How Chainlink Generates Definitive Truth About the Off-Chain World: Opening Up Multi-Trillion Dollar Markets For Smart Contracts

The following article is based on a recent presentation given by Chainlink Co-Founder Sergey Nazarov at Chainlink’s blockchain conference, SmartCon 0. He discusses how blockchains and smart contracts create definitive truth about asset ownership and transfer, and how Chainlink is actively extending this property of definitive truth to real-world data and events existing off-chain. By doing so, smart contracts greatly expand their functional capabilities, allowing them to disrupt multi-trillion dollar markets across a variety of industries and use cases.

Contractual Agreements Are Fundamental to Social Progress

When it comes to what drives our global economy, nothing is more foundational than a contractual agreement between independent parties. Contracts enable social coordination and collaboration on both a local and world-wide scale, from the extraction of raw materials and their transformation into products, to the vast global supply chain network and its supporting financial systems. Humanity’s ability to continually create more advanced contractual agreements is one of the core drivers of its social transformation from individual hunter gatherers to the increasingly interconnected and complex modern world of today.

However, the current infrastructure that enforces contractual obligations is based largely around trust in company brands and inefficient legal systems, which generate inherently probabilistic and/or delayed outcomes. While this system of contracts has worked for a long time, there are clear points of friction, particularly when it comes to counterparty risk — the probability another party in an agreement does not fulfill their contractual obligations. This is especially present when large centralized institutions create contracts with less capitalized entities like everyday citizens or small businesses. Since the large enterprise often runs or has influence over the infrastructure executing the contract, they have the power to bully smaller entities into taking unfair deals or risk wasting years of their time in court. As a result, it’s hard to predict with certainty whether or not a contract will be fairly honored, thus increasing the difficulty of managing capital, raising the costs of litigation, and lengthening out dispute resolution processes.

These limitations stemming from counterparty risk do not need to exist in perpetuity forever. There are now technologically enforced contracts built upon mathematical guarantees (blockchains, smart contracts, and oracles) that can produce outcomes which cannot be controlled or unfairly influenced by any centralized entity no matter how influential or trusted the brand. These contracts are able to provide strong guarantees on the contract executing exactly as mutually agreed upon, introducing a new value proposition into the world, technologically generated definitive truth.

How Blockchains Create Definitive Truth on Transactions, Ownership, and Contract State

Definitive truth is a quite simply truth that cannot be manipulated. Arguably the first form of technologically generated definitive truth was the launch of the Bitcoin blockchain in 2009. It initiated the start of an ever growing ledger of transactions managed and validated by an interconnected network of computers distributed across the world. For over ten years, the Bitcoin network has been the golden source of truth about the ownership of BTC (Bitcoin’s native asset), with every transfer validated and updated in the ledger by each node in the network. By using a decentralized network to achieve massive computational redundancy, the Bitcoin blockchain is able to maintain strong security guarantees of immutability and manipulation resistance to even the largest centralized entity.

However, Bitcoin only provides definitive truth on who owns Bitcoin and not any other coin, token, stock, currency, or other asset. It wasn’t until 2014 when Ethereum expanded this concept of technologically enforced definitive truth by launching a global blockchain network that allows for the hosting of censorship-resistant and immutable smart contract applications. With these smart contracts, the terms of an agreement are codified (if x event happens, then perform y action), execution is enforced by a manipulation resistant state machine, and the results are recorded in an immutable global ledger. This creates definitive truth not just on the validity of the transaction and ownership of Ether (the native currency of Ethereum), but on the state of any type of contractual agreement running on the network. This includes the tracking of a multitude of disparate tokens (represented by different smart contracts), effectively making Ethereum a global asset registry.

While Ethereum and any other smart contract enabled blockchain can generate and store definitive truth about each contract’s current state and all previous state changes, they cannot create definitive truth about real world data and events outside of the network (off-chain). This problem is due to the inherent security model of blockchains and is commonly referred to as the oracle problem. For smart contracts to reach their potential as the dominant form of digital agreement, they need bidirectional communication with systems outside the native blockchain they reside on. In order to do so, secure oracles are required to create definitive truth about the external world, ensuring the end-to-end process is secure and reliable.

How Chainlink Oracles Generates Definitive Truth About Real World Data and Events

Chainlink overcomes the oracle problem by providing users with a multitude of security techniques that can be mixed and matched to create definitive truth about the off-chain world. Most notably, these security features include decentralized computation, digital signatures, zero knowledge proofs, crypto-economic incentives/penalties, reputation systems, trusted execution environments, and more. Bringing definitive truth to the much broader and complex off-chain world expands the awareness of smart contracts, allowing them to obtain information from any external database/web server and stay up to date about everyday real-world events. This off-chain data can then be used as tamper-resistant inputs to trigger predefined business logic coded within a smart contract.

This first use case of Chainlink’s definitive truth about the outside world is the decentralized aggregation of public data sets, including market data and exchange rates. This takes the form of a decentralized oracle network made up of multiple independent nodes that collectively source data from multiple sources, with the nodes’ responses aggregated to create a single, highly accurate and manipulation resistant data point to trigger an on-chain smart contract.

Chainlink’s decentralized price oracle networks have spurred major growth of the Decentralized Finance (DeFi) market — a collection of permissionless and censorship-resistant financial services that operate without centralized or rent-seeking middlemen via blockchain-based smart contracts. The ability to consistently obtain definitive truth about changing market prices has enabled DeFi to grow from nothing into a market over $10B today, as nearly all DeFi applications require price feed oracles.

The DeFi ecosystem is still quite young too, and is likely to grow exponentially due to the inherent guarantees it provides to financial contracts and their outcomes. Through these guarantees, DeFi is also providing high yield opportunities to users, which may become increasingly appealing as an offset to the current low yield environment being experienced in traditional finance. In the past month alone, DeFi has doubled in total value locked (amount of collateral locked in DeFi smart contract applications), a trend that will only continue as the value of definitive truth-based contracts becomes clear to the wider public.

Chainlink Moving Smart Contracts Beyond DeFi

While DeFi is showing the demand for highly reliable and deterministic financial products, it is only the tip of the iceberg in terms of industries that oracle-enabled smart contracts will disrupt. While still in the early stage of market growth, where innovators and early adopters are driving adoption, definitive truth is a universal concept that can and will be extended far beyond the crypto space, making its way into all traditional markets.

However, in order to generate definitive truth for contracts utilized in traditional industries, companies need access to private, sensitive, and proprietary data without leaking that data to the public or the oracle itself. Thus, Chainlink has introduced a multitude of privacy-preserving oracle technologies, most notably through its 2018 acquisition of Town Crier (Intel SGX trusted execution environments) and its most recent acquisition of DECO (zero knowledge proofs regarding TLS web sessions). These techniques allow oracles to attest to the accuracy of sensitive data without exposing it, unlocking a vast amount of data for smart contract consumption that is currently unavailable due to privacy concerns. Chainlink has also introduced Mixicles, a clever way of using oracles to create on-chain privacy by decorrelating a contract’s inputs from its outputs.

The other key consideration is how to connect the data and services of legacy systems to smart contracts while retaining the blockchain’s guarantees around definitive truth and execution. The concern stems from an automated contract being hindered by a centralized off-chain component, such as a data provider sending faulty data, thus corrupting the execution of the contract. Chainlink brings a novel solution here as well through the use of on-chain binding service agreements, staking , and reputation systems. Legacy systems are able to serve as Chainlink oracles that sell their data/services directly to smart contracts and stake their own financial capital (LINK) in on-chain enforced service agreements as a form of insurance on their performance. The Node’s stake can be automatically taken as a penalty (slashed) if their services are not in accordance with the terms of the pre-agreed upon agreement and their performance documented as an on-chain immutable record. These on-chain performance records can be aggregated by reputation systems to let other users know the precise reliability of a particular legacy system, effectively bootstrapping higher security guarantees onto it without remaking its backend.

Through the use of privacy preserving oracles and staking-backed service agreements, a framework emerges that both allows oracles to attest to sensitive data within legacy systems without leaking it, and enables legacy systems to make their data and services available directly to smart contracts as trusted oracles. In both scenarios, the backend processes are uninterrupted, the data is kept private, and the legacy system is held to a similar standard of definitive truth as the blockchain it’s interacting with.

This massive expansion in the ability to generate definitive truth about external off-chain data and legacy system interactions exponentially increases the addressable market size of smart contracts to include the world’s largest and most important industries. Effectively, there becomes almost no limit to how smart contracts are developed and applied as a new form of data-driven automation, ultimately leading the smart contract economy past the chasm of early adopters and into the mainstream.

The potential for growth here simply cannot be understated. Even in the crypto sphere, DeFi is just a small but growing blip ($10B) compared to the market cap of cryptocurrencies as a whole ($360B). However, as the demand for high interest yield grows, definitive truth based contracts like DeFi applications will swallow the cryptocurrency market whole.

Still, on a grander scale, the cryptocurrency market itself is only a tiny fraction of the value within the global economy. As the growth of oracle-enabled smart contracts accelerates, a larger percentage of the world’s economic activity will begin to transition to definitive truth based infrastructure.

From commodities like gold ($10T), to the stock market ($90T), to the global real estate market ($280T), to the derivatives market ($1,000T), the collective economic value of these markets will not only demand definitive truth based smart contracts, but more value will be created in the process due to a major reduction in the costs associated with alleviating counterparty risk.

Putting this all together, it’s clear that the market size of oracle enabled smart contracts is nearly limitless in size, as more reliable and equitable infrastructure for economic exchange will inevitably win out across the majority of markets when compared against less reliable and corrupt alternatives. As is the case with the Internet today, we will eventually reach a point where it’s unfathomable to think about conducting economic exchange without technologically enforced definitive truth via oracle-enabled smart contracts. This is a powerful new tool at humanities disposal and we encourage everyone to participate so that its potential can be applied in a way that can benefit individuals as well as society as a whole.

Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.

Breaking down the information asymmetry on Chainlink, Smart Contracts, and the Fourth Industrial Revolution, founded by @Crypto___Oracle and @ChainLinkGod