Transcription
Real world assets will flip cryptocurrency for total value over the next 1 to 3 years. A lot of real world asset value will come from the trafi banking sector, and we'll start driving a lot of the adoption of defi protocols. So, it won't be about defi kills trafi; it'll be trafi becomes the biggest user of defi.
What are the exciting developments and innovations that you've seen within the blockchain space that are happening at the moment? Real world assets growing into, uh, both a trend and a very large amount of value on chain. So, right now, real world assets has surpassed the total value locked in defi, which is pretty significant because it's a very small percentage of what can be turned into a real world asset.
My personal view at this point is that real world assets will surpass the value of crypto, the total value of cryptocurrencies, over the next 1 to 3 years. And so, I think our industry will end up being defined by both what's in the real world asset blockchain format and what's in the cryptocurrency format. And this will significantly change how people view our industry and what it, uh, fundamentally does. Uh, so I think the real world asset trend is basically the big trend that's now going to be driving the majority of net new value into the industry, uh, alongside cryptocurrency.
Do you have a, a rough rough estimate of how long that might take? I think it'll take one, one to three years. I think a lot of it is going to be driven by the traditional financial world, uh, putting their users' value into real world assets. So, the, the big, big shift here is from tokens about cryptocurrencies made on public blockchains to real world assets, some of which are also generated on public blockchains, but a lot of which I think will be generated on various private chains and start interoperating with public chains over a set of, uh, standards, data standards, cross-chain connectivity standards, identity standards. And it's actually those standards that Chainlink is now pushing forward.
So, you gave a talk at, uh, ETCC about the role of Oracles in this tokenized asset wave that we're talking about here. Can you outline the sort of main talking points that you, um, that you were there to, to discuss, uh, for our audience, and maybe also touch on why, uh, you think this wave is incredibly significant for defi again?
Sure. So, I, I think the first point that everyone should understand is the importance of the real world asset trend. It's gotten larger than defi, it's accelerating, it includes value from both public chain fintech teams and traditional finance teams. BlackRock and Biddle are a good example of of this, that would be considered a real real world asset. So, this trend is, is, uh, pretty heavily accelerating now.
Um, the trend requires data about the asset to go on chain. It requires connectivity across chains, and it requires various levels of identity and other pieces of data. And all of that data also needs to move across chains. So, the other key point of the, um, of the presentation I gave before, and I've been giving over the last few months, is that you really need a single set of standards that are useful for defining how data works for real world assets, defining how they move across chains in a secure way, defining how identity relates to real world asset transactions, and all other really parts of the real world asset transaction.
So, it's not enough to just generate the real world asset as a token. You need to provide something like NAV data if the real world asset is a tokenized fund, which is something we're now doing on production for large entities like Fidelity and others. And basically, you need to also make sure that that data and that asset together in a tightly coupled way can move across chains. So, that if the asset moves from one chain to another chain, it doesn't lose access to the data. Because the data following the token or being attached to the token is really what makes a real world asset token better in many ways.
And then the next stage will be using that data to do various computations. In the case of tokenized funds, about things like fund administration. And you can't do those computations without the data, just like defi can't do its computations without price data. So, this is, uh, kind of the role that Chainlink is playing now. It's the creation of all of these standards, many of which are already adopted in defi. And the standards for data, cross-chain, identity, NAV, proof of reserves, all these different things are now being adopted in the capital markets.
And then, I, I think the culmination of many of these, um, talks that I give is that we're going towards a single internet of contracts, where you have all the defi folks and all the trafi folks on a single interconnected internet of contracts, using a single set of standards to transmit data, transmit value, agree on identity conditions, and, and all all the other conditions that need to happen for folks to transact. And it's very important for them to transact because the success of a real world asset is going to be defined by the amount of liquidity, by the amount of purchasing power that can access it to purchase it.
This is what has historically made some chains successful is that they had enough private keys inside of those chains to purchase any asset or use any defi protocol. But if we go to an internet of contracts world, putting an asset or a defi protocol on any chain should allow you to access the value and the private keys and the purchasing power of all the other chains. And this is kind of the very big shift that I think will drive everything towards a single global internet of contracts, which is, uh, something that needs a single standard.
This standard in the internet world, in the web 2 world, is TCP/IP, HTTPS, SSL. These are the standards that power the internet and all the websites and all the web applications and everything on the internet is on these standards to communicate with all the other things on the internet, whether it's about data or value. And that's what in the blockchain world, CCIP is, the Chainlink data feeds, the Chainlink proof of reserve system, that's what, um, the standards are now becoming for the blockchain world. And you need those connectivity standards in order to create this internet of contracts, which is the next iteration of our industry.
So, I, I know that at Chain, you guys are working, you know, very heavily towards creating this, this sort of infrastructure to make sure that can happen, and talking to both trafi and defi people. Um, there seems to be a lot of agreement on both the fact that these two powers are converging and that RWAs and tokenization, um, uh, presents a massive opportunity. I'm curious why you think there is a massive opportunity in tokenization and maybe, uh, why you've devoted so much of your time and energy to it.
Sure. So, so right now, independent analysis across thousands of, I'd say, one of the most comprehensive analysis shows that the Chainlink set of protocols is the most widely used technology for real world assets. I think that analysis is from Sentiment. You can find it online or, or somewhere on Twitter. Maybe I'm saying the firm's name wrong, but you can, you can find it.
Um, the reason I think the Chainlink community has gone towards real world assets is because it's been a part of the thesis of how the existing public blockchain world and the traditional financial world are going to interconnect with each other. And I think that thesis that the chain, the community has had for a long time is playing out now very clearly. So, the reason it's playing out is be, is, is really for two reasons. There, there's really two reasons to make a real world asset.
The first reason is that you provide access to a net new market. So, if you tokenize something, there's more people that buy that thing than would have bought it if it wasn't tokenized, right? So, if it's tokenized, it gets access to an ATU market. There's really two, two versions of that. One version is where you tokenize existing things like money market funds, and the market for that is that people basically want an on-chain form of that for diversification reasons, collateral reasons, and various other reasons.
Then there's what are called assets at the edges. These are assets that have never been ownable in a fractional form. So, the tokenization of a building, the tokenization of a carbon credit. These things are just very difficult to own and gain access to. And because tokenization is a new way to provide ownership of things, these things are being, being turned into ownership rights through tokenization. So, there are these two categories of opening up a new market.
Then there's the second really big reason why people do tokenization or real world asset tokenization, and that's for efficiency purposes. So, this is, uh, like the speed of settlement where you have atomic settlement. This is the ability to put various parts of the financial product on chain. This is where fund administration properties of the contract go into on-chain logic, and that on-chain logic is what now powers that financial product.
For this, you need things like NAV data, which now we're putting on chain on production for large entities like Fidelity and others. And so, you, you basically reach a world where if it cost, you know, $10 million to operate some kind of product, financial product, every year, it goes down to less than half a million. And the speed at which people can gain access to it, the speed at which they can settle against it, massively improves. That efficiency thing always has to do with really, so ERC back office backend problems that most people don't understand or care about, but they do care about the benefits that come out of solving those problems.
So, the best RWAs are the ones that open up a new market and do it with a form of the financial product that's more efficient. So, now you have a better financial product, and you've opened up a new market at the same time. And I think these are the RWAs that'll really take off. Uh, some of these are the tokenization of money market funds and, and, and a few others. But, realistically, the biggest underlying trend in RWAs is fund tokenization. So, that is a place where there's a lot of inefficiency, and it's a place where it's difficult to gain ownership of certain things in, in certain sizes, or at certain speeds, or to sell them at certain speeds. And as those speeds increase, and as your ability to own certain funds increases, I think fund tokenization has both of these properties of opening up a new market and being a more efficient financial product.
Clear. And, and sort of slightly tangential to that, something that, uh, I'm, uh, from, you know, talking to some of the brilliant people at the RWA summit this week, uh, was that currently, a majority of the, the capital that they see is flowing, uh, from defi to trafi. I'm curious what you think, uh, sort of still needs to happen for more trafi capital to start flowing into defi.
So, trfi has all kinds of conditions to do transactions around identity and around, you know, basically meeting a number of compliance requirements. The other thing that, that needs to exist is a good reason to send money into a defi product, that will probably center around yield, or what we should really call risk-adjusted return. So, the concept of risk-adjusted return in defi exists, but it's not as prevalent as in trafi. So, in trafi, it's about return and risk. In defi, a lot of it is about return, and people spend a lot less time thinking about risk.
So, in the trafi world, you need to prove much more that the risk is low, and you need to comply with certain legal requirements like AML, KYC, identity. I think these are, uh, the two missing pieces. So, I think the yield and the returns in defi are going to continue to appear attractive because it's going to be the place where a lot of cutting-edge, frankly, higher risk stuff ends up getting built. But then there will be a kind of sweet spot of high risk, but risk-adjusted, right? So, it's not as high risk because it proves certain things to you through things like proof of reserves, through things like NAV data going on chain, through things like having a cross-chain system that is actually secure. Every piece of a defi protocol or a public chain RWA that has a dependency that can be broken raises its risk.
And so, this is part of the role that Chainlink plays. Is it reduces the risk of those RWA and those defi protocols to the level where they can prove their reliability and prove that they are risk-adjusted enough to justify or, or allow trafi value to flow in. So, I, I think it's those things. I, I don't think it's necessarily the lack, the lack of yield or returns or diversification to into other things. So, I think there's definitely an economic force there, but that economic force has to be tempered with, um, low risk that's, that's, that's proven to be low risk, and ability to comply with all kinds of legal requirements for a transaction to happen.
This is something that the Chain community and I personally are working very, very clearly and closely on with large institutions, large banks, large asset managers to very clearly define what a successful transaction looks like. And, and on the topic then of, of, uh, liquidity fragmentation, do you think it's, it's a problem? And, and do you think as more and more assets become tokenized and they're put on chain, um, that the industry can, or should, or must prevent, you know, fragmented pools of liquidity from emerging?
Yeah, yeah, that's the big problem. This is what I mean when I say internet of contracts. Internet of contracts means, uh, unified liquidity across all chains, just like liquidity is kind of unified in the internet, in that you can access liquidity in other places, and it can access your application pretty seamlessly. Like in the internet, I don't need to contact you and ask you what database you're on in order for us to transact, because we have a protocol that sits between my database and your database, such as TCP/IP, that allows value and messages and data and, you know, transactions to flow pretty much seamlessly.
Um, this is what the internet of contracts is. So, when people talk about the siloing of liquidity, what they're basically saying is, man, oh man, I wish we had an internet of contracts where everything was connected, such that my application or my real world asset or my defi protocol could get all that purchasing power of all the chains, both public and private, to interact with it in a seamless way. Kind of like how on the internet, over TCP/IP, everyone on the internet can access my application, and they don't have to worry about, you know, what operating system they're on, or what database they use, or what type of phone they have. They can just all access my application because my application communicates with everything over a single protocol.
That's basically what the Chainlink protocol is, uh, is meant to be. And that's kind of also why it's called Chainlink, link. So, it's trying to link all of these things together. That's, uh, been the thesis since the very beginning, which you can see from the very first white paper in 2017. This is kind of the path we've been on. And I think what's happening now is more and more of the blockchain industry is starting to, you know, realize the value of that, basically.
Thank you. The, the last time we spoke, um, was back in April in Dubai, and we covered, you know, some of the exciting developments that are happening in the RWA space and, and the sort of versions of trafi and defi. And we've touched on those topics again, um, and we're going to get into CCIP in a second. I, I just want to ask, what are some of the, the most exciting developments, um, that you couldn't share with us back then, potentially, that you can now talk about?
Yes. So, a few, a few things have happened, um, since then. On the trafi side of things, I think there have been two big events as far as NAV data. So, net asset value data. Net asset value data is critical for fund, uh, usage administration and basically its existence on chain. So, fund tokenization, I think has moved forward significantly since we talked a few months ago. And from our point of view, we have put, um, more and more NAV data, NAV data on chain, both in a testnet pilot setting with very large institutions like the DTCC, and in a mainnet production setting with very large institutions like Fidelity International and Signum and, and others.
So, I think what's, what's really happened is the fund tokenization trend is accelerated. And because of the security and quality of the way that the Chainlink Oracle networks process and put data on chain, I think Chainlink has basically emerged as the preferred way to put NAV data on chain for tokenized funds to operate correctly. And what I'm seeing now is, is just a consistent stream of even more great tokenized funds that need both NAV data and proof of reserves and other kinds of data. And also, they will have and do have this liquidity problem where liquidity is split across multiple chains, with, uh, Chainlink being the only system that can provide them the data and the connectivity to the liquidity in a single system.
And it's actually very important, and we found this to be true, more more true, that the data and the value need to be tightly coupled. So, as the value and the ownership right moves, the data is attached to it in an, in an initial environment where it's created, but then the data has to stay attached to it as the value moves across multiple chains. And because Chainlink is the only system that puts in the data and has the ability to connect the ownership rights and the value across chains, um, at this point, from what I can tell, it's the only system that can allow the value and the data to move together in a tightly coupled way.
So, this has, as we kind of predicted and as we built the system to do this, it's become quite an important thing because you don't just want to make an asset that works on one chain, you want to make an asset that works on all the chains that it ends up going to, too. And, and I think there's some other partnerships that you were working on that I came across just from doing research. Um, can you share, sort of more broadly, who you've been in touch with, what types of financial institutions you've been partnering with, and, uh, are we going to see that continuing in the near future?
Yeah. So, I, I think when, when we spoke in Dubai, I was just coming off a really, um, long trip where I, where I was in maybe the largest 40, 50 financial centers of the world, so like London, Singapore, Hong Kong, Sydney, uh, Dubai, and, and a few others. In all those places, I would be meeting with, you know, central banks, the country's largest, you know, country exchange, the clearing and settlement depository of the country, the top four or five commercial banks, some of the larger asset managers.
I think a lot of those conversations have now progressed towards something more real. And what I'm seeing is that the trafi world is starting to launch more and more things on chain. For example, the Fidelity International tokenized that was launched last week, you know, that's something that got put together pretty quickly in the TR for the trafi world, like relative to how long it usually takes. So, I'm seeing an acceleration, uh, in terms of, you know, the specific folks that we announced with. I think there's been so many of these announcements at this point between banks and asset managers and, and, and a number of other large, large users that it's kind of hard for me to, for me to keep track.
Um, I think it's just going to keep picking up from here, in my opinion, because we've been the standard in defi, uh, for many years. Chain powers the majority of defi right now. And I think the quality of that standard and the fact that it's been operating on production for over five years successfully with high uptime, keeping the value safe, having now enabled over $12.5 trillion in US dollars in transaction value through the system, which will make, which does make Chainlink one of the most value processing systems in the whole, in the whole blockchain industry. I think what I'm, what I'm just seeing is, is a steady stream of more and more things going towards production rather than pilot or Po.
What are the next big milestones that you're working towards in, let's say, the upcoming 12 months? It's a bit difficult to sort of look, um, further into the future than that in defi, but 12 months, what are the key milestones you're working towards?
I think more trafi capital markets value on production, which Chainlink as a standard for both data and connectivity across chains. I think more and more defi protocols that do more advanced things using the, the various Chainlink protocols and systems for all kinds of data, computation, connectivity, the use of AI models and, and all these other things. And then over the next 12 months, might be too soon, but one of the things I would be very excited about is having more and more defi protocols interact with trafi and capital markets chains and systems and, and assets through the Chainlink standard.
So, the Chainlink set of standards around data, identity, connectivity, uh, really should underpin this internet of contracts, where in order for us to do a transaction, we need to agree on a price, we need to agree on a way to transmit value to each other. And if you're already on the Chainlink standard, and I'm already on the Chainlink standard for transmitting price, uh, information to each other, transmitting value to each other, then it becomes a little bit, it becomes seamless, becomes quite easy for us to just transact.
That's really the world that I'm particularly excited about, where you have a bunch of defi users, a bunch of trafi users, all interacting with each other, or all agreeing on on transactions using Chainlink price, all fulfilling identity requirements through Chainlink identity data feeds and connections to to existing identity providers. That's really kind of the world that would, would be the most exciting, that would start to emerge over the next 12 months. But I think we'll see more defi usage and more trafi usage. And then beyond the next 12 months, I think we'll see more of that interacting, um, on the Chainlink set of standards, which I think puts it in a position to be the underlying infrastructure of the internet of contracts across chains, across, uh, trafi use cases, across defi use cases, and really forming this kind of lower-level layer, uh, that makes all of this stuff work.
One of the terms that gets thrown around, um, you know, left, right, and center at conferences like ETCC, is, you know, onboarding the next billion users. What do you think about that? How far away from it are we? And, and how pivotal is some of the work that, you know, Chainlink is doing in terms of creating the infrastructure in achieving that, that perhaps, uh, pipe dream of the next billion users?
So, so the next billion users is, is really the job of the application developers. And I think the next billion users will come from two categories of applications. One will be the defi public chain applications, which have a serious problem with their private key usage and how complicated it is still to deal with a private key as a user. And this is kind of the basic consumer problem of crypto still to this day, is that private keys are hard to deal with. And so people seed control of their private keys to various, you know, centralized exchanges, interfaces, or, or whatever. But basically, it's, uh, making the user experience of crypto as good or better than web 2. That's going to be on the public chain consumer retail side.
I do think a very large amount of users, both in total value and individuals, will come from big asset managers, big banks, that many of them have millions of users, frankly, um, that have their life savings or all of their value in those institutions already. That having an account at that institution will now be able to use that account to do crypto things. So, the first category is the retail consumer using more defi, using more public chains, where the user experience around private keys really still needs to be improved.
And then the other group will be the capital markets trafi users, that many, many times might not even fully understand or care that they're using a blockchain-based asset or that they're getting their yield from a defi or a regulated defi protocol, but they will, but they will be a user of it. And I don't know from which of those two groups more, a larger percentage of those next billion users will will come from, but I'm pretty sure that a significant percentage, a double-digit percentage, will be coming from both of them.
That's basically where, uh, yeah, I think what might end up happening is by total numbers, you might end up getting more individual people by the, by the public chain web 3, uh, retail community side. But by total value, you might end up getting more total value for less users from the trafi capital market side, if I had to guess. I think that's probably how, how that next billion user thing will shake out.
And on that note, it's a, it's a question we like to ask, uh, all of our guests when we talk to them around ECC and major international conferences. Can you please share some alpha with us?
Real world assets will flip cryptocurrency for total value over the next 1 to 3 years. A lot of real world asset value will come from the trafi banking sector, and will start driving a lot of the adoption of defi protocols. So, it won't be about defi kills trafi; it'll be trafi becomes the biggest user of defi. That, I think, is a counterintuitive, non-obvious thing for people.
And what does that mean for who's going to win in the defi set of protocols? Um, I mean, regulation will become both clearer and lighter and more beneficial to the, to the whole crypto industry. That's going to happen over the next few years. That's going to open up a lot of things. Um, central bank digital currencies will emerge. I don't think that'll be a negative thing. I think that'll put more purchasing power on chain and allow more value to flow into defi protocols and into tokenized trafi systems.
So, central bank digital currencies will start creating even more purchasing power, which will drive a lot of that boom. Uh, there will continue to be many, many different chains. The cost and complexity of making a chain of your own will continue to drop, lower. So, there will be, you know, not hundreds of chains, not thousands, hundreds of thousands of chains. Chains will eventually be, uh, as common as databases, and all those chains will be stitched together, um, in a, in a seamless way, the way that TCP/IP stitches together the internet. And, you know, hopefully, that'll be CCIP from the Chainlink community, which is what, you know, we're working towards there.
That'll significantly change how people build applications because instead of saying, hey, I have to launch in this chain or this chain because that's where my user base is, they'll be able to launch on their own chain, and then their user base will be all the chains and all the users on all the chains because they'll be able to be connected to to all of those. Um, identity requirements and various compliance requirements will become easier to meet, partly because of regulatory clarity and partly because the technology from system systems like Chainlink will make them easier to meet. And so, you'll have a larger and larger percentage of the value happening through compliant transactions rather than, you know, just transactions with no identity and no compliance of any kind.
That'll also partly be driven by trafi. What else? Um, yeah, I think whole governments will, in, in embrace blockchains as a good thing, probably starting in Asia, or already happening in Asia, across Asia. Um, also then in the Middle East. I think there will be a very big corridor of blockchain transactional activity between the Middle East and Asia, um, doing various valuable transactions for real world assets, commodities, all kinds of things across those two geographies, um, which are both kind of in a state of reinventing their infrastructure and eager to transact with each other and looking for a way to do those transactions in a, in a way that's trust minimized. That'll, will be an interesting and valuable corridor of transactions.
Um, yeah, I think those are probably the, the most, the things that I think would be right now not totally obvious to everybody, that I think are are likely, are very likely to happen.
Thank you so much for making time to talk to us today. I really appreciate it.
Sure. My pleasure.
[Music]
Oh, oh.
[Music]