Ethereum: the next thing you need to know in digital currencies (Premium)

You understand bitcoin, right? And you’re pretty up to speed on blockchain, especially after reading Finadium’s 2015 research report and attending the Finadium 2016 Conference. Now its time to get up to speed on Ethereum for advanced smart contracts. Here’s why.

The reason why we should care about Ethereum is that because it can manage smart contracts in a more complete way than bitcoin, it is a possible technology to capture complex collateralized trades and have an automatic payment occur. The idea of a smart contract is that something happens that then automatically releases a payment. A January 2016 article in American Banker had a good summary of the smart contract functionality:

The principal feature of smart contracts is the risk reduction available through nondiscriminatory execution, which for some, will lead to greater economic benefits. Put another way, it’s a smart contract’s lack of a central counterparty agent that will enable these contracts to service markets with greater efficiency. And much like bitcoin itself, smart-contract technology can unlock untapped markets by circumventing existing regulatory infrastructures. This could lower the costs for a subset of our most common financial transactions.

According to Garry Golden, a leading thinker in this space, smart contracts could be used for asset sales, asset sharing or any credential management. For OTC derivatives, that means embedding ISDA CSA agreements in the contract itself where an automated transfer of collateral occurs. That’s all on an open, blockchain-style database.
The basic principals of Ethereum are a lot like bitcoin to the average person:

  • Peer to peer trading
  • A proprietary blockchain
  • A platform for decentralized applications

Proponents argue though that Ethereum is not just another bitcoin, or Bitcoin 2.0, but its own thing. There is a different currency unit, the Ether, that can be bought and sold like bitcoin. For our purposes we aren’t convinced that the concepts are distinct, but we see that the smart contract is unique.
The New York Times ran a piece recently that discussed how the financial industry is looking at the potential of Ethereum. According to the Times:

JPMorgan, for instance, has created a specific tool, Masala, that allows some of its internal databases to interact with an Ethereum blockchain.

Michael Novogratz, a former top executive at the private equity firm Fortress Investing Group, who helped lead Fortress’s investment in Bitcoin, has been looking at Ethereum since he left Fortress last fall… “A lot of the more established players were thinking, ‘It’s still an experiment,’ ” he said. “It feels like in the last two to three months that experiment is at least getting a lot more validation.”

Joseph Lubin has set up ConsenSys, a company based in Brooklyn that has hired over 50 developers to build applications on the Ethereum system, including one that enables music distribution and another that allows for a new kind of financial auditing.

Ethereum won’t be showing up on your doorstep tomorrow like blockchains are, but they are entering the mainstream lexicon and we expect will be part of the ongoing conversation on digital currencies. Now that you’ve got some basic intel, be sure to keep an eye on Ethereum news going forward.

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