How Chainlink Smart Contracts Will Decisively Eliminate All Global Poverty and Ensure Lasting Equality
The pie will be bigger than ever before: Chainlink-enabled smart contracts enable a “virtuous cycle” that will usher in a new gilded age beyond imagining.
And the pie will be more evenly distributed than ever before: By utterly transforming our institutions of 1) finance 2) data & 3) law, Chainlink smart contracts will transfer many trillions of dollars into the hands of everyday people.
In the following three sections, we will explore each of these topics.
Financial Transformation (through DeFi):
DeFi is a movement to build a parallel financial system upon decentralized foundations, i.e. re-creating every financial instrument in existence (and probably inventing some new ones along the way) on smart contracts. Put another way: what bitcoin (which has negligible smart contract capabilities) is to currency, DeFi (often on Ethereum) is to finance. Chainlink price feeds are arguably the single largest catalyst for the explosive growth of DeFi in the last year and a half.
“America 2.0 is going to be built on blockchain. A big part of that is going to be DeFi”-Mark Cuban, Defiant Podcast, February 12, 2021
Let us dive into why DeFi has garnered so much excitement and fanfare.
Reason 1: Information asymmetry to information parity in massive financial markets
Information asymmetry occurs whenever one party in an economic transaction has greater (or better) knowledge than the other — like a game of Battleship where one side can peek. Gone awry, this can result in market failures and moral hazards, most notably the 2007–2008 Global Financial Crisis.
Information parity, conversely, leads to fairer pricing and less market risk. This topic is of such paramount importance that five people have been awarded a Nobel Prize in Economics for their studies on it.
Traditional financial products are typically opaque and offer very little insight into the backend infrastructure. In contrast, DeFi products have a public blockchain for a backend, thus enabling them to be inherently auditable:
“yEarn (aka YFI) is possibly the first project that has successfully demonstrated how the diaspora of tools in the DeFi space have come together to create a profitable, infinitely scalable system.
We say system because it is exactly that: pure code sitting on the Ethereum network, auditable by anyone…the economic interest of which flows entirely back to the users of the network.”- Three Body Capital
“DeFi is not just a new kind of technology. It’s a movement to make trading more transparent.”- Patrick McConlogue
All of this takes place while keeping transaction data highly private. To use a metaphor:
Imagine the consumer as a satellite, gazing down at the Earth below. For many years, a thick fog (traditional finance) obscured everything. A vast highway network (backend) hid underneath. Some stretches were in disrepair, with results ranging from unfair traffic congestion to downright hazardous conditions, but they went largely unnoticed.
One day, a new wind (DeFi) sweeps in and blows the fog away. The satellite can now clearly see all the roads, but none of the specific cars (transaction data) that travel upon them.
To contextualize DeFi’s place in the broader history:
The Chainlink team has written extensively about how information parity can transform massive financial markets. Their blog comes highly recommended for further reading. To hit the highlights:
1. The global derivatives market is valued at $1.2 quadrillion. Not surprisingly, that comes with some risk.
“In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”-Warren Buffet
“Since accurate market information is hard to source, many parties go under because they overestimate or underestimate risk. This also results in many derivatives dealers being significantly overleveraged, whereas one bad outcome on a high-value contract can lead to a chain of defaults on other investments and across markets.”- Chainlink blog
DeFi would greatly reduce exposure to market risk, all while preserving privacy:
“Better information should prevent buyers from interacting with derivatives dealers that overleverage themselves, give regulators enhanced capabilities for lowering systemic risk, and reduce the ability for participants to cheat the system based on informational advantages. It ultimately curbs manipulation and helps markets find price equilibrium.”- Chainlink blog
“By incorporating TEE [or DECO] based oracles, market participants could confidentially share market data with each other, research groups, regulators, or into a smart contract that aggregates it all into a single overview dataset about the market. This would give everyone a truly holistic perspective of the current financial climate of derivatives based on uniform transparency standards for metadata, without revealing any party’s identity, position, or trade secrets. It gives all parties a better understanding of the market size and overall leverage, as well as enables earlier warning signals about the health of economic markets.”- Chainlink blog
2. Insurance accounts for 9% of world GDP (per the OECD). Due to pervasive distrust, fair pricing is hard to come by:
“While many policyholders are honest, insurance companies need to account for bad actors by raising the baseline costs on all premiums in order to reliably turn a profit.”-Chainlink blog
But insurance products built on DeFi can overcome this:
“Chainlink-enabled smart contracts offer a way for the insurance industry to move….toward a 1:1 information equilibrium between the insurance provider and policyholder….Both policyholders’ premiums and insurance companies’ costs decrease because fraud is drastically reduced”-Chainlink blog
Reason 2: Censorship-resistant participation in economic markets
From the redlining of Black home/business owners to Robinhood halting purchases of Gamestop shares, history makes one thing abundantly clear:
Traditional financial systems are often exclusionary, stifling everyday people from freely participating in markets and thereby taking control of their economic destiny.
How would DeFi have helped in those two cases?
1. Blockchains are decentralized; making it inherently impossible to “pull the plug” on trading. As noted by Qiao Wang and many other DeFi advocates during the Robinhood short squeeze:
2. Blockchains are objectively neutral. So long as the coded criteria are met (credit score, paycheck history, etc.), then you’re getting approved for your DeFi loan. The smart contract doesn’t care about your race. Nor will it invent double standards on the fly.
“Permission implies discretion, and discretion opens itself to the risk of subversion and corruption…Contrast this with a rules-based system, where the logic is straightforward (e.g. red light = stop; green light = go).”-Three Body Capital
As game-changing as this is, there is an even more important side to the permissionless coin…
Reason 3: Everyday people can be sellers of trust
A little bit of background: For any agreement to work, there must be a trusted third party that benevolently stores and executes the terms.
In traditional finance, this is handled by (centralized) institutions. Being perceived as venerable, they rely on brand and reputation-based trust to convince consumers of their benevolence. In return for providing this value add, they capture tremendous profits.
In smart contracts, this is handled by blockchains. This is sometimes called math-based trust since it relies on decentralized consensus (with game theory incentives) to ensure that the statistical probability of malevolence is demonstrably nonexistent.
For Ethereum 2.0, the consensus mechanism is “proof-of-stake”. Through a permissionless process called “staking”, anyone can participate in the ecosystem and get paid for what essentially amounts to being a “benevolent host of contract terms”.
What about the inputs that trigger the smart contracts in the first place? Chainlink oracles also feature a staking-based consensus mechanism where anyone can partake in getting paid for being a “benevolent fetcher of data”.
This has profound implications: For most of history, everyday people have only been able to be consumers/buyers of trust. This is the first time where regular folks can participate as producers/sellers of trust. Take a moment to appreciate the enormity of that.
“This comes in contrast to traditional finance where consumers purchase financial services offered by large institutions but often cannot participate in and/or earn profits by providing the service. In this regard, value is mostly captured by the institution, as opposed to spreading equity out through more user-driven participation.”-Crypto_Oracle
Trust is now crowdsourced! As math-based trust gouges away a significant market segment of traditional trust assurance services, the lucrative value add that was once captured by institutions will now flow into the hands of common people.
As a cherry on the cake: The entire staking process is algorithmic and automated, making it well-suited for passive income. With a few mouse clicks, one can buy some Ether/Link and set it to stake while they go off to work for the day.
The virtuous cycle that will create a gilded age beyond imagining
Consider this thought experiment:
Activation energy is the prerequisite for initiating a chemical reaction. Likewise, trust (i.e. enough to mitigate counterparty risk) is the prerequisite for initiating a business venture.
For burning wood, the activation energy is ~70 kJ/mol. Now imagine the laws of chemistry were different and this was hypothetically doubled to 140 kJ/mol. How differently would human history have unfolded? Perhaps we’d still be cavemen and civilization would have never taken off. At the very least, we’d be hundreds of years behind.
With more parties selling trust, its cost (i.e. activation energy) will go down. Today, we are still cavemen yearning for a business world that is more “flammable”.
Tomorrow, bearing the torch of smart contracts, we are Prometheus:
Reason 4: Inflation resistance
DeFi brings inflation resistance in two flavors. First, there is high yield (which comes as a natural consequence of blockchains being devoid of middleman inefficiencies):
“Global financial markets seek yield….and fear rapidly rising inflation from unprecedented money printing. DeFi consistently provides superior 5%+ yield….and acts as a hedge against inflation…
The low yields and the inflation of the traditional financial system will continue and bring everyone to a breaking point where people will seek out alternative sources of yield. And that alternative source of yield will be DeFi…. there’s going to be a mad dash for yield. And I think that’s where you really have the equivalent of the e-commerce boom.”- Sergey Nazarov, January 19, 2021
Second, there is bitcoin-on-DeFi. Wherein “wrapped” bitcoin tokens on Ethereum enable bitcoin to be used as collateral for far more complex financial instruments (loans, etc.) than it would be able to natively support. Extending bitcoin far beyond the narrow realm of digital gold and making its preexisting inflation-resistant properties far more broadly useful.
Icing on the cake: More efficient cross-border payments = More humanitarian aid (not strictly part of DeFi, but still worth mentioning)
Remittances are a big deal. They are the largest source of external financing for low- and medium-income countries (LMICs). According to the World Bank, the global sum of remittances is three times the global sum of aid. What’s more, countless studies point to them keeping millions of kids in school and improving educational outcomes.
In 2019, prior to the Covid downturn, LMIC remittances reached a record $554 billion at an average transfer fee of 7.1%. At such scales, any efficiency gain in cross-border payments amounts to the equivalent of a big boost to humanitarian aid.
Naturally, injecting blockchain technology into the equation can help make things more efficient. When it comes to this, Ripple and Stellar are the two major players that typically come to mind. Both of whom have partnerships with many major banks.
But arguably, the real elephant in the room is Chainlink. Bear in mind, most international payments are handled by SWIFT (Society for Worldwide Interbank Financial Telecommunication). And of all the blockchain projects out there, who does SWIFT have a longstanding partnership with? You guessed it; Chainlink.
Data Transformation (through Web 3):
Your data is worth a lot. So much so that tech behemoths lure you to generate it by offering free use of their platforms and services, as brilliantly highlighted by this cartoon from Geek & Poke:
“A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product.”-Tim Cook
And in the not-so-distant future, that data will be worth a whole lot more: AI feeds on data, thereby making data the new oil.
We often worry about the AI revolution. Even if it’s sure to generate enormous wealth, how evenly will it be distributed? What about the job displacement and the social unrest that comes with it?
Now imagine if you owned your data. In this new egalitarian paradigm, companies developing AI will need to pay you for your data. In short, any new business models, new wealth, and new services created by AI will just become a stream of passive income for everyday people.
We’d look forward to the AI revolution instead of dreading it! And we’d take back our power from big tech.
Such a vision of the future exists; it’s called Web 3. To give a quick overview:
- Web 3 = Users own their own data
- Chainlink is the chosen oracle provider of Web 3 Foundation, Polkadot, The Graph, Filecoin, and countless other players in the Web 3 ecosystem.
- Whereas Web 2.0 is woven together with HTTP protocols, Web 3.0 uses Ethereum protocols.
As Gavin Wood (co-founder of both Ethereum and Polkadot) once put it:
“Consider Web 3.0 to be an executable Magna Carta — ‘the foundation of the freedom of the individual against the arbitrary authority of the despot.’”
How is this different than Andrew Yang’s data dividend?
“Data as a property right” is a powerful idea. But Andrew Yang’s top-down approach merely legislates it in on a superficial level. This has two major shortcomings:
1. Data is framed as a commodity rather than a right.
“It’s okay to sell folks’ personal data, regardless of consent, so long as they’re compensated for it” is the message being sent.
2. Who decides the value of the data dividend?
“Data dividend plans are thin on details in regarding who will set the value of data. Logically, however, companies have the most information about the value they can extract from our data. They also have a vested interest in using the lowest possible bar to set that value. Legislation in Oregon to value health data would have allowed companies to set that value, leaving little chance that consumers would get anywhere near a fair shake. Even if a third party, such as a government panel, were tasked with setting a value, the companies would still be the primary sources of information about how they plan to monetize data.”-Hayley Tsukayama
“Yang vastly underestimates the difficulty in valuing data. DDP aims to build off the successes of the Consumer Privacy Act to establish a digital dividend…. But the state of California has already made rules around this law. It lists seven possible methods to calculate the value of data as well as a catchall for “any other practical and reliable method of calculation.” Each method yields widely different valuations in practice, one of them would price accounts at $140, another at fractions of a cent. Companies would immediately select into the lowest cost option, defeating the purpose of a dividend payment.”-Will Rinehart
With Web 3, “data as a property right” is baked into the world at an architectural level:
1. You hold the keys to your data in the first place. That’s the default state. Not some company stewarding what is nominally “your” data.
As such, you can choose to not sell it at all.
2. And should you sell, you’ll be the one dictating the price.
Legal Transformation (through deterministic financial contracts):
Smart contracts struggle with subjectivity, whereas traditional law struggles with social scalability. Working together synergistically, they can cover each other’s weaknesses and enable a superior form of financial contract. This is a big deal because:
“Every time, historically, a society has improved how its contracts work — usually through the improvement of its legal system — that society has enabled all types of economic activity that have gone on to redefine it.” — Sergey Nazarov, Fireside chat with Ari Juels (February 18, 2020)
“Contracts, throughout history, have been how people formalize and memorialize their commitments to each other to collaborate on something. And everything you see in front of you is largely a result of collaboration; other than the natural setting of trees, rocks, rivers, oceans, and things like that. Human collaboration is underpinned by contracts because contracts give the reliability that humans need to actually collaborate. If we couldn’t have contracts for whatever reason, it’s not clear to me that we’d be able to engage in all the high-cost collaborations that create all the things you see in front of you. The chair, the desk, the computer…. all of these are the results of hundreds of contracts.” — Sergey Nazarov, The Evolution of Smart Contracts and Cryptoeconomic Security (June 17, 2020)
The biggest shortcoming of traditional law: Social scalability
The current legal system is not socially scalable because:
1) Litigation can only be “executed” through the direct attention of a lawyer. Like a car without cruise control or an airplane without trim tabs, the system fails to maintain course the moment the driver or pilot steps away.
2) To make matters worse, lawyers come out of law school, which is not exactly a “mass production” process.
3) When folks renege on promises, it only makes sense to go after them if the value of the claim being enforced is bigger than the lawyer fees. Most small contract violations don’t have the ROI, so the victims usually just shrug it off and move on with their lives.
This results in legal deserts all around the world. Consider that the United States has anywhere from two-thirds to 70% of the world’s lawyers, yet still has millions of legally underserved people. Even noted blockchain critic Sebastien Meunier concedes that “Smart contracts won’t replace lawyers, [but] they may enforce rules in areas of the law deserted by lawyers”.
Altogether, this makes the present-day enforcement of financial contracts probabilistic rather than deterministic. Why is this deeply problematic?
Imagine if gravity only “executed” when in the presence of a physicist. What an unpredictable world that would be! It sounds ridiculous, but that’s the legal world we live in.
That is the uncertainty endured by the billions of people trapped in legal deserts. Without reliable access to financial contracts, they are unable to engage in the economic collaborations that would have otherwise empowered them to escape poverty.
With smart contracts, agreement execution becomes as predictable and neutral as a law of physics and a lot of anxiety is taken out of the equation.
“Traditional law is manual, local and often uncertain. Public blockchains are automated, global and predicable in their operations.”-Nick Szabo
Enabling a huge leap forward into a world where folks can more readily trust each other and build together:
“I think that a technically enforced system of contracts that works in all these different use cases is going to once again allow people to leapfrog past a broken legal system that, in many emerging markets, doesn’t allow people to live fair and dignified lives.”-Sergey Nazarov
The biggest shortcoming of smart contracts: The “subjectivity problem”
“A truly intelligent contract would take into account all the extenuating circumstances, look at the spirit of the contract and make rulings that are fair even in the most murky of circumstances. In other words, a truly smart contract would act like a really good judge…. And in this light, Oracles are just dumbed down versions of judges. Instead of getting machine-only execution and simplified enforcement, what you actually get is the complexity of having to encode all possible outcomes with the subjectivity and risk of human judgment.”- Jimmy Song
With respect to subjectivity, all smart contract use cases fall into 3 categories:
1) Those that can avoid it altogether. For instance, price feeds for derivatives, which are a relatively cut-and-dry input for an oracle to retrieve.
As an aside, it should be noted that these typically offer the best ROI for smart contracts adoption:
2) Subjectivity that can be handled by continued advances in artificial intelligence
Back in 1996, Nick Szabo clarified “I call these new contracts smart, because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied”.
As of 2021, Chainlink external adapters can provide connectivity to a broad suite of cloud-native, API-centric artificial intelligence resources — from small startups like Falon Fatemi’s Node.io all the way to corporate behemoths like Tensorflow on AWS Sagemaker (which accounts for 85% of Tensorflow deployments on the cloud).
Artificial intelligence is a game-changer because it opens the door for qualitative knowledge to also be algorithmically described. Whereas before, computer code was constrained to the realm of the quantitative.
A great example can be found in auto collision insurance. Damage estimation is not an exact science. A body shop manager uses a honed eye, intuition, and experience to come up with a number. Clearly, this is absolutely a qualitative process.
Guess what? Persistent Systems has a machine learning product for estimating auto collision damage that is being sold on the AWS Sagemaker marketplace.
3) Subjectivity from non-operational clauses.
These stem from the inherent richness and nuance of the human experience, are more concerned with the relational than the transactional, and as such can never be automated away.
As Brett Cenkus (Harvard JD) notes, “contracts are intentionally full of subjective determinations. Read any business contract and you will quickly realize that corporate lawyers are smitten with the word reasonable” because “many contracts are more relational than transactional”.
Examples of non-operational clauses include:
- Use “reasonable care”
- Act in “good faith”
- Exercise “commercially reasonable efforts”
As Enclave Research puts it: “These terms have legal meaning, but are clearly not boolean. What these terms mean is subjective and hard to codify in a way that makes sense.”
An excellent example of relational subjectivity is found in derivatives, which are a combination of two parts.
The first half is pure business logic, i.e. the aforementioned price feed aspect: A will pay B on date C an amount based on the price of copper.
The second half concerns the more complex, relational aspects of dealing with insolvency/counterparty risk: If A reasonably believes that B will not be able to make the payments as agreed, then A must give B reasonable notice so that B can take reasonable steps to correct the problem. If B fails to take reasonable steps, then we will use this nuanced, judgement-driven approach to unwind the transaction and figure out who owes what to whom.
The only way to overcome this is to build a bridge back to traditional law. One compelling architecture for doing so is the OLE stack, which consists of three building blocks:
- OpenLaw tools as the Ricardian contract
- (Chain)Link as the oracle
- Ethereum as the blockchain
In addition to OpenLaw, many others are making excellent contributions to “building the bridge”, including ISDA, Accord Project, and LawSnap.
Human solutions to human problems
In conclusion:
1. Smart contracts did not come to replace human lawyers, but to keep enforcing their will even after they’ve stepped away from the steering wheel or flight controls.
Smart contracts are also meant to empower lawyers to reallocate their time away from the more tedious aspects of contracting and towards high value-add tasks (e.g. business strategy):
“The value of a business lawyer isn’t in the paper, it’s in the advice.”-Brett Cenkus (Harvard JD)
2. Smart contracts did not come to abolish traditional law, but to fulfill it to a degree never seen before.
3. Smart contracts are not about lazily throwing technology solutions at human problems. They’re about taking human solutions to human problems and making them scalable with technology:
“The ISDA common domain model is critical for this market’s IT. In today’s market, people manage processes. But in tomorrow’s, people will manage automation and the automation will run the processes.”-Matt Tait, Google Cloud representative @ ISDA’s 34th Annual General Meeting in Hong Kong on April 12, 2019
Epilogue
Dear reader, hopefully I’ve done a good job of connecting the dots and convinced you that Chainlink is at the crux of a supremely important humanitarian movement. One that will:
1. Curb the historical destroyers of wealth: inflation, financial crises, and remittances.
2. Democratize access to the means of wealth production by offering censorship-resistant market participation, low-cost access to trust assurance services, and oases amidst legal deserts.
3. Introduce powerful new sources of passive income for everyday people: permissionless trust-selling, Web 3 data dividend, and high-yield banking.
