Ethereum is one of those projects that has enormous implications for finance but is not yet at the point of influencing the industry. It may be getting closer, however, for Ethereum is pitched by its backers as a better, more secure and more powerful version of Bitcoin, one that is designed to recognize smart contracts, thus setting the stage for lots of secure, peer-to-peer transactions.
The implications for financial institutions, not just their back-office operations but their very existence as intermediaries, are huge – but it’s hard to really quantify today. But Ethereum is also something worth keeping an eye on: in a few short years, it may well be powering your business – or putting you out of business.
Ethereum is a decentralized crypto-currency platform that has emerged as a rival to Bitcoin. It is distinguished from Bitcoin by having developed a blockchain that incorporates smart contracts.
Ethereum is not yet being used commercially – its founders have a sometimes hostile view of banks – but the technology is getting close, and will be embedded in many functions within a few years, predicts Joseph Lubin, a co-founder of Ethereum who now runs a business, ConsenSys, that develops apps to be used on top of it.
If Ethereum meets even some of its potential, it could become the blockchain underpinning a lot of transactions and commercial uses. Lubin likens it to a new internet, but not just with a single Ethereum public blockchain operating but with many, each using privacy mechanisms “that will enable Ethererum to become a compute infrastructure that companies can trust.”
Lubin said: “The World Wide Web was invented in 1990 but it didn’t gain consumer traction until 2000. We’ll see that with blockchain, but today it’s not scalable enough or trusted enough.” That is why in addition to public blockchain initiatives such as Ethereum and Bitcoin, there are many private blockchains being established.
Public versus commercially private
Lubin argues, however, that companies or governments will want to avail themselves of public blockchains too, because of the scale they will be able to bring. For the short term, companies don’t need such global scale for their own uses. “Many organizations are building on that assumption, but they may find themselves painted into a corner in a few years from now,” Lubin said, speaking at a seminar organized by SIM University in March.
Lubin was born in Canada, studied robotics at Princeton University, and entered the hedge funds world as a software engineer. Things got more interesting in 2008, when “Satoshi Nakamoto” published his Bitcoin software allowing for a decentralized system in which validation and decision-making was done through consensus, and kept honest so long as hackers or thieves were fewer than half of the participants.
Ethereum was proposed in 2013 by a young Russian programmer, Vitalik Buterin, who wanted to develop a platform to support new crypto-currencies and applications on a single transaction ledger. Buterin, a Bitcoin programmer, disliked Bitcoin’s limits on the number of units that could be mined and other aspects of its design that slowed down its computing power. He realized this meant Bitcoin would hit a ceiling on scalability of use. It would be too slow or too niche.
In 2014, Lubin joined Ethereum Switzerland, a company set up to develop the software to realize Buterlin’s vision; this was later converted to the non-profit Ethereum Foundation. Lubin was COO before setting up ConsenSys in Brooklyn, New York, to develop apps for the emerging platform.
The vision behind Ethereum was to create a “virtual machine” or a “global computer” that would open it up from a few specialists to millions of programmers to use it for all kinds of things. This is where Lubin sits: he wants to use Ethereum and its ether currency (ETH) to solve specific problems.
Fork in the road
He says Ethereum already protects $1.5 billion worth of projects, but this is just the beginning. “The value of a public, permissionless platform [that is, anyone can build apps on it] is that we solve the hardest problems, take that infrastructure, simplify the assumptions, increase performance, and create systems that operate with features that enterprises need,” Lubin said.
In other words, Ethereum is creating the best governance and cyber-security around blockchain and digital currencies that will become attractive to private companies. Unlike Bitcoin, Ethereum is designed to encourage smart contracts and other applications to be embedded in its blockchain.
Already it has pioneered crowdfunding platforms that have enabled private capital to invest in startups quickly. “A lot of investors can’t put money into companies, because they lack accreditation or they only have $10 to spend,” Lubin said. “Our tool lets huge amounts of capital to reach startups ignored by venture capital; the amount of innovation [supported this way] will be impressive.”
The crowdfunding route has not been smooth, though: in June 2016, the Ethereum crowdfunding platform, called DAO, turned out to have software flaws and it was hacked.
The rancorous debate within the Ethereum community about whether to shut DAO or attempt to get the ether tokens returned led to a ‘hard fork’, in which the software community couldn’t agree and so led to an irreversible split. There are now two Ethereum communities with their own currencies, with a minority that resisted any such retribution of funds clinging to “Ethereum Classic” (or ETC).
Lubin says the next step for Ethereum is to ensure a secure I.T. infrastructure, by moving decentralizing security. “Our current I.T. infrastructures are on-premise, involving firewalls – but these can be breached and then the assets become owned,” he said. “Blockchain infrastructure involves strong cryptographic authorization with respect to every transaction. Strong cryptography is baked in, all the way through.”
That will be a lot for financial institutions to swallow. Even the biggest banks have yet to open their data to third-party cloud servers, let alone to a public, open-sourced blockchain such as Ethereum.
The perfect price-discovery mechanism
But Ethereum’s backers may not care: Lubin calls an I.T. infrastructure that is peer-to-peer “a force for universal disintermediation” and “the perfect price-discovery mechanism”.
He added: “We will see in many industries the value extracted by middlemen shrink, and even disappear.”
Making this easy will be a platform enabling global identities – a public, open-sourced version of India’s Aadhar digital I.D., for example. This is another case where Ethereum and Bitcoin fade into the background as enabling infrastructure, and in which people can use the I.D. for all sorts of transactions, registrations or investments.
“Now, our identity is not owned by us,” Lubin said. “It’s owned by governments and by banks and by Mark Zuckerberg, who make all the money on our identities.”
But he predicts decentralized, peer-to-peer platforms will give individuals control over their digital identities. While this is a sunny vision for people, it also enables companies to share digital infrastructure too.
Such uses will propel demand for digital currencies, whether they are issued by a government, by a corporation or by a platform like Ethereum or Bitcoin. Money will transform into digital tokens, representing fiat currencies as well as values for commodities, stocks, bonds, and investment vehicles.