R3, a financial innovation consortium that includes over 50 of the most prominent banks in the world, has placed Ethereum at the top of the list for promising blockchain platforms. R3 recently commissioned Vitalik Buterin, the creator of Ethereum, to write a report about Ethereum design, upcoming technical advancements and applications in private systems. The report, “Ethereum Platform Review – Challenges and Opportunities for Private and Consortium Blockchains,” by Vitalik Buterin, is available online at R3’s website.
The Report
Buterin’s 44-page report provides a comprehensive overview of Ethereum’s overall architecture, technical design, current status, and development roadmap. Ethereum 2.0 is expected to be released in late 2017 and Ethereum 3.0 will be released in late 2018. These labels aren’t filled with much information but show that developers are moving at full speed. Financial applications are the main focus of the report.
The report offers useful guidance to financial institutions that want to create private blockchains using Ethereum technology. Executive summary of Buterin’s Report by R3 Senior Strategy Associate Kathleen Breitman, and Richard Gendal Brown, CTO. The executive summary states that R3 has evaluated cryptographic currencies and ledgers in terms of technical scalability and privacy. It also evaluates the ability to introduce automation into business processes via smart contracts.
Ethereum Platform
“The [Ethereum] platform has many appealing features: Ethereum natively supports Turing complete smart contracts, and the scripting language can be used easily.”
Breitman has written the executive summary. It summarizes the main points from R3’s point of view. Breitman points out that scaling is a key question for distributed ledger solutions to capital markets. Blockchain technologies are still far behind, by orders-of-magnitude, the transaction throughputs of mainstream financial networks. Two solutions are being explored by Ethereum developers to increase the network’s throughput are sharding or state channels.
Transactions
All transactions in current Ethereum (and Bitcoin networks) are replicated by all the nodes. This limits the network’s throughput to one node. A sharded network would have different subnetworks or shards that would allow transactions to be processed only by the subsets of nodes within each shard. State channels – an extension of the Lightning Network concept in Bitcoin would allow transactions to be conducted off-chain between parties directly using the blockchain as a final arbiter in the event of disputes.
Privacy is another important issue. R3 is not concerned about privacy in a crypto-anarchic, libertarian sense. It is more concerned with the privacy requirements of financial markets. Breitman notes that it is a non-negotiable in capital markets that the open interests and all parties are adequately hidden. Buterin points out that privacy schemes are in the Ethereum roadmap. In the meantime, developers of private Ethereum networks have the option to implement privacy-preserving solutions.
Financial Applications
Buterin discusses the financial applications of Ethereum technology. These include blockchain-based processing financial contracts and derivatives, digitization real-world assets and blockchain-based contracts of difference (CFDs), enforced by smart contract, and collateral management. Financial applications can also benefit from some nonfinancial applications such as identity verification. Other important applications combine payment with nonfinancial service. Ethereum smart contracts, for example, could allow the creation of decentralized versions such as Uber and handle the payments without the need to have a company involved.
Conclusion
Brown wrote the second part of R3’s executive summary. He says that Ethereum is a tool for new ways to think about distributed systems and a great prototyping, simulation, and prototyping platform. “As with all new technologies,” extensive analysis and simulation will be necessary.
Brown questions whether it is better to add scalability and privacy to an existing platform than having them built-in from scratch. R3 will continue to investigate which aspects of existing platforms could be used to solve financial services problems, and which should be discarded by R3’s members.