Joseph Lubin, Co-Founder of Ethereum & ConsenSys

We were able to sit down with Ethereum and ConsenSys Founder Joseph Lubin last week at TechCrunch Disrupt SF and talk to him about some of the projects that ConsenSys is working on.

[Editor’s Note: This interview has been edited for clarity]

CCN: What is ConsenSys?

Joseph Lubin: ConsenSys is a venture development studio with a few different sides of the company. We have the product side of the company, we are a consultancy as well. We do advisory work and we write lots of software for companies, governments, and central banks.

We do a lot of education work as well. ConsenSys Academy has educated about 1,500 working engineers and lots of lawyers and other kinds of learners who’ve gone to places like companies and the World Bank and run a half day or one-day programs.

We have a capital markets arm where we built a custody solution, not yet live, that should be a foundational element in bringing institutions into the space. We do venture investing and have invested in a little over 20 companies, not including the accelerator we’ve started which will bring the total to well over 20 companies. We also token launch projects.

Whether it’s an investor token, a security or a consumer utility token that would not be considered a security. Bill Hinman, director of corporate finance of the SEC gave us really clear guidelines about 10 weeks ago and we’ve been working with regulators like them around the world.

We have the ability through our token foundry platform to issue consumer utility tokens. That is the essence of ConsenSys. It’s a really oddly shaped company because we had to build up the Ethereum ecosystem ourselves. We started building product and we needed to build infrastructure, people started calling us from companies and governments and we spun up our consulting arm and educate people because we couldn’t hire fast enough.

CCN: One of the things I’m curious about with ConsenSys is the Amazon effect, right? You guys have like 50 projects on this hub and spoke model and they’re doing everything. They’re doing science, legal. Are you concerned that you’re discouraging startups that might say, “Oh, ConsenSys is doing this. ConsenSys is Amazon.” You know, you guys are the best. We’re not going to do this.

JL: Could you give an example?

CCN: I actually did an interview with a company called Orvium which runs on Ethereum and kind of competes with what you guys do in your Conscience project. I think that’d be a good example of a space where you’d be competing with a startup in the ecosystem.

JL: There’s so much you could do in the science phase. Conscience is about scientific journals and how the publishing or perish model is broken and kind of fix that. It’s a really amateur space and if you’re not talented, and have conviction in your ideas, such that if you hear about some other project that’s sort of in the internet and you shut down, you probably shouldn’t pursue your project. Basically, this technology is going to enable a different form of trust.

We’re moving from a world of rule systems that are constructed by people, and implemented by people in top-down command and control systems some are well. In some cases through oligarchy, sometimes through monarchy, sometimes through elected officials, to a world in which we have automated trust.

We can enter into agreements or create laws and those things are guaranteed to execute. It’s going to take a long time to build a mature well-functioning systems using that, but it’s a paradigm shift. In the whole world economic, social and political systems over the next few decades are going to be affected by that paradigm shift and trust and execution of all systems. There’s a lot of room for startups, too.

CCN: Can you talk a little bit about how your accelerator program compares to the hub and spoke model you’ve set up?

JL: Our accelerator is only taking 5%. We started as a hybrid company. We started as something between a Microsoft-Apple-Google and the VC and we were really much closer to a software company. It was just like people that we hired that were employees and building out their projects that we owned.

Normally, ConsenSys would own 100% of the project, right? But we wanted to change that model. We wanted to create a situation where the people who were building it stayed ConsenSys employees.

But had the potential to own basically, ConsenSys would retain in the early cases 50% of the project and we would enable a cap table where people were founders of the project or contributing heavily to the project, they had the potential to spin the project out and in this world where we can do token launches, it’s attractive to spin projects.

To give them their own independent legal entity and create a network business model. In that situation, instead of just being an employee of the company, people have the potential to stay at ConsenSys in some form, but still, own a big chunk of it.

CCN: Internally, how does that work? Do founders come to you with a project or do they start off as employees at ConsenSys and come up with an idea?

JL: Many projects were created by me or us, in-house. We hired people to build out those projects. Some people were already employees at ConsenSys, they came up with the ideas. We brought in some projects early on. MetaMask was a project that Baron Davis was doing, Boardroom was a project that Nick Dodson was doing but they’ve been with us for three years or something like that. They’re fully ConsenSys projects yet still if those projects span out of ConsenSys those people will have a big chunk of that.

CCN: China has become such a big part of the cryptocurrency market. What is ConsenSys strategy in China?

JL: We have concrete plans for Hong Kong. I don’t know if you were aware but in Xiongan, we signed an agreement in this special economic in China near Beijing to sort of take the pressure off Beijing for the next few decades. We had a press conference a little while ago, sign an agreement with them to essentially drive some thought.

CCN: Was it a PR event?

JL: No, real work is getting done. I don’t know that they’re going to let us write software for their infrastructure there but we have a bunch of people who are helping drive thought leadership for the Smart City project there.

There are other things that we can’t talk about with large mainland companies that were close to signing. We are in the middle of establishing a presence there. We have I think, 19 people at ConsenSys who are not situated there but are of Chinese nationality or have significant expertise working in the country and that’s sort of our China strategy. We will have a presence, we sort of do but yeah, we’ll have some real presence.

CCN: Have any Chinese projects joined the ConsenSys group?

JL: So far, no. I’ve spoken to a few and there will probably be a few that do join especially because we’re able to hire people there. Currently, we can’t legally hire there, but we’re getting very close to being able to do that.

CCN: In what areas do you see the biggest, the best potential for your technology to disrupt? Then you talked about something earlier, you know, the supply chain, clearly the financial services industry, that’s where it all began.

JL: It’s really anywhere that the different companies are people who don’t trust one another, wants to enhance trust in their interactions. Maybe I don’t even know somebody and I want to do a transaction with them.

I could do that on the blockchain and I could be comfortable that unless mathematics is wrong with unbelievably-high certainty of that transaction with an entity that I don’t know is guaranteed to execute properly.

It also has serious implications for reducing or eliminating counterparty risk. Situations where companies compete with one another but want to do something collaboratively need shared trustworthy infrastructure, so for fixed income reference data systems, instead of a whole lot of companies in the finance industry fixing data from prospectuses that they’ve bought from Bloomberg or Thomson Reuters, and maintaining their own teams to do that, we actually have a team called TruSet that’s standing up the system to enable collaboration, fixing data, entering new data, and being incentivized to share it and check it.

There’s more: finance & supply chain when you have lots of different actors who can all share the same network. It also has applications in the music industry. For instance, there was a project called The Global Repertoire Database around 2008, I think about seven or eight million pounds were burned by major players in the music industry on this failed project.

Essentially, they were trying to create a database that could be shared by the entire music industry. They went quite a ways down the road but eventually couldn’t figure out who would own the IP and who would load the machines with sets and the project fell apart for that reason.

Now we’re seeing many different consortium being formed because with blockchains you essentially get rid of your infrastructure issues on a public blockchain, all the infrastructure is just there and you’re just reading the front-end and you can deploy the back-end to the public blockchain and the transactions validators of the miners take care of running the infrastructure, they get paid for that.

For a consortium, you can keep it private and permissioned and you can essentially have everybody and nobody on it. You can set up policies around governance, but you can run it in a cloud. We lifted the team that built to version one, two, and three of blockchain as a service for IBM.

They built it for Fabric, and they’ve now built a version four, partnered with AWS for Ethereum. In the free tier, they have about 1,000 consortia that are running stuff for setting up their systems. It’s only been live for about five months. But it’s some example of how companies want to collaborate or even companies want to put some of their internal infrastructure on a blockchain so different departments can collaborate more effectively with more trustworthiness and/or transparency. This system enables very simple deployment of blockchain systems on cloud.

CCN: Can you talk a little bit more about Fabric?

JL: Fabric does facilitate collaboration and you can use it in a corporate context. You can use it in a consortium context. You can’t really use it as a public blockchain because it’s missing crypto-economics.

It’s missing the ability to incentivize lots of different actors around the world to share their resources and make it a very decentralized system. When you use something like IBM’s Fabric, you pretty much have centralized control over that system, which may result in more collaboration and more trust.

However, it’s still not the full decentralized trusted a real blockchain support. But we have a project called Viant which is doing some major work in the space. I’m allowed to mention GlaxoSmithKline, and there’s another major consumer goods company, a major energy company, and they’re building a supply chain using Ethereum technology.

They can do that either on the public blockchain or they can set up private permissioned versions of that. They also have provenance project that we did with the World Food Programme worldwide. It’s basically a project where tuna was tracked from being landed on the boat, tagged, achieving its paperwork when it’s brought on shore. The next phase will track temperature.

If it falls below a certain temperature in the refrigerated airplane, or in the truck then a certain alert would go off on the app that we have, and it would be deemed perhaps an unsafe piece of fish. We got that working and demonstrated that.

CCN: What’s the advantage to performing that function on the blockchain?

JL: The reason you want to do that on a blockchain is that you’ve got lots of different companies and lots of different actors, some of whom are competing.

They’re all part of a network that everybody needs to trust, so there shouldn’t be an opportunity to basically cheat the system. Still, at the edges, one could potentially enter bad data into the system. But we’re really pushing the trust of the potential improper manipulations out into the periphery and maybe try to control that even better in the future enables us to build more trust into these systems.

CCN: Can you describe your current relationship with Ethereum and Vitalik in particular?

JL: We have hot debates all the way through.

CCN: Do you see an impact from these conflicts on ConsenSys?

JL: We’re just leaving phase one of the blockchain experience. Phase one is basically a whole lot of projects getting together and building what I call layer one blockchains — basically, blockchains where all the actors on the system have to hold all the data and have to process all the transactions and there are some optimizations that can be made there.

We need to change and the truth of the matter is the current system is over-secured. We need to get to architectures that are much more scalable in terms of number of transactions per second. On the internet, we’ve gotten to millions of transactions per second for certain kinds of shared database architectures such as Facebook. But we don’t have trust, Mark performs lots of experiments on us. We can’t really stop that and we don’t really know exactly what they’re doing.

It’s a slot machine, where we’re really being manipulated into being a Facebook product. We’ve thrown away the millions of transactions per second replaced it with 20 transactions per second on layer one Ethereum, but we now have a trustworthy foundation, we can start to rebuild scalability. As we move from phase one in this ecosystem to phase two, we’re seeing layer two technologies that enable hundreds or thousands of transactions per second, they’re not as decentralized as layer one Ethereum.

We have technologies like state channels and Plasma along with other kinds of side chain mechanisms. There are many of them right now that are coming online being explored by game companies and exchanges, etc. and that will enable us in this next phase to have very significant applications that consumers are interested in, traders are interested in and link them into Ethereum.

That linkage to Ethereum will ensure that no, but if one of these layer two systems that are a little bit less trustworthy, if they fall over foot, for whatever reason, or if the people who are running them are corrupt people will, without the permission of the people running these layer two systems will be able to pull their tokens to safety and not lose any money. That’s an exciting new architecture for our ecosystem.

Proof of Stake and Sharding of layer one is where we get scalability built into layer one. We’re still going to have layer two solutions, we’re still going to need them.

So what is our relationship to the Ethereum Foundation? Still very warm… Well, it wasn’t warm for a little while. There was a previous executive director that didn’t enable great interaction between our company and the Ethereum Foundation, whereas the Ethereum Foundation is much more open now and much more collaborative.

They’re publishing everything and although the core developer meetings have been in public forever after the first year or so. We have people at those meetings all the time. We have people attending events in Taiwan, and various other places. We have our own 40 protocol engineers at ConsenSys. We are helping to build out Casper. We have an early Plasma team so we’re not doing a huge amount of work on Plasma right now.

CCN: So you would say it’s good?

JL: We see them at different places around the world. The Ethereum ecosystem in my opinion, is pretty warm and friendly. It’s a lot of people who do like each other and who spend time together around the world. I was just at Burning Man last week and spent a lot of the time with people from other projects.

Vitalik has not gone to the Burning Man so far. It’ll be cool if he did, but it’s still a group of people that are very communicative and collaborative. Ethereum wasn’t formed in the same way that Bitcoin was. Bitcoin was essentially a response by crypto-anarchists to concerns about the monetary infrastructure and centralization through the financial industry and governments, etc.

Since it was proposed as an alternative money system, it had that money and trading ethos, Ethereum came along because we felt that people should build everything on this new decentralized database technology, not just a narrow money system. We’ve always been a developer community and open source developer communities are traditionally pretty open and collaborative so it stayed that way.

CCN: One of the questions I have is I could see some conflict coming up if you guys have a killer app that’s really enterprise facing. Let’s say it’s for the DTCC and you guys start really pushing for Proof of Stake and Sharding because you need it. Do you see any issue arising there between ConsenSys and the Ethereum Foundation over the speed and method of scaling?

JL: I don’t think so. It’s all about coming into consensus at the end of the day, coming into consensus every 15 seconds now, every four or five seconds soon when the next version of the consensus algorithms comes to prominence. If you’re not coming into consensus, with the other Ethereum clients, you’re not Ethereum.

The Parity team and the Go team have a new client that we’re building. We were involved in a few clients such as the early Java client that Roman Mandeleil and his team build, he was a ConsenSys member. If these clients don’t work out their issues and come into consensus on the core aspects of the protocol, then it’s not Ethereum.

Ethereum is partially defined by the Ethereum Foundation, but it really is defined by the lots of others. If you look at the reduction in issuance debate, there are lots of people with different agendas who weighed in on that debate. There were different signaling mechanisms, different voting mechanisms, and the same thing happened with the DAO (decentralized autonomous organization).

Lots of different signaling, voting, and other mechanisms and so there are lots of different actors that have to agree on things or the project is screwed, because you can forge it and if the majority dislikes what developers are trying to force on them then Ethereum doesn’t exist as it is anymore. We really do have to come to consensus at a human level in order to continue to come to consensus every few seconds on the blockchain.

If we want scalability, we can build it on our own in layer two.

CCN: You said earlier to give you that scalability but it doesn’t give quite the level of trust that the layer does. Why?

JL: You could set up a Proof of Authority blockchain where there’s a single entity that creates the blocks and tells everybody what the state transitions of the system are. What it would do is checkpoint the system every block or every few blocks into public Ethereum and by checkpointing the system people could essentially do the following:

Let’s say it’s a game on this proof of authority blockchain with a game company in control of the blockchain, they link it in through a technology called Plasma and they issue crypto collectibles, cards, digitally scarce swords, or other things.

Those things can trade on a market. I could buy one of those. I could move it into the game from public Ethereum. I could pull it out of the game, not because I’m worried or anything, but maybe because I want to move it into an exchange either on a paradigm or on a different Plasma system, so I can sell it. It just gives companies or entities the ability to run higher transaction throughput applications. It gives people the comfort that nobody can steal their value tokens, whether they’re fungible tokens or non-fungible tokens.

CCN: You wouldn’t consider off-chain scaling ideal, or would you?

JL: It’s where we have to go next, figuring out on-chain or layer one scaling is complicated. I think two projects are going to get there in radically different ways. It’s very limited on what you can do on Bitcoin but I think Ethereum is going to get there. DFINITY is working on virtually the same mechanisms. Cardano is probably going to get there after the first two.

CCN: What about Zilliqa?

JL: Maybe, yeah. I know a little less about that project. They’re looking at charting differently, but it’s incredibly hard to stand up a blockchain ecosystem.

CCN: How do you finance or all these different projects? Do you do it through ICOs or is it more of a traditional financing model?

JL: Yeah. We have many lines of business. Our academy makes money. We’ve got a Coursera course that I probably should have said something about when I was introducing. It went live yesterday. For non-technical people, $99 for a course. We’ve been selling ebooks and lots of different education around the world.

We have a security audit team, one of the top teams in the world. They turn away 99% of the work that comes in because we can’t grow that team fast enough. They make a tremendous amount of money auditing smart contracts. We have a consulting group that makes many millions of dollars around the world on various different projects.

CCN: Is that mostly with governments?

JL: It’s mostly with companies. We’ve done government work in Dubai, military work in Singapore, and other work that I cannot talk about with South African Reserve Bank.

We’re managers of the European Union Blockchain observatory. It’s a contract that we won which enables us to work with all the member nations write white papers and drive leadership.

Other business lines include token foundry. We are able to tokenize and launch our own internal projects and we do that for third parties as well. If it’s a significantly lucrative business and when we do tokenize our own projects, some of those projects have brought in a large amount of revenue for consumer utility purposes. A large amount can be in the tens or hundreds of millions of dollars.

CCN: How does market volatility affect your ability to finance these projects?

JL: It’s just natural. We see it in the legacy financial world. We see overshoots and directions, people operate on fear and greed cycles and when you see something exciting, you want to pile in for various reasons. Most people pile in just to make money and don’t understand what’s going on.

We’ve seen big overshoots, we’ve seen five or six of those since Bitcoin started. One seems astonishing and unsustainable and it inevitably corrects the first one was at about $31 or $32 and bitcoin corrected it down to $2, and everybody thinks it’s all over and then it goes up to $200 or something, then up to $1,000 or something and then up to $20,000. The beauty of all this is that it brings attention to the ecosystem.

It brings value into the ecosystem in the form of money, in the form of entrepreneurial talent, in the form of technical talent, in the form of cybersecurity talent and each one of these surges in place causes an enormous amount of activity.

Companies form, companies grow faster, more consumers start paying attention and using these systems and then it overshoots. There’s a correction but during the corrections, there are so many more people who are building fundamental infrastructure which causes basically the next event.

CCN: Of all of your projects, which one do you think is going to be the biggest?

JL: I think several of them. Two that are top of mind that are societally important are open law enabling legally enforceable hybrid blockchain based agreements. You can basically have an agreement. People can cryptographically sign it and companies can cryptographically sign it.

The entirety of the agreement is on the blockchain, it’s not a piece of paper that you can lose or an email that you can lose. You can escrow money into the agreement itself. You can send data into the agreement itself, you can have the agreement, a programmatic clause act when certain conditions are met.

Maybe payout on a purchase agreement or an employment agreement. That’s going to be really transformational. We’re starting to use open law in NDAs in our company and we just partnered with a company called Rocket Lawyer to enable their 35 million customers to sign agreements on blockchain infrastructure.

Instead of it being stored on Rocket Lawyer’s servers, the agreements can be partially or completely stored on ethereum and arbitration systems that we’re building can be brought to bear and we can build a tokenized ecosystem around that.

If you’re doing an agreement on open law, it can either be fully transparent on the blockchain or in decentralized storage, or you can sign something called a digest (a hash) of the agreement. A digest is basically you running the text of the agreement through a program that turns it into to a unique string that doesn’t make any sense to anybody but it sort of verifies that that agreement as it existed at a certain time.

The counterparties to that agreement can sign the digest just a long alphanumeric string and by signing that long alphanumeric string, each one can prove that they signed the agreement just like a signature, but it enables the agreement to be private.

That’s one potentially societally important project. Probably commercially interesting as well. Civil is another project that’s doing a token launch very soon.

Civil is a platform for sustainable, ethical journalism. It has a constitution, it has lots of newsrooms that companies have already joined, lots of professional journalists and fifty topically focused newsrooms.

Vivian Schiller actually left NPR to run the Civil foundation. Associated Press is our partner, and there’s another major partner that we’re going to announce in a few days and a few other major journalistic institutions may get involved as investors and/or partners.

The partner means that they either use the ecosystem or they can use the infrastructure. With Associated Press, they’re enabling licensing of all of their content to all of the newsrooms. Most of it for free initially and also the infrastructure will enable AP to track licensing better than we are able to, it’s pretty exciting stuff.

Note: This interview is part of the CCN Podcast. The podcast and this interview are also available on iTunes, TuneIn, Stitcher, Google Play Music, Spotify, SoundCloud, YouTube or wherever you get your podcasts. Make sure you rate and subscribe!

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