Blockchain software company ConsenSys’ acquisition of enterprise-grade Ethereum-variant platform Quorum from JPMorgan Chase is “a match made in blockchain heaven,” says ConsenSys founder and CEO Joseph Lubin.
Wall Street pillar JPMorgan will now become a customer of Brooklyn-based ConsenSys, which will fully manage projects on Quorum and offer software support and services as it integrates its existing protocol engineering strategies with the blockchain platform.
“We have two layers in our own Hyperledger Besu-based client, both systems have confidentiality overlays and enterprise tooling, effectively,” said Lubin, in an interview with Forkast.News. “So it became clear that it was kind of a match made in blockchain heaven, because we could move both platforms forward, merge them into one platform.”
Hyperledger Besu is an enterprise-grade Ethereum project created by ConsenSys engineers that grants transactions on the platform compatibility with the public Ethereum mainnet.
ConsenSys has acquired Quorum! Through this acquisition and investment from JP Morgan, we will continue to drive adoption and innovation through an open source protocol layer on which production-ready business applications can be built. #WelcomeQuorum https://t.co/YGBrAiprpt pic.twitter.com/cNWe28roDA— ConsenSys (@Consensys) August 25, 2020
The deal, reportedly worth US$50 million, is said to also involve JPMorgan investing $20 million in ConsenSys.
Lubin described JPMorgan’s investment in ConsenSys as an “ongoing process” and that ConsenSys acquired “maybe thousands” of customers through the commercial agreement between the two organizations.
“Potentially hundreds, thousands or so customers out there — up to this point haven’t had a coherent, complete enterprise Ethereum or enterprise blockchain solution anywhere,” said Lubin, who was a co-founder of Ethereum. “ConsenSys has been busy building out the infrastructure for the public permissionless Ethereum ecosystem, so we built lots of infrastructure, developer tooling, security, audit services, wallets, and all of that is now becoming available to foreign clients.”
The deal could mark a turning point for global financial infrastructure, as decentralized platforms like Ethereum now have a larger role to play in traditional banking systems. The impact of Covid-19 on the financial institutions that led to spikes in interest rates could also spur greater institutional adoption of blockchain and cryptocurrencies.
“I like to think of decentralized protocols like Ethereum as being a revolution in trust, where for millennia we’ve had to settle for the best that we could do in centralized and subjective trust systems,” Lubin said. “At this moment, we’re all aware of a catastrophic failure in centralized trust systems across the planet, and I think people are crying out for a new way of doing things.”
Watch Lubin’s interview in full, as he explains to Forkast.News Editor-in-Chief Angie Lau how ConsenSys’ acquisition of JPMorgan’s Quorum will affect the blockchain ecosystem, his expectations for Ethereum 2.0, and the rise of DeFi.
Forkast.News is a content syndication partner of Decrypt, an editorially independent publication funded by ConsenSys.
- Why JPMorgan spun off Quorum: “It became clear to [JPMorgan] that Quorum was very popular, but they didn’t really want to be a software infrastructure company or software product company. They didn’t really want to spin up a big, strong support unit.”
- How this acquisition could affect ConsenSys and users: “The best way to think about how this helps ConsenSys is to understand how it helps the customer. So potentially hundreds, thousands or so customers out there — up to this point, they haven’t had a coherent, complete enterprise Ethereum or enterprise blockchain solution anywhere.”
- The roadmap for ConsenSys moving forward: “We will continue to do portfolio management and investing in our initial company, ConsenSys AG, and this new company, ConsenSys Software, is essentially building out a blockchain operating system, so a very focused effort.”
- Impact on traditional financial systems: “I like to think of decentralized protocols like Ethereum as being a revolution in trust, where for millennia we’ve had to settle for the best that we could do in centralized and subjective trust systems. At this moment, we’re all aware of a catastrophic failure in centralized trust systems across the planet, and I think people are crying out for a new way of doing things.”
Angie Lau: Welcome to ‘Word on the Block,’ the series that takes a deeper dive into the blockchain and emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.
Well, it is big news in blockchain: ConsenSys, the Brooklyn-based Ethereum software firm, has acquired JPMorgan’s blockchain project, a platform called Quorum. So here to share the why, the how, and what happens next is Joseph Lubin. It’s good to see you again. Joseph Lubin is co-founder of Ethereum and founder of ConsenSys.
Joseph Lubin: Thanks for having me on.
Lau: Absolutely. There was a lot of buzz late last year as to JPMorgan and Quorum, and the speculation that it needed to leave JPMorgan to actually grow, and so ConsenSys was one of the names that was bandied about — obviously, this is an Ethereum-based platform. How did this all come about?
Lubin: So I can give you a ConsenSys perspective and maybe a little bit of awareness of what was going on on the JPMorgan side…. So, ConsenSys and JPMorgan have been very friendly and collaborative for quite some time. JPMorgan started paying attention to Ethereum and blockchain technology even before a public Mainnet was released. So they started experimenting and building out some things when we were still building proof of concept.
They had a handful of different teams that focused on blockchain technology, and we’ve interacted with them roughly from the start. We started to interact with them in a really concerted way around the time of the advent of the Enterprise Ethereum Alliance (EEA). So we were two of the major drivers of that initiative and have been two of the major drivers of activity inside the EEA since launch, really. So we’ve had warm, collaborative, open channels for a long time. ConsenSys itself has done quite a bit of work using the Quorum platform. We’ve been offering world-class software support from our customer success and support group for somewhere around two and a half years, and so we’re not new to Quorum.
From JPMorgan’s perspective — and this is partially speculation — they are configured to be a world-class financial institution. They have world-class technologists resident, but they use technology in the service of delivering financial services around the world, and they have to make choices to derive the highest value from their technology operations.
And so it became clear to them that Quorum was very popular, but they didn’t really want to be a software infrastructure company or software product company. They didn’t really want to spin up a big, strong support unit. And we did a bunch of that for different installations that we built for different institutions and consortia. So I think they faced the decision of how to continue to offer blockchain-based applications, knowing that they needed a certain platform, a certain configuration, an enterprise Ethereum platform, without just needing to be a software company.
They considered spinning out Quorum into its own independent entity, and they shopped around with different potential partners and came to the conclusion that ConsenSys is deep enough and broad enough, with nearly a hundred protocol engineers, that we would be effectively the ideal stewards of the platform and that we could continue working normally and collaboratively together to build out the roadmaps that they would like to see, to build out the roadmap that we would like to see for our Hyperledger Besu client, which essentially accomplishes very similar things to what the two layers of Quorum does.
We have two layers in our own Hyperledger Besu-based client, both systems have confidentiality overlays and enterprise tooling, effectively. And so it became clear that it was kind of a match made in blockchain heaven, because we could move both platforms forward, merge them into one platform They’re currently two single platforms right now, in terms of branding with some implementation differences so that the people can choose to customize if they wish. And in the not-too-distant future — and according to the Enterprise Ethereum Alliance specifications — we will achieve plug and play interoperability and effectively merge the code bases into one code base.
So we were fortunate enough to be able to acquire the project. And that comes along with hundreds, maybe thousands of customers that weren’t really paying customers. But now JPMorgan is a paying customer of ConsenSys, and JPMorgan and hundreds of financial institutions will receive support from ConsenSys. And there are hundreds of other users of Quorum in the world that we will now be able to more directly address. That came along with an investment and a commercial agreement between our two organizations.
Lau: Yeah, it really inflates the business opportunities for ConsenSys to really bring in-house all of those financial firms and services that JPMorgan already kind of complements and services itself. So you mentioned the deal. It’s very interesting, reports say that JPMorgan invested US$20 million into ConsenSys as part of a US$50 million dollar convertible debt deal. Can you confirm those numbers?
Lubin: I can neither confirm nor deny those numbers at this point. It’s part of an ongoing process.
Lau: It’s an ongoing process for ConsenSys; I want you to explain how this helps ConsenSys, how this potentially reshapes it, how are you using this investment partnership moving forward?
Lubin: So the best way to think about how this helps ConsenSys is to understand how it helps the customer. So potentially hundreds, thousands or so customers out there — up to this point, they haven’t had a coherent, complete enterprise Ethereum or enterprise blockchain solution anywhere. ConsenSys has been busy building out the infrastructure for the public permissionless Ethereum ecosystem, so we built lots of infrastructure, developer tooling, security, audit services, wallets, and all of that is now becoming available to foreign clients.
So our Truffle Suite developer tooling will now intimately and directly support Quorum development, our security audit software [layers and] software tools, and a bunch of people that do manual security on it, they’ll focus more directly on Quorum. We are in the process of configuring very sophisticated cloud architectures and the ability to deploy it, and so that now becomes available to all the clients. We have an orchestration tool that enables the orchestration of simple or complex transactions, receiving receipts, keeping registries of smart contracts.
We have business workflow, we have digital asset issuance and full lifecycle management. We have document management. And I could name maybe seven or eight other products and services that are now available. So it’s about finally creating a really great solution for customers and that just enables us to do an enormous amount more business, so it opens up the entire Quorum clientele directly to us.
Lau: It’s a huge task. So then what happens to all of your portfolio companies, the companies that you’ve invested in, the startups that are part of the ecosystem? How are you reorganizing both the enterprise services part of it, which Quorum seemingly might be a part of, and then how are you still supporting the startup and the portfolio companies which you’ve invested in?
Lubin: So first, in a sense, that’s an orthogonal question to our acquisition of Quorum over the last year. Plus, we architected ConsenSys into a portfolio management and investment company and a sibling company, a new company called ConsenSys Software, which has absorbed some of the major properties constituting a blockchain stack.
So these are our Pegasus group, our protocol engineering and systems group. They’re the group that is essentially becoming the stewards of Quorum and merging with our existing client. Infura, our infrastructure group, which handles extremely busy days, up to 10 billion queries from the Ethereum ecosystem. Our Codefi group for commerce and decentralized finance, which is building many applications and services that are essentially being offered through Infura, or being offered through Metamask, our wallet, or being offered standalone. Metamask, our wallet solution, is the most secure and largest user base wallet in the ecosystem.
And so all of that has been available in private commission systems. So it’s all dedicated to the public permissionless space, but we can take that technology and make it available in private permissioned context when we build custom solutions or increasingly, and this is happening very often when we can simply apply our existing and maturing products to private permissioned networks, whether they’re inside a single organization or across consortia.
So we are a software product company that does some custom work, and increasingly the custom work that we do is making heavy use of our products, so the custom work that we do is starting to look more like glue software, or little pieces of middleware between our products, as we build complex and composite solutions for different clientele. So we will continue to do portfolio management and investing in our initial company, ConsenSys AG, and this new company, ConsenSys Software, is essentially building out a blockchain operating system, so a very focused effort.
Lau: The blockchain operating system that you know is a very competitive space, but one place where it seems to be really the trigger and the foundation is what’s happening in DeFi right now. And the last time we talked, earlier this year, we talked about if DeFi was ready for prime time. What’s your assessment today, and just the trend line for DeFi right now? And how do you think that ConsenSys and the projects that you’re building as well, but then as it’s correlated to Ethereum, how is that supporting the rise of DeFi?
Lubin: So if you define prime time by adoption, by naive consumers, I think we’re not quite there yet, but we’re moving remarkably close to that. DeFi is decentralized finance, natively digital finance. It has been described as a set of potentially interoperating Lego block financial protocols, some of these protocols subserve lending and borrowing, or insurance, or prediction markets, or derivatives, or synthetics, or equity issuance, or bond issuance. And so decentralized exchanges are a very large part of it.
These technologies really constitute the development, the emergence of a new financial plumbing layer for the planet. I like to think of decentralized protocols like Ethereum as being a revolution in trust, where for millennia we’ve had to settle for the best that we could do in centralized and subjective trust systems. At this moment, we’re all aware of a catastrophic failure in centralized trust systems across the planet, and I think people are crying out for a new way of doing things.
We’ve been saying that decentralized protocols can replace subjective trust with automated and objective trust, so building real, trustworthy systems that every actor using those systems can believe in, can believe are not improperly manipulated just because by the nature of this new database technology, everybody knows exactly what’s happening on the protocol and when it happens. There’s no way to go into the history of the database and improperly manipulate it and essentially cheat the system, unless you’re potentially willing to marshal prohibitively expensive resources.
So a much better foundation, and upon that new trust foundation, we can now invent and build with digital assets, and these digital assets started out as ERC-20 tokens, and we’ve seen lots of exciting experimentation with non-fungible tokens, price-stable currencies, stablecoins, have laid a really exciting foundation upon which we’re essentially seeing this new financial planning for the emerging digital economy being built, and so in addition to the technological excitement, there’s a lot of money being made.
There’s billions — I think that ecosystem’s probably sitting around 20 billion dollars total, between staking and value of the tokens, and it’s growing really rapidly. In a world in which yields are low or negative, we have this expanding, exponentially expanding ecosystem, where the tokens are rising in price, but also people are achieving yields.
Lau: It’s almost a non-existent world in traditional finance right now, with central banks around the world really lowering it to the level of negative rates.
Lubin: The interesting thing is that just because we’re probably at the end of the debt supercycle, some of your debt supercycle and monetary systems or maybe end-of-life-ing, we need to happen upon or construct a new monetary regime in different nations or for the planet. The regulators, the politicians, the systems are just constrained to making moves that drive more and more people in our direction. So it’s a remarkable, self-fulfilling prophecy.
Lau: It is. There are constraints, though, right now. Technology has not necessarily caught up with the influx of demand, whether or not it’s the drive of DeFi or if it’s stablecoins. I’m noting that Ethereum is now the most popular blockchain, surpassing bitcoin in volumes alone, but it’s also driving the price of ether to, unfortunately, levels where it is prohibitive to a lot of people.
Lubin: For some use cases, and it’s much less than a bitcoin transaction.
Lau: That’s true. But since I have you here, I’m going to read a quote from a Reddit user that posted — Willy3380 — we found this quote, “to require a transaction fee of US$99 is beyond ridiculous. This will be a major roadblock to growth if someone on the team doesn’t address this. I hope someone on the team will address this, and soon it has to be addressed for mass adoption.” And he’s talking about one of the platforms, but generally speaking, the gas fees are very astronomical for some. There is a growing concern as to whether or not this does stop the rise, the trend line. How are you addressing these issues? How is Ethereum addressing these issues?
Lubin: Yes. So thank you for quoting some Reddit wisdom, it generally guides our behavior. So I would be really, really disturbed if we weren’t having profound scaling issues at this point. Throughout the history of information technology, hardware and software, humans have always built out something new, a new technology, a new protocol, new piece of hardware, whether it’s memory or screen size, and immediately the industrial software developers or users max out that technology.
So we’re constantly bumping against this ceiling of scalability in different forms, and we need to do that in order to find out what needs to get fixed first. So we’re going to continue to bump up against scalability. I don’t know if you dialed in to the Internet using a ’96 baud modem, but we’ve bumped up against lots of ceilings in my career, and I’m happy to say that we’re still doing that.
So where we’re seeing solutions is in a bunch of different directions; we’ve been talking about Layer 2 solutions, where we have hundreds of thousands of transactions per second sitting in a network layer on top and connected into Layer 1 Ethereum and deriving its trust from Ethereum. And G-network is online with many thousands of transactions per second, Scale is coming online momentarily, there are the DEXes, the decentralized exchanges that are implementing Rollup technologies, there are a couple of different brands of Rollup technology, we’re pioneering another one that probably nobody’s heard about at ConsenSys, via a new mechanism.
So scalability is being addressed by evolving the Ethereum 1.0 protocol, by adding literally tens or hundreds of thousands of transactions per second at Layer 2 above Layer 1, and by building out Ethereum 2.0, which will multiply all of that scalability by, probably around 500 early on, and then even more over time. So it’s already happening. Scalability is here. It’s not evenly distributed, there are a bunch of applications that are able to make use of it, and it’ll become more generally available.
Lau: Eth2 is on schedule, though we do know that there was a little bit of a hiccup with the testnet Medalla; it seemed like the long awaited update was just around the corner, but unfortunately, a time bug brought the testnet and paused it for a little bit. Can you address that? Where are we now on the roadmap for Eth2?
Lubin: So the Argentinean pronunciation of Medalla is Me-dah-shah, and that’s what everyone’s going with right now, so that’s canonical right now. And thank you for giving me another great setup. So testnets are there for us to find bugs, and not just for us to find bugs and fix them, but for us to find bugs and build out the processes that are required so that if we do encounter a bug on the mainnet, we’re already well-practiced in how to address that.
We’ve seen that on Ethereum 1.0, where there have been a small number of issues early on on the network, and the response time and the fixes came remarkably quickly. So we need issues to pop up. If there were no issues popping up, I would be very concerned. I would raise bounties just to try to get one issue on the testnet, so that we can have all the teams working together to practice on how to remediate issues on the mainnet.
So what happened was a dependency on an external third party service by one of the clients. There were five clients on the network at the time, and that’s remarkable too, just getting five different teams, building five different pieces of software, and keeping them in sync on the ConsenSys network, is incredible. So it took a few days to understand the problem and fix the problem. And what is really remarkable is that the network healed itself — so the network did not go down, and it is now back in sync, it’s back in operation. It finalized lots, and so from a very ugly configuration, it actually resuscitated itself and is perfectly healthy again.
Lau: Phase 1 is the second phase of Eth2, it’s going to roll out in 2021, it’s going to integrate shard chain, which really reduces the time and increases the transaction speeds and the number of transactions per second. Where do you see it going as it correlates the trends that we’re seeing in DeFi and bringing it back to all of these financial services and institutions like the JPMorgans who are now clients of yours under Quorum? How does this all coincide with what we’re going to see next year, seeing more enterprise integration potentially?
Lubin: So as you were indicating, there are some major phases to Ethereum 2.0: it’s Phase 0, 1, and 2, the three major phases. Phase 0 goes live, I believe, probably in November; we have smart people betting that it’s going to be November. And that brings the heartbeat of the system to life, the Beacon chain, the proof of stake system.
You can also think of the proof of stake system as a DeFi application, because people are staking their ether in order to achieve yield, to essentially stand off this public good infrastructure, so the infrastructure bond, in a sense. And it’s going to be one of the biggest and most important yield applications in the Ethereum ecosystem. It’s going to require quite a large amount of Ether to be staked, but all the testnets have seen tremendous activity, so there’s no concern that we won’t get that much Ether staked on the network.
Phase 1, the next phase, does roll out probably next year. A lot of the complexity has been built into Phase 0. Phase 1 is about adding data shards, Phase 2 is about adding execution engines. Phase 1 will bring an enormous amount of data availability to applications, and it’s not going to bring, initially, data availability to applications on Ethereum 2.0, it’s going to bring data availability to applications on Ethereum 1.0.
These Layer 2 networks that I was talking about, one of the things that they’re really starving for is guaranteed access to data, or data availability. And so sharding itself is going to be a tremendous scalability mechanism for Ethereum 1.0, even before it becomes a more tremendous scalability mechanism for Ethereum 2.0.
The next phase, Phase 2, brings execution environments. My assumption is that we’re going to have the ability to run certain kinds of programs very, very soon after we launch Phase 1, so a little bit of Phase 2, or maybe Phase 2 gets implemented in phases, and we’ll see some real functionality early on, and then full-blown functionality maybe a year later, nine months later, something like that.
Lau: You know, reflecting just what the blockchain journey has been with all of these protocols and with Ethereum also being the basis of a lot of enterprise solutions, like the JPMorgan coin, like Quorum, like Hyperledger Besu, where does it leave the rest of the blockchain protocols? Is this an industry in which interoperability and “co-opetition” — is that something that will serve this industry well? How do you perceive that?
Lubin: I think in the near term, we’ll certainly see competition among protocols near middle term, as exists right now. Systems like Fabric do a decent job of being a substrate for applications that are more narrowly-scoped; you can’t have many nodes on a Fabric network, that’s not what IBM is really selling. There are other good blockchain technologies — Tezos, Cosmos, Dfinity, Polkadot — it’s possible that they’ll carve out a niche for themselves.
It is spectacularly unlikely, in my opinion, that they will be able to catch up to the orders of magnitude in difference in size, difference in growth, differences in speed of development, differences in developer community, difference in infrastructure, that Ethereum holds as some advantage over those protocols, which really, despite the indications in the press, they really don’t have a lot of people working on those systems.
Ethereum is at least two orders of magnitude larger than all of those systems. Any new technology is going to have to grapple with regulatory issues where Ethereum and Bitcoin have already cleared that bar and have been declared commodities. So it’s going to be spectacularly difficult for a new, even high-quality technology and team, to build a tokenized blockchain protocol and get real engagement for it. They’re essentially going to have to distribute their token broadly and equitably in order to have legitimacy and excitement from their community, and they’re really going to have to promise their community that this token is going to grow in value by the agency of some core team, and by definition, that’s a security.
And so they’re in this quandary where they have to sell security almost by definition, and therefore, almost by definition, they’re not going to be able to distribute it broadly and equitably, because they’re going to have to be distributing to accredited investors. So we’ve seen some pretty good teams and protocols built, that are now called DEC coins, that are not gaining the traction that, say, two years ago the VCs were excited about. So there will be attempts, but the VCs don’t seem to be very interested in supporting new competing protocols.
So that said, yeah, I think there will be interoperation across a handful of different blockchain technologies, and there will be great and important interoperation between things like blockchain protocols and decentralized storage systems like IPFS and Filecoin, or decentralized bandwidth or decentralized heavy compute systems or decentralized identity systems. So that’s what I think the increasingly decentralized World Wide Web is going to look like; it is indeed a bunch of interoperating protocols.
Lau: Well, Joe, if there’s one thing about competition we know, it’s that at least everybody’s feet are held to the fire, and there’s accountability and there’s also development of best practices. So as we move into the future, it’s anyone’s guess, but your guesses are usually pretty strong, and thank you so much for sharing that perspective with us. We really appreciate you joining us on the show today.
Lubin: Thank you.
Lau: All right, Joe, we’ll speak again. So thank you for joining us, and thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Forkast.News’ Editor-in-Chief Angie Lau. Until the next time.