Ethereum: A Valuable FinTech Sandbox

Daniel Cawrey looks at how Ethereum's potential in blockchain experimentation will help bring about a new digital asset-based economic paradigm.

AccessTimeIconMay 6, 2016 at 1:30 p.m. UTC
Updated Sep 11, 2021 at 12:15 p.m. UTC

When it comes to bitcoin and blockchain technology, established industries have made already their technological selection – they clearly want blockchain, not bitcoin.

Given the ongoing travails of bitcoin, this is arguably reasonable, and allows the focus to fall on new platforms offering different features and advantages.

While bitcoin’s ledger technology is a more natural fit for interesting innovations being built outside of incumbent systems, separating the blockchain technology for experimental purposes within existing environments has an obvious use case.

Enter Ethereum, which has been facilitating this for some time, and has now released production-ready code.

To put it simply, Ethereum is a sandbox, enabling entrepreneurs and their developers to experiment with new products, including financial ones, without the risk of harming existing systems.

Experimenting with finance

This is an exciting time for FinTech. There is an eager audience awaiting fresh ideas within banking. A new generation, millennials, are beginning to make key financial choices, seeking out new and innovative banking services.

Today, there are viable alternatives to placing money into savings or traditional investment accounts. A good example is the proliferation of peer-to-peer lending, which sees investors put up money for personal loans to individuals in need of capital. Investors get a return, and individuals get the funds they need outside the restrictions of the traditional banking system. Both parties win.

And yet more inventive financial services are on the horizon. With blockchain-based smart contract systems on platforms like Ethereum, new products will proliferate in 21st century banking and savvy users will demand this 'milliennial financial stack'.

This technology isn’t just about modifying existing systems, it’s also about creating structures that are entirely new. It’s about rethinking cash and agreements surrounding existing money-based systems.

The failed altcoin experiment

The number of alternative cryptocurrencies or altcoins is mind boggling, and while many are dead at the roadside, it’s unclear which of the remaining ones actually have any merit.

Some of these still boast dumbfounding market capitalizations too. NEM, for example, has a $13m market cap, but it’s not clear if this value is legitimate, since many altcoins are used for fraud such as 'pump and dump' schemes.

While once it was thought altcoins enabled experimentation in the digital currency ecosystem, they have been left behind, and I believe the era of alternative cryptocurrencies has largely come and gone.

Technically an altcoin, Ethereum stands out from the crowd, however. It takes the potential for experimentation far beyond its rivals – combining a currency (ether) with ledgers and complex agreements that can spawn digital assets. These advanced functions can enable innovations that were simply not possible before.

Further, as a standard and open framework, Ethereum is a platform upon which engineers can easily collaborate. It now has reached a stage where a great number technical projects are being built on its platform, and has matured to a point most altcoins never achieve: developer adoption.

Rethinking the concept of cash

Alternative cryptocurrency advocates claim altcoins create a “closed loop economy” that doesn’t touch banking. This is misguided reasoning.

Banking is the global glue that enables crucial economic levers, including market liquidity and the commercial paper markets. Without this glue, market seizure is inevitable, and that is what what happened during the Great Recession of 2007-8.

What alternative cryptocurrency advocates do realize is that the existing financial system is starting to look like the slowest runner on the track.

Today, tons of technical systems run an antiquated cash-based economy, using cash that is backed by ... nothing. These systems were built this way because there was never an adequate technology for a systematic rethinking of the concept of money.

What exists today is similar to an emulator on a PC, used for playing video games from ancient platforms. In the case of finance, the systems support an idea of money that is now looking rather antiquated – the equivalent of running the original Donkey Kong on your laptop, perhaps.

But now the technology for that rethink of money does exist in the power of cryptographically backed systems and, with cash already moving in the digital realm, is being seen as an increasingly attractive alternative.

So, what if, instead of emulating a cash-based economy in a digital world, we tried something entirely new – just to see if it works?

Many Ethereum projects intend to do exactly that. A list of conceptual projects can be found here: some of them financial, a few purely academic, and others are ambitiously pursuing complete reinvention. All these projects are setting out to try things and see what sticks.

New ideas, lower costs

I predict innovative ideas based on Ethereum will improve upon existing systems. Over the next few years, there will be a maturation in the Ethereum ecosystem, and some projects will become more than just good ideas, going beyond proof of concept into the real world.

Ethereum will help create new models for various incumbent systems, including finance, which will see a shift within the next decade. This is because the costs of deploying new financial concepts will drop dramatically thanks to systems built with blockchains.

This is similar to what has happened with the Internet’s development over the past 20 years: low barriers of entry coupled with declining costs created immense opportunity for new digital systems. With the combination of a unit of account, a blockchain and smart contract capabilities, Ethereum has the potential to innovate across many industries.

In finance, this will be an exciting period of innovation. It will be an era of change comparable to the Medici's record keeping centuries ago, creating as it did the modern banking system.

What will result is a new digital asset-based economic paradigm, and Ethereum as a platform for experimentation is helping bring that about.

Sandbox image via Shutterstock


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