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#32 - Oracles, DeFi and RWAs with Chronicle's Nik Kunkel
40 Plays3 months ago
Nick is the founder of Chronicle Labs and former member of the Maker team. Nik is a strong believer in decentralization and transparency, especially when it comes to Oracles.
Building DeFi Infrastructure
Nick joined the founding team of Maker, venturing into a landscape where decentralized finance was virtually non-existent. There were no decentralized exchanges (DEXs), lending protocols, stablecoins, or the necessary infrastructure to support them—including oracles.
To bring their vision of an open financial system to life, Nick and his team had to build foundational tools from scratch. They developed the first DEX on Ethereum over a weekend and created the initial oracles alongside Mariano Conti. These early efforts were crucial in setting the stage for the vibrant DeFi ecosystem we see today.
Oracles act as an interoperability layer between blockchain networks and external data sources. Nick offers a simple analogy: "Imagine blockchain networks as your phone in airplane mode—cut off from the outside world. Oracles are what reconnect your phone, allowing it to access external information."
Despite their importance, oracles have often been the Achilles' heel of DeFi. Many hacks and exploits stem from oracle manipulation, underscoring the need for more robust solutions.
Observing stagnation in oracle innovation, Nick founded Chronicle Labs to tackle these challenges head-on. "Oracle innovation had clearly started to lag behind DeFi innovation," he notes. Chronicle aims to build a new oracle system from the ground up, focusing on transparency, security, and performance.
Key vulnerabilities in existing oracles include
Centralization Risks: If an oracle relies on a single data provider, it becomes a single point of failure.
Lack of Transparency: Users often have no way to verify where data originates or how it's processed.
Scalability Issues: High computational costs limit the number of validators and the frequency of updates.
Real World Assets (RWAs): The Next Frontier in DeFi
Nick is particularly excited about the integration of Real World Assets into DeFi. "DeFi needs a catalyst to go from billions to trillions in TVL," he asserts. RWAs bring a vast pool of high-quality collateral into the DeFi ecosystem, offering a path to unprecedented scalability.
Chronicle recently launched its RWA Oracle to facilitate this integration. Unlike traditional assets, RWAs aren't inherently transparent or verifiable on-chain. Chronicle's RWA Oracle bridges this gap by providing crucial information such as purchase dates, yields, maturity dates, and more.
An illustrative example of RWA integration is Chronicle's collaboration with M^0, a protocol that combines the best aspects of centralized issuers like Circle and decentralized platforms like MakerDAO.
How It Works: Users lock traditional financial assets, such as treasury bills, in a custodian account. They can then borrow stablecoins against these assets.The RWA Oracle independently verifies the assets held in custody, ensuring transparency and security. This model offers the scalability of centralized issuers while maintaining decentralization. It addresses limitations in both existing models and presents a sustainable way to scale DeFi.
Nick believes that for DeFi to realize its full potential, it must adhere to the core crypto ethos of transparency and decentralization. "If we scale DeFi in the wrong way, if we lose this core ethos, then what are we really doing here?" he asks rhetorically.
Chronicle Labs is committed to setting industry standards by: ensuring transparency, maintaining decentralization, and focusing on security.
This podcast is fuelled by algorithmic crypto trading platform Aesir.
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Transcript
Origins of DeFi and First Ethereum DEX
00:00:08
Speaker
My origin story kind of starts in in late 2016. I was part of the the founding team of Maker and ah ah sorry, now called Sky, right? But um ah essentially back then, right? ah none of what we consider DeFi today really existed, right? So there were no DEXs, there were no lending protocols, there were no stablecoins, and so all of there was no infrastructure, right? So there were no oracles. So really when
00:00:44
Speaker
i We had this vision right that, oh, there's going to be this decentralized kind of open finance. And at the centerpiece of all that, will they'll need this unit of account, like a stablecoin. And um it was a pretty grand vision back then. right ah Today, it sounds like, oh, yeah, obviously, duh. right But back then, it was kind of crazy.
Building Foundational DeFi Tools
00:01:11
Speaker
um but it required so much precursory um things to be built that for the first like year, we weren't even building DAI. We were building like, oh, well, DeFi is going to need a DEX. So we made a DEX over a weekend. We made the first DEX on Ethereum. um Oh, well, we're going to need oracles for our stable coin. So me and Mariano Conti, we built the first oracles on on Ethereum. right um Back then, if you wanted to troubleshoot your salinity code,
00:01:53
Speaker
Um, you had no idea what was wrong with your smart contract. Um, you would do a transaction and Etherscan would say out of gas and you would know something was wrong. Um, but you would have no idea where the bug was or what line or you would have no color. Oh yeah. Um, so we had to make like the first solidity debugger.
00:02:18
Speaker
right and so It's all this kind of stuff that like um I think ah but a lot of people today kind of just like take for granted. um But like the OG like DeFi people, like we didn't have
Maker's Oracles: A Bash Beginnings
00:02:32
Speaker
any of this. like We really had to start from like start from my ground zero and and really build it up piece by piece.
00:02:39
Speaker
um And so now, you know fortunately, right there's this you know vibrant DeFi ecosystem, right and there's tons of stablecoins, there's tons of DEXs, there's tons of Oracles, right there's tons of lenders. right um and and And now, right when someone like you know proposes like some new primitive, right it just seems like a like the next step, or it seems like a plus one, but it's not I'm not seeing that like zero to one kind of like um like ah Like the attempt to really create like ah like that zero to one kind of step change um that that I feel you know often often
Oracle Security and Decentralization in Chronicle
00:03:20
Speaker
talks about. Fun fun fact, right the the first version of Oracle's that we wrote in Maker were written in Bash.
00:03:26
Speaker
um and and
00:03:31
Speaker
Wow. No, but but that's kind of the the reaction I was expecting. um but would be you know And and for for the listeners that don't know, why so Bash is like this like really primitive kind of like... um I guess you would call it like a a scripting language for you know when when someone has like a command prompt or a terminal on, you know you like write like little scripts. And it's great for that. But it was never meant for writing like really advanced, kind of complex applications.
00:04:04
Speaker
um But the reason that we ended up writing the first you know or version of of the Oracle's and Maker in Bash was because we were trying to tie together all of these different tools that we had built. And the one thing that Bash was very good at was just gluing together a bunch of stuff.
00:04:25
Speaker
um So you know you would have like the module that you know is um fetching all of
Role of Oracles in DeFi Operations
00:04:34
Speaker
the you know ah pricing data from all of the exchange api's right and maybe that that is written in in go or something or maybe it's written in python.
00:04:44
Speaker
We have like the peer-to-peer kind of communication module right that's like talking between the different validators. right um and Maybe that's i don't know written in in JavaScript or you know Node.js, right what whatever it is.
00:05:01
Speaker
right um Then you have right this other tool that's used to communicate with Ethereum, right when you need to pull data from on-chain or when you need to push an Oracle update to to a chain. right and you know All of those libraries right are are written um you know in this tool that that was called like Seth, that was like also written in Bash.
00:05:25
Speaker
right and so So, so, so from from that perspective, right, that, that was, you know, how we rationalized that decision, right? How do you glue all these different kind of like, um, bits and pieces right together. And it's a great language for, for that. Um, you know, today, it's very interesting choice. I got to say yeah eighty but either single line of code in Chronicle now that that's bash anymore. Right. But, uh, at the time, right, you know, for prototyping, it was, it was the right choice.
00:05:55
Speaker
Right. It almost sounds like that was your data layer, um, in a sense, like getting all of these, you know, different APIs and then compute and and work with that data. I'm guessing in in bash. Yeah. That's interesting. And also mad respect for writing assembly code. I don't think I've um ever heard anyone saying that I've wrote assembly code, which is, it's really cool. It's not, it's not a happy memory.
00:06:25
Speaker
So obviously and you moved from working with Maker to working on on Chronicle. um And I just want to understand from you what is like the main kind of drive behind Chronicle? um What's
Innovations in Oracle Technology
00:06:40
Speaker
his vision? And also, like what is your involvement both both from like a visionary perspective and also like a technical ah perspective as well?
00:06:52
Speaker
It it kind of came from you know what I was seeing happen in DeFi. right we had um yeah We built up this enormous you know ah ecosystem of decentralized kind of financial products.
00:07:10
Speaker
um Right and work those were involved, you know, at all these kind of different touch points right they were involved on the lending side right they were involved on the bridging side on the cross chain communication.
00:07:26
Speaker
ah side of things, you know to talk to different chains. you know They were involved with real world assets you know to um ah report on the the reserve backing of of different financial products. right so They were kind of ever present, but at the same time, you know Oracle Innovation had clearly started to lag behind DeFi Innovation. um The space hadn't really changed all that much compared to ah the Oracles that I'd worked on you know like three, four, or five, six years ago um at Maker when we kind of really like invented that that field.
00:08:09
Speaker
um and And it became a bit worrisome seeing kind of how much oracles had kind of become the Achilles heel of of DeFi, right? um You know, if you look at a lot of the the hacks that have happened in DeFi, you know, not all, but, um, for a a very large, uh, some of them, right. The root cause is some kind of Oracle manipulation. Right. Um, and when you kind of look at the market and see like the market share kind of like dominance by, you know, like a single player, um,
00:08:49
Speaker
It's quite concerning, right? Because it means that, you know, defy as much as it has managed to like, um, you put itself outside of the box of the traditional financial system to kind of insulate itself from those systemic risks has kind of very organically created its own systemic risks. And so so that was really like the motivator for for Chronicle is how do we you know go back to kind of ground zero and really build up a new Oracle that
00:09:26
Speaker
um you know solves a lot of these challenges that we're kind of seeing in in the ecosystem today.
Oracles as Interoperability Layers
00:09:34
Speaker
Right. And that's very interesting that you' you've mentioned that a lot of other big proportion of the hacks or exploits that are happening in DFAR are because of some kind of Oracle manipulation. um I think maybe what would be the best way to explain what an Oracle is and also what what is the failure point of an Oracle, generally speaking?
00:10:00
Speaker
Absolutely. So um I think the simplest way to explain what an Oracle is and what an Oracle does is to take your cell phone and put it on airplane mode.
00:10:14
Speaker
and Now, you know consider how useless your phone has become. right and It is the ability of the applications on your phone to send and receive kind of external information external stimuli from outside of the sandbox of your phone.
00:10:34
Speaker
That gives applications this rich utility that that we're used to, that we enjoy. and so To bring this you know back to to crypto, um imagine blockchain networks as your phone. right ah The blockchain network is the sandbox. um It is the black box.
00:10:55
Speaker
And crypto applications have no um omnipotence. They have no kind of visibility of what's happening external to the chain. And so oracles are really this mechanism to solve that problem. How do we bring this external stimuli, this external information from outside of the chain onto the chain? um But what makes it a little bit of a more challenging problem to solve, what makes this non-trivial is that you don't want to rely on um whoever is kind of providing this information. right You don't want to have to trust them that they won't manipulate the data in any way.
00:11:40
Speaker
And you don't want to have to trust them that they might you know censor the data at some point in the future. but So you really want these data integrity and data availability type of guarantees. And so that is kind of what makes the the Oracle problem um kind of like a fun, interesting, like challenging problem.
00:12:03
Speaker
Yeah, no, it's super fascinating. So in a way then, ah would it be accurate to say that an Oracle is like an API layer for the blockchain? It connects the blockchain or a chain with external data. Yeah, you're absolutely correct in that. um I would take it one step further and say that um Oracle's act as the interoperability layer um between on-chain and off-chain.
00:12:32
Speaker
Okay. So added functionality, I guess, on top of just data, uh, in and out, just, you can also do stuff with it. I'm guessing you can prompt the smart contract to do something with a certain, with us once the certain data is fetched or, or, you know, some kind of logic, uh, that can happen there. Exactly. Yep.
Integrating RWAs into DeFi
00:12:53
Speaker
I think when we talk about data in an abstract sense, right? People are like, Oh yeah, data. Great. Right. Um, but like.
00:13:00
Speaker
What are like Oracle's actually being used for? um I think the most common examples in DeFi are um when you are um saying taking out a loan or when you're doing anything with leverage in DeFi. The DeFi protocol needs to kind of be aware of you know what is the value of your collateral right and what is the value of versus what is the value of what you borrow.
00:13:30
Speaker
If at any point right ah the value of your collateral you know starts getting really close to the value of what you borrowed, right then that's when you get liquidated. right And ah you know as a user, you probably think of that as a a very negative thing. right But as a protocol, right this is an immune response. right This is what a protocol does to ensure its solvency. And so really, this this entire the entire ability of the protocol to protect itself and to stay solvent is really dependent on this oracle, you know one being accurate.
00:14:06
Speaker
you know to being low latency right and and not being able to be manipulated. right and Because if it is manipulated, right that's when you see a hack. right That's when you see a protocol getting drained. right um Another you know example could be when you use a bridge. right um People don't call them oracles. They call them bridges. but this ah A bridge is just kind of like a white label term. What's happening underneath the hood is that you know Let's say you're going from Ethereum to optimism, right? ah What the bridge is doing is there's an Oracle that attests to seeing this kind of event on Ethereum and it will, um you know, attest and those, you know, attestation signatures can then be used on the smart contract on the optimism side, right? To prove that, hey, I've,
00:15:01
Speaker
bridge these funds on Ethereum, you know please release them to me on optimism. right um Same thing with cross-chain communication. right um I think you know the the most obvious example here is when you have this kind of like hub and spoke type of model for a protocol.
00:15:22
Speaker
So, if you have a product, some kind of DeFi protocol, like cross-deployed across a bunch of different chains, right? You have it on, you know, on Arbitrum, on Optimism, on CK Sync, you know, on StarkNet, on on Linea, right? Whatever it is, on Scroll. um But you don't want to have governance on every single one of those chains, right? Where then the token holders need to then migrate, you know, their tokens to each chain and then vote on that chain, right? that That's not a scalable form of doing governance, right? So typically what happens is that protocols will kind of choose one chain that's like their hub, ah that that's where governance happens.
00:16:05
Speaker
And then you can use oracles with as cross-chain communication to send messages across chains. you know Hey, there was a vote. It happened on the hub. It approved changes x, y, and z. And use those oracle attested to changes on the other chains to in know kind of in effect do all those those changes as if the governance vote had happened on that specific chain. So so the use case is pretty diverse and kind of constantly growing every day. right I think when we saw NFTs, right
00:16:45
Speaker
ah there were you know you would mint a random NFT. Well, the randomization of which NFT you got you know came from an oracle ah that was you know giving you a provable random number.
Complexities of RWA Integration
00:17:05
Speaker
Yeah, that that's super interesting. And it's is super super interesting the extinction between using oracles to fetch external data and using oracles to confirm activities or transactions happening, a communication happening between chains. um And actually something interesting here, do you think that cross-chain oracles where continue will continue to exist? Or do you think that they'll be phased out by a more secure protocol or something closer to IBC that doesn't rely on a third party to do this checking process?
00:17:41
Speaker
um I mean, I'm a big proponent of the multi-chain thesis. I don't you know think we're all just going to transact on a single chain. um And furthermore, I think that the way that you um you get more people to use ah crypto applications is to not have them realize that they're even using crypto. right um That's how you make kind of ah crypto usage ubiquitous in in society is in that ah you kind of abstract away um a lot of the UX, right, where in the end, people won't even know what chain they're actually using, right? To them, it's just the app on their phone. And the back end of that app just happens to be, you know, on a chain or on multiple chains.
00:18:35
Speaker
So in in that sense, yeah, right. Cross-chain communication is very much here to stay. um i I don't think um it's quite as consolidated as as you make it out to be. I think that if you look at like a timeline of market share of of even things like DEXs or bridges or even like um you know DeFi, um you know like lending protocols, stablecoins. There is some entrenchment over time, but I think there's much more fluidity and kind of market share and and opportunities you know for for new players to kind of pop up and and and you know bring bring some new utility while while everyone else plays catch up. I definitely think there's like a rich kind of
00:19:34
Speaker
like ah Like opportunity here, right? In every category, right? No no one is is safe, right? ah and No one in D5 feels like they can just like rest on their hands and and just coast.
00:19:49
Speaker
I just wanted to go back for a moment ah to toward Oracle's and talk a little bit about the different um components of an Oracle, and specifically about the when it comes to Chronicle, yeah the off-chain and on-chain aspects of an Oracle.
Security Standards in Oracle Industry
00:20:07
Speaker
um Do you want to maybe break it down a bit? like What does Chronicle do off-chain, and what it does on-chain, and how do these two things match up?
00:20:20
Speaker
Yeah, I mean, off-chain is really just the discovery of data, right? So sourcing data from all of the different sources, um and those sources can be on-chain, you know, they can be DEXs, they can be off-chain.
00:20:36
Speaker
you Those sources can be um you know from you know ah some kind of like land registry. right They can come from some kind of stock exchange, right what whatever some kind of data aggregator. right So there's this aggregation, this discovery of information, the aggregation of information. A validator will plug it into a model, and then the output of that model is signed by the validator with a cryptographic signature.
00:21:06
Speaker
And so then what kind of happens, and and this is actually another property that I think makes Chronicle very unique, is um what most Oracle providers will do is if they have 10 validators, they will just have 10 different cryptographic signatures and they will, you know, when they update the Oracle, they need to One, you know push all of these 10 cryptographic signatures to the Oracle smart contract, and then the smart contract needs to verify all 10 of these cryptographic signatures. And this is a problem because it's a one, it's a lot of data, and two, the signatures are very expensive too to verify.
00:21:51
Speaker
And so um you know it it's it kind of cripples the Oracle in a way where because the Oracle is expensive to update, the Oracle just isn't updated that frequently. And so it's ah the the way you can think of an Oracle not updating frequently is it's just not a very performant Oracle. right So maybe if the price of Bitcoin moves half a percent,
00:22:18
Speaker
the Oracle doesn't react to that because it's too expensive to update the Oracle every time the price moves half a percent. So maybe the Oracle updates when Bitcoin moves 1%, right? So what we do differently is that the validators actually collaborate to generate a single signature.
00:22:38
Speaker
So this is called a Schnoor signature, and and it's actually most it's it's actually used in in Bitcoin. um But the the real innovation here right is that you get away from this one-to-one relationship of validators to signatures, and you instead have this many-to-one relationship of validators to signatures.
00:22:58
Speaker
And so um when you only have to push one signature on chain, you know that's very cheap. And when you only have to verify one signature, that's very cheap. And because it's so cheap, you can update the oracle much, much more frequently. And so now you actually have a much, much more performant oracle.
Chronicle's Role and Partnerships in DeFi
00:23:18
Speaker
So the other thing that that enables is that you can have many more validators ah than you can in this like single signature model. um Because what tends to happen in the single signature model is when each validator is cranking out its own signatures is that you start limiting the amount of validators that you would use in your Oracle to keep the cost slow.
00:23:43
Speaker
um and i mean this is a This is just not a good architecture. right um why would you Why would you cripple your Oracle with less security just to keep the cost low? So what short signatures allow you to do is to have as many validators as you want. right And so more validators means it's much, much harder what much more difficult right to kind of coordinate and an Oracle attack you know between all of these different validators. right So instead of having 10 validators, you can have 100, 1,000, 10,000 validators. But they're all still collaborating just to generate this one signature. And so this one signature is still extremely cheap to ah to to verify and use to update the Oracle.
00:24:34
Speaker
So it's really just an oracle that is, one, you know much more secure, but two, much cheaper, and therefore much more performant as well. So it kind of just checks all of the boxes.
00:24:48
Speaker
Yeah, that's super cool. So then when you say that um typically when you run one signature per validator and when you don't use that protocol, it becomes expensive um or computationally expensive. um Who are we talking about here? Since I'm guessing Chronicle doesn't have a lot of overhead, right you're giving away, you're allowing validators to to process you know to compute all this data so who would actually you know foot the bill at the end of the day. So the way i mean essentially oracles run as a service right so um if you want to use an oracle right typically you go to an oracle provider and you have to pay them.
00:25:31
Speaker
a certain amount of money per month. um The dominant costs there ah usually being the gas cost right of um what is it actually costing right to push these updates on chain. and I think what you've what you find is that well if the Oracle is much cheaper to update than the cost of the Oracle. It can also be much lower. so um you end up With Chronicle, you end up having a much more affordable Oracle that is also much more performant because it can update much more frequently for a much lower amount of money.
Challenges and Solutions in Oracle Security
00:26:07
Speaker
Wow, that's really cool. So how come isn't everyone doing this? It's obviously the much better choice of going about it. Well, I'd say ah we're growing quite a bit, right? And we're backing some of the biggest protocols and in all of DeFi, right? um In terms of TVL, we are the second largest Oracle.
00:26:26
Speaker
ah just behind Chainlink, right? We are the Oracle for MakerDAO, we're the Oracle for Spark Protocol, ah we're the Oracle for many of the markets on on Morfo, um and you know we've recently started kind of going aggressively into the ah RWA market as well, which we kind of think has enormous potential to even eclipse the TVL of DeFi within within the next 12 months.
00:26:54
Speaker
So not only you're you're currently second to Chainlink, but you're're it's also considerably cheaper to run Chronicle compared to Chainlink, right? Because of what you just explained. Absolutely. Yeah. That's super cool, man. That's super cool. So what are your plans, I'm guessing, for the next one to two years in terms of um new innovations, features, partnerships? like Where do you see Chronicle being anywhere between one to two years from now? And is there anything that you're particularly excited to to to share or tease at the current moment? So I think ah the most exciting um most exciting thing happening in crypto right now
00:27:37
Speaker
is the introduction of RWAs. I think we've seen kind of relatively steady growth of of DeFi over the last few years. um But DeFi really needs a catalyst to go from billions to trillions in TVL. And in order to make that next step, um what does DeFi need? Well, it needs the introduction of a large amount of high quality collateral.
00:28:09
Speaker
ah It cannot be held back by, okay, um BTC has this market cap and ah you know the percentage of BTC that are you know used in DeFi is Y and therefore, and ETH has the this other market cap and the percentage of ETH you know floating around on chain is is Z and the sum of those right is like the maximum scale of DeFi. That is way too constrictive.
00:28:37
Speaker
right um And so what the introduction of real-world assets allows you to do is to really tap into ah these huge traditional financial markets right where there's actually tens of trillions of dollars of assets that are just sitting there waiting to get utilized. um And similarly, um crypto can um you know provide credit um I think right now you have a lot of kind of stablecoin liquidity looking to earn yield. And so ah it's no surprise that you know one of the first um financial products on the ah RWA side that caught a lot of traction was kind of tokenized treasury bills.
00:29:28
Speaker
right um because finally there was this yield that you could get with your stablecoins or your dollars right that wasn't coming from this boom bust cycle of leverage.
00:29:41
Speaker
right um you know When you get yield in DeFi, where do you think the yield is coming from? but The yield is coming from another person who is borrowing, and typically they're borrowing because they want leverage. right They're speculating that um crypto markets will go up and they'll make a profit. right and so When we are in a bull market, right yields are very, very high.
00:30:05
Speaker
ah But when we're in a bear market, yields can be very, very low. And so the introduction of um tokenized treasury bills in the form of RWAs really allowed this one ah this accessibility to sustainable yield at a huge scale.
00:30:30
Speaker
right and Those are kind of like the the three kind of properties that are that are extremely important. right um in particular like Take ah credit protocol like maker that has billions ah of dollars on its balance sheet. right um It can't go in the latest yield farm. right ah One, it's too risky, but two, as soon as it tries to move you know anything more than 20, 30, 40 million, right um the yield just gets diluted too much. right so um Once you reach a certain level of scale,
00:31:11
Speaker
um It's not just the sustainability of the yield, but really the scalability of the yield. And that's where were kind of ah the increase in monetary policy rates were the perfect storm for RWAs to like burst on the scene and really show organic utility and in the form of of Treasury bill yield. Right. That's super cool. When do you think that would happen? ah Is it already happening?
00:31:41
Speaker
Oh, it's absolutely already happening. So, um, actually, um, we just launched our RWA Oracle, uh, last week. Oh, wow. Congrats. Yep. So, uh, uh, essentially the problem that you need to solve with an RWA is that it's not a crypto native asset.
00:32:08
Speaker
right So um what do I mean by that? right ETH is a crypto-native asset. um everyone can kind of Every ETH is like fungible with every other ETH. If you have ETH in a wallet, you don't need to worry about the ETH getting stolen out of that wallet. right It's just there. You know how much ETH is in circulation.
00:32:33
Speaker
Alright, so all information that you kind of need about this crypto native asset is already available on chain with RWAs. You don't have this, right? And so bringing like actually just tokenizing the RWA, that's the easy part. um But once the RWA is on chain and you want to integrate it into a DeFi protocol, um that's much more difficult because the DeFi protocol wants to treat the ah RWA like a DeFi native asset, like a crypto native asset where it can you know get all of the information it needs.
00:33:10
Speaker
but it has has none of it. And so that's where really oracles kind of step in to fill that void and really give DeFi protocols all the information they need around an RWA to let them pretend that that asset is crypto native. So um using a you know tokenized treasury bill as an example, right? What do you need to know about this treasury bill?
00:33:39
Speaker
Well, one, you probably want to know, you know when was it purchased? Every Treasury bill has a term before it matures. right So when was this Treasury bill purchased? What is the term? right What is the yield that it's generating? um you know when is it On what date is it going to mature?
00:34:06
Speaker
And when you're then talking about a portfolio of Treasury bills, right? Well, you're and probably not going to have 100% of the portfolio in the exact same kind of Treasury bill, right? You probably have some that you bought this month, some that you bought the month before, maybe some that you bought two months before that. And now the distribution of when these Treasury bills mature matters.
00:34:32
Speaker
um Why does it matter? Well, remember what happened to Silicon Valley Bank? ah There was a bank run on Silicon Valley Bank um and people were pulling trying to pull all their money out and you know banks actually keep a very low amount of you know cash.
00:34:53
Speaker
on hand and so they operate on a fractional reserve around one to 10 or something like that if maybe it's even back in that now so they had to liquidate their Treasury bill reserves and they had to liquidate them at um at a loss right um you know because if they're not mature yet then someone else has to take you know the ah liquidity risk of waiting until that Treasury bill matures to be able to get the the money out. um And so like the problem that Silicon Valley Bank had was not an asset problem. It had enough assets right to cover um you know in reserve, right to cover its outstanding liabilities. ah The problem that Silicon Valley Bank had was a maturity mismatch, right where it had
00:35:42
Speaker
short-term liabilities right of people wanting to take money out now, but it had long-term assets that wouldn't ah mature until you know some farther date into the future. but and and That's what ultimately required it to be saved. right and so These are the same type of considerations that a DeFi protocol might need to do.
00:36:06
Speaker
right where um if the DeFi protocol wants to recall 20% of the credit that it distributed, that you know RWA be able to handle that right without um presenting any kind of like solvency issues right with respect to the the health of the of the credit line. and so This is you know where it really almost becomes a requirement to have an RWA oracle when you're a DeFi protocol trying to integrate a tokenized real-world asset. and it's it's It's a really
00:36:48
Speaker
kind of immature space. I think we're the only Oracle protocol to really have this type of product. um and i And I want to emphasize you know how unique this product is, because we're not going to an asset issuer and being like, tell us all the information about your RWA, and we'll put it on chain.
00:37:17
Speaker
Um, because that's not secure. Um, the reason why that's not secure is because the asset issuer has a moral hazard, right? And the moral hazard is that they can just lie, right? And it's in their interest to lie. Um, because if they say, yeah, yeah, yeah, right. It's fully backed, right? The treasury bills are worth, you know, one and a half billion. And that's why we minted, you know, 1.4 billion on chain and trust us, bro. It's it's all good, right?
00:37:47
Speaker
um but We don't do that, right? um We go directly to the custodian where the assets are actually held and we have direct access to the accounts at the custodian on behalf of the issuer. So we can really be an independent third-party arbiter that is really attesting to you know what is actually held in custody at the custodian ah to really provide that firm on-chain guarantee um that is independent you know from the the moral hazard issues that the issuer has. Right. Wow. That's cool. is that Is that something that is available globally or are there any geographical restrictions based on current law or regulations anywhere?
00:38:39
Speaker
um so I think you know crypto regulatory policy is is still evolving right um and in every jurisdiction. right and It's always going to be the case that innovation kind of outpaces ah regulation, ah but there's, I think, encouraging signs and in a number of of the major um financial districts in the world. right so If you look at New York,
00:39:04
Speaker
If you look at London, Singapore, Hong Kong, ah Tokyo, Zurich, these are kind of the leading financial hubs in the world, and they're all um trying to ah create kind of favorable regulatory frameworks around being able to do this because they all see the the potential.
00:39:23
Speaker
um i think um Germany is kind of leading the pack here. um so the Our kind of first RWA integration was with a protocol called M0, who I think has a very interesting take on stablecoin.
00:39:46
Speaker
um So what M0 does, the way you can think about M0 is it's kind of a cross between Circle and MakerDAO. And it kind of takes the best elements of each and says, OK, I fixed the problems with with both of you.
00:40:03
Speaker
So the problem with, for example, if your circle um issuing USDC is that circle is a centralized issuer, right? And as a centralized issuer, right, they can ah mint new USDC and they can burn your USDC, right? And you essentially have to trust circle. <unk>s It's a great product. I use USDC. I love it. um But you know that That's one of the the weaknesses of of that type of model. um On the other side, you have Maker, which is much more decentralized. um you know It's a decentralized issuer, not a centralized issuer. But the problem is right that Maker is not as scalable.
00:40:48
Speaker
um And you know it's it's not necessarily yield-bearing if you are a um if you are a kind of stablecoin generator. right If you are locking up ETH to borrow DAI, you have to pay Maker some kind of um borrow rate. So where M0 is, is somewhere kind of in the middle. right So M0 is a decentralized protocol.
00:41:19
Speaker
um But unlike Maker, it doesn't just have access to exclusively crypto collateral, it has access to kind of the entire traditional financial market kind of suite of assets. And so for example, um someone who wants to mint stablecoins can go to a custodian, um they create an account.
00:41:44
Speaker
um and they will lock up some kind of financial asset. So let's let's use treasury bills as as an example. They can lock up their treasury bills. They're earning yield on those treasury bills right because they're constantly maturing every second, right earning more yield. And then they can borrow and stablecoins against those treasury bills that they're holding at the custodian. right And they um in order to get their assets back, right, they have to then burn the stablecoins on chain um in order to release kind of their encumbered assets. And at the middle of all that is it the Chronicle RWA Oracle. So we're the ones that are
00:42:27
Speaker
ah get visibility into the custodian um and have like access like read access to all of the accounts. And so when someone wants to mint M stablecoins, they say, hey, I want to mint 10,000 stablecoins. We go great. Let's take a look at your account.
00:42:46
Speaker
um Okay, there's more than 10,000 worth of treasury bills in your account. We validate this mint. And so now the the user can go and use that validated mint signature to go and mint their stable clients through the M0 protocol. right So it's a right centralized issuer. It's a completely independent Oracle that's actually validating the underlying assets in real time.
00:43:13
Speaker
um But it's a much more scalable stablecoin model because it has access to all of these traditional financial market um assets as collateral.
00:43:24
Speaker
well and you said they're based in germany there ah they yeah Well, I mean, I think it's a decentralized financial protocol. So it's actually distributed, right? And they're they're not based anywhere. um But in this case,
00:43:42
Speaker
in this case the um the custodian is is based in in Germany. So I think it's commendable. um what the Germans have really done on the regulatory side right to um make something like this possible. and I think it can be used as a great case study right to be able to scale this to other jurisdictions. right um Like I said earlier, in the US and in the UK, in a lot of those Asian markets like Singapore and Hong Kong, um I think it's it's going to happen relatively quickly. um I would say six months at the latest.
00:44:20
Speaker
Yeah. Oh no. and And it's really fascinating. And it's interesting you say Germany because um if you're familiar with Christoph Jensch, I'm probably butchered his last name, but he's the author of the DAO and he's created a company recently called tokenize or.it. they're They're based in Germany and they're ah What they're doing, they're they're tokenizing um shares within a company, like GMBH companies, which is the equivalent of limited companies. They're doing that in Germany. And in Germany, you can tokenize a company's shares so long as the, I think the total value of the shares is under 8 million.
00:44:58
Speaker
If it's under 8 million, you're free to do it. right And I think it's probably one of the only European countries where you can do that. You probably you can't do it anywhere else in Europe at the current time. That's why it had to be Germany. And it's really interesting to see that you know Germany does allow for that framework to happen. And I'm really looking forward for other countries to to start um opening up to these possibilities, like tokenizing real world assets for sure. Huge thing for the future. Absolutely. you know like Like I said, RWAs are really what is going to notch up the scale of DeFi from billions to trillions. And I think Chronicle is really kind of setting the standard for um doing this the right way. ah Because ah if we scale DeFi you know in the wrong way, if we lose kind of this core crypto ethos of transparency and decentralization, you know then then what are we really doing here?
00:45:58
Speaker
right And there's no reason why we can't do both. right So let's bring our WAs on board, um but let's have you know transparent and independent oracles like Chronicle you know kind of setting the standard for, OK, we can do this, but we can do this in a safe, scalable, and and sustainable kind of manner.
00:46:21
Speaker
Yeah, honestly, and and hats off to you guys for just trailblazing through that. I think it's fantastic to see companies doing this and ah really pushing adoption and just bringing you know crypto to you know the use cases that it always was meant to have. When do you think someone that's completely new to crypto can to come in and have a great experience without having to go down the rabbit hole for two years? I mean, I think we're already starting to see that today.
00:46:50
Speaker
um there is a um When you look at kind of the distribution of of the funnel into crypto, right ah the first step is usually that you go sign up on an exchange. right Maybe it's ah Coinbase, maybe it's Binance, it's Kraken, it's OKX, whatever it is. right And then what you kind of saw is those exchanges started to make wallets. So um you know almost every exchange has their own has their own wallet. right And so that's how you can now you know start bringing your foreign exchange to bring their users you know on chain.
00:47:37
Speaker
right um Then you started seeing chains <unk> sorry exchanges making their own chains. right So you're seeing this with with Coinbase, with Base. OKX is creating their own L2. Kraken's creating their own L2. Binance has had a Binance Smart Chain for quite a while. right and And it has a lot of activity. I actually think it's ah relative to the amount of activity it has. like it's It's actually not given enough credit.
00:48:07
Speaker
um he and And those types of funnels are are extremely powerful, right? um Because it it really, um you can really start getting like this this kind of like closed loop right from, hey, um Binance user transfer some of your Binance deposit to your Binance mobile wallet, and then you can use this application you know on Binance Smart Chain to go mint your, I don't know, NFT or or do some kind of like DeFi action, right? Take out a loan, right? And yeah this is a closed loop type of system.
00:48:49
Speaker
And it's really just a UX problem of extracting away that complexity. right And so um there's no more hard technology problems here to solve. right And so I think it's going to be rather surprising, actually, how quickly um this happens. That's an interesting point. but I guess i guess the the simplicity of it is always easier to iterate over something that's centralized rather than decentralized protocol. I feel like that's where it's getting a little bit more complex, it's how do you maintain decentralization, you know, either over a chain or a protocol and and still give the user the same experience as a centralized service or as close as possible? um Absolutely. Right. um But I think, you know, um using base as an example, right? Base is an L2 that's secured by Ethereum. And contrary to most things in crypto, which
00:49:44
Speaker
um
00:49:47
Speaker
tends to have a first mover type of hierarchy, right where you know ah we we kind of saw this with Arbitrum, where they were the first L2 to launch. And for a long time, wright Arbitrum was just the biggest L2. And now you see that with Bass, not only have they managed to catch up, but they've actually been able to like leapfrog, even though they were one of the um even though they they were one of the much much later altus to launch right and so i think it really proves out that this uh this funnel of being able to you know for the exchanges being able to convert you know their exchange users into chain users um that ah that flywheel effect is incredibly powerful.
00:50:35
Speaker
Right. That's a very good point, actually. Yeah. um I wouldn't have thought that exchanges are a gateway to decentralization, but yeah, 100%. It's definitely getting there. And it's definitely and not only an easy way, but an efficient way as well to to convert users, to get them into the decentralized space, which is really cool. and So then moving away from that a bit, I just wanted to touch again on um, the challenges, right, of, of creating, uh, an Oracle, um, and, and the pitfalls of it, right. Um, when an attacker, let's say is looking for a vector towards like manipulating, uh, some, some like pro protocol data of an Oracle, like, how would you go, how would an attacker well be one of the most common vectors of attack for an Oracle? Obviously they would have to have.
00:51:27
Speaker
access to the data that it's pulling from or to the middleware that checks whether that data is ah valid or not. So um it's quite diverse in in that respect. And so so I don't want to dive into it too much. um i would I think I'll just leave it at that. Each Oracle is built extremely differently.
00:51:55
Speaker
and with varying degrees of of security and and checks and balances and and decentralization. right um And so it is incredibly important when choosing an Oracle um to do kind of extreme due diligence into how does your you know chosen oracle that you're considering actually work and what guarantees are you getting, right? And what are the different, um like if you map out like a matrix, what are the different behaviors under different types of stressors, right? um And what you'll find
00:52:36
Speaker
like Like the reason that this is also important is because your you know decentralized finance protocol is only as decentralized as its Oracle. You can have the completely you know most decentralized DeFi protocol in the world, but if your Oracle is centralized, guess what?
00:52:55
Speaker
this protocol is now centralized as well. right um if if there's a you know and And I think theres there's kind of two flavors here. right um there's there's There's actually more, but I think um you can bucket them into into two kind of two kind of flavors.
00:53:14
Speaker
and so one is um an oracle that achieves some distributed consensus right um and what this essentially means right is that there is a bunch of uh validators here right and each validator kind of individually attests to some piece of data and once you have some kind of super majority of the number of validators attesting to something right now that um piece of Oracle data is considered to be, you know, um to have quorum. It's considered to be secure.
00:53:48
Speaker
um Now, there's one caveat here, which is um not all validators are created equal. And if someone is just running their own validators or just running all of the validators, um this is not distributed consensus. right this is ah This is just an oracle that is Sybil.
00:54:12
Speaker
um you know it's It's all the same person. right So so that yeah they're not getting any value out of that distributed consensus. Um, but I digress, right. And so, and the second bucket. Right. Is these, I know i think that's a good distinction because a lot of people, sorry, just, just to, um, highlight what you just said, um, the difference between decentralized and distributed that that's very important because decentralized means that anyone can run a node.
00:54:38
Speaker
Even though 80% is just this one company running all of the nodes, distributed means that it's an equal number of nodes shared across each party. So it's it's a lot more, I get it, verifiably fair.
00:54:52
Speaker
right and and you know Even the quality of the validators matters. Who are these validators? right Who are these people? Who are these entities, companies? right Who are these actors? um Because if it's just a random group of people, right why should you trust this oracle? right um and and you know This is the kind of due diligence that you know which will is surprisingly uncommon in DeFi.
00:55:25
Speaker
um right ah there There tends to be this trend of, like oh, well, so-and-so uses this, so it's probably fine. right and and and This is this is kind of like the the step of like next step of maturity and risk management that I think we we kind of need to make in DeFi, right is to to really um pick things apart, um be critical about them, write and and really analyze them.
00:55:53
Speaker
um But going back to my my previous point, right, ah on the two flavors of oracles, right, so there's these oracles that achieve consensus through validators. And then there's these oracles that just say like, no, I'm just telling you what the data is and I'm just delivering you the data and like, here you go, right.
00:56:12
Speaker
um The latter is, it should be clear, is is very inferior. like You have zero guarantees that this Oracle provider is giving you correct data or will you know um censor you at some point. um If that provider you know Oracle provider were to have a malicious employee who is upset, maybe they were let go.
00:56:42
Speaker
um Or maybe this Oracle provider was to get hacked. right um You feel the downstream effects of that by using that Oracle provider. right um So it is incredibly important right that you choose an Oracle that has a robust, you know resilient, distributed consensus of ah highly reputable validators. And ah without getting too shilly, I think that's something that really sets Chronicle apart, um is we have hands down the highest quality validators um of any Oracle provider in the space.
00:57:22
Speaker
um We have projects like MakerDAO, Etherscan, Infura, Gitcoin, even Gnosis. And so the idea of our validator strategy really is to let us get all of the really highly reputable projects in the space to run a validator for Chronicle Oracles.
00:57:46
Speaker
such that the only way you know for the oracle to ever be hacked is if all of these validators were to essentially um commit cannibalism.
00:57:58
Speaker
right i would it would It would be like ah like you know ah a snake eating its own tail. right And if you have a very small group of validators, right that might be possible. um But our goal is really to just get like the top 100 validators in like the top most 100 reputable entities right ah in the space that have earned the trust of of users already, right? So if you're using a Chronicle Oracle, right, um you probably, you know, um have maybe you've used dye, right? So you have some kind of trust already in the maker team, or maybe you've been using a Gnosis safe, right? So you have some kind of trust in in the Gnosis team, right? You've probably been using Etherscan since like your first transaction that you've ever made, right? um So these are
00:58:54
Speaker
These are teams where, you know, a user will have already, you know, really built up a kind of social layer level of, of trust and reputation. And those teams are not likely to, or I would say are highly unlikely to come together, right. And ah really ruin their reputation in, in this, uh, in this industry. Yeah. And that's a very.
00:59:20
Speaker
clever way of going about it. I was actually meant to ask you about this because I noticed that you you have all these ah like reputable companies as validators. So I'm guessing you're quite ah strict with who can become a validator, essentially. but Absolutely. um I would say um yeah know without trying to sound offensive, we reject 90% of people who approach us to to become a validator.
00:59:45
Speaker
um it is It is a very important role right and it requires really high reputation, high integrity actors. so and If you were to add anyone who doesn't have that reputation, right it actually makes the oracle worse right because the average amount of of of reputation, right the average amount of security has actually gone down.
01:00:09
Speaker
Yeah, no, completely. I completely understand it and I don't think it's offensive at all. I think it's just it's it's obviously in the interest of the protocol to watch out for the integrity of the validators and I'm sure that everyone in the space would would agree with this.
01:00:23
Speaker
um yeah so then In terms of um the the the validators that you you do work with, obviously you get a lot of value um by getting these reputable companies you know to to validate protocol actions. What did they get in return out of this ah um ah out of your partnership? so Having been in the space for this long, right um there's an incredibly um large number of people who um are very ideologically aligned with what it mean you know what crypto can mean for the world, if done right, um you know as well as you know there are people who are very short-term minded and and are just here you know to to make a quick buck or something. um But for for those long-term players you know playing long-term games, they're all quite
01:01:17
Speaker
visionaries and they all really want to move the space forward and they all kind of see the same problems that that we do right with the space where um you know oracles are not transparent.
01:01:32
Speaker
right where oracles are not decentralized, where oracles are too expensive right for ah the average you know upstart protocol to to be able to afford, um right um or the the oracles are not you know that resilient.
01:01:50
Speaker
right when you have like a really um You know dramatic day like ah black Thursday, right? um you You know the the oracles, you know, they they don't update they stop updating right and this is the critical moment where you need your Oracle to to work um And so really, I think we've just managed to amass this you know really great group of of people right who all just really want to move the space forward um and are happy to just you know um be able to be a part of that. And and and and that to me is actually quite beautiful.
01:02:30
Speaker
Yeah, no, that is fantastic. I feel like that this is one of the unique characteristics of this space is that people that are really into it, like you you know they're really into the space, they're really into the tech. um And you know I love that because that's what that's what Bitcoin, like that was the reason for Bitcoin. you know It was like a response towards a broken financial system um where people resonate, that people resonated with.
01:02:57
Speaker
And a lot of the people that are that are have joined this space at that time, that they still have the same kind of ideas. Now, you know I'm not saying Bitcoin maxis are always right. um ah you know Everyone's entitled to their own you know opinion or favorite chain or coin. um But you look at people like Michael Saylor, the guy's been like with waving the Bitcoin flag for as long as I've known him. And he's fantastic you know to see people without unwavering faith.
01:03:25
Speaker
in their protocols or the tools that they believe in. Absolutely. you know and I kind of view Chronicle in in the same way. right you know Chronicle was um you know the reason that that I started Chronicle was as a direct response to um what I kind of saw in the Oracle landscape being completely inadequate and inadequate and saying, like no, you know like Chronicle can really raise like the industry standard here. There are so many issues that I see. like For example, um I think one of our core values is transparency.
01:04:06
Speaker
um I think there's this misconception um in our industry that Oracles are kind of like a fortune teller. um that ah It's in the name, I guess. Here's the smart contract and it it gives you the data and then off you go with that data. right um But no one ever really stops the question, well,
01:04:32
Speaker
how to Where did that data come from? How do I know that data is correct? um And so um with Chronicle, um every we kind of have like this end-to-end like verifiability. So if you, for example, look up an Oracle in our dashboard,
01:04:51
Speaker
um for any price, the the current price or any update that it's that Oracle has done since the beginning of time, I think going back to like 2018. You can see exactly which validator was, ah which set of validators was involved in composing that price. um You can even break it down one step further and see you know ah Why did this validator report that particular price or that particular piece of data? Where did it get that data from? right And you can see like, oh, well, this validator looked at Coinbase and that they got this, and it looked at Kraken, and it got this, looked at Binance, and it got this, right looked at OKX, and it got this, looked at Hobie. So you really have like this end-to-end kind of trace, and it's all cryptographically signed.
01:05:42
Speaker
right so um ah You can really verify the cryptographic digital signature in your browser to prove to yourself, right? Not having to to trust the data that you're seeing, not having to trust the website, and not having to trust Chronicle, right? But really prove to yourself that like, yes, at this point in time, this is exactly what what happened. And I think that kind of end-to-end verifiability and and traceability, transparency is is really like something unique to Chronicle as an Oracle provider ah that no one else really does. And I think is like the most true to the um kind of crypto ethos of don't trust, verify. ah Maybe, um is there anywhere that people can learn more about Chronicle, um Dev and Dev Docs and anything like that?
01:06:38
Speaker
Absolutely. um So our our Twitter is at Chronicle Labs. So follow us on there you know to get all of the latest updates. um I think the coolest thing to probably you know um get up to speed with Chronicle is probably just checking out our dashboard. So at chroniclelabs.org slash dashboard.
01:06:59
Speaker
ah You'll find all of the different oracles that we, you know, support on all the different chains and you'll be able to do the the exercise I talked about earlier, right? Like click on an price update and see like the exact validators and the exact, you know, sources and data that was used and and verify all that information cryptographically. um I think it's really fun to to kind of play around with.
01:07:22
Speaker
And if you have any questions um or you know you just want to talk to the team, get to know us, come join our Discord at chat.chroniclelabs.org. Awesome. Well, thanks a lot, Nick. And thank you for for the conversation. Thank you for explaining everything around Chronicle and Oracles. I think um it's a fantastic product. And I'm really looking forward to your guys' development of RWAs. Yeah, really appreciate you having us on. This was super fun. Thank you.
01:07:50
Speaker
Take care, man. Bye everybody.