For executives in financial services, blockchain technology is an increasing reality – but it's the safe, nice, kind, where banks or others have a say in who gets to participate, and with a trusted vendor running things.
That’s in contrast to the public networks behind Bitcoin and Ethereum, and a growing number of other protocols. The more decentralized the network, the more radical the lack of a central authority or backstop – and the less likely a bank, insurer or stock market is going to participate.
Over time, however, it is the public blockchains that pose a threat to incumbents of all kinds: tech, finance, sovereign. If the crypto-currencies and related use cases they support ever go mainstream, classic finance could find itself in trouble, regardless of its use of “distributed-ledger lite” technology.
Of these, Ethereum has the largest developer community and remains the de facto challenger to the status quo. This was the protocol co-invented by a then-teenage Russian émigré to Canada named Vitalik Buterin. He remains the poster boy for the technology and the community.
He showed up in Hong Kong last week to brief the Ethereum world on several issues that should be of interest to finance people. And while the attendance at recent blockchain events is waaaaay down on last year, Vitalik – everyone refers to him by his first name – drew over a thousand people to a Kowloon hotel ballroom. He’s still the Ethereum guru.
He is a pixie of a man, super skinny and jangly in a very friendly, earnest way. Vitalik has had to put up with a lot of abuse on Twitter from crypto investors who blame him for their financial woes. He remains a leader because he has never sought to command: he emphasizes the decentralized nature of the community.
Although rich from his ether holdings, he continuously sells down his supply, in contrast to the HODL ethos in crypto. And while financial applications are important to Ethereum, Vitalik is disdainful of speculators: he’s in this to change the world. His lack of greed makes him more dangerous to traditional finance than any Bitcoin punter.
The problem he has in realizing his ambitions is that Ethereum doesn’t work very well.
It’s slow, and clunky, and not able to handle transactions quickly or at volume. Vitalik is trying to change that.
Ethereum shares some characteristics with Bitcoin. It operates on an incentive scheme known as proof of work (see here for more on this). Because every node must authenticate every transaction, it takes a long time to run a hash.
Ethereum brought two innovations. One was how it issued its ether token to the world as a means of raising money and incentivizing the network to use the ether token. This made Ethereum basically the first initial coin offering (ICO). Secondly, it was the first protocol to introduce smart contracts.
By allowing anyone to use this protocol to raise venture capital to fund projects, with smart contracts to dictate who gets paid (or carries out some other function) when for what, Vitalik and co-creators such as Joe Lubin set the foundation for the commercialization of blockchain – with Ethereum as the go-to protocol for this brave new world.
The system’s drawbacks, however, became apparent almost immediately. For almost three years now, Vitalik has led the community towards building “Ethereum 2.0”, which is meant to make the system fast and scalable, so it can handle the volumes required to be a mainstream infrastructure for, say, payments.
Vitalik’s message last week was that the development community is basically done with the first part of this effort, which is to shift Ethereum’s incentive schemes from proof of work to proof of stake (see here for a primer).
Finance is the first blockchain app that will achieve widescale adoption
Of course, this begs the question of whether developers should stick with Ethereum in a proof-of-stake framework, rather than just migrating toward protocols originally designed for proof of stake (such as Cardano and NEO), or as hybrids, such as EOS.
The next two phases of reaching Ethereum 2.0 involve “sharding”, which is a technique (longstanding in computer science) to divvy up the responsibility for validating transactions among nodes, instead of making each node responsible for authenticating each event. This involves both sharding of data, and sharding of smart contracts.
This remains a work in progress. Developers have, however, been working on a project, Eth1.X, meant to provide enough updates to serve as a bridge between the status quo and the envisaged upgrade.
These are “base layer” upgrades; the community is also working on “layer 2” tasks addressing privacy and off-chain activities.
Those are the technical developments. Vitalik also spoke about user pickup in areas such as decentralized exchanges and stablecoins that are proving to be useful to people, and not just to those from the development world.
“Finance is the first blockchain app that will achieve widescale adoption,” Vitalik told his audience. This is because these apps are competing with terrible legacy financial systems. Other blockchain applications for things that have nothing to do with crypto-currencies, such as identity and reputation, are competing in a world where existing services aren’t that bad – they’re just centralized.
So expect a continued push into financial services by the Ethereum community, and a continued effort to take these things mainstream, such as through tie-ups with mobile browsers and smartphone makers such as HTC and Samsung. These partnerships are going to make it much easier and friendly for ordinary people to set up crypto wallets.
Ethereum will forever be associated with the ICO boom and bust of 2017-2018. Only a handful of the projects financed through these token raises are likely to produce anything of use.
New protocols have emerged with hybrid incentive schemes that are already much faster and more scalable. Ethereum has lots of enthusiasts, thanks in part to Vitalik’s noble leadership and grandiose ambitions. But its shift to “2.0”, despite his upbeat demeanor, is not yet accomplished.
In fact, it sounds pretty much the same (at least to a civilian such as your correspondent) as what Vitalik said in a similar talk two years ago. For developers out to change the world, that may not be a long time. For those looking to launch commercial Dapps, though, it might be another story.
It seems fair at this stage to ask not just when Ethereum 2.0 will be ready, but if.
Will a truly decentralized, public blockchain will ever pose a viable challenge to “centralized” (traditional) finance or other exploitative incumbencies. Or...if one does achieve this, will it be based on Ethereum?