Ethereum holds a top position among the promising blockchain platforms being investigated by R3, the financial innovation consortium that includes more than 50 of the world’s leading banks. Recently R3 commissioned Ethereum creator Vitalik Buterin to write a report on Ethereum design, upcoming technical developments and applications in private systems. Buterin’s report, titled “Ethereum: Platform Review – Opportunities and Challenges for Private and Consortium Blockchains,” is online on R3’s website.
Buterin’s 44-page report gives a detailed overview of Ethereum’s overall architecture and technical design, current status and development roadmap. Ethereum 2.0 is expected in late 2017 and Ethereum 3.0 in late 2018. These labels don’t have much information attached, but indicate that the developers are pushing ahead at full speed. The report has a special focus on financial applications. In particular, the report provides useful directions to financial firms intending to build private blockchains with Ethereum technology.
R3 Senior Strategy Associate Kathleen Breitman and CTO Richard Gendal Brown wrote an executive summary of Buterin’s report. “In R3’s assessment of cryptographic currencies and ledgers, we evaluate each solution in terms of technical scalability, privacy and the ability to introduce automation into business processes through smart contracts,” notes the executive summary. “There are many attractive features of the [Ethereum] platform: Ethereum natively supports Turing-complete smart contracts and the scripting language is user-friendly.”
The first part of the executive summary, written by Breitman, summarizes the main points of Buterin’s text from R3’s perspective. Breitman notes that scalability is a key outstanding question for distributed ledger solutions in capital markets, and blockchain technologies are still very much behind, by orders of magnitude, the transaction throughput of mainstream financial networks. Ethereum developers are exploring two solutions to enhance the network’s throughput: sharding and state channels.
In current Ethereum (and Bitcoin) networks, all transactions are replicated by all nodes, which limits the throughput of the entire network to that of one single node. A sharded network would be partitioned into different subnetworks, or shards, with transactions processed only by the subset of nodes in a shard. State channels ‒ a generalization of the Lightning Network concept in Bitcoin ‒ would permit conduct of most transactions off-chain, between parties directly, using the blockchain only as a kind of final arbiter in case of disputes.
Privacy is another important issue. R3 is not concerned with privacy in the libertarian, crypto-anarchic sense, but with the standard privacy requirements of financial markets. “In capital markets, it’s non-negotiable that the open interests of all parties are adequately concealed,” notes Breitman. Buterin notes that implementing privacy schemes is in the Ethereum roadmap, and in the meantime the developers of private Ethereum networks can go ahead and implement custom privacy-preserving solutions.
Buterin outlines the financial applications of Ethereum technology to use cases including blockchain-based processing of financial contracts and derivatives, other financial instruments on the blockchain, digitization of real-world assets, blockchain-based contracts for difference (CFDs) enforced by smart contracts, and collateral management. Some nonfinancial applications, such as identity verification, are useful in financial applications. Other important applications combine payments with nonfinancial services. For example, Ethereum smart contracts could permit creating decentralized versions of services such as Uber and handling the payments without the need for a company in the middle.
The second part of the executive summary, written by Brown, conveys R3’s point of view. “We view Ethereum as a guide for new ways of thinking about distributed systems, as well as an excellent prototyping and simulation platform,” he says. “As with all new technologies, extensive analysis and simulation will be required.”
Brown questions the suitability of adding scalability, privacy and business logic to an existing platform instead of having those built-in from the start. He says that R3 will continue to explore which aspects of existing platforms can inspire solutions to financial services problems and which aspects should be considered as not appropriate for R3’s members.