[[Presenter]]: [[Sergey Nazarov]] URL: https://www.youtube.com/watch?v=YShbzR7mlog Date: 2022-01-01 Tagged: #presentations ## Overview On January 1, 2022, [[Chainlink]] released a presentation by CEO and Cofounder [[Sergey Nazarov]] on the Future of Chainlink. ## Two Ways that Smart Contracts Will Transform the Economy and Society Chainlink is focused on making "hybrid smart contracts" (see [[Lessons from "The Future of Chainlink" by Sergey Nazarov#What are Hybrid Smart Contracts]]) that will transform society by solving two different societal problems: 1. Replacing weak "Paper Guarantees" with stronger "Cryptographic Guarantees" 2. The problem of situations where there is no consensus regarding fundamental facts, aka a condition of "No Shared Truth" and the need to use software to reach a state of definitive truth through the use of decentralized oracles What he is getting at is that there are two distinct but related issues that stand in the way of collaborating with each other: 1. We can't trust each other to act as agreed, i.e. to fulfill our promises to each other 2. We can't trust each other to agree on what happened, i.e. we don't have "shared agreement" about the truth ![[Screen Shot 2022-02-04 at 4.08.05 PM.png]] ## What are Hybrid Smart Contracts? Chainlink describes a [[Hybrid Smart Contract]] as a smart contract solves **both problems** that by combining 1. "code running on a [[blockchain]]" with 2. data and computation from outside the blockchain (aka "off-chain") provided by a [[decentralized oracle network]]. see [Hybrid Smart Contracts Explained](https://blog.chain.link/hybrid-smart-contracts-explained/) Example: [[Crop Insurance]] Let's say the [[parametric insurance]] policy says >"if the rainfall in Dawson County, Nebraska in the month of June is less than 8 inches, the Carrier agrees to pay policy holder $10,000 for every 0.1 inch under 8 inches" ^5e80cf The code running on the blockchain will make the payout automatically -- this "cryptographically guaranteed" in the sense that it is out of the insurance carrier's hands -- the code running on the blockchain executes independently and impartially. The decentralized oracle network does the actual calculation of the rainfall for the month of june. The network collects the data on the rainfall and passes it to the code running on the blockchain. ## The Dangers of Paper Guarantees https://www.youtube.com/watch?v=YShbzR7mlog&t=1490s ![[Screen Shot 2022-02-04 at 4.46.10 PM.png]] Nazarov uses to term "Paper guarantee" to refer to the traditional guarantee provided by a traditional legal contract in the traditional legal system. The term "paper" should be understood in at least two senses: (1) "paper" as in a "legal document written on paper" but also (2) "paper" as in "weak/fragile" or "ineffectual and unable to withstand challenge" e.g., "[paper tiger](https://en.wikipedia.org/wiki/Paper_tiger)" The weakness of a "paper guarantee" i.e. a guarantee that relies on the traditional legal system, is that it is "probabilistic" in other words there is a probability but not a certainty that the guarantee will hold. Editor's note: IMHO this lack of certainty stems from reasons both good and bad, -- and there are profound disagreements about whether, and when, this is a bug or a feature. See [[5. What if a smart contract has a mistake?]] and [[why not to enforce contract language]] ## Replacing Paper Guarantees with Stronger Cryptographic Guarantees After thousands of years of relying on "paper guarantess" along came bitcoin, which provided and alternative -- cryptographic guarantees: >With the emergence of Bitcoin and decentralized infrastructure for the first time in history, you could be provided something called a cryptographic guarantee, as far as agreement was concerned, with Bitcoin being the first example of you owning a Bitcoin being the cryptographic guarantee that Bitcoin provided ## A World Powered By Truth ![[Screen Shot 2022-02-07 at 8.40.40 PM.png]] The paper guarantee is a forward looking risk: we have only a probabilistic guarantee that the other party to a contract will perform as agreed. In contrast, the lack of shared truth is a backward looking risk: we can't agree on what happened. In its extreme form, this is the problem of fake news, frauds, and scams. Is that video accurate? Was that bank solvent on the day that it signed that agreement? Was that investment backed by sufficient assets? Note that this is related to but distinct from the problem of unreliable paper guarantees. As Nazarov explains there are two necessary conditions for trustworthy agreements: > you need to have both (1) definitive truth and (2) the system of contracts that guarantees the outcome of that definitive truth. In other words, in the case of Enron, or Wirecard, or Bernie Madoff, a reliable contract is a necessary, but not a sufficient condition: even if we have an ironclad agreement, it doesn't matter if the data going into the agreement is fake or unreliable. ## The Oracle Problem And this brings us to a problem, known in the industry as the "[[Oracle Problem]]" how can I make sure that my cryptographically guaranteed agreement, my smart contract, has the right ***data*** to reach the right result. Back to crop insurance. At it's core, this is an "If/Then" statement: >"if the rainfall in Dawson County, Nebraska in the month of June is less than 8 inches, the Carrier agrees to pay policy holder $10,000 for every 0.1 inch under 8 inches" As noted above, with a smart contract, this agreement is based on a "cryptographic guarantee" -- in other words, software running on a decentralized network, aka a "blockchain" But, as noted above, this cryptographic guarantee is a encessary, but by itself not a sufficient condition for a trustworthy agreement. We also need a shared definition of truth. The innovation of [[Chainlink]] is to use decentralization to reach this shared consensus. see [[How a Decentralized Oracle Network Works]]