THE NEXT GREAT WAVE: A decentralized oracle network

I’ll start from the beginning. For clarity, I will briefly share my views regarding bitcoin. This way you’ll understand my thought process and how I came to this conclusion. Beginning with why I believe bitcoin is the hardest form of money to ever exist and closing with why I believe a decentralized oracle network is the next great wave of innovation.

Bitcoin is the best form of money in the history of humankind. The most reliable and secure financial network in the world. Sound monetary policy, immutable, permissionless, censorship resistant, unconfiscatable. Comparing bitcoin to gold is a simple task because they both possess similar characteristics. My aim isn’t to claim that bitcoin is superior but that it carries the same properties that make it sound money. I understand gold has a few thousand years of credibility being considered a store of value and bitcoin is only a decade in. Bitcoin is hard capped at twenty-one million. We can make estimates, but we don’t know for sure how much gold is entirely underneath the ground. There is only twenty-one million Bitcoin that will ever be mined. There are currently thirty-six million-millionaires on the planet which means that there isn’t enough Bitcoin for every millionaire to own one. With 7.5 billion people on earth, if bitcoin does become the global world currency or even a settlement layer for derivatives contracts, banks, and remittances, the sky is the limit. People like to claim that Bitcoin isn’t scarce because you can fork the code and create new coins out of thin air. Not the case, because what also makes Bitcoin valuable is that it’s the longest proof of work chain with the highest number of users. Bitcoin is more divisible than Gold which makes it easier to transact with in real time. With gold, you might have to shave some off to pay for smaller items, and you’ll then need to carry around a scale to measure its weight to make sure you don’t overpay. Governments can confiscate your gold if you try and leave the country with large amounts as it’s difficult to conceal. With bitcoin, all you need is to memorize twelve words, and you can take it anywhere anytime. Bitcoin is also easier to send from person to person over long distances. Using bitcoin, you don’t have to trust a third party to send it overseas, but with gold, you’ll have to pay transport and shipping fees, insurance, and trust they handle your gold with care. It’s also easier to store bitcoin whereas if you have one million dollars of gold, storing it safely becomes an issue. The real kicker here is that Gold can currently be manufactured in a nuclear reactor, it’s called nuclear transmutation by changing the atomic structure of mercury. If the technology ever advances to the point where it is economically feasible to do this, it will be as if Gold has a bug in it’s atomic structure that can not be patched with an update. The amount of gold able to be economically mined will change over time as new technology such as deep crust mining, ocean floor mining, and asteroid mining, is developed. Even if these methods are far off from becoming a reality they are still a high possibility in the next two or three decades. What we know for sure is that there will never be more than twenty-one million bitcoin. Gold is valuable because it’s extremely difficult to find and extract from the earth. I feel bitcoin improves upon the characteristics of gold but I don’t believe gold will disappear as a SoV. Gold has been valuable for thousands of years and will continue to be because the traits that make it sound money hasn’t changed. Gold and bitcoin are not competitors but rather the perfect alliance.

The world is moving digital, and that includes the way we can send, receive, and store money. Right now, smart contracts are limited to tokenization, i.e., initial coin offerings. These are simple contracts that state if you send x amount of Ethereum to y address you’ll receive a certain number of erc-20 tokens in return. A great way to raise capital for start-up companies, but smart contract capabilities can reach far beyond these use cases.

First, we had Bitcoin: a decentralized currency. Next came Ethereum: a decentralized smart contract platform. When looking at the big picture the third wave of technology to be developed are oracles. Specifically, a decentralized oracle network seems to be in my view the next logical step of development, that is, finding a secure way to connect smart contracts to the real world in real time. When looking at the entire cryptocurrency space, I see many coins that claim they are the “Ethereum killer” when they are just making horizontal trade-offs. Take EOS for example, it has 21 validators, this will increase speed, but it is greatly decreasing security and sacrificing decentralization. Coins such as NANO tout “free and instant transactions.” I don’t believe the money of the internet should be feeless nor do I believe free and instant is hardly as important as privacy. If I am going to bet on a payment coin, it’s going to be Monero for that reason. Who cares about speed when security and anonymity is far more important for everyday transactions. I don’t think it’s clever to bet against Bitcoin as it has proven over time to be highly secure. The derivatives and bond markets are estimated at $1.2 quadrillion, and smart contracts have the potential to mimic real-world agreements, so this is where I will maintain most of my focus moving forward. If I am looking at it from an investment standpoint, I would rather invest in the next generation, layer, or protocol that is a solution to some of the major bottlenecks that are keeping smart contracts from being integrated into our everyday lives. Betting on an alt-coin that promises to “kill bitcoin” or “replace ethereum” might be profitable short-term because of human emotion, hype, and speculation inflating the price, but long-term I feel will be a losing strategy a vast majority of the time, if not every time. The coins and tokens I believe have the greatest fundamentals long-term are Bitcoin, Monero, Ethereum, and ChainLink. Bitcoin for a store of value, Monero for a private currency or cash, Ethereum for a smart contract platform and ChainLink for a decentralized oracle network.

Source: https://chain.link/

ChainLink is a network of oracles that will act as middleware to feed data to smart contracts (A). The problem with intelligent agreements today is that they cannot connect to external data feeds. Nazarov states “the decentralized nature of smart contracts that make them tamper-proof, also removes their ability to access key contractual performance data, denying them the use of any & all web APIs, as well as precluding them from utilizing important existing outputs like bank payments” (1). The miners and node operators cannot supply real-world data without there being issues with reaching consensus. Egberts explains that nodes cannot retrieve external data because “if they did, it would simply need an inconsistent response (such as a randomized answer to the data-inquiry or a temporary time-out of the inquired source) to shut down the entire network: Diverging inquiry-results would prevent the nodes from finding a consensus during the block validation process. Without such a consensus, no new blocks could be created, so that the whole decentralized network would be in jeopardy” (8). Smart contracts have the potential to mimic real-world agreements such as insurance, bonds, securities, e-signatures, and cross-border bank payments. The most important external resource is data because you need it to trigger the contract. If it’s a smart security contract you will need market price data, if it’s a smart insurance contract it’ll need IoT data, if it’s a trade finance smart contract it’ll need GPS data and customs API feeds. Smart contracts need a trustless method of retrieving this data without jeopardizing the security and decentralization benefits of using a trustless distributed ledger. Therefore, I do not believe that using a centralized oracle solution is the best approach. Once this centralized oracle is widely adopted and the aggregate market cap exceeds several billion dollars, they will have a “security at the edges” problem. I believe greed will always win and if the incentive to cooperate becomes high enough the centralized oracle will act maliciously. The solution to this would be to implement a network of oracles so that if one fails, it doesn’t jeopardize the execution of the smart contract. For intelligent agreements to thrive, an environment is needed that allows them to self-execute and self-verify without a centralized third party. Also, if someone is going to use a trustless decentralized smart contract platform but then rely on a centralized oracle to trigger the smart contract, it defeats the entire purpose of having decentralization in the first place. ChainLink will make centralized oracles obsolete. Full decentralization by x number of nodes will not always be necessary, but the fact that smart contract creators have the option to add in extra layers of security is what will make every other centralized oracle redundant. People claim that private chains will not use ChainLink, but this isn’t going to be the case. You see, even if two businesses are using a privately distributed ledger both parties will want guarantees that the data has not been manipulated. For example, if you have an international shipping company and some clients that are using a Hyperledger fabric cluster, the clients will not want to rely on the data from a centralized oracle that the shipping company is running. They are using blockchain to facilitate trust, transparency, and privacy.

Source: https://www.smartcontract.com/

SmartContract.com is the company behind building the ChainLink Network and have been providing oracle services for four years. Sergey Nazarov, the CEO of SmartContract.com, has been invited to SIBOS twice and his company SmartContract.com completed a PoC (Proof of Concept) for SWIFT. SmartContract.com was awarded the SWIFT startup award for completing this PoC by building an Ethereum “smart bond” based on the LIBOR rate. LIBOR stands for “London Interbank Offering Rate and is a benchmark rate that some of the world’s leading banks charge each other for short-term loans” (4). “Nazarov’s proof-of-concept uses a smart contract to calculate its own LIBOR rate and create a bond payable in real time with a Swift message instead of a cryptocurrency. The bond then keeps track of its own history, in a sense, in a similar way that every bitcoin preserves its entire provenance” (5). To be noted, SWIFT’s messaging services are used and trusted by more than 11,000 financial institutions in more than 200 countries and territories around the world (6). ChainLink is more focused on enterprise adoption rather marketing hype. The team is focused on the task of on-boarding big-time data providers who will most likely be holding large amounts of the ChainLink token to run their node. Node operators are incentivized to hold large amounts of the ChainLink token because the more they hold, the more the data coming from that node can be trusted. Smart Contract creators can use the ChainLink token to pay node operators for specific data required for a particular use case on a query to query basis. Many people claim that oracles are the new “miners” of the blockchain. “The network is designed to empower an emerging business model in which oracles will be paid for what they offer, just as cryptocurrency miners are” (9). The best use cases for a smart contract will be in a situation where data can entirely determine an outcome. These are called data-driven agreements. In the future, the goal is for an on-chain contract to be able to reach out to another on chain contract that represents some off-chain resource.

Source: https://create.smartcontract.com/sibos17

ChainLink is going to usher in the fourth industrial revolution by creating the first trustless third-party network. Klaus Schwab, Founder of World Economic Forum, indisputably the most powerful connector in the world, mentioned SmartContract.com, the company behind ChainLink in his book, The Fourth Industrial Revolution. “SmartContracts.com provides programmable contracts that do payouts between two parties once certain criteria have been met, without involving a middleman. These contracts are secured in the blockchain as ‘self-executing contractual states,’ which eliminate the risk of relying on others to follow through on their commitments” (Schwab, p. 156). This will bring to life what was first envisioned by Nick Szabo in 1997 called The God Protocols (10). Szabo defines The God Protocols as “the most trustworthy third party imaginable — a deity who is on everybody’s side” (10). ChainLink will act as the ultimate trust-less third-party by creating an end to end decentralized oracle network, which will catapult smart contracts into mainstream markets with real application. This will fundamentally change businesses at the DNA level. ChainLink is set to become the de-facto middleware between not only external data to smart contracts but also for other blockchains as well. Companies have been talking about intelligent agreements for years. The problem is, you have this highly secure unkillable contract in the middle, but the end to end system is not reliable. If there is no way to retrieve data in a decentralized way it nullifies the highly secure uncrackable security you have in the middle. Big enterprises have been waiting on a secure blockchain middleware to bring to life the massive number of use cases that will save them millions, if not billions, of dollars. For example, as the Capgemini Report states, smart contracts can save US mortgage banks six billion and an additional one hundred and forty-nine billion from leveraged loan volume growth with a reduction in settlement times (11). The overall theme here is that trust is expensive in the business realm. When you have multiple entities that are all partaking in a transaction, there are a lot of redundancies and paperwork that needs to be passed along from party to party. With smart contracts everyone will be able to look at one tamper-proof record and trust the information is reliable.

Source: Capgemini Consulting Analysis pg. 16

The API economy is expected to be worth around 2.2 trillion dollars by the end of 2018. API stands for Application Programmable Interface and is how computers communicate with each other on the back-end. If not for API’s, many applications such as Uber (GPS+SMS+Payments) would not exist. Open banking is also on the horizon and will play a significant role in the expansion of the API economy in the very near term. Open banking is defined by Mulesoft.com as “the use of open APIs allowing third-party developers to build applications and services around financial institutions, increasing financial transparency options for account holders” (2). The best example of this in the United States is a company called Mint.com. This site allows a user to connect their banking accounts and credit cards to help them keep a budget by organizing all transactions into their respective categories. Mulesoft.com states “using APIs means that banking data will be available in real-time, providing consumers with better ways to conduct transactions, save, and invest their money” (2). In the EU, open banking is the new standard since a piece of legislation has been passed called the Revised Payment Services Directive (PSD2). PSD2 will force banks to provide third-party institutions access to their customers’ account information such as balances, inputs, and outputs through open API’s. Mint.com partnered with numerous banks that allow them to have access to customers data, but soon in the EU, it will be the law for all banks to open up access to all third-party developers. Open banking will cause an onslaught of innovative companies that will now be able to build on top of banks’ infrastructure to provide people a more convenient real-time banking experience. This piece of legislation will go into effect January 2019. Hallström states “PSD2 enables bank customers, both consumers and businesses, to use third-party providers to manage their finances. In the near future, you may be using Facebook or Google to pay your bills, making P2P transfers and analyze your spending, while still having your money safely placed in your current bank account” (3). To bring this full circle, this makes ChainLink, a software that will bridge existing websites and API’s with Ethereum and Bitcoin out of the box ripe for success as eighty percent of smart contracts must access external resources via API’s to function.

A decentralized trustless smart oracle network will be highly disruptive technology by creating the first self-verifiable and self-executing environment allowing true automation to occur. Buying ChainLink today is as if you’re buying equity into The God Protocol itself.

My target for adoption is 2020–2022: the next Bitcoin halving, Ethereum Proof of Stake implementation and also the year Capgemini predicts mainstream adoption of smart contracts will begin. I also plan on setting up a node and staking my LINK. If you’d like to do this as well and earn LINK tokens by providing smart contracts real world data, contact the ChainLink technical integration manager, Thomas Hodges.

Disclaimer:

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Sources:

A. https://link.smartcontract.com/whitepaper

1. https://medium.com/chainlink/chainlink-an-overview-and-our-focus-14f03335b803

2. https://www.mulesoft.com/resources/api/psd2-revised-payment-services-directive

3. https://www.evry.com/en/news/articles/psd2-the-directive-that-will-change-banking-as-we-know-it/

4. https://www.investopedia.com/terms/l/libor.asp

5. https://www.coindesk.com/swift-relevant-in-a-blockchain-world/

6. https://www.swift.com/

7. Schwab, K. (2016). The Fourth Industrial Revolution. (Pg. 156).

8. https://legal-tech-blog.de/the-problem-of-blockchain-oracles-interview-with-alexander-egberts

9. https://www.americanbanker.com/news/the-race-to-connect-smart-contracts-to-the-real-world

10. https://nakamotoinstitute.org/the-god-protocols/

11. https://www.capgemini.com/consulting-de/wp-content/uploads/sites/32/2017/08/smart_contracts_paper_long_0.pdf