The Breakdown - Sergey Nazarov on Why the World Needs a New Model of (Cryptographic) Trust

Episode Date: April 15, 2023

NLW is joined by Chainlink co-founder Sergey Nazarov for the first in “The Breakdown”'s "Paradigm Shift" interview series. Sergey discusses why society's trust model has broken down, how cryptographic truth serves as an alternative, and why this alternative method of understanding truth will become even more important as a countermeasure to artificial intelligence.  - “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.  

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Breakdown. Register now at Consensus.coindus.com and join CoinDesk at Consensus 2023. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is produced and distributed by CoinDest. What's going on, guys? It is Friday, April 14th, and today I am joined by Sergei Nazaroff for a paradigm shift conversation. Before we dive into that, a quick reminder, the breakdown is expanding to the breakdown network. We've launched a new show, Bitcoin Builders, which you can find anywhere you listen to podcast, and most importantly, if you are listening to this on the CoinDesk Podcast Network feed, you will need to switch over to the breakdown-only feed. After April 23rd,

the breakdown will only be available on that breakdown-only feed. For more info about that announcement, go back and listen to my show from April 11th. All right, guys, today I'm excited to announce a new interview series that I've been mentally calling paradigm shifts. These are interviews where, rather than just talking about whatever happens to be going on in markets that week, we actually dig deeper into a bigger thesis or a way of looking at the world. They're meant to be a little bit more ponderous, big thinky, exploratory, etc., right? Something that's good for Friday and weekend listening. I'm kicking off the series with Sergei Nazaroff. Sergey is the co-founder of ChainLink, which most of you will know as the leading decentralized Oracle network, helping developers bring

real-world data into blockchain applications. This discussion, though, isn't really about the normal crypto stuff. Instead, it builds on a number of themes that Sergei has been publicly exploring that have to do with more fundamental changes when it comes to human digital experiences. On March 14th, Sergey tweeted, recent institutional failures once again highlight the fragility of today's economic system, where the combination of fractional reserve banking, rising rates, illiquid assets and rapid withdrawals can lead to rapid insolvency. It's clear we need to redefine society's trust model. He expanded on this a few weeks later. On April 4th, Sergei tweeted, the release of Twitter's algorithm is part of a societal shift towards large

brands restoring trust through opening code and of people wanting to know how the systems that shape our lives actually work in a guaranteed way. The strongest form of this is cryptographic guarantees. I expect more and more of society to become cryptographically guaranteed over time. We're entering a unique moment of realization by users. Every day, we are waking up to the power that technological platforms have over every one of their interactions. How they communicate, who they connect with, where they spend their money, what currency they transact in. The good news is that once people realize that there is a superior way for their digital and commercial lives to work, they rarely go back. People can't unsee this better way of interacting.

Our new collective mission is to help create a world that is powered by cryptographic truth. So my conversation with Sergey picks up on these themes. The idea is that one, society's trust model is broken. Two, cryptographic truth offers an answer. And three, we extend this conversation even further, exploring how the emergence of generative AI amplifies these challenges to a new, previously unimaginable level. All right, Sergey, welcome back to the breakdown, sir. How are you doing? Doing well. Thank you for having me. Yeah, no, I'm super excited. This is long overdue. We've been talking about having you back to explore some of the themes that we started talking about years ago now at this point. But I think that the timing has gotten even more opportune. I think that a lot of the conversations

that people are having now are manifestations of some of the things that we were talking about the last time. And a lot of those conversations are fundamentally about a shifting idea of the trust systems around us, right? So we are continuing to experience challenges to the default assumptions that we've had about the world around us that might be in terms of the failure of institutions and declining belief in them, right? We just had a great example of the banking crisis last month. It also is, I think, being driven or accelerated by, you know, transformative technological change, in particular AI. So where we want to start today is discussing society's trust model and what the challenges have been. And then I think from there, we're going to spend some time

going into, you know, the alternatives that are being created, potentially a new way to look at what we're all doing here in the crypto industry and some of the future ramifications that might be sort of emergent now. But that's where we'll start and I'm really looking forward at the conversation. Yeah, so am I excited to jump in? All right. So where I want to start is kind of with some of the foundations and trying to kind of underpin the argument. And so let's start with what society's trust model has been and what challenges have started to arise that are making people question that model? So I think the failure of brands and institutions that people were considered, considered as reliable, are things that have started to shake people's assumptions

about what a brand and an institution means. And I think what's happened so far with banks is a very, very small thing, frankly, relative to what could happen, some of what will probably happen. And I think the realization that people are starting to have is this difference between a probabilistic world and a deterministic world. So I think many people assume that they were in a deterministic world where things are guaranteed and where there is no ability to deviate. But really, they're in a probabilistic world where even if you have a password to a bank account, you don't actually have control of anything in that bank account. You just have a way to log into some system with a nice logo in it that gives you the illusion of control, basically.

or the illusion of safety, whereas deterministic systems like blockchains and smart contracts give you real control and in many senses real safety. And so the recent institutional issues, which frankly, they have been handled relatively well and they have been stopped from spreading. But I think they are just a small, small sign of everything else that's in the system. There's still a lot more that can shake out of the system. And when that shakes out of the system, I think people will see that while they thought they had a relationship with those assets and with those institutions that was guaranteed, they will realize

that it's actually a probabilistic relationship, which means that those institutions and those systems can actually do whatever they want. They don't have to follow through on their commitments. And so that's the fundamental difference between, I think, our industry and how the world currently works. It's that the way the world currently works is probabilistic. And the reason people don't realize the value of our industries because they think it's deterministic. They think it's guaranteed. But as those guarantees fail, they will realize the value of a deterministic world. And the technology that provides that is blockchain, smart contracts, and oracles. So that's what I think the transition will be. And that's why I feel that our industry, regardless of how

it's viewed as an asset class, on a technology basis, is inversely correlated with different modes of societal failure and different modes of societal trust issues and crises of faith. And I actually have good historical examples that already prove that deterministically guaranteeing things to users is how society tends to resolve a crisis of faith and get people back to the point where they can continue to interact with each other reliably. So this is a great, a really, really good jumping off point. So I want to kind of dive deeper into some of these terms and the ideas that underlie them. So this deterministic world versus a probabilistic world effectively comes down to how guaranteed things are that people think are guaranteed. And to some extent, is it fair to say that the reason that we've had

or that people have operated in a probabilistic world is that that was just what was available, that there wasn't sort of a possibility of pure determinism because the institutions around us sort of ultimately had multiple masters? Or, you know, another way to put it is, why hasn't the world been as deterministic as people feel that it is? Yeah, because it wasn't possible. And really cryptographic guarantees, essentially encryption technologies, have allowed this to emerge. And initially, encryption technologies were applied to text messages and information transfer. And they provided guarantees that that information would be secure and private, regardless of what anyone wanted to do. What really has happened throughout history up until the last, let's say, 50 to 70 years,

is you always had to rely on a person in a legal system for everything. And then information technology started to make things more and more automated, but information technology was still completely controlled by people. And because it was completely controlled by people, really, it could end up doing whatever those people wanted at any point. It's really only in the last, I would say, 20, 30 years that people have begun to push back on technology platforms in their misuse of technology. And one good example of this is text messages. So 10, 15 years ago, everyone would send text messages unencrypted over telecom channels through SMS or through social media applications. And nobody wondered or worried about the security or the privacy of their data, not really.

But then there were a number of failures. There were basically a number of crises of faith where the institutions, the telecoms and the social media companies that facilitated the messaging, misused that data. Either they allowed themselves to be hacked or they were misusing the data purposefully to extract value or do weird things with elections or whatever. In the end, what you really arrive at is a crisis of faith, where people said, I want to keep getting the benefit of text messaging, but I don't want it if it means that you get to see it or you get to control it. And how is that problem solved? It was solved by introducing encryption. In the case of messaging, end-to-end encrypted

messages. And now the average consumer knows what that is and uses systems that do end-to-end encrypted messaging. And that resolved that crisis of faith, basically, because what it comes down to is that the entity that you use can't misbehave. It's not that it won't choose to misbehave. It's not that it won't try to misbehave. It's that it physically cannot access your messages. And there's obviously different degrees of that and different levels of guarantees there as well. For example, Signal, I think, has the strongest level of guarantees. And that is what I think will happen with all digital interactions between people. There will be centralized facilitators that say, just trust me, it'll be fine. I'm Credit Suisse. I've existed since the mid-19th century. I've existed for over

100 years. It'll be fine. And then if enough times, it isn't fine, if there's enough SVBs, enough Credit Suisse things, people realize that it isn't fine, just like they realize that sending unencrypted text messages isn't fine. There'll be a crisis of faith. And they'll be a crisis of faith. And I think that's what we're going towards pretty rapidly. And that crisis of faith will once again be resolved through encryption technology. But those encryption technologies, in the case of digital transactions, digital relationships, and digital interactions between peers about anything of value, will be a blockchain, smart contract, and Oracle-based.

And so that's what I feel our industry is about. It's about facilitating that new level of reliability and deterministic guarantees, which are attractive to certain groups that understand this problem or have philosophical views, libertarian views, other views, that lead them to seek this solution sooner because they understand the fragility of the systems that they are using that don't have these guarantees. But I strongly believe that this fragility of most widely used digital systems will become clear in gaming, in derivatives, in insurance, in ad networks, in supply chain systems, in global trade relationships. And the reason is that as I discuss all this with all those industries,

and I provide them with a simple question, a simple kind of thought experiment, if I was able to give you the same web to application at the same speeds, the same cost, the same usability, but I was able to add this property of deterministically guaranteeing it. I was able to guarantee that the application would behave only in the ways that you expect and not other way. For example, it could never take your money and keep it for itself, or it could never take your digital goods that you earn through hours and hours of grinding in a game and not have you access them, right? Or maybe it decides to do some other stuff that you don't want. I've yet to meet a person, any of these industry that says, sure, give me the Web 2 application

that has more risk. Every rational agent would choose a Web 3 application as long as it was at parity on all the other properties of the Web 2 application. And so it's actually just a very obvious outcome, when you look at it, it's just the type of outcome that requires a certain push from the existing systems not fulfilling people's expectations. And this is why when bank failures happen, when there's credit crunches in countries, like for example, even in Greece earlier when there was that whole ATM lockup, the amount of Bitcoin IP addresses that appeared in Greece in surrounding countries that were worried about solvency issues with their local banking system, skyrocketed. And it's very simple. It's just that there's a system that you have. It stops working

and you need an alternative. And that's what blockchains are. And that's what our whole industry is. It's that alternative system that, based on the way the world is going, I think will become the obvious alternative in the coming years. So this framework of a probabilistic world versus a deterministic world, is probabilistic just another way of saying counterparty risk? And that previously sort of all institutional relationships that we had came with the counterparty risk of whoever the people were that were running that institution or running that system and whatever incentives they might have that would lead them away from the arrangement that they had initially formed with us? Counterparty risk is a good way to look at it. I think it goes beyond counterparty risk.

There's all these different terms for it, frankly. There's censorship resistance. There's tamper-proofness. There's counterparty risk. And each of them comes from different parts of the world. For example, counterparty risk is more of a financial world term. And censorship resistant is more a term from, you know, other parts of the other world where people care about that. But it basically comes down to really reliability. Reliability and security are the all encompassing concepts. So what, what I'm basically saying is that all the agreements that you have in a digital only system, in a Web 2 system, even though you feel you can rely on them, The reality is that in many cases, you cannot.

And the brands that provide you those agreements want you not to think about that. They don't want you to wonder about your actual relationship with them because it doesn't benefit them. And so the world has been set up in a way where there's all these big, big counterparty risks, censorship risks, tampering risks, adversary risks, security risks, downtime risks, all these risks that are abstracted away from you. but that you are exposed to. And I think that many of those systems will be experiencing the culmination of those risks actually

taking place. And that's what I consistently see. So what I consistently see is that the messaging example is a good one. The Bitcoin example is a good one when Greece had its credit crisis. And it's just the same movie again and again and again in different parts of the world, in different places, right? So if enough banks fail, people start wondering, well, how do I protect myself? One option is you can have physical commodities. One option is you could have digital assets, which is what they'll call in the banking industry. But it's all the same thing, right? You'll have deterministic access and control over something. You'll have direct control. That's the problem that they would have that cryptographic guarantees would solve. In gaming, it could be a different problem. In gaming, it could be a problem that you spend tens of thousands of hours playing a game. And then the rules change on you.

The rules just get changed. And all the time that you put into the game essentially is kind of diminished or robbed from you. So that's an example of what gamers might care about when they look at deterministic guarantees. Like if I put all this time into a game, the rules of the game cannot be arbitrarily changed. And so I value that property. And really, I think it's just going to continue all over the place. Insurance is another great example where people who haven't had their insurance policies

paid out. I can tell you from my own experience of working with those groups and the insurance industry, they're looking for a deterministic solution. They're looking for a way where instead of not getting their insurance policy paid out, their insurance policy is automatically paid out without them having to contact anyone, argue with anyone, have to go to court with anyone, or any of this other stuff. And so these problems abound, and therefore the opportunities abound, frankly, because it's a fundamental problem.

the solution to them to this problem has only appeared for transactions with the appearance of Bitcoin. Before Bitcoin, you really had no way to guarantee transactions of a certain type or of any type in certain people's eyes. And then it expanded from there. And so, you know, there's our industry. Let's actually, this is a perfect point, I think, define why. What makes this industry deterministic? And I think it's okay to be a little bit rudimentary here, assuming that not everyone who is listening to this has spent lots of time on the technicals of the blockchain space. But what is it, you know, what are, what is cryptographic truth? What are cryptographic guarantees? What makes blockchain smart contracts, oracles, deterministic as opposed to probabilistic?

Sure. So let's think about the computer science innovation of our industry, right? Our industry didn't invent private key infrastructure. It didn't invent, you know, those other encryption things. What it has really invented is a new form of computing, which would be called decentralized computing, right? And what does decentralized computing really generate, uniquely generate? It generates consensus. And what does that consensus really provide you? Well, it provides you deterministic guarantees, because all the other systems can be controlled, can be stopped, can be manipulated, can be changed. But deterministic systems, their definition is that they will function the same way every time. Every time you do something, they'll behave in this predictable,

repeatable manner. And that's what blockchain protocols and Oracle networks and smart contracts offer. They offer that predictability because they are beyond the control of anyone party. Once you create a smart contract as an agent to represent your interests, it will act on what you put into it. And there isn't really a way to change that. So the whole point of our industry really is to generate consensus, decentralized consensus, on more and more topics, combine those topics, and make more advanced applications. And that's where oracles come in because oracles greatly expand the topics, the things that decentralized consensus can be generated on. But at a very high level, if you hear the term consensus and if you hear the term decentralization,

what you're really hearing is that somebody values deterministically guaranteed systems. they value that that system guarantees its outcomes in a mathematical sense. So that as long as math and encryption works, then you will get the outcome you expect. Now, people vary in their views on how much decentralization, how much consensus, how many nodes, how big a network should be. They vary in the algorithms they want to use to reach consensus and the speeds at which they want to reach consensus and all these other more technical factors. But fundamentally, our industry generates.

this consensus so far it's generated, generated predominantly about token ledgers and private key signatures, because those are the three things that blockchains can really do well. They can generate consensus on private key signatures, token ledgers, and state machines. Oracle networks, in contrast, generate consensus on everything else. And through the combination of oracles and in blockchains, you get more advanced kind of smart contract 2.0 use cases, such as defy and others, which go on to provide you deterministic guarantees in new parts of the economy. Once again, because you have generated consensus about the things in that part of the economy that matter to those users. I want to get specific on that in just a minute, but I want to be highly reductive just for the sake of real

kind of understanding for anyone listening. You know, to some extent, there are two pieces of this consensus. And again, highly reductive here, but I'm just trying to simplify it. One is the rules of the system, right, whatever the sort of inputs are and what the outputs are supposed to be, the rules that are predetermined. And then the second piece is the infrastructure of the system that enforces those rules, right? And that's where the decentralization comes in. The decentralization is a vector by which the ability for it to be controlled, tampered, compromised by an individual interest or an individual institution's interest is reduced. Is that a fair simplification? I mean, yeah, there's a few other factors at play, but essentially there's the

protocol, and then there's the infrastructure and the details of the infrastructure that runs the protocol. And both of those are important. Let's talk about where this is being applied now, because I think a natural question is how widely can this determinism be applied, right? You've given the example of encryption of messages, which is sort of an ongoing use case. You've given the example of Bitcoin, which is sort of transactions without the same counterparty risk that we have in other situations. You mentioned the idea that historically there have been these three areas, private key signatures, token ledgers, and state machines, but that oracles are now providing deterministic guarantees in new parts

of the economy. What are those other parts of the economy? Where is this happening that would help people understand how this sort of deterministic guarantee is expanding from these very simple, clear use cases of, you know, transaction letters, for example. Sure. So there's a few good examples between DFI, gaming, and insurance. So within DFI, imagine if you had a bank account or you had a counterparty where you put your assets into and you knew every single thing that was going on within that bank. So you knew every single transaction.

You knew every single piece of collateral. You knew every single thing that that bank, that that counterparty did. Not later. Not through some kind of annual audit. not through some kind of disclosure, but in real time. So you knew every single thing that was happening with your counterparty as it's happening. And that counterparty would provide you some yield, and they would put your assets into a smart contract that you could always withdraw from, under all circumstance. You could always remove your money. That is a good example, right? So you have

lending protocols like Ave and others that allow people to gain a yield, similar to a savings account for some of the things that happen in traditional financial institution. But the difference is that you can know every single thing going on within the Ave protocol. And you can always withdraw your funds. Anytime, for any reason, you know, meteorites could start hitting the planet. You'd be able to withdraw your funds. Weekend or not, banking crisis or not, whatever crisis or not, you have access. So, defy is a good example because it's basically the reformatting of all the world's financial

systems into this transparent mode and into this user-controlled mode. And that transparency and that user control to people that have experienced it is obvious, right? Because it's like, why shouldn't I be able to withdraw my funds whenever I want? Why shouldn't I know what my counterparty is doing to put the funds at risk? It seems like very obvious things once you have them. And so that's the first category, is defined decentralized financial products. But everybody doesn't use financial products, so there's other examples. Gaming is another good example. In gaming, there is a history of various game creators,

either manipulating the games to make more money from users, or having the game grow and then changing the rules of the game or deciding to shut it down or invalidating the value of certain goods in the game. So there are many gamers out there that could have spent time, doing what's called grinding, basically grinding out, large amounts of value in the game. But then the game creator decides that whatever they created, whatever they made is invalidated. That's another very weird situation, frankly, that I think will make gaming very, very attractive. And actually, I think that in blockchain gaming,

there already are and will be more and more people that can consider it even like a profession, because there will be real economies that won't be manipulated by the game creator to make the game creator money, there'll be big, growing real economies that benefit all the players in predictable ways so that if what you do is you play video games, you can actually make a living out of it and you can do it in a predictable way because the rules can't simply be changed at any moment. The third category that I tend to like is insurance. Insurance is a big global industry, and it depends on what we consider to be insurance, whether we look at derivatives as insurance or whether we look at packaged insurance products as

insurance, but at the end of the day, there are many parts of the world where people don't have access to insurance and many parts of the world where even if they have insurance, the insurance doesn't function the way they expect. One of my favorite examples is weather insurance, because with weather, it's relatively easy to verify what happened, to verify the amount of rainfall, the amount of wind speed, the amount of various factors that relate to a policy or to a derivative. And in many of those cases, whether people go to banks and get derivatives to get institutional grade levels of insurance against events, or they go and get packaged insurance policies, in many cases, the payouts don't happen. They simply don't happen because of some loophole

or some basically a decision not to pay out is the actual situation. And that's a multi-trillion dollar industry in and of itself. Now, each of these problems is different. Each of these problems relates to different categories of people. And so if you're in one category, you might not care about insurance. And if you're another category, you might care about gamers, gaming or gamers. But the thing that I think everyone should keep in mind is that there is definitely a part of your life that is not as reliable as you think it is. Like one example is even concert tickets. This is the example that somehow sometimes seems to get this over to people who have been defrauded by being sold fake concert tickets.

And what the real answer is is you could just have an application where you could scan any ticket that anyone would ever try to sell you, and it could verify if it was real because you would have a shared global database of all the hashes of real tickets in a blockchain. And that's it. And so in almost every aspect of life, there is a way to solve key reliability problems. The reason that people aren't out there thinking about that is because they've grown so used to the state of affairs, right? They've basically become numb to the problem. And they will remain numb to it until it reaches a certain fever pitch, such as bank failures. And then I think there will be a very, very rapid transition to this deterministic world. Because once again, I encourage anyone who doesn't think this

makes sense to find a use case and then go ask the people that use case, if I could give you what you're getting now at the same speed, the same cost, the same user experience. But I could also deterministically guarantee that what you expected to do will get done every time. Would you ever choose the previous version that wasn't deterministically guaranteed. And I've actually never found anyone in any industry in the 10 plus years that I've been working on these systems that has found an example where they prefer the first older legacy version. So in that sense, to me, it's very wide-ranging to all parts of society. So one of the things that I want to push in on a little bit with you is this idea of the extent to which it is a numbness and of people not realizing that

society is organized in this way, which I think is certainly part of it, versus a power imbalance that people are simply used to, where they are used to institutions having more power than individuals or even groups of individuals. And maybe groups of individuals can oversee, but just to take the example of gaming, we live in a world where, of course, the game creator, the game owner and their interests would be prioritized over the, you know, the desires of the game community on some level, right? Hey, it's a company. They can do whatever they want ultimately. They were the ones who built the game and whatever, right? There's a lot of that type of assumption. How much of what's sort of implicated in this transition to a more deterministic world is

restructuring these, you know, societies or segments of societies or economies around the sort of primacy and supremacy of the interests of the end users or the end customers over what was an institution providing the service at the center? Sure. So the ideas around communal ownership have existed for a couple of decades in their more advanced form in political science, but really, I think they've existed for centuries. And there's been different modes of communal ownership throughout the centuries. I think what you're really talking about is a kind of digital communal ownership where the people that create the applications cannot simply extract all of the value by owning the means of production, basically. And so I think there's this type of, and you see

actually in a lot of these DeFi protocols that have communities where everyone can understand exactly what's going on with those protocols and those systems. And I think that's a very interesting direction. In the early stages of those systems, I think it creates a lot of friction. And I think it creates a of questioning and a lot of overhead. But in the later stages, it will continue to be valuable. So I think the way that society will get restructured is that people that use different applications will have better and better incentives to use those applications, basically. And in using those applications, they will become a member of a community, of a communal ecosystem, basically, where they'll not only be users, but there'll also be participants in the system. It's like if you

were to go to Walmart and you were to tell people to go to Walmart because you have a share in Walmart's success or you can have a real impact on that success. And there's actually a fair deal between you and Walmart for your participation in their community. This, I think, is part of the vision of society's restructuring according to some of these applications and games and so on. I think the real goal initially is to build the system and then to have this more communal version of the world. But I think that society will be changed also in that way, where people will not just be users, they will be community members of different products, basically.

Products will not just have users, and they will not just have communities that don't receive anything. They will have both. They will have products and communities that get something from being part of the user base. This is super interesting. Obviously, I agree. I think what this sort of transition implicates is a restructuring of business models as well, right? You're not going to have the same sort of way that a game studio would have thought they would make money in the past be the way that they're thinking about making money in the future, at least not entirely the same, even if there's overlapping revenue streams and things like that. In this world where like a priori, seeding control are part of the possible outcomes to the community, right? It's sort of a fundamentally different way of looking at it and designing. which isn't to say that there aren't new business models available that fit around this. The idea of tokenization of communities and tokenization of products that were previously sort of owned and operated exclusively by, you know, a middleman or a platform has been one

of the core underlying drivers and excitements of this entire space, right? If you go back and read, you know, Chris Dixon's why decentralization matters from 2018 and A16s's, you know, theses around this. He talks a lot about the idea that tokenization creates a mechanism where there's no longer a separation between the owner class and the user class. And by doing so, it breaks down the misalignment of incentives that eventually happens. And he's talking specifically about social networks. And I think it's a super interesting thesis. I've always been fascinated by that way of thinking. I'll frame this as a question. What have we learned with call it the first five

years of experiments of tokenization. And I guess, you know, maybe another way to put it is, to what extent has the speculative side of tokenization either enabled or counteracted the sort of the restructuring force of tokenization? And I'm not trying to sort of say, you know, or kind of pin my perspective here on it. But I think it's interesting. We now moved out of the realm of the theoretical in terms of some of this sort of available restructuring. And I'm interested to kind of take an honest look at where we are right now, you know, and what your perception of that is. I think tokenization is good in its initial forms because it has put value into the system. And that value, you know, has gone from $10 million when I was looking at this stuff to

way, way more, trillions of dollars at some point now. So I think it's created a market that has attracted developers to build things. And those developers have created more and more advanced ways, frankly, get even more value into the system. For example, NFTs in the art world are a good example of a category that was not stored in the blockchain world, but it became more stored over time and actually started to pervade popular culture and become subset of the art world. So I think what tokenization did first is it created a lot of synthetic things that put value into the system overall, and that attracted more people and more developer. I think the second thing, and the thing that's going to drive a lot of

systems to become successful or not successful is quite simply network effects and certain economies of scale and things like that. So at a certain point, you reached communities and you reached applications that aggregated enough demand and aggregated enough security and aggregated enough of some kind of resource that they became the leader, right? They became the leader in that category. So, for example, chain link is the leader in Oracle networks by a wide margin, well over 50% market share in pretty much almost every category where we have a service. And so when you aggregate security and when you aggregate economics into a single system, that system becomes better. This is similar to Ethereum, where it aggregated a ton of value into one network. And so a bunch of people launched their applications in that network in order to gain access to that value.

So I think the things that we've learned is that tokenization and direct access control and direct ownership of assets is attractive. It's attractive enough to create a multi-trillion dollar industry. That multi-dollar trillion dollar industry has strong network effect dynamics where winner take-all matters. And that that industry is now going to another stage, I would say the second stage, where not only are more assets moving in through things like real world asset tokenization, which is going to be a very big thing, driven by various technologies like proof of reserves and others. But also a world where more advanced applications can do creative things with those assets.

I think of it like the early days of the internet. In the early days of the internet, you might have had information transfer through email and messages. But you didn't have e-commerce yet, right? You had information transfer. People could send pictures to each other. They could send text to each other. but you didn't have e-commerce where text and images was combined to create one of the main use cases of the internet, right, e-commerce, the purchase and delivery of goods through the internet.

But you did reach a certain threshold where bandwidth, security and the ability to encrypt credit card numbers, compression and decompression of images, and the security of text information, once again, through encryption technologies, was combined to create e-commerce. And I think Defi is the early e-commerce. Defi right now is in the stages of e-commerce where you would send checks through the mail to get your books delivered by the U.S. Postal Service. That's the stage that DeFi is right now relative to the internet e-commerce analogy. And that means it has a very, very far way to grow into something really amazing. And so I think that the initial lessons are, you know, there's value in tokenization.

network effects are important. And when you start combining the centralized infrastructure like Oracle networks and smart contracts into more advanced things, you get the next generation of applications. And the next generation of applications, the one that will redefine the internet, sorry, the blockchain industry from a speculative environment with tokenization into its e-commerce equivalent of the way that all peer-to-peer and even peer-to-platform transactions work. is the next stage. That's the stage that we're going in, right? We're kind of at a place where everyone is still wondering, is the internet ever going to go beyond moving around pieces of text? To you and me, I think it's pretty obvious that obviously this industry is going to go very far

beyond moving around tokenized synthetic things. But that's the next step. What are the challenges to get into that next step? You live in this world every day. How much are the challenges technical? How much are they regulatory? How much are they structural? How much are they about demand of users, how much are they about a new type of trust hurdle where you're talking about kind of moving from a probabilistic to a deterministic world, but it requires either A, a sort of understanding of why the sort of cryptographically enforced version of trust and determinism is better, or B, just sort of a trust that it is. So I guess what are, you know, what are the major challenges that you see as sort of the industry evolves? I think there's three main challenges

technically, and then there's one big challenge from an adoption point of view. The first technical challenge is scalability, because the scalability of blockchain systems still has not reached the speeds and the throughput that is necessary for industries like derivatives, gaming, and others to fully transition. And this is proven by the emergence of app chains and the transition to a world where we won't have a single settlement layer for everything. We'll have sublayers, right? We'll have app chains. And those app chains need to exist because there is no single environment that can handle all of that throughput, despite many, many valiant and thoughtful attempts. So the first one is

scalability. Oracle networks don't have these scalability issues because they're the smaller committee efficient version of decentralized consensus, basically. The second problem is connectivity. Connectivity is the problem that Oracle Network solve where you need access to other systems in order to build advanced applications. For example, you can't build essentialized financial products without data. You can't build most games without random numbers. You can't build insurance without access to information about the insured event. This is a good example of how this will continue to evolve, basically. At the end of the day, the third one, I think, could be the one that really determines even faster, like accelerated adoption. And that is privacy.

Privacy is something that's been built into the Web 2 world in a very deep way, both privacy of contractual conditions, privacy of personally identifying information, privacy of transactional events, privacy of all these things is common. And so privacy will be a dynamic that needs to get built in. And that'll get built in through new encryption technologies, like zero knowledge proofs, Eventually, my hope is through homomorphic encryption and others. Those are the three main challenges. Oracle networks relate to all three of them. The scalability challenge can be aided by offloading more computations into Oracle

networks. The connectivity challenge is principally and pretty much totally solved by Oracle networks. And the privacy challenge is also solved by Oracle networks by basically introducing encryption technology like zero knowledge proofs to keep information private but allow it to be used. So to prove the state of the information without disclosing it, and we have things like Deco and other cool technologies that are pretty much on the cusp of, I think, creating a revolutionary set of advancements there. The big adoption problem is with the usability of private keys. So the big adoption problem is still the usability of private keys by the average consumer. And I think that problem will likely be solved through mobile phones and some kind of secure

hardware element or maybe not mobile phones. I don't know. Look, I don't have expertise in that. The point is private key signing is still a pretty wacky problem for the average consumer and private key control. And until that problem is solved, you'll keep having this repackaging an aggregation of private keys in centralized entities because you, because of, consumers can't use the private keys easily enough. But once those three deep technical problems are solved and what's the private key usability problem is solved, I think it's obvious that this will be adopted extremely rapidly. Which of those technical problems will be solved first is in question. How once once two of those four are solved, how they will interact and what unique use cases

will be able to be made available at scale is an interesting question. When all four of them are solved, then I think the whole world just moves in mass into a deterministically guaranteed form. Because by that point, there really just won't be any reason not to do it. It'll just be an obvious thing. And by that point, I think so many things will have gone wrong over the next five to 10 years that the global economy, the average consumer will be very aware of the risks that they are exposed to by not having a certain level of control of the things that impact their

daily lives. Where do governments fit into this equation? Because obviously, I think one could make an argument that the sort of largest probabilistic institution are governments, right? Where the guarantees that they have vis-a-vis their citizens are in many ways the flimsiest, because they're the most wide-ranging. They're the most subject to interpretation. We have entire systems of governance that are designed to constantly reinterpret them. And they also are responsive to the interests of large resource holders in the form of lobbyists and corporations and the sort of existing business models that are challenged by and potentially upended by this sort of deterministic world. I think about the example of, I saw a tweet, I think it was from Ryan Selkis, but I could

be wrong about that the other day, that said or that argued, if we were having to, having the encryption conversation that we had in the 90s right now, there's no way that the government that we have would sort of have the same protections for end-to-end encryptions that are there now. I think you can sort of make the same argument for cash, that there's no way that if the technology we had now was available, that a government would approve cash that they couldn't control or see. Do you think about or how do you think about the sort of, governmental risk, be a regulatory or something else for this sort of ascension into this deterministic system? I think that one of the greatest forces of the last 70 years has been

globalization. Globalization has fundamentally interconnected the world's economies and made people comfortable with interacting across borders and in the digital world. And that interaction seems to continue to happen regardless of government interests. And this is proven by people's ability to use applications built by companies in Asia, built by companies in Europe, built by companies not in their local domestic market. So I think what globalization has done is it's created these great economies of scale and all these great interconnected economies where people specialize in the things that they're good at. Some of that seems to be falling apart now due to various geopolitical things and in all that's going to create inefficiencies for a lot of places.

But all of that aside, I think what a globalization also did is it created a mindset that anyone anywhere can build an application used by the whole world. And so I think that's the new reality that all, that everyone exists, basically. And in that reality, it's very hard to control anything on a global level. So my view is that we're all global citizens. There's a global kind of economy. And the Internet and the centralized technologies accelerate that globalization dynamic, even if there are specific countries that don't want to accelerate or want to decelerate it.

So the answer to your question is really that we're in a capitalist world. Globalization has been kind of the genius out of the bottle. and you're never going to put it back in, and everyone's just going to work with everyone, regardless of what anyone else wants. And there's going to be more and more technologies to facilitate that. And that's the way the world's going to work. It's interesting. It's sort of a couple parts of the argument that I think are interesting. One is it's effectively, I mean, you didn't say it quite like this, but there's sort of an implication there, that the ability of those, that set of institutions that I was just asking about to dictate

whether these new systems can or can't get going has been radically diminished just by by virtue of how the world has evolved. And then two, another kind of interesting implication is even as we're seeing perhaps a de-globalization happen in certain sectors, right? And sort of a shift when it comes to big manufacturing, as a for example, right? The U.S. having major incentives to kind of bring semiconductor chip manufacturing back home. That the digital globalization continues unabated and just even more omnipresent. And so there might be a divergence of sort of digital globalization and whatever sort of big manufacturing industry stuff is happening. Yeah, it's not clear this is going to affect local asset prices or local goods prices. Like, it's not clear that that's going to happen

because everybody within their borders can still set some kind of tariffs or markets or whatever. But in terms of the digital world, people all over the world, even in China all over the place, places that try to seriously, seriously control things, all have VPNs. If somebody doesn't want you to watch some kind of show when you're traveling, like if you want to stream a show and you can't, just turn on a VPN. Just turn on a VPN and that's it. And the show thinks that you're in wherever it wants you to be. And you can actually get different shows by turning on different locations on VPNs

from the same streaming thing. It's down to the level where it's impossible not to have to, have a globalized economy. There's going to be a globalized economy, at least in the digital world. What's going to happen in the physical world? I mean, I think that people will find ways to gain efficiencies there as well, but I don't have as much experience with that, except in our work on real world assets and proof of reserves. And there's obviously a lot of challenging problems there, which will be very interesting to solve. I think globalization, yeah, I think everyone can be like, I want this and I want that, but anyone can just launch an application in

some country and give you access. So we can all want a lot of things. But at the end of the day, that application is accessible by anyone who can go get a VPN. So there you go. So speaking of seemingly unstoppable forces, I want to shift the conversation into AI a little bit. I know this something you've started thinking about a lot more recently. And certainly I have as well. And we talked about it a bunch in the preparation for this. But to kind of frame it a little bit, A lot of what you've been describing, the sort of feeling of momentum of inevitability about these deterministic systems, as opposed to the probabilistic systems that people have had to deal with because they were the only option. It has to do with exactly that, consumer choice,

not consumer demand per se, but just sort of when presented with option A and option B, option A being probabilistic, option B involving guarantees and the system actually functioning the way that you think it is and serves your interests in a guaranteed fashion, you point out that you haven't found someone yet who would prefer the probabilistic over the deterministic in almost all situations. I think this suggests is that underlying these shifts is sort of a larger kind of cultural or societal condition. And one of the things right now that is rapidly changing the world in which people live is the sort of the emergence of artificial intelligence, and it's infiltration of so many parts of our everyday life.

Part of what people are observing is that this is also shifting the way that we have to think about trust. Mid Journey recently turned off its free access, at least temporarily, because of, you know, things like Pope and Obesional. Puffer Jacket photos and, you know, Trump being arrested photos, which are highly compelling and realistic. I wonder to what extent or what I want to talk about next is the way in which artificial intelligence, deep fakes, misinformation, both, you know, call it benign misinformation or

deep fakes, you know, people who are just sort of making fun photos for the internet versus actually sort of adversarial or malicious, you know, intended AI. changes the nature of the trust equation and what the implications might be for these sort of cryptographic systems. So I'm not sure where the right place to dive into that is. It's something that I think the crypto industry is noticing. In fact, maybe I'll just have one quick quote before I let you dive in. Last night, from when we were recording, G Money, who's a big NFT guy, tweeted out, what if the killer app of crypto wasn't magic internet money or overpriced JPEGs, but rather a way to verify what's real and what's siops in the upcoming battle,

against our AI overlords. So anyways, this is something, Sergey, that I know you've been thinking about a lot. So, you know, bring us into the thinking about what, you know, these cryptographic systems and deterministic systems mean in AI world. Yeah, sure. So I think the thing with AI is that it's very exciting and has a lot of great applications, but it's the type of technology that can get away from people without the right controls and without some of the right things in place to manage risk. And also, it's accelerating at a very fast, fast pace. I've had an interest in it for many years, but at the end of the day, the way it relates to our industry is what I call AI resistant. So I think that one of the main questions is what are the countermeasures to AI misbehavior and adversarial AI things, basically?

Both the misuse of AI, which is in the example you described, as well as purely adversarial AI, both of these questions are things I don't see really enough. work being done in. And at the end of the day, from the point of view of decentralized infrastructure like blockchains, adversarial AI would just be another adversary, be another type of adversary. So the real question is, would blockchains be the safe haven to create a reliable world in a world that was made less trustworthy and less reliable by the misuse or through adversarial AIs? That's the way that I would formulate the question. And I think that's, The answer to that question is yes, that blockchains would be quite useful. Oracles and smart contracts would be quite useful, not only for verifying what's a deep fake

and not a deep fake, but also for maintaining the ability to transact in markets, maintaining a view of reality in relation to asset prices and assets, because one of the simplest things that AIs could do, frankly, is they could go manipulate and crash markets. And then you would be left with the need for a market, but no existence. of a market. And then if you had an alternative environment, such as a blockchain environment, like a Dex or derivatives, DeFi project, or something else like that, and that was resistant to AI manipulation, then you would migrate there. So for me, AI has a lot of great potential that I'm excited to utilize in risk management, even within Oracle networks and in other ways.

but at the same time it presents unique risks and a unique kind of profile for what an adversary could be and could do and kind of a new type of adversary. And that adversary is one that could make the world very unreliable, unpredictable. And that's once again what I feel blockchains in our industry does, is it creates a predictable world, right? It creates a world where things are deterministic and the outcomes of markets, the outcomes of information is reliable. So the degree to which AIs get misused or there's an adversarial AI that goes on to manipulate markets or information, I do think that encryption technologies will be quite useful in minimizing that, in minimizing that risk. And if that risk grows large enough, and if there's enough manipulation by

AIs of markets that are not AI resistant or of information channels that are not AI resistant, then I think encryption technologies will be able to resolve that prices of faith even more. So I think it's not really just about blockchains. I think it's about encryption technologies. And blockchains are an encryption technology that will have a very large role to play in a world that would become unreliable due to AI misuse or misbehavior. And so that's the thing that's interesting to me, in addition to how can AI be used for risk management and to increase the security of Oracle networks. Because really, it's a tool like anything else.

You can misuse the tool or you can use the tool properly. And with any new tool, you'll have people that use it properly and people that misuse it. And if our industry is focused on creating a deterministic, reliable, predictable world, well, then our industry will have to create that against all forms of unpredictability. And if AI becomes a form of unpredictability, then it's possible that our industry becomes the solution to that problem in certain cases. In your deep fake example,

I wouldn't say it's a relatively simple fix, but I think you probably need a public infrastructure that can identify people and then can allow them to sign information as accurate or inaccurate, personally, I really wouldn't be surprised if Twitter became this. So if Twitter, you know, they had the checkmarking everybody. On the one hand, it makes them money. On the other hand, they're getting people to verify themselves into a private key infrastructure where they could

sign things as fake or real. And I think blockchains would have a role to play in that. But I think blockchains would actually have an even bigger role to play in various systems where transactions were getting manipulated. So for example, markets. While deepfakes in this type of stuff is valuable, really markets are very valuable. Markets are what the whole world runs on. And if you get to a world where AIs can manipulate markets in adversarial ways, that's a pretty scary world. And if you had another alternative world where you had other markets that weren't manipulated, like defy markets weren't as easy to manipulate for the reasons that we said with encryption technologies being kind of ingrained in there at the very base level,

that could indeed happen. But it once again depends on this event, right? It depends on this negative event. The negative event could be global financial collapse irrespective of AI. Could be AI. Could be AI accelerating global financial crisis. Could be, I don't know what it could be. But basically, it could be a ton of stuff.

And I don't think the world's going to get more reliable. I think it's going to get less reliable. And whether that's AI-driven or global markets, fun time comes to an end. driven. I think our industry will be the answer to both or either of those scenarios. What makes blockchain or encryption-based systems more inherently able to resist or AI-resistant? Or manipulation-resistant? Sure. Makes sense. So blockchain-based systems and smart contracts and define all these things are built from day one with security audits and security and encryption baked in to allow it to be resistant to various anonymous advertisements.

So from the beginning, the whole premise of the system is actually to be resistant to manipulation. So that's one big advantage. This is not how many centralized systems are built. The way that centralized systems are built is if you find one flaw and you get into the system, once you're past the security measures of the system, you can do a lot of crazy stuff, basically. And the amount of internal checks and the amount of internal checks and balances is not as large. So I think the first thing is that DFI protocols have been securing hundreds of billions of dollars in value in an already very adversarial environment that it constantly tries to take and steal from them. The second reason, which I think is actually the more important reason, is once again, consensus.

Consensus is what underpins all of these applications, whether it's at an Oracle network basis or a smart contract state or the blockchain transaction itself. All of those are generated through some form of consensus. And the reason that consensus has better security properties is because of having one entity to compromise, you have tens or hundreds or thousands of entities, basically. So your ability to compromise one entity, research that entity's security practices, identify issues and holes in its infrastructure, is significantly easier than it is to do that to over 50% of the Bitcoin network, right? So you basically are left in a place where you have multiple places to compromise. And then as you have systems that have more and more independent

nodes, you essentially arrive at a place where it becomes harder and harder. So it's essentially the decentralization property. No, I think it makes sense. And thank you for taking some time. This is an area of growing discourse. And I genuinely believe, I said this, I've said this a couple times on Twitter. First, that a meaningful number of people who have been in the crypto space for, you know, whatever it is the last couple years and maybe came into the door of interesting tokenization projects or came in the door of, you know, NFTs are going to find themselves feeling like the big purpose is, in fact, you know, having this sort of alternative to some of the challenges

that sort of a new AI world will beget. So super interested to have that conversation. I guess by way of wrapping up, Sergey, it's been a great conversation. You know, as you look over the next, I don't know, call it six months, 12 months, what are the most important or sort of exciting steps on the pathway to this more deterministic world? You know, are there particular technical advances that you see around the horizon? Are there particular industrial applications that are kind of most exciting? Are there, you know, use cases that you think are going to help more people understand it. When you look at sort of the near future, what do you think are sort of the next dominoes

to fall in the move from probabilistic to deterministic? I think defy has a big future and will continue to become more and more widely used. Blockchain gaming, I think as the scalability properties of the core underlying infrastructure improves, will continue to migrate. And I see more and more large real studios looking at making blockchain-based games for some of the reasons that I described. I think those are the two main categories right now, Define Gaming. Insurance is something we're always working on and moves us slowly as an industry, but has a lot of impact. I think what we're going to do in order to facilitate all that, have greater and greater

quality data, allow people to do more advanced computations in a consensus-driven way outside of a blockchain and enable cross-chain communications and value transfer so that you can build applications that are essentially functioning across multiple chains. So those are the three big pillars of what we plan to achieve is more and better quality data, more advanced computation. So you can build more advanced applications still using consensus, but without relying on the computational limitations of chains. And then also cross-chain communications and value transfer so that you can build applications across multiple chains in what we're calling cross-chain applications. I think those three infrastructure improvements in the coming months and years really

accelerate what people can do in defying gaming and insurance. But then there's always other use cases, right? Like it's very possible deep fakes become important. And then there's a lot of value for some version of proof of reserves that proves the origin of a piece of content, kind of how NFTs came out of left field and very quickly became kind of a social phenomenon. So I think that there's always that kind of unexpected element. When that comes, I think what we're going to do is we're going to repurpose Oracle networks to address the need for cryptographic guarantees and cryptographic truth in that new unexpected element as well. Do you think, I mean, maybe that's another great question. Does it feel to you like the infrastructure is starting to be in place now to deal with unexpected

occurrences that happened? You know, you were just kind of mentioning that you could repurpose for this purpose? Do you see that sort of not just in the context of oracles, which obviously you spend your time on, but other parts of the crypto or blockchain ecosystem as well? Are we prepared? Maybe another way to ask it is, are we prepared for unknown unknowns or are there things that we're lagging on that need to be built? I think AI and quantum computing are things that are unclear in terms of their capacity to influence our industry. I think both of those have the ability to make what our industry does either more valuable or less valuable, depending on how they progress, basically.

I think that our industry will need to adapt to the emergence of both of those technologies in the next, well, AI right now, quantum computing, that's not clear to me. But I would say those are two big unknown unknowns, depending on how far they go and how fast they get there. Other than that, there's the usual question about consumer demand and governments and all this type of stuff. but that's something that our industry has become experienced and more experienced at dealing with. Because as long as the consumer demand is there, people will make applications that service it. I think the unknowns and unknowns are really around. Yeah, AI and quantum computing.

I would say those are the two big questions that I have. Well, those are big questions, I think, for everyone right now. And always awesome to have you here, Sergey, to dig into this stuff. We're going to need to have these conversations on a more frequent clip just to keep track of everything. but I appreciate you taking the time out of building to come talk with us today. Absolutely, my pleasure. Thank you for having me. All right, guys, back to NLW here.

I've been thinking a lot over the last few weeks about the AI dimension of this conversation. On April 6, G Money, best known for his NFT work, wrote, what if the killer app of crypto wasn't magic internet money or overpriced JPEGs, but rather a way to verify what's real and what's siops in the upcoming battle against our AI overlords? I retweeted that and wrote Market, within 12 months, a meaningful percentage, 20% plus of people involved in the crypto industry will have come to this conclusion. Now, I think in general, a lot of folks are tempted right now to dismiss

the discussions happening around AI as just the latest in a seemingly never-ending tech hype train. I think that would be wrong. I also think that many are going to extra dismiss the notion of crypto systems as a countermeasure to AI as just buzzwords stacked on buzzwords. I think that would be wrong as well. It is not deterministic to say that on-chain Truth solves generated AI falsehoods. But it is the case that these tools are evolving in ways that are inherently resistant to some of the challenges of AI. It's clear that since we recorded, Sergei has continued to think about these themes as well. On April 11th, he wrote a post on LinkedIn that I've excerpted here. The question, Sergei, writes, is not whether we should slow down

the development of AI. That ship is likely sailed. The key question now is how parts of our society can become AI resistant. How do we build countermeasures to protect ourselves from the misuse of AI technologies when it comes to key parts of our society and economy. I strongly believe that AI will accelerate certain parts of societal fear, mistrust, and degeneration, to the point that restoring trust through the adoption of cryptographic guarantees, decentralized infrastructure, and cryptographic truth-based systems will be the only way forward. Once the valuable link between putting key parts of society into decentralized systems and becoming more AI resistant is made even more clear, I expect that our industry will become even more critical to how society works in a cryptographically

guaranteed manner. There is lots to chew on here, and I think this is very much the beginning, not the end of a conversation. If you enjoyed it and you want to keep having that conversation, do come join us on the Breakers Discord. It's a place that we've set up for exactly this type of chat, along with a lot of other memes and less heady things as well. Anyways, guys, that is the show for today. I hope you enjoyed it. As always, until tomorrow, be safe and take care of each other. Peace.