Chainlink is everywhere in the crypto ecosystem. Over the past three years, its underlying oracle technology – a way to feed external data into programmable smart contracts – has been integrated into over 300 projects. It’s become such a critical component of decentralized finance (DeFi) that Vitalik Buterin has called for projects like UNI to convert into competing oracle tokens to help further decentralize the space.
Meanwhile, Chainlink’s native token, LINK, has grown to become one of the largest cryptocurrencies by market cap. A gang of so-called Link Marines – typically those with financial stakes – prowl Twitter to protect the reputation of Chainlink and its illustrious co-founder, Sergey Nazarov.
This rapid success, and the bizarre cult behavior surrounding Chainlink, have raised legitimate concerns about the project. Buterin, for one, has said the system lacks a coherent way to penalize bad data providers. The Chainlink team recently released a white paper offering potential solutions here.
Chainlink 2.0 would introduce the concept of “explicit staking” and add a second layer of trusted oracles to supervise the network (more on that below). Though critics have raised flags here as well, it's hard to argue Chainlink hasn't found product-market fit.
Ahead of his appearance at Consensus 2021 I asked co-founder Sergey Nazarov about the challenges facing, and the future of, the multi-billion dollar network. He would only respond to “technical” questions – so no comment on the Marines, the token’s rapid accretion or Buterin’s proposal, unfortunately. Here’s what he said.
Has your answer to "Could you create a hybrid smart contract to prove someone painted your house the right shade of blue?" changed at all?
You can create a hybrid smart contract around anything that an off-chain data source can prove to be true. While there aren’t many data sources to prove the color of a house today, if there was sufficient demand for data that proves this event it would become available, and a hybrid smart contract could then be efficiently settled based upon that data, after being validated by a decentralized oracle network.
You've mentioned how “hybrid smart contracts" are already revolutionizing DeFi. What's happening here?
Hybrid smart contracts are the combination of deterministic, on-chain code featuring high reliability, transparency and security, together with the real world’s off-chain events. This is the next step in the evolution of smart contracts as a technology. DeFi is a perfect example. You have financial products that are transparently operated on-chain but require interaction with the off-chain world’s data, such as price data, to come into existence. As more external data is validated and placed on-chain, even more DeFi smart contracts are launched, clearly showing that the number of decentralized services, in this case validated off-chain data delivery, is a key deciding factor in the initial emergence and continued growth of hybrid smart contract ecosystems such as DeFi.
How are participants in the Chainlink ecosystem incentivized to provide reliable oracle services, and what is the system to disincentivize misinformation?
The crypto-economic model that secures the Chainlink network is driven by both implicit and explicit incentives. Implicit incentives are also seen in existing networks such as Bitcoin. Miners in the Bitcoin network collectively maintain the security of the protocol as they have a strong economic incentive to uphold the value of their specialized ASIC mining equipment and their future revenue denominated in bitcoin.
Any malicious activity would lead to a devaluation of their holdings and loss of future revenue, which is how the Bitcoin network has operated without issue for over a decade. Chainlink leverages similar economic incentives to ensure accurate and reliable data is made available to smart contracts across a number of blockchain networks. With regard to explicit incentives, the recent Chainlink 2.0 white paper presented an explicit staking model that significantly increases the crypto-economic security of the network through super-linear staking.
How does Chainlink benefit from decentralized storage providers like Filecoin? What is stored that wouldn’t already be on a blockchain?
Between blockchain networks, Chainlink’s oracle infrastructure and decentralized storage providers like Filecoin, a fully decentralized Web 3.0 technology stack is starting to emerge in which smart contracts provide definitive state changes, asset control and private key access. Chainlink oracles power decentralized services for all real-world interactions, and decentralized storage networks provide efficient decentralized storage of data over the long term. Chainlink and Filecoin go very well together; Chainlink enables the input of data into Filecoin for long-term storage, as well as a gateway for smart contracts on various chains to purchase data from Filecoin.
What else are you looking to fund with Chainlink Community Grants? What are the biggest successes of that program?
The Chainlink Community Grant program has already helped support leading ecosystem tools like market.link and reputation.link, while also providing many original research grants for the smart contract ecosystem, numerous native integrations of Chainlink on additional blockchain networks, social impact initiatives for emerging markets across the world and environmental sustainability efforts.
Could you give a little insight into Chainlink's business development? How closely does Chainlink Labs work with teams on integrations?
As a permissionless framework for building oracle networks, many development teams go on to use Chainlink on their own by referencing the publicly available documentation. Chainlink is an easy system to integrate. However, we are always here to help teams that want to integrate their application with Chainlink and need custom support. We can be reached at firstname.lastname@example.org. We have and will continue to help projects create custom oracle networks that are needed for more specialized use cases, whether it’s fetching weather data from a specific geographic region for smart contract insurance agreements or securely connecting existing backend systems to the growing blockchain ecosystem.
What are you most excited about in crypto?
What excites me most is fundamentally changing the way the world works to improve society in two key ways.
Firstly, the booms and busts we see with financial markets are based on information asymmetries that benefit the very few who can exploit them. Often, the rest of society is left to foot the bill. This is not right and has to change. Secondly, millions of users across emerging markets still lack basic economic agreements about bank accounts, insurance, global trade and many other contract systems that users in developed markets often take for granted. Hybrid smart contract applications can take the rest of the world from zero to one, regardless of their local system’s failings. This is perhaps the most worthwhile goal in all of contract theory.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.