier was, and you returned to that, was precisely this kind of scaling up. So you said, well, going from hundreds to thousands of oracles, of networks. And I was wondering if, well, A, if you have any insight as to the composition of these networks today, do you see them more being like a single-purpose network? So you have, for example, one network that does application A

and then another one that does B, or is it more like mixed? And that's part one of the question. And the second part, and maybe more interesting in a forward-looking way was what do you think these hybrid smart contracts will enable in the future and what do you think the impact will be for society at large in the years to come? I think each individual decentralized oracle network will have its own specific goals. And when I say specific goals, I mean as specific as generating one piece of data about a single price pair, like the ETHUSD price or the BTCUSD price, and providing that one piece of data and arriving at a single consensus

around what the accurate, reliable picture of the world is from the point of view of that one piece of data. Likewise, I think you'll see many Oracle networks that are built on a case-by-case basis for specific smart contracts to meet their specific data retrieval and some of the off-chain computation needs around that data, specific needs. I think what you're really going to see is two types of networks. You're going to see networks that are participating in this shared security network effect where you have multiple users.

I mean, we already have large amounts of users contributing their fees into a single pool for one decentralized Oracle network and contributing to the ongoing improvement of the security of that Oracle network on an into a pool, and that pool is then paid out to the nodes, and the nodes get more and more fees and are basically required for those fees to provide greater and greater security, or maybe just more nodes are added or more data sources are added or whatever the security properties that the user of the decentralized Oracle network need. And then the second type of Oracle network will be a request model- decentralized Oracle network need. And then the second type of Oracle network will be a request model-based Oracle network or kind of more of bespoke decentralized Oracle network

where you'll have somebody compose a decentralized Oracle network about a topic that other people might not find interesting. So it might be the topic of get me the IoT data from these 1,000 solar panels in a field of 10,000 solar panels, and then do a computation to validate that the solar panel field is operating properly, and return the result of that computation back to the insurance contract, which is ensuring

that the solar field is supposed to continue to operate. And then you might have a different decentralized oracle network where the oracle network provides the price of electricity to that same insurance policy, because one of the parameters of the insurance policy might be insuring against the drop in electricity prices, as well as whether the solar panel field is continuing to provide electricity. And so I think you'll actually have more and more advanced smart contracts where you have people using shared security decentralized Oracle networks that are growing in security as each additional user utilizes them. And those will still be really, really focused, but they will have many, many users that pool their fees.

And then you'll have individual Oracle networks composed to service the needs of a specific smart contract. And those will be paid for by the user of that specific smart contract to achieve their unique goals that they need achieved in a decentralized way, but that can't really be achieved outside of a decentralized Oracle network. And so the real goal of Chainlink is to provide the software and the framework for people to be able to both utilize existing compositions of decentralized Oracle networks that provide services that already exist and to provide those services in an increasingly efficient and increasingly secure way and it's to provide a framework for people to compose whatever they need

from a decentralized oracle network once again giving them as a developer the ability to build a more advanced smart contract in this hybrid smart contract format and it's it's once again our our frameworks and the Chainlink frameworks and the Chainlink network's ability to provide this flexible approach to more decentralized services, essentially more building blocks for developers and creators of smart contracts, that I think is the critical aspect of this. And in that sense, it's important to have a separation of concerns where a single decentralized Oracle network is focused on achieving a single set of outcomes. And that is

what it's held accountable for. And that is what all the users can expect from it. And that's what the users of the smart contracts relying on that decentralized Oracle network can actually go and inspect it about and kind of assess its quality and assess the reliability of the hybrid smart contract as a whole based on both its on-chain code and the composition of various decentralized Oracle networks into that off-chain code as a trigger or as a service that provides either triggering real-world events or ingesting real-world events to trigger outcomes in the contract. To answer your second question, I think these hybrid smart contracts are going to be delivering on the vision of smart contracts that a lot of people in our industry have, and many of the

people in our industry have had for a long time. So for example, when I began building smart contracts seven or eight years, smart contracts seven or eight years ago now, the conception that I had of a smart contract was actually a tamper-proof digital agreement that could prove that an event occurred, right? And so it wasn't just that it was a tamper-proof agreement on a blockchain, it was that it could be tamper-proof and it could prove things. And that was actually the conception with which I and we initially approached building smart contracts generally. It's only really later, in my opinion, that smart contracts came to define just on-chain code running a blockchain or running a smart contract platform. And that's what they mean now, and that's fine code and into the realm of decentralized financial products that suddenly give people in parts of the world where there weren't any banks or there weren't any savings accounts, a savings account or a digital bank that's equivalent to the types of services we have in developed markets,

or that'll be able to provide them a decentralized insurance product that protects them from the risk of drought by the decentralized Oracle networks verifying the weather events, and then the smart contract triggering the payouts to the relevant farmers at their kind of cheap Android phone that they've gotten to consume Wikipedia and use the internet. But now they can also use that $50 Android phone to consume a contract framework that allows them to both save their assets in a way that combats inflation, as well as get insurance against life-changing events like drought and many other things, all the way to global trade and possibly even voting schemes and any number of other dynamics where you suddenly replace the trust issues of society in both the developed markets and the emerging markets with a set of cryptographically guaranteed systems that are immediately accessible globally

through the internet. And so I really think it's this transition from agreements that don't need to be honored and therefore can't even exist in certain parts of the world, like bank accounts or insurance contracts. They don't exist in many parts of the world where people actually need them the most. And the second dynamic being that it kind of proliferation and prevalence of the internet and greater and greater internet penetration happening across the globe. I think that both of those dynamics will come together to reinvent how the emerging market relates to the global economy, how they manage their own internal economic lives in emerging markets through bank accounts and insurance products and global trade products

that eliminate all kinds of middlemen. And it'll also change the developed world's markets by creating the type of transparency and risk management that will soften boom and bust cycles, right? Because a lot of the global economy is basically defined by a continual set of boom and bust cycles that are unfortunately getting larger and larger, partly because there isn't a lot of transparency

about what's going on with the underlying assets or how the actual financial system works. And so I think these hybrid smart contracts in going beyond tokenization and private key voting are going to bring all of these use cases to life. And I think they've already brung them to life in the case of DeFi and certain parts of gaming and certain parts of decentralized insurance. And I really think it's just the early days of what these more advanced hybrid smart contracts will be able to do for both our industry and society at large. Okay, thank you. I think we're almost out of time. So if you have any closing thoughts or any information actually on the logistics. So when will people be able to

access the white paper and what's its course? What do you expect to happen with the white paper from now on, basically? Yeah, so I think people can already access the white paper now. They can go to chain.link and I'm sure they'll be able to find it from there. It's a large paper of well over 100 pages that we put together with some of the best academics in the distributed systems and secure systems design fields. We really see the paper as a kind of overview of the key features and some of the key capabilities we plan to pursue. We've already achieved a lot of the capabilities that we initially set out to achieve, and we have those working and providing the largest amount of data ever to blockchain systems and feeding a very large percentage of DeFi that's kind of growing by the day. And we're consistently seeing more and more

need for people to build more and more advanced smart contracts with the help of these decentralized Oracle networks. So what I think the white paper will serve as is as an overview to our community about what it is that we're achieving here and how we're building it and how we're looking to achieve these kind of important goals of taking hybrid smart contracts into a new realm of usefulness. And we're very excited to collaborate with all the DeFi projects we work with and all the other decentralized insurance and gaming projects in improving what decentralized Oracle networks do. And, of course, with the amazing community that we have that's helping us build this

and that we're building it together with in the form of many different teams, all contributing to creating a great world class set of decentralized Oracle networks, which will eventually be defined, I think, as this decentralized meta layer that coordinates all of this important activity between smart contracts and the rest of the world. And I think it's really the appearance of this additional layer of services that's going to change how our industry builds smart contracts. And as it does that, more and more people will see that blockchains and smart contracts are not just about tokens. They're actually about redefining the trust dynamics of every part of their economic life. And whether that's the global financial markets or whether that's people in the emerging market having access to bank accounts and insurance products for the first time ever, regardless of their legal system and how it operates. kind of outcomes are what we're seeking to achieve with this white paper and hoping to accelerate together with our amazing community, which we're, as always, unbelievably grateful to for all their support and ongoing collaboration with us. Thank you very much for having me,

George. It was a pleasure chatting with you. I'm excited about the future and looking forward to talking again sometime soon. Thank you. I hope you enjoyed the podcast. If you like my work, you can follow Linked Data Orchestration on Twitter, LinkedIn, and Facebook.