#440 Sergey Nazarov on Oracles and Smart Contracts

Sergey Nazarov is the CEO of Chainlink, where he is focused on smart contracts and oracles. In this conversation, we discuss decentralized finance, what is driving the growth of this part of the industry, and how Chainlink’s technology can accelerate smart contracts and oracles. ======================= Smart investors know being early is critical to success in crypto. CoinList is where early adopters invest in, earn, and trade the best new crypto assets before they list on other exchanges. Try CoinList Pro and be first to trade on network launch. Sign up via coinlist.co/pomp and earn $10 in BTC after you trade $100. ======================= Diginex is the first company with a cryptocurrency exchange to be listed in the US. That exchange, EQUOS, has been built to institutional standards, but is available to everyone. You can trade Bitcoin and Ethereum spot, as well as Bitcoin perpetuals, and get a 5% discount on all fees, by signing up using equos.com/pomp ======================= Pomp writes a daily letter to over 90,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Sergey Nazarov is the CEO of Chainlink, where he is focused on smart contracts and oracles. In this conversation, we discuss decentralized finance, what is driving the growth of this part of the industry, and how Chainlink's technology can accelerate smart contracts and oracles. As always, I really enjoy this conversation with Sergey, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is Coinlist. Coinlist has one critical advantage. If you want to be early in crypto, Coinlist can help. Smart investors know being early

• 0:47Anthony Pompliano?

  is critical to success in crypto. Coinlist is where early adopters invest in, earn, and trade the best new crypto assets before they list on other exchanges. So you can try Coinlist Pro and be first to trade on network launch. You can sign up via coinlist.co/pomp. Again, coinlist.co/pomp, and you can earn $10 in Bitcoin after you trade $100. If you want to trade things that are available on no other exchange, head on over to Coinlist. You can use their Coinlist Pro product to get access to assets before they're listed on traditional exchanges. Being early, critical to success in crypto, head on over, coinlist.co/pomp.

• 1:32Anthony Pompliano?

  Next up is Diginex. They're the first company with a cryptocurrency exchange to be listed in the United States. That exchange, EQOS, E-Q-U-O-S, has been built to institutional standards, but it is available to everyone. You can trade Bitcoin and Ethereum spot, as well as Bitcoin perpetuals, and get a 5% discount on all fees when you sign up using equos.com/pomp. Again, equos.com/pomp. So Diginex is the first publicly traded company that has a crypto exchange. That crypto exchange is called EQOS. If you want to use EQOS, you have to go to equos.com/pomp. You'll get a discount on fees, and you can Start trading Bitcoin Ethereum spot and Bitcoin perpetuals. So head on over equos.com/pomp.

• 2:17Anthony Pompliano?

  Lastly, don't forget that I write a daily letter to over 90,000 investors about business, technology, and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Sergey. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a

• 2:57Anthony Pompliano?

  particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:09Anthony Pompliano?

  All right, guys. Bang, bang. I've got Sergey here. Thank you so much for doing this, sir.

• 3:15Speaker 01

  Thank you for having me. Good to chat with you again. Thank you.

• 3:18Anthony Pompliano?

  Absolutely. For those that didn't listen to the first episode that we did together, maybe give us a quick, you know, two minutes on your background and what Chainlink does.

• 3:28Speaker 01

  Sure. So I've been building smart contracts now for over seven years. Through that time, I've built a number of contracts for large financial institutions, insurance firms, have worked on my own contracts that have gotten some adoption. And through that time, I've kind of come upon the oracle problem and the problem of how to contracts connect to external systems. And that connection to external systems is quite important because smart contracts gain their security from being separate from the world of other insecure systems. So smart contracts and blockchains generally only know about what's inside of them. And the ability for them to know what's outside of them is what enables things like DeFi

• 4:12Speaker 01

  and decentralized insurance and all these use cases that I've been working on for a number of years. So basically, I've I've started to focus my time and energy on the body of work around Oracles, and Oracles are the technology that solve this problem. So they they allow you to retain the security of a smart contract and its extreme reliability while connecting it to less secure systems like data feeds or, you know, various other systems that can control the contract, but guaranteeing that those systems don't manipulate the contract. So basically, the contract can now ingest data about market events, weather, any number of other data points, and that enables new types of contracts to come into existence,

• 4:55Speaker 01

  of which DeFi and decentralized insurance, you know, those are the two most prominent examples, but there's there's many others.

• 5:02Anthony Pompliano?

  Got it. And so maybe let's just start with like, what is DeFi and what's driving the growth of the DeFi industry right now?

• 5:10Speaker 01

  So decentralized finance right right now is the taking of existing financial products and the placing of them onto a blockchain infrastructure. And there's categories like lending protocols and derivatives protocols. And what they seek to do is, in the case of lending protocol, generate yield, but generate yield on crypto assets and provide that yield in a transparent kind of counterparty risk-informed and and very reliable way against crypto assets because that's the format in which you can get the yield. Derivatives markets on blockchain have various benefits in terms of counterparty risk, settlement speeds, all these types of benefits. So what what decentralized finance is really about is the redefinition of what

• 5:54Speaker 01

  blockchains and smart contracts are doing to include financial products, right? So far, smart contracts and blockchains have been predominantly about, let's make a token. And tokenization has been the predominant focus of of these technologies, which which is fine, because tokenization generates a lot of value and it brings a lot of value into the ecosystem that can then be put into various formats. But but at the end of the day, that's not all that smart contracts and blockchains do. And what decentralized finances is the creation of financial products, usually around the crypto asset format, so around tokens like Bitcoin or other tokens. And it generates an ecosystem of financial products around the tokens that came out of the first tokenization boom.

• 6:39Speaker 01

  But it's it's a very important evolution because the evolution this time is not about the creation of more tokens, even though that might be a side effect of of this evolution. The evolution now is about blockchains and smart contracts being used to make financial products, which provide value regardless of the token or the collateral or the asset. And and really, this is where blockchains and smart contracts begin to deliver on the promises that the global financial system seeks to deliver on, but because of certain technical limitations is unable is unable to.

• 7:15Anthony Pompliano?

  Got it. And so when you think of kind of the decentralized finance industry today, how would you look at the progress that's been made since the last time we talked? Are we, you know, 20% better, 200% better? Just how do you kind of think about the progress? And then maybe compare it to where you think we'll eventually get. Are we kind of 1% of the the way to to the final state, 20%? Just just give us some ballparks as to how you think about that progress.

• 7:47Speaker 01

  I think it's it's a very significant increase. I would say it's a tripling or a quadrupling at least. And and that's even borne out partly by the numbers and the value secured there. I think the value secured numbers are even a larger increase than that. And I think that there's basically, I would say, maybe three, three really important events that have happened. When one of the events is that you have highly reliable oracles. So you have an ability for decentralized financial smart contracts to gain access to external data. And that's a necessary starting point for them to build something useful.

• 8:30Speaker 01

  And the amount of data that's now on a blockchain like Ethereum or others is the largest it's ever been. And with each additional piece of data, each additional price feed, each additional piece of weather data for insurance products or commodities data about the commodities markets sees the creation of additional on-chain marketplaces around that category of financial products. And so that is a big change. That change is also part of something called composability. So what you're seeing now that you didn't necessarily see before as much is you're seeing the ability to compose different DeFi protocols together into more advanced protocols.

• 9:15Speaker 01

  So what you're seeing now is a very historically significant thing, I think, because in an analogy, once the web began to have enough libraries and enough APIs, you had developers compose those libraries and APIs into very advanced applications, consumer applications, B2B applications, all kinds of applications. For example, Uber is a combination of libraries and various APIs to do things like get the location of the user, message them through something like Twilio and pay a driver. Right?

• 9:56Speaker 01

  And so right now in DeFi, what you see is DeFi protocols building these little building blocks, these little pieces of on-chain code that you could consider essentially on-chain code libraries that other protocols then come and use pieces of. And so now you have a larger and larger body of work that's open source and that's being continually improved instead of everybody making their own version, which is how you arrive at the type of libraries and developer resources that underpinned the leading applications and leading killer apps that make the web and the mobile revolution happen. Right? And so there's a very important historical analog to what's happening right now there. The oracles are kind of like the APIs, right?

• 10:40Speaker 01

  So you're starting to see APIs and libraries appear in mass. And you're seeing more and more relatively small development teams combine those oracles and other DeFi protocols, on-chain kind of contracts into more and more advanced financial products, very importantly, while maintaining security, right? So that's maybe the third thing that's really happening is that you have on-chain financial products that are able to return a yield of anywhere between 1% to 8%. And they're able to do that for billions of dollars in value. And they're able to do that extremely securely.

• 11:20Speaker 01

  And they're able to properly secure billions of dollars in value while creating transparency. And they're able to be built by people that didn't need to build every single piece of that product. So they were able to take a piece from that protocol that has been running for a year and they know works well. And they were able to take an oracle and plug that in as a data source. And they know that that oracle has been working for over a year and it's going to reliably provide them price data. And so teams of anywhere from three to 10 people are now able to make financial products that can securely create rates of return and exposure to various outcomes from a

• 12:03Speaker 01

  secure base of building blocks. And that has led to more and more usage, but really the usage is at a fraction of what I think it will be. Because if you look at the basic numbers, if we're anywhere between 10 and 15 billion in the DeFi kind of ecosystem, depending on the day, and the amount of value in the crypto format that can make its way into DeFi is in the $450 billion range, then the percentage of value that's currently getting the benefits of DeFi is still very, very small. And so that alone, a doubling of DeFi would mean it would go to, you know, 30, 30 billion,

• 12:47Speaker 01

  which wouldn't be even 10% of all the assets that are in a crypto format. If it triples, then we're at 45 billion and that's only 10% at current prices of what the total possible assets in the crypto, because it need, that, that, that's the one limitation of DeFi, really, is that it needs to have assets in the crypto format in order for that asset to gain the benefit of DeFi.

• 13:12Anthony Pompliano?

  Absolutely. And obviously, the thesis there would be that over time, that kind of 450 billion goes up over a trillion and larger and larger. One of the things I've seen you talk about in the past, I find very fascinating, is this belief that Bitcoin is part of DeFi and can benefit from DeFi. Explain that or elaborate a little bit as to what you mean when you say that.

• 13:36Speaker 01

  I think Bitcoin, as, as the largest crypto asset, can benefit from the DeFi ecosystem in its creation of a whole suite of financial products that allow people to get additional benefits from holding Bitcoin, right? So, so Bitcoin, I think, is, is very, very attractive because it's inversely correlated with things like bad monetary policy, which, which there's going to be more and more attention around in, in, in the coming months and years.

• 14:06Speaker 01

  It's viewed by more and more people as a hedge against inflation, which is set to, to occur, right? And so both of those factors, I think, are extremely important to underpin its, its, its usefulness and adoption to both the average person, as shown by PayPal or somebody like that, saying, "We want to provide access to this," or through things like MicroStrategy buying, you know, 250 million in Bitcoin. So both institutions and individuals, there's a lot of proxies that say, like, "This is attractive because of an inflation hedge and in being inversely correlated with bad monetary policy," right? But I, I think there's a third piece of this puzzle, which is also extremely attractive, that, that I think is under, underappreciated.

• 14:50Speaker 01

  And that's the benefit to generate a rate of return on Bitcoin in a trustless way that doesn't depend on the global financial system and doesn't depend on standard. Standard practices that might be viewed as untrustworthy or unreliable, or might not even get as good a rate of return as you would get somewhere else, right? So I think the third piece of the puzzle that DeFi really brings is the ability for a Bitcoin to get a rate of return of anywhere from 1% to 8%. By being just like the Bitcoin is trustlessly owned by you, now you can trustlessly engage in a financial product with this asset.

• 15:35Speaker 01

  And what that means is that you still have the ability to control that Bitcoin, you still have the ability, and now you have the ability to know the solvency of the financial product, the solvency of the financial system, very, very explicitly. And it's all once again backed by trust-minimized computation, just like the movement and existence of Bitcoin is backed by trust-minimized computation, right? So I think the benefit is that, once people are able to see Bitcoin as not only a hedge against inflation just through mere ownership, and not only as an inversely correlated asset with bad monetary policy, or what becomes publicly considered to be bad monetary policy,

• 16:18Speaker 01

  but also as an asset that provides a rate of return, right? A yield-generating asset, or an asset that can be put into some kind of market where it can be used as collateral, or can be used to basically generate yield for the holder. And that that exposure to a set of financial products is as trustless as Bitcoin itself, or close to being as trustless. I think that in an environment where yields are probably set to be pretty low, from the global bond market, from, you know, various other traditionally yield-generating environments, the ability for people to have an asset like Bitcoin, even if it's volatile,

• 17:01Speaker 01

  at the level of 8% to 5%, if you're getting a yield of 5% or 8%, then you have an asset that gives you much, much better yield, right? And I think this is what... Decentralized financial products in whatever ecosystem that they come to exist in can make happen for Bitcoin. And I think you see this already being appreciated by certain holders of Bitcoin through the over $1 billion that have already flown into other ecosystems as a Bitcoin, right? So if a Bitcoin becomes something called a wrapped Bitcoin, it doesn't

• 17:42Speaker 01

  lose any value, it still gets purchased, and the demand for wrapped Bitcoins translates to real demand for real Bitcoins, right? And so, the more, basically, the more utility, the more value that either institutions, actually institutions and individuals get from holding Bitcoin as an asset, as generated by the DeFi ecosystem, the more Bitcoin adoption will happen. And so I think it's an extremely positive relationship where Bitcoin is informing a lot of people about trustless computation and all these types of guarantees that a crypto asset should have and has. And it's getting people comfortable with the

• 18:27Speaker 01

  ideas that you don't want a financial institution to control every aspect of your relationship with your financial life. You can actually have a trustless relationship with the financial part of your life. So it's educating people about that. And I think it's a very logical leap for people to then go, okay, I have this trustless asset that is, you know, a good inflation hedge, protects me against bad monetary policy, and it turns out I can actually use it to interact with various trustless financial products, and I get all these additional benefits from that, right?

• 19:07Anthony Pompliano?

  Do you think that the kind of wrapped Bitcoin and the interoperability or usage in the decentralized finance world, is that in competition with kind of the same products or same types of mechanisms being built in a decentralized way on top of Bitcoin? Like, is that an either/or scenario? So either we take Bitcoin, we wrap it and we put it into this decentralized finance kind of ecosystem being built, or we build decentralized infrastructure on Bitcoin as kind of another option. Are those two things competing? Or do you think actually there's a world where those two things could like live in coexistence and both happen?

• 19:49Speaker 01

  I think both can happen. I think there's smart contract platforms like Blockstack and RSK that focus on relying on the security of Bitcoin as the underpinning of their of their systems guarantees. I think generally speaking, the Bitcoin blockchain has been resistant to including a lot of transactions that aren't about Bitcoin, right? That aren't about the movement of Bitcoin and the security of Bitcoin and the perpetuation of Bitcoin as a kind of digital gold alternative that has all these properties of being an inflation hedge and being inversely correlated with bad monetary policy, right? And so I think that

• 20:28Speaker 01

  I don't think it I don't think it actually really matters that much for Bitcoin's success, what environment it happens in. I think the important thing is that it happens. So whether it happens in an environment that is very positive towards Bitcoin, or if it's an environment that pushes more transactions into Bitcoin,

• 20:49Speaker 01

  I don't think that's what what's the deciding factors for deciding factor for Bitcoin's success, right? Like at the start of the Bitcoin's life and at the start of when people were really looking at it, they were looking at it for microtransactions and they were looking at it for a number of different things, right? And now it's kind of evolved into this globally known and increasingly attractive inflation hedge and inversely correlated asset for bad monetary policy. Like that's what that's what I consistently hear now from pretty much everybody, right? And that's fine. That's a very good position for that for that asset to be in. And if other people build

• 21:30Speaker 01

  systems that are underpinned by Bitcoin's security or not underpinned by Bitcoin's security, I think people might have a decision to make about like, do I trust the security of the system where the financial product is operating? And am I comfortable with the security guarantees of that system? And therefore, am I comfortable putting my Bitcoin into that system? Right? And do I want to risk? Do I want to take the technology risk of that system against my Bitcoin? Right? And they might say, I want to put that into systems that are secured by the by the hash power of the Bitcoin chain. And that might make those systems and therefore the hash power of the Bitcoin chain more valuable and more useful in certain ways. That's that's entirely possible.

• 22:13Speaker 01

  But I think that that is probably a secondary consideration for Bitcoin. I think the main consideration for Bitcoin right now is how does it become the first globally recognized government less decentralized kind of asset? That is inversely correlated with with things about the modern financial system, inflation, existing ideas about monetary policy. Right? And that being accelerated because there is a yield coming from some environment somewhere.

• 22:52Speaker 01

  And that that yield meets this meets a version of the conditions that Bitcoin seeks to meet is is is already a very positive step in the right direction. I don't think that whether Bitcoin becomes a platform to to actually house these financial products is is particularly critical to success. I don't think that's something it's it's sought out immensely over the years. I think part of the success of Bitcoin is because of its extreme focus. Right? And and that focus continues to be, you know, hedge against inflation, inversely correlated with bad monetary policy and basically private private key controlled digital asset

• 23:32Speaker 01

  that that nobody can take from me because there's no institution between me and my asset.

• 23:38Anthony Pompliano?

  Yeah, what's so interesting about this is obviously the decentralized finance kind of promise, if it comes to fruition, it will be incredibly valuable. Right? I think I think there's a lot of people who would have a hard time arguing against that. One of the core components of it is oracles, which is something that you have been working on for a while. Talk to us about kind of the importance of oracles to that infrastructure. And then maybe after we go over that, we can get into some real world examples. But just what is the oracle kind of importance in this infrastructure? And how do you see that evolving over time?

• 24:14Speaker 01

  Sure, so there's a few different categories of what an oracle does. At the simplest level, what an oracle will be able to already does successfully in the DeFi landscape is provide data. So smart contracts exist in these blockchain-based platforms that are purposefully walled off from the rest of the world for security reasons. And that security is what makes the smart contract reliable, right? So you want a hyper-secure, hyper-reliable form of digital agreement. And in order to do that, you've made a system of miners and a collection of individual

• 24:55Speaker 01

  civil-resistant nodes that basically come to consensus, come to agreement about a smart contract and its current state and its changes in state, right? And what oracles do is they enable data to flow into that environment. Because that environment is purposefully and will continue to be limited in its capacity to interact with something called an API or a data feed or basically any external system. And this is the sense in which a blockchain only knows what's in a blockchain itself. And usually what that is, is the signatures from private keys and token movements. And because that's the functionality of blockchains, generally speaking, that's what

• 25:40Speaker 01

  that's what they've been used for so far, right? So what oracles do is they expand the universe of what smart blockchains and smart contracts can be used for by providing data. Then the question kind of becomes, you know, what are the categories of data? Two categories of data that I find to be quite useful and important are price and data that enables insurance products. So basically, price data enables lending protocols to generate that yield that I was talking about, because you can properly value assets and you can return yield on those assets. You also need price data to make derivatives markets, which generate their own type of exposure and yield and all kinds of various types of returns. And then another example would be weather data.

• 26:21Speaker 01

  So what weather data does is it provides data about rainfall and temperature, and it allows the creation of something like crop insurance. So for example, one of our users, Arbol, they generate crop insurance, and they do that in the US, but also, very importantly, in countries like Costa Rica, Cambodia, and other countries where they aren't able to have insurance because their local legal system doesn't enable that. And all the insurance that's generated by something like Arbol in the US or in these emerging markets, where they're literally going from zero to one with having insurance, provides revenues and collateral into the blockchain format, into the crypto format.

• 27:02Speaker 01

  So basically, what Oracles do initially is they provide a lot of data, which allows people to make financial products that accrues greater and greater amounts of value into the smart contract format in various other types of contracts that were previously not in existence on a blockchain. Lending, derivatives, insurance products. And as this value in the smart contract on-chain format grows and grows and grows, it actually begins a virtuous cycle. Because as you get insurance premiums, you can turn those into securities or tokens or whatever you want to turn them into, and feed those into a DeFi market that then converts those into yield

• 27:45Speaker 01

  and creates more of an incentive to create more insurance products, right? So initially, Oracles generate the data-rich environment in which financial products need to be made. Without a data-rich environment, you don't really have financial products being made. Then you have some additional uses of Oracles. One of them is the ability to do computations that blockchains and smart contracts can't or don't do for scalability or complexity reasons. One of those examples is something like randomness. So in our, in our system, we have something called ChainLink VRF. It took us, you know, well over a year, close to two years to put it together. We got it audited by, by some top auditors and it's actually a novel form of generating

• 28:28Speaker 01

  on-chain verifiable randomness. So we can prove that there's a source of randomness that is ungamable by the creator of the application or the user of the application. And this is very important for generating gaming, generating things like fair token sales and, and any number of other, of other use cases that once again bring great, you know, generating NFTs, non-fungible tokens that then become their own assets. And this is another example of where an oracle generates an input into the smart contract system, which enables more value to be put onto that system. And then the NFTs, for example, that might be generated by a randomness outcome, because

• 29:11Speaker 01

  people know they're generated fairly and that nobody is gaming the system to generate NFTs as a way to steal from other users, to generate the good NFTs for themselves. Those NFTs, those non-fungible tokens, those kind of digital goods, digital assets, become more valuable. And then they also flow into the DeFi ecosystem, right? The, the third and, and final example that I think is, is relevant to the point earlier about Bitcoin is, is something called proof of reserve. So for, for wrapped Bitcoin and, and soon for other assets, what, what an oracle network is able to do, it's able to prove that an asset is actually somewhere and it's actually in a certain state.

• 29:52Speaker 01

  So for the key, for, for wrapped Bitcoin, what our proof of reserve approach does is prove that there is actually Bitcoin locked up within the Bitcoin chain for every WBTC that's in existence somewhere else. And that creates a greater level of assurance that the WBTC is true, truly about a real Bitcoin and increases its adoption in various DeFi programs, uh, protocols and various kind of products as a form of collateral, right? So what an oracle network does there is create various assurances that the collateral or the asset in a DeFi protocol can be relied upon and that gives it an ability to get even better yield.

• 30:37Speaker 01

  We've since then expanded that to, to one stablecoin where you can actually prove that the stablecoin is backed by a real bank account. And the Oracle network checks if the money is in the bank account. Um, I think on hourly or daily basis, but it checks it, it checks it very regularly. And it's like an ongoing technological audit of the value in that bank account. Shifting us from a world where we would have to wait for six, every six month or annual audit of that stablecoin. Right? And, and so what I, what I think Oracle networks do is they both create a data rich environment. Where as we put more and more data on chain about new commodities, new, new various markets.

• 31:17Speaker 01

  We see various decentralized financial products popping up around those, those, those markets. Right? It, it also provides a large, um, a large amount of surety about how some of these protocols work, whether they're relying on Bitcoin in the form of wrapped Bitcoin. Or whether they're generating something like a non-fungible token that's then used as an asset in other protocols as a form of collateral. The ability for oracles to prove that a certain collateral has a certain value is, is actually, in my opinion, something that would have, would have seriously softened and possibly stopped the 2008 financial crisis. Because if, if you had oracles proving

• 32:01Speaker 01

  the value of homes or the, how many homes a certain mortgage holder had and returning that data into a transparent financial system. Then the boom and bust cycle of the 2008 financial crisis wouldn't have been nearly as large. And so or oracles basically provide both data and um assurances that the value within DeFi is, is actually there.

• 32:29Anthony Pompliano?

  Yeah. Talk a little bit about what needs to happen for oracles and DeFi to go more mainstream. How, how do we get more people using this stuff? Is it user experience? Is there a macro environment uh kind of change that needs to occur? What gets DeFi and oracles more mainstream?

• 32:48Speaker 01

  I think there's two kinds of patterns that are going to emerge and they're probably both gonna emerge. They're both slowly already emerging. The slow case is what we see right now in the community, right? We see 450 billion in the crypto format. We see anywhere between 10 to 15 billion in the DeFi format. And we see more from the crypto format flowing into DeFi. And we see a number of protocols and a number of teams becoming successful and successful enough to stand on their own two feet for many years to get financing and to continue to exist as teams that make DeFi protocols, right? So you basically have an ecosystem that has enough capital within it

• 33:31Speaker 01

  so that people can make financial products, become successful. Other people can see their success, make even better and even more financial products and continue this cycle of better and better financial products in an ecosystem with sufficient usership and sufficient value to continually make that worthwhile, right? So there's a larger enough of a market so that the financial products in DeFi, even without any additional value coming into the ecosystem, is large enough and is compelling enough to have really high-quality DeFi teams, you know, like Synthetix and AVE and Urn and others,

• 34:11Speaker 01

  building better and better financial products and doing that at kind of a breakneck pace. And I think what that'll lead to is better and better financial products on-chain, more and more usable financial products on-chain and actually more accessibility to those, right? And I think one of the other drivers of that is yield. The ability for these financial products to generate anywhere from 1% to 8% yield versus that half percent or less yield that you get from the existing financial system is going to be a very attractive property if it continues. And so people are slowly going to realize... Why am I in the standard financial system if I get half a percent or less in yield?

• 34:55Speaker 01

  Whereas all I have to do is turn my dollars or my yen or my pounds into stable coins. And then I suddenly get 2% or 4%. And all that's going to really happen is the rails to do that are just going to get more and more polished. Probably such that even Robin Hood or various other various other web interfaces that already own users end up using the protocols that are being built today to do that. Because at the end of the day, those applications seek to provide people yield. They seek to provide returns. They don't really care where the returns come from, as long as they can get those returns. And as long as they can get them in a reliable, secure way. Right? So that's the slow case.

• 35:38Speaker 01

  The fast case is a kind of scary scenario where the global financial markets go through a bust cycle. Right? Boom and bust cycles are usually on an eight to 12 timeline. And so on, on the eight to 12 timeline of global financial system boom and bust cycles. We are very much, we are very much kind of on time and slightly overdue for that. Possibly because there's been a lot of monetary policy and fiscal stimulus and all kinds of different stimulus. Right? Possibly that's what's kept the global financial market going past what is likely to have probably been a bust cycle if none of this happened. Right?

• 36:19Speaker 01

  But invariably, the nature of global financial markets have a massive boom and bust dimension. That's unfortunately the nature of these markets. You know, there's debt cycles around that. There's all kinds of proof that that's how it works. I think the reality that I experienced in 2008 and that I see so unfold. And it's proven by a lot of the studies and a lot of the research and a lot of the kind of things that came out of the year 2009 after 2008 financial crisis is that whereas people before, while everything was good, are completely insensitive to counterparty risk and the transparency of their relationship with an institution. Right?

• 37:05Speaker 01

  When things go bad, as they do in a bust cycle, people go to the other side of the spectrum. They become hypersensitive. And this is actually proven by the places where you've seen these kind of smaller bust cycles. For example, a few years ago, Greece locked up all of its ATMs and you could only withdraw 66 euros as an individual or an entity. So whether you had a business or you're an individual, you could only get 66 euros. And Bitcoin wallet registration numbers from Greek IPs went up 300%.

• 37:35Speaker 01

  Bitcoin wallet registration numbers from other IPs in neighboring countries that were also worrying about a similar type of debt situation and their ATMs being locked up. Those countries saw equally large or even larger 600% rises in Bitcoin wallet address creation from those IPs. So what you basically see is that when the global financial system or where the standard financial system no longer provides people predictability, it no longer provides them safety, it no longer provides them yield or what it says it provides, right, is reliable access to your assets, yield to combat inflation and like these basic things.

• 38:20Speaker 01

  Because bust cycles basically lead to solvency issues. Those solvency issues show people that their relationship with institutions is not what they thought they were. Once people see that their relationships with institutions are not what they thought they were, they seek alternatives. The difference between 2008 and now is that now Bitcoin exists. And now all these decentralized financial products exist. And so I think what the fast case for DeFi adoption is, is that when the next bust cycle comes and the solvency of financial institutions that people have a relationship with and the...

• 39:04Speaker 01

  Kind of relationship they have with their assets in those institutions become proven to be much less reliable and much less safe than they thought. This time, when people look around and say, what are my alternatives? Blockchains will be front and center, saying, we've been telling you for a decade or more that this is going to happen, and we've been building a system for a decade or more to combat exactly this problem. Congratulations, it's ready, it's come on, we're open, we're open, come on in. You can, you can put your value into Bitcoin, you can get yield on that value.

• 39:45Speaker 01

  You can have control on that without an institution, you know, limiting you to take out 66 euros per day. And right now, when you say to somebody, you know, what if the ATMs only gave you back 66 euros per day? People go like, oh, you know, I don't think that's possible. I don't think that ever, that can even happen. But if that ever did happen, or a version of that, even a version of that ever happened, the hypersensitivity of people on that point will, in my, in my, in my, in my internal language, be called what I, what I call the fast case. And the fast case will be, my God, I have to, it turns out, my relationship with my assets is completely different than what I thought. How can I achieve holding of assets

• 40:31Speaker 01

  places, in places other than my mattress? While, while still, while still getting yield and while still using technology? And, and the only real answer will be blockchains and Bitcoins and DeFi. And so I think it's, it's actually good that that hasn't happened yet. And, and really, that's going to be a very painful thing, so hopefully that doesn't happen too much, but the degree to which it does happen will create a very, very sharp demand. And if, if by that time, DeFi is sufficiently polished, which I really think it already probably is, then, then you will see a very sharp, sharp adoption of it.

• 41:09Anthony Pompliano?

  Absolutely. What are you looking out over the next 12 months, maybe 24 months? What are the milestones that you're paying attention to, or the data points that you're watching? Where you're like, look, this is either going to signal that things are drastically accelerating or decelerating? What are those milestones and data points?

• 41:28Speaker 01

  I think total value locked in DeFi is an important milestone. I think the total amount of Bitcoin that is put into DeFi products or put into a format like wrapped Bitcoin that can be used in DeFi products.

• 41:45Speaker 01

  I do think the amount of new people adopting Bitcoin, the amount of new institutions adopting crypto assets generally, which between PayPal turning on kind of the ability for the average person to get cryptocurrency and all the different custody solutions that I see being generated in various contexts by banks and the success that I think some custody providers are going to have because of that, which signals basically institutional adoption, right? The problem for institutions is custody and the fact that good custody providers are getting financing rounds and gaining adoption basically suggests that there's a lot of institutions gearing up to custody crypto assets, right?

• 42:31Speaker 01

  So I think it would be those three things. How much value is locked into the decentralized financial product format? Wherever that format kind of lives? How much of that value? How much value has flowed from standard Bitcoin into Bitcoin that's in a wrapped form or in some form that can be utilized trustlessly in a decentralized financial product? And then also basically how many new people are there? How many new institutions like Microstrategies and PayPal and others have said, "You know, this crypto asset thing is not fully understood by me, but I think it's good enough.

• 43:15Speaker 01

  I think it's close enough that I should have some kind of relationship to it. I should allow my users to consume it. I should own some Bitcoin in my treasury as an institution." You know, these types of things, right? So I think those would be the three things that I would keep an eye on. And if all three of those are happening, then I think the world is developing very much in the direction of the slow case. And when the fast case happens, or if whenever the fast case happens, I mean, that'll be blatantly obvious, right? That'll, that'll be like a massive explosion. It'll be, it'll be a monumental shift in people's thinking about their relationship

• 43:57Speaker 01

  to assets and financial products. Because I think the reason actually people don't make this shift yet is many of them simply don't know that this is an option. They simply don't know that they have the option of a more reliable, better yield generating, kind of more secure financial product as an option. They just don't know that. And the reason they don't know that is because there's, there's no, there's not a sufficient force pushing them to know that. You know, they're kind of going through their daily lives and they're used to using the, the, the products and the assets they have and they're fine with that. And, and, and that makes sense when everything's good and everything is, is pretty stable and, and the world is predictable. But the point at which the world becomes

• 44:40Speaker 01

  unpredictable is the point at which there are very large technological shifts that are able to bring predictability back to the world. And in the financial kind of assets landscape and in the financial products landscape, and even in the insurance landscape, that, that is what blockchains will provide to what I think in the fast case will be an increasingly unpredictable world. But, but that, that'll be immediately apparent. You won't need any kind of idea of like, is that happening or not? That'll be happening very clearly.

• 45:11Anthony Pompliano?

  Yeah, I love your framework of kind of the fast case and the slow case. Sergey, listen, I really, really appreciate the time. This is fantastic. You guys have been doing a ton of work. And, you know, I think I told you last time that anytime the word oracle comes up, immediately your name comes up and the work you guys are doing. So that's a huge kudos to, to all that hard work. Where can we send people to find out more about what you're working on or find you on the internet?

• 45:38Speaker 01

  Sure, sure. We're at chain.link. At Twitter, it's twitter.com/chainlink. We've actually been using that pretty heavily to let people know about what's going on. New users, new capabilities in the chain link protocol and how it provides data to all these systems. I'm also on Twitter at Sergey Nazarov and I'm slowly tweeting things there. So any of those three places would be good.

• 46:03Anthony Pompliano?

  Absolutely. You've got no shortage of the link Marines, that's for sure. They are all over Twitter. Listen, sir, thank you so much for your time and we will definitely have to do this again in the future.

• 46:13Speaker 01

  My pleasure. Thank you for having me.