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Speaker A: The end case of what on chain finance will ultimately look like, where it'll be a hybrid of both on chain executing code, as well as these off chain collateralized assets or natively issued on chain assets like tokenized bonds. Moving through the system using Chainlink price data, using chain link proof rese... |
Speaker B: Bankless nation. Welcome to the bull case for Chainlink. A few weeks ago, we hosted a long awaited interview of Sergei Nazarov, the founder of Chainlink. We got the pitch for why Chainlink, what it does, what it wants to do, and what economic activity it potentially unlocks for the on chain world. If you hav... |
Speaker A: Yeah, it's been a couple years. |
Speaker B: Thanks for having me on and coming in as well. We have fishy catfish. Fishy Catfish has been a minor investor and all around crypto enthusiasts since about 2013. In 2016, one of his friends recommended him to get on Twitter and he's been trapped in the mental asylum that is crypto Twitter ever since. In 2017... |
Speaker C: Your first time, David, thank you for having me, bud. Appreciate to be here and thank you for extending the invitation to us to come on here. Is this the part where we say that this is not financial advice? And that goes doubly for me because I'm just a guy who found off the streets of Twitter. |
Speaker B: Yes, this is certainly the place it'll also be at the end. This is not financial advice. This, I think, is just like the other half of the conversation that we did with Sergey not too long ago. Sergey, we got the big download on what is chainlink? What is an oracle network? What is its ambitions? But we were... |
Speaker A: Let's dive in. |
Speaker C: I think we are. |
Speaker B: Okay, so I kind of want to first set the stage. Um, we did the what is chainlink? Episode with sergey. Uh, and I I learned, uh, an immense amount of, uh, material all throughout that podcast. Uh, but that was 90 minutes of saying, what is chainlink? So I kind of want to just try and get the two sentence vers... |
Speaker A: Yeah. So I'll keep it brief. You know, if you want the full explanation, then definitely check out the bankless episode with Sergey. Very in depth, but basically at a very high level. Blockchains are very decentralized, secure networks for processing transactions. But through their security model, they can't... |
Speaker B: Yeah. Sergey's interview will explain how chain Link gets that done. But I thought that explanation was pretty, pretty powerful. Just the blockchain oracle problem. This is a problem that exists. If we reroll the dice of crypto, like that is a fundamental constraint of what blockchains have is blockchains kn... |
Speaker A: Because it just comes down to the security model. Like, the reason blockchains are so secure is because they're isolated. And the only thing blockchains validators care about is, is this transaction valid or is it not invalid? Then that's what makes them so robust against attacks. But you still need these ex... |
Speaker B: Fishy, what would you add to this definition? |
Speaker C: I view it as this kind of heterogeneous general purpose framework for compiling together these external validator sets to basically provide services that blockchains need but can't do themselves. |
Speaker B: Beautiful, beautiful. And I think before we go on and start talking about the way that the link token plays a role in this, it's worth talking about these two potential futures that existed, the potential for crypto, blockchain defi that exists without something like chainlink. And then there's the version t... |
Speaker A: Yeah. So when you look at what blockchains do and what you can do natively with just a blockchain, you can kind of bucket it into like three different things. You can mint a token, you can move a token around, you can swap a token for another, and I guess also a fourth. You could do dao voting with private k... |
Speaker B: Yeah, I think to put on my Oracle network bull hat, the world in which crypto only has data about itself is one where it remains kind of niche and a curiosity, and only services a small fraction of the total spectrum of what could be financial activity on a blockchain, which I think that financial and financ... |
Speaker A: Yeah, I mean, I think one thing is that people, you know, the crypto market cap in the ecosystem is about a trillion dollars. And I think people don't see how much value actually exists in the traditional system. Like, Sergey kind of touched on this as well. But, like, it's not about adding another trillion.... |
Speaker B: I think this was a really good setting at the table and just providing context for the vision for what ChainLink wants to go after. And I want to start to narrow this conversation about specifically the link token and the role that the token plays in this future, this future version of the world that we all ... |
Speaker C: So, before Chainlink was even a thing, Sergey and Steve Ellis had founded, and they ran a company called Smart Contract back in 2014, which was actually a centralized Oracle as a service company. And so I actually got a chance to even meet Sergey before Chainlinks made out of launch back in 2019. And we actu... |
Speaker B: From scratch and really just to set the stage of the era that that was in crypto 2013. That was two years before ethereum. And so I think that when you are. You mean to say that it was impressive that they just thought they ran through this idea maze so early? There wasn't a lot of clay in crypto to work wit... |
Speaker C: Yeah, it was actually a year. That was 2014. I'm not sure if you misheard me, but I don't know the full kind of tech stack of what they were using at the time. I know, I've heard later on Sergey talk about that he came across Ethereum and realized that they'll be building this portion of the tech stack. So t... |
Speaker B: Okay, so how did we get to the link token? Where does the link token enter this story? |
Speaker C: Before we get into that, I kind of just kind of back up for just one more second. So to kind of set the stage for how protocols work in their kind of early stages, and then we can kind of time specifically the role of the link token within the link ecosystem. Every single protocol kind of has this two sided ... |
Speaker A: Preston? Yeah, what I consider decentralized infrastructure protocols, that's a protocol with independent validators said to come to consensus about some service, that's blockchains, but that's also oracle networks, and they use tokens and basically very, very similar reasons. Fishy touched upon like the chi... |
Speaker B: Okay, so I think what you guys are doing is you're starting to like draw us a map of how link maps itself into the chain link ecosystem, right where chainlink is the bitcoin system. Link is the, the incentive mechanism that keeps everything cohered. Let's go into specifically the link tokens role in Chainlin... |
Speaker A: Yeah, I can hop into this one. I kind of bucket this under two different things. On the one side of the coin, you have link as a payment token. So link is the standard form of payment for all chain link services. And that's both directly users or applications paying in LinkedIn to network service providers f... |
Speaker B: I think that was really well said. The patterns that I'm seeing between chainlink and other blockchains are pretty clear. So link is the native currency of chain link in the same way BTC is the native currency of bitcoin, or ETH is the native currency of Ethereum. And when you want to pay for economic activi... |
Speaker A: Yeah, exactly. The way I think of it is blockchains ideally are set and forget. You set up your validator, you make sure it's reliable, you have redundancies and backups, and you set up correctly. But then it's kind of, it runs on its own. You don't really have to touch it. Having an oracle node is basically... |
Speaker B: Fishy, is there anything you want to add to this? |
Speaker C: Yeah, there's a couple of things I'm going to add. The fundamental value prop of the link token is you can think of it like this, is that the link token, when staked, is essentially a claim to a portion of the cash flows from the services provided by the Chainlink networks. The aggregate bundled service prov... |
Speaker B: This feels like a bond market where price and yields are related to each other. If more economic activity is going through chainlink, yields are going to go up because more fees are being paid through chainlink, and therefore the link token has a claim on more fees. The prices go up, but does that make yield... |
Speaker C: Yeah, because the yield is sort of like a ratio between the cost of the token and the dollar values that are earned through your portion of the service fee. So it's the ratio between dollars paid on a particular node versus what the cost of the link token. What's the dollar value of the link token you have s... |
Speaker B: But is the services provided by chain link denominated in dollars or is it denominated in LinkedIn? |
Speaker C: It's denominator in dollars is my understanding. I think that's my understanding of it is because I think they wanted to have this implicit hedging design built into it so that the volatility of the link token doesn't be a prohibitive source of friction towards applications using services, because I think mo... |
Speaker A: And just to expand upon this, theres different payment models within the chainlink network. Theres a standard usage based payment model which is either you pay out request or you fund a subscription contract thats drawn down upon. And like Vishi mentioned, its denominated in USdeZ, but it's payable in link o... |
Speaker B: Right. I think you're illustrating one of the differences between paying for block space in a blockchain system versus paying for services from Chainlink. I kind of want to drill down this, this one little nuance here. Uh, if I want to pay for a transaction on Ethereum, I pay ether and I calculate the gas, a... |
Speaker A: Yeah, so within the Chainlink network, Chainlink is this framework for building decentralized Oracle networks. And so Chainlink Labs is like one entity who helps build Oracle networks and works with node operators and basically wants to make sure that those independent service, those independent set of valid... |
Speaker C: When blockchains get lots of applications and lots of users on the same network or same even ecosystem of networks. Right. You know, you get positive network effects on certain variables like increased liquidity or potentially synergistic composability between all those apps, even combined with other apps. B... |
Speaker B: Right? And I think that was all interesting juxtaposition between chainlink and typical blockchain economics. But the question I'm really trying to go for is, how does fee price discovery happen? So there's a two sided marketplace. Say I'm aave and I need to buy ingested the ether price for a particular mome... |
Speaker A: Ultimately, what Chainlink is effectively building towards is this decentralized computing marketplace where you have node operators listing their services. They're listing their pricing. Users come to this interface, they say, hey, I need seven nodes, I want these seven data sources, do this computation wit... |
Speaker B: Okay, so like say I'm some DeFi applicant like Aave and I am a buyer of the ETH price or the data that tells me what the ETH price is and I need that to be secure and ungameable. So I need to buy it by the ETH price, the data that is the EtH price from more than one oracle because I need decentralization, I ... |
Speaker C: Yeah, you're definitely on the right track, but there's other variables to compete on other than just price. There's also the past performance of the oracles. Also what's the economic stake being put up by particular node operations versus others. So you're not just competing on price where they're kind of r... |
Speaker B: And one of those variables that you talked about, fishy, that was super helpful, by the way, is the amount of link that this one oracle is staking, correct? |
Speaker C: Yes. |
Speaker B: Okay. And so, like, if I'm trying to be selected as a seller of data, I can compete with other sellers of data saying, well, I've got like ten times the amount of link staked that they do. And so I have ten times more link at stake that might be slashed if I give you a bad, bad data. Is that correct? |
Speaker C: I can't speak to this on specific terms because this is something that's like Sergey just sort of introduced recently at Smartcon this kind of, he had a slide called decentralized computing marketplace. And obviously, you know, I'm not part of the chain link team, so I don't have any insight, but I can speak... |
Speaker A: And I think another dynamic here is both. You can go to the marketplace and you can choose, hey, I want these nodes and I want these properties. But you can also take existing oracle networks that already exist and pay for those. And because Chainlink offers all these different services, I kind of think of i... |
Speaker B: Go for it. Fishy. |
Speaker C: Yeah. I also want to add another point too. I don't know if this is like a different topic, but it also kind of ties into the fact that like, because Chainlink is kind of designed as being this kind of giant, kind of decentralized platform of services, that that's also one of its largest kind of comparative ... |
Speaker A: I think just to add on to that, setting this into context, what would an application that would require multiple services look like? I think tying this to tokenized real world assets. First, institutions need to be able to connect to all the hundreds of different blockchains that exist, and they can use chai... |
Speaker B: I think the explanation that fishy just went through and the way that you finish it off chain of God just really rhymes well with why kind of Ryan and I aren't poly layer one enthusiasts. Whereas just like there's every single new layer, one just adds in another risk dependency, especially when there's a bun... |
Speaker C: And then also what I also point out, too, is that Chainlink is able to offer value and generate value and capture fees at all these different parts of the modular tech stack. By acting as a layer zero, it can offer certain things at the layer one, at the layer two, but another thing that's also unique to cha... |
Speaker A: Expanding on the point of the scope of fees, when you look at blockchain l one coins, you're basically betting on that specific blockchain ecosystem being the dominant blockchain ecosystem that will have all the useful applications people want. When you look at specific applications and their tokens, you're ... |
Speaker B: There's something in the link economics that I want to close the loop on. We've talked about all these different possible ways of being a validator, all the different Oracle services that they could provide. Then we also talked about the marketplace competition to being the best Oracle provider across a vari... |
Speaker A: Yeah, I mean, when you're like a node operator and you subscribe to a job, it may have some collateral requirement of like a thousand link or something. So you have that link locked up in that service. And if you want to expand your services and offer other jobs and capture other jobs, you may have to put up... |
Speaker B: Okay, so generally speaking, producing more economic activity through my node, again, generally speaking, requires more link collateral and more unrehypothecated link collateral is just better. And so there's a general loose connection between me providing more services to more people and the amount of link ... |
Speaker A: I would say like there can be a loose connection, but I think a lot of it could be like directly tied to it, where if I don't have the link to offer a particular service or get access to a job listing, I just fundamentally can't service that job itself. So my revenue would basically be capped at some kind of... |
Speaker C: Because basically, let's say you take on like five, six jobs and all your clouds are already allocated to those jobs and now jobs number seven, 8910, come through the door, but now all your clouds already kind of like allocate to those other jobs. You would not lose out on the revenue that you could have cap... |
Speaker B: Understood. And this is the way that link actually becomes hooked into yield. And it's kind of like a market force forces mechanism, whereas ether, it's hooked into Ethereum's yield very directly. The protocol pays, the yield is objective, there's no subjectivity there. But with link in the system, it's kind... |
Speaker A: Yeah. And I think it's kind of down to the topography where Ethereum is this like unified protocol. Wherever I, you join the Ethereum network as a validator and you have this specific job you're supposed to perform and the protocol pays you, where Chainlink is more of a framework for building oracle networks... |
Speaker B: Certainly. And I would assume that also due to market forces say Chainlink succeeds all of its wildest hopes and dreams. And the link price absolutely moons the magnitude of collateral that people would need to put up in link terms would naturally come down because the link token went up in price. And so it ... |
Speaker A: Yeah, but there's a network effect where if the chainlink network is becoming more valuable, that usually means it's securing more value itself because it's becoming a more useful protocol. So it may not be directly tied, but as Chainlink securing more value and that improves the economics, then that ultimat... |
Speaker C: Yeah, I was also just a little bit more about the hot topic right now. Also into crypto is kind of like tokenization of the rwAs. And so I just wanted to talk a little bit about that too. And so Sergey, when he spoke with you, he explained that tokenization rwas is a very direct path of how the amount of cap... |
Speaker A: Just to tie onto that, tying it back to Chainlink. A lot of what fishy is talking about is not theoretical. Please, please, institutions get interested in rwas. Chainlink has been working with an array of institutions to make this feasible. Where there was a recent collaboration between Chainlink, Swift and ... |
Speaker B: Yeah, ultimately, all of these trillions of dollars that Sergey was talking about, the conduit is chain link and the settlement layer is ethereum, is, is the case for that I potentially see here, which, I mean, I like people buying as much ethereum block space as possible. Are there any sorts of, like, numbe... |
Speaker C: Well, I mean, I think Sergey has said that he thinks that tokenizing rwas will ten x the amount of capital, like the dollar value. So in a Sergey sounds like he was saying at least $10 trillion worth of assets can come on chain. And then he also, in your podcast, he used the word quadrillions. But again, tha... |
Speaker A: Yeah. And when you look at what are the institutions themselves saying, like, there was a BNY Mellon report that said, like, 97% of institutional investors agree that tokenization is going to revolutionize asset management itself. Like, basically, that whole asset management industry is looking towards token... |
Speaker C: And David, if you want to see how hard it is to predict, just ask no prize winner Paul Krugman about how hard it is to predict the economic impact of the Internet. Who said that the Internet will be no more impactful than the fax machine? It's like, I don't want to be the Paul Krugman or crypto, and to throw... |
Speaker B: I will say that maybe if I, I definitely see that maybe to try to attempt to articulate my bull case for Chainlink is that there's already assets out there, there's already securitization out there. There's already some trillion dollars of assets that are already securitized, which is trad word for tokenized... |
Speaker A: Yeah, it's pretty good. That's how they can put it. |
Speaker B: Okay, guys, so say I'm a link bull. What catalyst, what short term catalysts would I be looking forward to? Like what's on the horizon over the next, like six months to two years? What would I be looking towards? |
Speaker A: I mean, right now, if we look at what Chainlink's doing right now, it's basically making three big bets. Right now you have CCIP for crosse chain interoperability, and that's both defi interoperability, so synthetix and Aave using it, as well as the tradfi interoperability and all the rwas that we talked abo... |
Speaker C: And also want to add one more point. I know here in crypto, we've always struggled with regulation and what's the regulatory clarity and why are they doing this and what's going with that bill? And we hate the hostile language in the bills at times. But if I was a betting man and I was trying to figure out, ... |
Speaker B: Well, guys, I think we can leave it there. I feel sufficiently educated on to what Chainlink is trying to do and how link fits into this. If someone listening to this, some member of the bankless nation is interested in becoming further link build where they go. Where would be the top of the rabbit hole that... |
Speaker A: So I don't mean to show my own podcast. On your podcast. It feels kind of fine. |
Speaker B: No. Well, within reason. |
Speaker A: Okay. Yeah, I have the CLG podcast. I did a podcast with Sergey a little bit earlier this year and also put out a recent one. I think that's one resource that people like to listen to things. If you're listening to this, you probably like to listen to podcasts, so I would recommend that. And as well as the C... |
Speaker B: And where can guests find you guys on twitter? |
Speaker A: You can find me chandling God on twitter. You'll probably see me talking about chainlink or Defi or just battling the misinformation. |
Speaker C: Yeah. And I'm right alongside him there on twitter. As fishy catfish on twitter. Shoot me a Dm. I'm always happy to answer questions about Chainlink or talk about whatever. Just find me. And I love chatting with people. |
Speaker B: Well, guys, thank you for coming on the show today and helping me articulate the bull case for Link. It has been a long time coming, but now that, like, I. At the beginning, now that we did the. The show with Sergey about chainlink, I felt like it was only time to do the other half of that conversation with ... |
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