On 6/22/21, Bloomberg published a report that Goldman Sachs had began performing transactions on the JP Morgan private blockchain built upon the Ethereum network. This news was met with little fanfare and largely ignored by the crypto media at large due to China mining FUD.
To understand the significance of this event, you need to understand some backstory. First, in 2020, JPM created a new business entity, known as Onyx, to house its blockchain and digital currency efforts. Onyx was created to facilitate round-the-clock cross-border payments and the creation of separate payment rails for central banks that have expressed interest in starting their own currencies. At present, Onyx is performing $1B worth of daily transactions on ETH.
In a 2020 CNBC interview, JPM’s senior executive and Onyx CEO, Umar Farooq, noted that blockchain technology can be viewed from the perspective of the Gartner hype cycle, a model for the adoption of new technologies. Farooq noted: “If you think about blockchain, we are either somewhere in the trough of disillusionment or just beyond that on the hype curve…That’s why at JPMorgan we’ve been relatively quiet about it until we were ready to scale it and commercialize it.”
Following this rationale, in October 2020, JP Morgan performed the first commercial transaction with its eponymous token, the JPMCoin, with little fanfare. The JPMCoin is an ERC20 token build upon the Ethereum blockchain; it is JPMorgan’s internal representation of a digital dollar.
In June 2021, we learned that JPM has recently been focusing their attention on the use of repurchase agreements that utilize smart contracts and a digitized version of the U.S. dollar.
Bloomberg notes that JPMorgan created the new repo market using its version of the Ethereum blockchain, with its first trades in December. It has since gone on to trade more than $1 billion a day through its Onyx blockchain platform. The firm is speaking with more than 10 banking and investing clients about joining the repo network, according to spokeswoman Jessica Francisco. Bank of New York Mellon Corp. served as the custody agent for the trades.
The first Goldman Sachs trade was performed on June 17th 2021 when it swapped a tokenized version of a U.S. Treasury bond for JPMCoin, JPMorgan’s internal representation of a digital dollar, according to Mathew McDermott, global head of digital assets for Goldman’s global markets division. He declined to give the value of the trade but did note that unlike in the traditional repo market, the exact amount of time the banks took to complete the transaction was quantifiable. In this case, it was 3 hours and 5 minutes. McDermott noted that knowing the precise time is a big step up from the current market, as is the way the collateral and cash are interchanged simultaneously and immediately. “We pay interest per the minute,” he said. “We firmly think this will change the nature of the intraday marketplace.”
What is the Repo market?
The repurchase agreement, or “repo,” market is an obscure but important part of the financial system that has drawn increasing attention lately.
On average, $2 trillion to $4 trillion in repurchase agreements – collateralized short-term loans – are traded each day.
Types of Repo Transactions:
A repurchase agreement (repo) is a short-term secured loan: one party sells securities to another and agrees to repurchase those securities later at a higher price. The securities serve as collateral. The difference between the securities’ initial price and their repurchase price is the interest paid on the loan, known as the repo rate.
A reverse repurchase agreement (reverse repo) is the mirror of a repo transaction. In a reverse repo, one party purchases securities and agrees to sell them back for a positive return at a later date, often as soon as the next day. Most repos are overnight, though they can be longer.
The Case for a JPM Repo Market on Ethereum:
Transactions in the $2.4 trillion repo market raise cash overnight or for a few days, but are difficult to arrange within the same trading day. The digitized upgrade of this market provides that ability to JPMorgan, using smart contracts on an Ethereum-based blockchain that allows cash and Treasuries to be returned instantaneously.
Blockchain technology allows rapid execution and settlement of these contracts in a 24/7 manner. The use of ETH is especially significant because it allows for transactions to be completed on a secure network, soon to be even more secure by virtue of the blockchain’s upgrade from proof of work to proof of stake.
The use of side chains and rollups will permit Ethereum’s ability to scale rapidly over the coming year prior to the launch of sharding on Eth 2.0. Specifically, post EIP-1559, the network (including roll ups) will be able to double throughput by up to 2x for a limited amount of time, while gas prices stabilize. Interestingly, data shards also have a similar mechanism where the max data is 2x target. So, rollups will be able to do up to 170,000 TPS in bursts. Please refer to the ETH scalability roadmap for expected TPS throughout Ethereum’s upcoming network upgrades.
Ethereum Market Cap as it expands to Bridge Defi to Fiat Markets:
The market cap of Ethereum is likely to explosively increase if JPM and other big banks continue to use ETH for execution and settlement of smart contracts related to the repo market.
Given the many benefits of blockchain technology for this type of financial transaction, adoption in the market-space can widely be expected to be rapid.
The repo market performs $2 trillion in daily transactions. Let’s assume that JPM and their ETH based chain manage to capture one half of the daily transaction volume in the repo market. That’s $1T in transaction volume traversing the ETH blockchain daily.
For the uninformed, market capitalization is a metric used to understand the current market value of an asset. In the context of cryptocurrencies, crypto market capitalization refers to the present value of the cryptocurrency network. You can calculate the market capitalization of an individual cryptocurrency as well as the industry as a whole.
Crypto market capitalization = supply of crypto assets in circulation x the value of an individual unit.
As of 7/3/21, the global crypto market cap is $1.43T. Ethereum’s current market cap is $259,608,967,080. According to the analytics website, DeFi Llama, the total locked value for defi across all blockchains is 108.5B as of 7/3/21. On the Ethereum blockchain, which holds a disproportionate amount of defi TVL compared to other chains, TVL is equivalent to 83.17B.
As such, if ETH managed to capture one half of the global repo market volume, ETH TVL would theoretically increase to 1.83T. This represents a growth of 9x more than the present value of ETH. As such, a reasonable price for ETH would be $2329 (x9) = $20,961.
Conclusion:
It is hard to be bearish about Ethereum when network growth in the defi space continues at an explosive rate with increasing TVL in institutional based smart contracts which can take advantage of Ethereum’s upcoming improvements in transactional speed and scalability.
As noted, “…at JPMorgan we’ve been relatively quiet about it until we were ready to scale it and commercialize it (sic blockchain technology).”
JP Morgan has indeed been quietly growing their network use to scale. I expect that soon we will see more real world use cases announced as Ethereum helps to bridge the fiat banking system with the crypto-ecosystem. When the world wakes up and begins to realize that a blockchain based world is already here, and set to expand, many people in the traditional fiat banking system will be forced to face the fact that cryptocurrency is not an elaborate Ponzi scheme but is, in fact, the future of finance.
Reference:
https://www.brookings.edu/blog/up-front/2020/01/28/what-is-the-repo-market-and-why-does-it-matter/
https://www.jpmorgan.com/solutions/cib/news/digital-coin-payments
https://explorer.bitquery.io/ethereum/token/0x4e7922604e5b89c10e9bc251d32977a5bcfbf82d
Special thanks to use of the Ethereum Scalability Roadmap courtesy of u/Liberoso:
Disclaimer: I am not a financial advisor and this writing is a piece of crypto journalism and not financial advice. I hodl ether & bitcoin.
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