ETHEREUM

While the Bitcoin scalability issue continues to resolve, Ethereum, an alternative digital currency technology, has gained quite a bit of interest and, in fact, traction over the latter half of 2015 and so far in 2016.

Ethereum provides a digital currency token and application-foundational blockchain technology, similar to the Bitcoin scheme. The key difference between the two, however, is that Ethereum was developed from the ground up to focus on smart contracts, whereas Bitcoin was developed to focus on a peer-to-peer digital cash. Ethereum allows “scripting”, or enacting snippets of computer code for various purposes (much like the everyday computer programs we use), a provision which was initially allowed in Bitcoin but disabled during early testing for security reasons. Smart contracts are snippets of computer code or “scripts” that facilitate, verify, or enforce the negotiation or performance of a contact.

Background

Ethereum was proposed by Vitalik Buterin in late 2013. The Ethereum Foundation, primarily responsible for facilitating and funding Ethereum development, raised an estimated $18.5 million (approximately 32,000 bitcoins at the time) in exchange for about 60 million ether (the currency unit of the Ethereum platform, also known as ETH) in a 42-day crowdsale. Because of the attention that surrounded the technology initially and the time it took to finally launch as of July 2015, some ecosystem observers became dismissive of its potential and this became the general attitude of the ecosystem. However, given the increasing number of entrepreneurs building applications on top of Ethereum in recent months and its resurgence in discussions we and other industry members have had, attention to it must be renewed.

Challenges

Since the launch of Ethereum, there have been concerns about the Ethereum Foundation as an organization in addition to the technology’s scalability (much akin to Bitcoin’s scalability issue).

The Ethereum Foundation raised $18.5 million worth of bitcoin in a highly successful crowd sale but suffered a loss of $9 million per the decline of bitcoin price. Foundation expenses peaked at over €400,000 per month, spent on a combination of development funding, communications services, administrative costs, and security audits. The Foundation has been able to cut down on administrative costs by consolidating their multiple legal entities and reducing office rent, bringing expenses down to now €175,000 per month.

Ethereum recently launched Homestead, the second major version of the Ethereum platform, which includes several protocol changes and a networking change. The Ethereum team will now focus on the development of Serenity, the next version of the Ethereum protocol, which will include powerful software abstraction features: the Casper consensus algorithm (hybrid of proof-of-work and proof-of-stake, i.e., improved security) and basic scaffolding that will allow for the development of scalability features over time with minimal disruption to the platform’s services.

Ether

Ether, the digital token-currency of Ethereum, has become the second largest digital currency by market capitalization, behind bitcoin. Recently, ether’s overall market cap eclipsed a $1 billion threshold, which has only been achieved by one other digital currency, Bitcoin. Just before that, earlier this month, Ether’s market cap climbed above $600 million for the first time, surpassing the combined market cap of alternative digital currency veterans Ripple and Litecoin (the now 3rd and 4th largest digital currencies by market cap, long time 2nd and 3rd), up from its usual market cap of around $450 million.

Ether price has recently reached new highs partly driven by public interest generated from a Microsoft partnership and recruitment interest from Thomson Reuters. Microsoft has included the Ethereum startup BlockApps, which provides Ethereum blockchain software for enterprises, into its Azure Blockchain-as-a-Service marketplace (Azure is Microsoft’s open, flexible, enterprise-grade cloud computing platform). The company fits in with Microsoft’s goal of enabling enterprises and developers to quickly deploy a blockchain environment on Azure. Thomson Reuters is in search for a talented blockchain developer, who is well-versed in the Ethereum distributed ledger technology and can design and implement complex distributed ledger solutions for the company, an additional sign of Ethereum’s growing legitimacy.

Ethereum In Action

Pantera has always been ledger-agnostic when evaluating blockchain investments and has been monitoring Ethereum since the beginning. Before taking it seriously, we were waiting for the technology to gain legitimate traction and to see if it could actually be implemented in compelling use-cases. A big indicator of progress to us was when some of our own portfolio companies began incorporating Ethereum into their application technology stacks. Below are some interesting use-cases being built on the technology:

Chronicled, a Pantera portfolio company, is a company providing authentication and provenance using blockchain technology. The company has developed pilot implementations on both Bitcoin and Ethereum blockchains and finds the Ethereum framework and coding language to be the most user-friendly and flexible of the two. Chronicled has not formally announced their commitment to Ethereum and are waiting to see convergence in the blockchain space before any commitment. That said, based on our informal conversations with the team, it does feel that Chronicled is leaning in the direction of an Ethereum blockchain implementation.

Slock.it is a “smart contract lock” that is run on the Ethereum blockchain. The company has partnered with energy giant RWE to reinvent how electric cars are charged today. Cars will be equipped with digital wallets and will be able to communicate with autonomous electric charging stations, which use smart contracts to allow users to rent the station, put up a deposit, charge their car, then get their deposit back. In another case, Slock.it would enable for charging the electric vehicle by tiny increments, using induction points beneath the road while a car is waiting at a traffic light. Smart contracts remove the complexity of paper contracts. Normally the charging stations charge by the hour and there is no way to pay for what you use, so the experience is suboptimal. With slock.it, users will be able to see how much energy they are consuming. When charging is complete, the charging station refunds a deposit through a smart contract.

R3 is a consortium of about 50 banks looking to collaborate and consult with other banks in order to provide distributed ledger technology to help cut costs in the middle and back offices. Some use-cases for banks of distributed ledger technology include settlements of securities and issuance of syndicated loans. R3 has hired blockchainers like Tim Swanson and Mike Hearn to help develop technology and has stated that they are starting off with building on top of Ethereum. So far, 11 banks have connected using Ethereum: Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit, and Wells Fargo.

Time will tell whether Ethereum can live up to its grand promises. In part to accomplish these, Ethereum leadership must be able to steer the scalability of their organization and technology. Ethereum will also have to outperform or reconcile with up-and-coming competitive technologies like Rootstock, an Ethereum-imitating sidechain that is utilizing the computing power of the Bitcoin blockchain through merge mining. The network security advantages of using Bitcoin over Ethereum proper are still substantially compelling. Nevertheless, Pantera is excited to see the continued development of Ethereum and will continue to evaluate companies building interesting, useful applications on top of the technology.