The Ether Report

by Brett Shear (Co-Founder and President of FiN)

It’s a Sunday and you realize you need to transfer money, but the bank is not cooperative outside of their hours of operations. What if the holidays or late nights no longer got in the way of seamless real-time transactions, even if it’s international? What if financial institutions’ could reduce their costs from execution, clearing, and securities services by over 30% from their current clearinghouse and other intermediary providers? What if Walmart and Chipotle could track each farmed good from the farm to the stores, finding the source of food-related health problems in real-time? These hypotheticals are closer to reality than one might think and being made possible by companies such as ConsenSys, IBM, Microsoft, and blockchain startups on the Ethereum blockchain.

To Sum up Ethereum

The Ethereum blockchain provides a medium for a network of computers to store and transfer information or value securely. It contains a public distributed ledger across the network tracking all the transfers and storage on the blockchain. Computers or nodes participating in the network are incentivized to confirm pending transfers, resulting in a consensus of the information. In addition, ethereum allows for developers to build on an application layer to provide services utilizing the nature of the distributed ledger, including the use of smart contracts. Smart contracts are a coded set of instructions set to execute automatically contingent on certain conditions being met, which can further communicate to trigger another smart contract. The building of applications and use of smart contracts has driven the growth of use cases and real world implications of the Ethereum blockchain.

Ethereum makes process automation and detailed ledger recording possible with its array of developer tools and accumulation of smart contracts. For example, an entire clearing house process can be made up of smart contracts, in which each smart contract would handle a settlement by releasing assets to the appropriate parties only once certain conditions are met. For the food supply chain industry, smart contracts would facilitate digital tracking and storage of all product information (such as temperatures, dates, batch numbers, shipping details) at all levels and each stage of the supply chain. Ether can be transferred to anyone with a public address on the blockchain around the world at any time within about 14 seconds, and soon to be faster with new solutions.

Ether is the Fuel

Ether is a derivative of Ethereum, growing along its coupled blockchain while being expended on the transfer and storage fees within the ecosystem. It can be exchanged for its value as payment, with each transfer being verified and permanently recorded in the distributed ledger. To transfer ether across the blockchain and store information, a small “fee” is paid that is set by the miner. The miner receives this “fee” as a reward for validating transactions.

Ether can be thought of as the “oil” of the Ethereum ecosystem. In society, car drivers pay a certain fee equal to the amount of oil or gas used by their car to drive from point A to point B. The amount of oil needed is a fee to transport the driver from one location to another. The “driver” of Ethereum transfers the “car” which is in the form of ether or a deployed smart contract. For the “car” to be transferred to its destination, a certain amount of ether is expended as a fee to the validator determined by what the validator is willing to accept to confirm the transfer. Basically, Ether is fueling transactions and/or messages (can be in the form of smart contracts) transferred on the ethereum blockchain. At this point, in the Ethereum world, we are not even in the Ford Model T stage. There is so much more potential growth for Ethereum to be used for enterprise applications and numerous use cases.

Although Ether is used to pay for the small fees on transactions, messages, and storage, the total cost of an automated blockchain system is significantly less than the intermediary expenses associated. According to a Columbia journal article, a 2014 study by SWIFT and Oliver Wyman, the banking industry spends between $65–85 billion annually on clearing and settlement. A Santander study suggests that blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance by $15–20 billion per annum by 2022. For the food supply chain industry, food fraud cost $49 billion annually and foodborne illness costs are up to $93.2 billion annually. The financial industry and food supply chain are targeted use cases of blockchains. Ethereum separates itself from the rest of blockchains with its smart contract function and openly creative programming language backed by a strong community of developers. The Ethereum community has built an array of developer tools for enterprises to build blockchain infrastructure and software to interoperate with their systems.

Ether in Enterprise

Ethereum is already being used to build infrastructure for large institutions experimenting and testing blockchain information systems in hopes of being at production grade and used on a large scale. Ethereum has recently launched the Enterprise Ethereum Alliance which will compete with the other private network, or permissioned blockchain services, such as Hyperledger and R3. Moreover, Ethereum has a heavily adopted public blockchain with the potential ability to interoperate the permissioned enterprise blockchains with the public version in the future. This goes beyond the current Bitcoin Blockchain ecosystem and enterprise-servicing permissioned blockchains.

Founding members of Enterprise Ethereum Alliance include Accenture, Banco Santander, BNY Mellon, CME Group, JP Morgan, ConsenSys, Microsoft, IC3 (Cornell’s cryptography research team), Thomson Reuters, UBS, and so on. Basically, all of these companies are testing and beginning to implement the Ethereum blockchain as the infrastructure of their information systems and to automate processes. As these large companies use the Ethereum blockchain within their systems with many transactions’ the fees for each smart contract and transaction will accumulate and create a strong demand for Ether. It is advantageous for firms to build their reconciliation processes, remittance systems, dispute processes, etc. on a blockchain due to the significant decrease in costs by automation of the processes and shared information. Specifically’ the Ethereum blockchain is advantageous to firms because of its suite of developer tools available and potential to interoperate with other private networks and the public chain. The Ethereum blockchain suite of developer tools for enterprises are available from ConsenSys, Block Apps, Microsoft Azure, etc.

Ether in Applications to the Average Consumer

Both the business to consumer and business to business models are being reevaluated because of the disintermediation of businesses and peer-to-peer capabilities of decentralized applications. A decentralized application is a project that executes a chain of accumulated smart contracts that automate the operations or backend processes of a service. For example, Businesses like Amazon Cloud will have their business to consumer model costs undercut by peer-to-peer exchanges that decentralize computing power utilizing Ethereum, such as Golem. In addition, gambling sites will be undercut with an automated and decentralized exchange called prediction markets build on Ethereum, such as GNOSIS or Augur. Another example is VaribL that has built an options exchange for digital assets with an automated execution process, clearing process, and securities services with the use of smart contracts. The full spectrum of developer tools available allows developers to utilize blockchain technology in just about any industry. There are continuously more projects, or decentralized applications, being build to affect different industries looking for mass adoption, while each one expends ether on their automated processes and increases its demand.

Ether in the Government

Ethereum has use cases to provide governments more transparent, real-time, and auditable information. Regulators can be slow to catch fraud and take preventative measures to stop unethical behavior. A shared distributed ledger with access given to regulators to monitor certain business transactions would detect fraud in real-time. Also, the permanent record on the blockchain and validation procedures of the ledger would defer fraud to virtually a level of zero risks. As Governments interact and transact by infiltrating blockchain infrastructure it will add to the use of large amounts of Ether. The Chamber of Digital Commerce has already partnered with the Structure Finance Industry Group (SFIG), to bring blockchain to securitization. In addition, Dubai aims to have an entire city-wide private blockchain network built on Ethereum by 2020.

Long Term

This long-term investment is betting on the success of enterprise adoption of private networks and blockchain infrastructure, decentralized applications developed for mass adoption, and government adoption of Ethereum. In the case there is the success in merging the enterprise blockchains with the public Ethereum blockchain, Ethereum could become the standard protocol for blockchains like the World Wide Web or the TCP/IP of the internet.

So buy? Yes, buy, because the many projects being created on the Ethereum protocol are revolutionizing industries through disintermediation, low-cost business models, and the highest possible security. In addition, many enterprises that have yet to run their massive systems on the Ethereum blockchain are in the experimenting phase. With the success of lower costs, shared visibility, permanent and potentially real-time audited transactions, businesses will run their millions of transactions/messages on Ethereum. This all leads to an increase in the demand of Ether because it is the oil that fuels the ecosystem.

We all know Economics 101… ↑ Demand = ↑ Price

Recent Updates to Ether:

Bitcoin projects have been switching over to an Ethereum based platform such as Storj (one of Bitcoin’s killer Dapps) and the web browser Brave. The recent debates and publicly exposed scaling issues have led to an uneasy Bitcoin community and could increase adoption of the Ethereum blockchain.

Originally published at The Shear Report.


Originally published at brettshear.com on March 26, 2017.