Bankless

190 - Sergey Nazarov on Chainlink’s CCIP

Mon Oct 02 2023

blockchainbankstrust minimizationCCIPOracle networksverifiable webdecentralized finance

Description

This episode explores Chainlink's role in bridging banks and blockchains. It covers topics such as trust minimized off-chain computation, Oracle networks, CCIP protocol, and the future of crypto. The goal is to enable the whole world to run on blockchains and connect banks with blockchain technology. Chainlink aims to create a verifiable web backed by protocols and standards that are immune to manipulation. The episode discusses the importance of trust minimization, the challenges in connecting banks and blockchains, and the potential for securitization 2.0.

Insights

Chainlink's CCIP protocol enables communication between banks and crypto networks

CCIP provides a single integration point for banks to connect with thousands of chains, solving the problem of transacting with each other in the banking sector.

Chainlink expands beyond market data to be the largest provider of proof of reserves and various computations

Oracle networks in Chainlink generate singular computations and aggregations of price pairs, securing value and processing over eight and a half trillion dollars worth of transaction value.

Trust minimized off-chain computation is essential for creating the verifiable web

Examples include automating DeFi protocols, adding identity data to assets, and enabling cross-chain transactions.

Oracle networks fill the void by making other types of data and computation more trustless

They greatly increase the use of blockchains and connect existing systems to use blockchains.

CCIP allows smart contracts to become cross-chain applications

Users can easily deposit funds into DeFi protocols through their bank accounts, enabling value transfer between different chains and protocols.

Chainlink aims to connect the bankless money system on blockchain to the traditional banking world through interoperability

By connecting existing systems into CCIP, banks can reduce friction and integrate trillions of dollars worth of assets with blockchains using their existing infrastructure.

Banks can use the full power of Ethereum through Chainlink's CCIP protocol

CCIP enables banks to define their desired interaction with specific chains, contracts, and functions, condensing the process of interacting with other chains into one transaction.

Chainlink enriches real-world asset tokens by connecting them back to reality with proof of reserves

The Chainlink system creates real-world assets that are connected back to reality, allowing movement between chains and ensuring updated status of assets.

Cross-chain security can be categorized into five levels

Chainlink's decentralized approach offers real security compared to systems with limited decentralization.

The future of crypto can be viewed in two ways: the low case and the fast case

Once society realizes the superior benefits of a cryptographically guaranteed system, it will become the way the world works.

Chapters

Bridging Banks and Blockchains
Chainlink's Role in Interoperability
Enabling Trust Minimized Off-Chain Computation
Oracle Networks and Trust Minimization
Expanding Off-Chain Computation with Chainlink
Creating Independent Oracle Networks
Connecting Banks and Blockchains through CCIP
Enabling Banks to Connect with Chains
Using CCIP to Connect Banks and Blockchains
Benefits of CCIP for Cross-Chain Applications
The Role of Swift in Bank Adoption of Blockchain
Connecting Financial Products to Reality with Chainlink
The Role of Blockchain in High-Integrity Financial Systems
Levels of Security for Cross-Chain Transactions
The Future of Crypto: Low Case vs Fast Case

Summary

Transcript

Bridging Banks and Blockchains

00:01 - 06:31

The goal is to have the whole world running on blockchains, with banks and financial institutions connected to and utilizing blockchains for their financial products.
Chainlink's CCIP protocol aims to enable communication between banks and crypto networks.
Decentralized oracle networks like Chainlink play a role in bridging the gap between banks and blockchains.
Uniting banks and blockchains could create a $100 trillion market or even higher, known as 'securitization 2.0'.
Sergey Nazarov outlines five levels of security for decentralized networks.
The Protocol Sync Thesis suggests that once banks can communicate with blockchains, there will be a flow of value onto the blockchain.
There are significant opportunities for traditional finance once they realize the benefits of blockchain technology.
The challenge lies in connecting BankerTech with blockchain technology.
This episode introduces Chainlink and its role in bridging banks and blockchains.

Chainlink's Role in Interoperability

06:18 - 13:33

Chainlink is more than just providing prices for DeFi, it aims to become the interoperability layer between tradfi and defi.
Oracle Networks are an environment that does computation in a trust minimized way about everything outside of a blockchain.
Chainlink has generated over a thousand Oracle networks live on production, securing value and processing over eight and a half trillion dollars worth of transaction value.
Oracle networks extend to basically every computation outside of a blockchain that you would want to make trust minimized through the use of consent.
Chainlink has expanded beyond market data to be the largest provider of proof of reserves and various computations for gaming, automation, and cross-chain communication.
The cross-chain system uses Oracle networks as a valid data set to compute cross-chain communication including the movement of value and messages.
Chainlink's security model has stood the test of time for over four years on production.

Enabling Trust Minimized Off-Chain Computation

13:12 - 20:02

Chainlink's vision is to enable trust minimized off-chain computation.
Off-chain computation refers to all computations outside of a blockchain that need to be made trust minimized.
Trust minimized off-chain computation is essential for creating the verifiable web.
Examples of trust minimized computation include automating DeFi protocols, adding identity data to assets, and enabling cross-chain transactions.
Application creators prefer to focus on building applications rather than infrastructure.
In the future, more people will realize the importance of trust minimization and the verifiable web.
AI will accelerate the adoption of computations through blockchains and Oracle networks.
Bankless podcast explores the topic of Oracle networks in this episode.

Oracle Networks and Trust Minimization

19:39 - 27:13

The traditional world relies on trust networks and the legal framework for trust.
Blockchain data is powerful but has limitations in terms of trust minimization.
Oracle networks fill the void by making other types of data and computation more trustless.
Chainlink provides price oracle data, but there are many other data sets that need to be digitized and made trust minimized.
Oracle networks greatly increase the use of blockchains and connect existing systems to use blockchains.
Verifiable web aims to create a manipulation-resistant web where assets are always under control and contractual arrangements are guaranteed.
Emerging markets can benefit from parallel systems of contracts enabled by stablecoins, smart contracts, and Oracle networks.
Chainlink's vision expands beyond price oracles to include various types of off-chain computation for trust minimization.

Expanding Off-Chain Computation with Chainlink

26:48 - 33:59

DeFi is a concept where a smart contract provides an output consumed by other apps.
Chainlink expands this vision to trust minimize various types of off-chain computation.
Creating a standard and consumable system for organizing around different types of data is challenging.
Chainlink allows you to create validator sets with high-quality nodes and reputable data sources.
Oracle networks in Chainlink generate singular computations and aggregations of price pairs.
Chainlink has launched over a thousand Oracle networks that have successfully secured value for years.
Chainlink is not just one singular network, but over a thousand specific decentralized services.
Each service can be configured with the amount of nodes, data, and conditions it needs to meet.
If a service or node fails to meet the conditions, it suffers reputational damage and may be excluded.
Chainlink is not repackaging blockchains, but creating millions of individual decentralized services.
Oracle networks are the small pieces that handle off-chain computation and cross-chain communication for smart contracts beyond tokenization.
Real-world asset tokens require proof of reserves, identity, and secure cross-chain bridges.

Creating Independent Oracle Networks

33:43 - 40:13

Cloud computing, SAS, operating systems, and Oracle networks are more than what they seem.
Oracle networks are subject to market forces.
Chainlink allows users to configure their own security needs in an Oracle network.
The goal of Chainlink is to enable the creation of millions of Oracle networks for various applications.
The inception moment of a Chainlink Oracle network can happen through existing services, contacting Chainlink for assistance, or building a network independently.
Chainlink is ahead in generating separate independent networks with distinct security properties.

Connecting Banks and Blockchains through CCIP

39:45 - 46:58

Chainlink is able to generate separate independent networks with distinct security properties and methods.
The protocol expands into making specific categories of Oracle Net, allowing for more types of services.
Chainlink aims to connect the bankless money system on blockchain to the traditional banking world through interoperability.
The goal is to create a verifiable web backed by protocols and standards that are immune to manipulation.
CCIP (Cross-Chain Interoperability Protocol) seeks to unify different chains, enabling connections between bank chains and public chains.
CCIP provides a single integration point for banks to connect with thousands of chains, solving the problem of transacting with each other in the banking sector.
CCIP also enables blockchain technology to transmit data about token movements and messages/events, combining data with value.
By connecting existing systems into CCIP, banks can reduce friction and integrate trillions of dollars worth of assets with blockchains using their existing infrastructure.

Enabling Banks to Connect with Chains

46:31 - 53:11

The goal with the banking sector is to allow them to integrate with chains using their existing infrastructure.
Banks will not replace their old infrastructure but rather connect it to blockchain.
Value from banks can flow into public chains for DeFi protocols to use.
Banks are expected to generate high-quality real-world asset tokens for DeFi diversification.
Celo Layer 2 brings advantages like decentralized sequencer, off-chain data availability, and one block finality.
Active addresses on Celo have grown over 500% recently.
Uniswap Labs released the Uniswap mobile wallet for iOS, making token trading easier on the go.
Toku simplifies global token incentive awards by providing legal and tax support.
Chainlink acts as an aggregator and manager of bank interactions with different chains.

Using CCIP to Connect Banks and Blockchains

52:43 - 59:15

Banks can use the full power of Ethereum through Chainlink's CCIP protocol.
CCIP is a low-level protocol that allows banks to define their desired interaction with specific chains, contracts, and functions.
Chainlink enables banks to use their existing systems like Swift messages and signing infrastructure to interact with blockchain networks.
CCIP condenses the process of interacting with other chains into one transaction, eliminating the need for wallets or integration.
Web3 systems like aggregators and wallets can also benefit from CCIP by allowing users to access multiple DeFi protocols on different chains without integrating directly with those chains.
Chainlink aims to build an interoperability and liquidity layer between public and private chains.
CCIP focuses on execution rather than intent, enabling users to send value to new chains, trigger contracts, and receive tokens seamlessly.

Benefits of CCIP for Cross-Chain Applications

58:54 - 1:05:44

CCIP allows smart contracts to become cross-chain applications
Banks can interact with different blockchains through CCIP
Users can easily deposit funds into DeFi protocols through their bank accounts
CCIP enables value transfer between different chains and protocols
CCIP accelerates bank adoption of blockchain technology
CCIP creates a global liquidity layer for banks and DeFi
Value can flow into DeFi if all world systems connect to blockchains
Users can move value across chains without knowing the specific chains involved
Swift is a private key infrastructure used by banks for transaction signing
Swift is important for adoption by banks

The Role of Swift in Bank Adoption of Blockchain

1:05:27 - 1:12:35

Swift is a big signing infrastructure and the world's largest private key infrastructure for banks.
Swift is a messaging system and a set of standards for banks to communicate with each other.
Swift is an entirely member-owned organization with a transactional-based voting scheme.
Swift has great properties for security and wide integration.
Swift is not a blockchain, but a private key infrastructure and messaging standards.
CCIP can speak both Swift and blockchain languages, creating global standards for banks to transact on blockchains.
Banks will adopt crypto when they can generate profit from real-world asset tokens and stablecoins.
Securitization 2.0 will allow banks to turn anything into financial products, increasing their interaction with crypto.
Real-world asset tokens and stablecoins will increase the value in public blockchain DeFi.

Connecting Financial Products to Reality with Chainlink

1:12:21 - 1:19:33

The goal is for the whole world to run on blockchains and for everyone to be connected to and utilizing blockchains for their financial products.
Banks have a big opportunity to generate assets, put them on chain, and give them to a global market through the Chainlink CCIP network.
Chainlink enriches real-world asset tokens by connecting them back to reality with proof of reserves.
Chainlink does not generate or deploy the base token contract; banks can use existing tokenization standards on any blockchain technology they prefer.
Chainlink provides critical data into coins such as gold coins, stable coins, and other types of coins that require connection with reality.
CCIP allows various wallets and contracts on different chains to purchase tokens through the network.
CCIP brings back whatever the token was exchanged for from another chain.
The Chainlink system creates real-world assets that are connected back to reality, allowing movement between chains and ensuring updated status of assets.
CCIP aims to become the largest global single liquidity layer across all public and private chains.
Having a golden record of real-world assets helps manage risk in the banking infrastructure world.
By properly managing risk using Oracle Networks Blockchain CCIP, we can avoid crises like the 2008 financial crisis caused by disconnected underlying assets from reality.

The Role of Blockchain in High-Integrity Financial Systems

1:19:03 - 1:26:22

Data is lost in the process of selling financial products, leading to systemic financial risk.
The DTCC is the clearing and settlement system of the securities industry.
The DTCC settles two to four quadrillion dollars a year.
Blockchain technology can enable the whole global economy to benefit from high-integrity financial systems.
CSDs like the DTCC can continue to exist in the blockchain world and provide value-added services.
Settlements through the DTCC are considered legally binding.
The goal is to create a secure and reliable system that connects financial products to reality.
There are five levels of security for cross-chain transactions.

Levels of Security for Cross-Chain Transactions

1:26:03 - 1:33:07

Cross-chain security can be categorized into five levels.
Level 1 is the lowest level of security, where a single server and key holder are vulnerable to hacking or malicious actions.
Level 2 involves multiple servers controlled by a single key holder, which does not provide true decentralization.
Level 3 introduces independent node operators with separate private keys, offering better security than Level 2.
Creating a single network for cross-chain transactions is not scalable and poses significant risks.
Level 4 focuses on creating multiple distinct networks that are separate from each other, providing scalability and individual security management.
At Level 5, multiple networks collaborate to form one service, such as the CCIP bridge consisting of three Oracle networks.
The risk management network in CCIP is implemented separately from the executing and committing networks.
Chainlink's decentralized approach offers real security compared to systems with limited decentralization.
Decentralization should not be used as a marketing ploy without delivering actual value and security.
The future of crypto holds the potential for securitization 2.0, combining crypto with traditional finance systems.

The Future of Crypto: Low Case vs Fast Case

1:32:39 - 1:37:53

The future of crypto can be viewed in two ways: the low case and the fast case.
In the low case, the quality of crypto systems improves gradually, attracting more users and growing the industry.
The fast case involves monumental failures in traditional finance that lead to significant financial pain and political tension.
In this scenario, a cryptographically guaranteed world becomes extremely attractive as people realize the fragility of existing systems.
The low case predicts gradual growth to a 10 trillion plus industry, while the fast case envisions rapid adoption of blockchain technology.
Once society realizes the superior benefits of a cryptographically guaranteed system, it will become the way the world works.