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R3 Publishes Vitalik Buterin Report on Ethereum for Banks

(@pete_rizzo_) | Published on June 1, 2016 at 16:00 BST
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R3CEV has released a new report evaluating how the alternative blockchain platform Ethereum could be used by banks engaged in consortium and private blockchain initiatives.

Penned by Ethereum inventor Vitalik Buterin, the more than 40-page report provides a technical overview of Ethereum’s architecture and applications in finance, as well as an analytical look at how financial institutions can seek to build private blockchains using the technology and the issues they may face in doing so.

For those uncomfortable navigating the sometimes dense language more common to white papers, the publication coincides with a shorter executive summary authored by R3 chief scientist Richard Gendal Brown and strategy lead Kathleen Breitman. The companion piece, also released today, explains the impetus for the report as well as the high-level takeaways for less technical readers.

As described by R3 head of research Tim Swanson, the report was commissioned due to the volume of requests the startup was receiving from its banking partners for information on Ethereum and its novel and highly publicized features such as smart contracts.

Swanson further sought to position the publication as a sign that R3 is committed to following developments in the wider public blockchain ecosystem, even if its proposed solutions like the smart contracts platform Corda, differ in approach.

Swanson told CoinDesk:

"The idea is to keep track of platforms and go beyond the superficial. These platforms weren’t designed for regulated financial institutions, [but] that’s not to say that things can’t change. We’re being methodical."

Both Swanson and Breitman contend that the research helps position R3 as a thought leader in the space, as well as a collaborator across an industry in which all members are working to solve difficult challenges related to the use of blockchain tech.

In his written remarks, Brown struck a similar tone, describing Ethereum as a "remarkable achievement", one that he believes can serve as a guide for those prototyping blockchain-based solutions.

However, he cautioned that it may ultimately prove problematic for financial institutions to "appropriate" technologies such as Ethereum that were designed for different purposes into the requirements of traditional finance.

Scaling challenges

The report is perhaps most notable as it provides a unique window into how Buterin believes the Ethereum platform could be utilized by financial services firms. The publication follows a test of Ethereum by 11 major banks, conducted by R3 in January of this year.

In his writing, Buterin identified the scalability of the Ethereum platform as a primary concern, though one that is being worked on by all innovators in the ecosystem. In this light, he advocated that institutions should begin working with newer improvements planned for the Ethereum network aimed at addressing this problem.

Of particular note, Buterin said, is that institutions investigate state channels, the payment channel technology that would seek to enable high volumes of Ethereum exchanges to take place off the main blockchain, before settling to this layer; and take steps to implement sharding within their blockchain-based systems.

Buterin wrote:

"Institutions concerned about scalability have two primary routes: (i) explore the option of building as much of the application logic as possible inside of state channels, whether on a public or private chain, and (ii) implement EIP 105 in a private-chain Ethereum version, and use asynchronous programming with the sharding mechanism to achieve parallelizability."

Both technologies are not scheduled to be implemented on the live Ethereum blockchain until the launch of Serenity, the release scheduled after its forthcoming Metropolis update. No release date has been set for either upgrade.

However, Buterin noted that institutions are able to implement planned features in private versions of technology, though they may be doing so at a time when such features are still being refined by the Ethereum development community.

Buterin further provided a high-level look at why this problem is inherent in the architecture of modern blockchain platforms.

"Blockchains are unique in that the specific kind of decentralization that they provide is one of a different character – one that is not distributed, in the sense of 'split up between different parties', but replicated: every single node on the network processes every transaction and maintains the entire state," he writes.

Privacy improvements

Buterin also prioritized a discussion of privacy, a topic that has emerged as a hotly debated issue following public musings of those working closely to the financial industry.

Blockchain environments, these experts contend, are today not suited for use by consortium efforts, as doing so could lead banks to share business sensitive data.

Buterin, however, notes that, in his view, private blockchains are not a solution to privacy. In part, his argument puts forth the idea that blockchains are naturally environments for data sharing and management, and that engaging in those environments comes with certain inherent trade-offs.

"If your primary information security concern is that you want privacy, and you are not interested in getting into advanced crypto or at least moderately complex cryptoeconomic mechanisms such as state channels, then you likely want a server and not a blockchain," Buterin wrote.

Buterin asserts that those working on private blockchains have two options when faced with this challenge. They can work to minimize revealing links between information shared in a blockchain environment, or develop advanced solutions that would enable privacy to be "mathematically provable".

He continued by noting that either option presents challenges that will require creative thinking by those interested in playing an active part in finding solutions.

Overall, however, he presented optimism that Ethereum would come to introduce solutions to these roadblocks, with his descriptions of the platform seeking to convey the sheer scale and complexity that this undertaking will require.

Buterin wrote:

"The long-term goal for Ethereum 2.0 and 3.0 is for the protocol to quite literally be able to maintain a blockchain capable of processing Visa-scale transaction levels, or even several orders of magnitude higher, using a network consisting of nothing but a sufficiently large set of users running nodes on consumer laptops."

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