The start of 2017 has seen the rise of the Ethereum blockchain platform and the advancement of key use cases for distributed ledgers in banking. Major players’ growing contribution to the blockchain landscape is a step in the right direction.
There is growing acceptance that distributed ledger technology will cause significant changes in the financial services industry. It will bring efficiencies to the market in the long term by replacing or improving many existing processes, including global interbank settlement costs and secure recordkeeping. With more and more financial institutions evaluating and prototyping uses of this technology, 2017 will see value emerge across the entire industry.
Distributed database technology company R3 is helping lead the push. In January 2016, R3 and 11 banks conducted their first distributed ledger experiment using the Ethereum blockchain. Since then, R3 has tested seven more blockchains with over 40 different banks. In addition, R3 recently conducted extensive research on how Ethereum could be integrated by large banks to reduce friction and costs.
Now JPMorgan Chase, Microsoft, Intel, Santander, ING, and other organizations have teamed up to form the Enterprise Ethereum Alliance, in order to develop standards and technology to make it easier for companies to use Ethereum. The alliance is expected to enhance the privacy, security, and scalability of Ethereum, making it better suited to business applications.
Meanwhile, a new Ethereum-based banking platform BABB is expected to launch in the UK imminently. BABB will use Ethereum blockchain and operate on a decentralized information model to minimize costs while maximizing data reliability and security. In this model, customer data will be encrypted and stored securely on the blockchain, with the permissions for who can access or use it entirely controlled by the customer.
So why is Ethereum proving popular? Its attractiveness is due to its public nature and transaction security, as public blockchains are rigorously tested by being active or live in the market. Similar to Bitcoin, Ethereum is a distributed consensus ledger structured as a blockchain. It has its own token or cryptocurrency (ether) created by mining, as well as its own protocol, running on internet nodes using a proof-of-work consensus mechanism.
However, while bitcoins are designed specifically to be a cryptocurrency to enable payments between addresses, ethers are created to run peer-to-peer contracts. Both bitcoins and ethers are held in blocks, and both originate when blocks are created as rewards for miners. But whereas Bitcoin blocks are created in about 10 minutes, Ethereum blocks are created every 12 seconds. As a result, Ethereum is likely to gain traction quickly in financial services, particularly banking.
The transition from vision and hypothesis to application and execution signifies the next major step towards using distributed ledgers to transform how institutions interact, report, and trade with each other in financial markets. Support for Ethereum (and blockchain technology in general) will grow rapidly over the next few years, and adoption will increase as banks update their solutions to take advantage of the blockchain opportunity.
By Resham Karira, Retail Banking Analyst