R3 releases Ethereum report following requests from many of its banking members

R3CEV has published a new report assessing how the Ethereum blockchain platform can be used by banks involved in consortium and private blockchain projects.

The 40-plus-page report, written by Ethereum creator Vitalik Buterin, provides a technical overview of Ethereum’s architecture and its applications in the financial sector, and analyzes how financial institutions can seek to use Ethereum technology to build private blockchains and the problems they may face in the process.

For those who don’t like reading densely packed technical reports, R3 Chief Scientist Richard Gendal Brown and Strategic Lead Kathleen Breitman wrote a shorter executive summary to accompany the report that explains the report for non-technical readers.

According to R3’s head of research, Tim Swanson, the report was commissioned after R3 received a large number of requests from its banking partners for information about Ethereum and its new and high-profile features, such as smart contracts.

Svensson further pointed out that they positioned the release of the report as a sign of R3’s commitment to the broader public blockchain ecosystem, although their own proposed solutions, such as the smart contract platform Corda, take a different approach.

Swenson said:

“The idea is to track the platforms and look at them. These platforms are not designed for regulated financial institutions, but that doesn’t mean it can’t change. We are taking our time.”

Both Svensson and Breitman said the research helps position R3 as a thought leader and collaborator in an industry that is all grappling with issues around the use of blockchain technology.

Brown struck a similar tone in his executive summary, describing Ethereum as a “remarkable achievement” that he believes could serve as a guide for prototyping blockchain-based solutions.

However, Brown warned that Ethereum may ultimately prove to be an unsuitable technology for financial institutions, as it was designed for multiple purposes and to meet the requirements of traditional financial institutions.

Expanding Challenges

What’s most interesting about the report is that it provides a unique window into how Buterin believes the ethereum platform can be used by financial services firms. The report follows a test of ethereum conducted in January by 11 major banks in the R3 consortium.

In his report, Buterin identified the Ethereum platform’s primary problem as scalability, despite all the innovators currently working on Ethereum in the ecosystem. In this context, he advocated that institutions should start researching new improvements for the Ethereum network.

In particular, Buterin said, those investigating state channels, payment channel technology, will seek to enable large numbers of ethereum transactions to take place outside the main blockchain, as well as taking steps to implement partitioning within their blockchain systems.

Buterin wrote:

“The scalability that institutions care about can be achieved in two main ways: 1. Exploring the option of building as much application logic as possible in state channels, whether on a public or private chain; 2. Implementing EIP 105 in a private Ethereum version, using an asynchronous programming design with a partitioning mechanism to achieve parallelism.”

Neither technology is scheduled to be implemented on the live Ethereum blockchain until the release of Serenity, which is scheduled to take place after the upcoming Metropolis update. The date is currently undecided.

However, Buterin noted that institutions will be able to implement planned features on private versions of ethereum, although when they do, they will still be refined by the ethereum development community.

At a higher level, Buterin argues that this problem is inherent to the architecture of modern blockchain platforms.

“Blockchain is unique in that the specific decentralization it provides is a different kind of thing. It is not distributed in the sense of ‘spread across different institutions,’ but it is replicated: every node on the network processes every transaction and maintains the entire state.”

Privacy Improvements

Buterin also prioritized privacy, a topic that has become a hotly debated issue for those working closely with the financial industry.

Experts believe that the blockchain environment is not currently suitable for use by banking consortiums because it could lead to the sharing of sensitive business data between banks.

However, Buterin pointed out that private blockchains are not a solution to privacy. To the extent that he believes that blockchains are essentially a data sharing and management environment, participating in such an environment comes with certain inherent trade-offs.

“If your primary information security concern is that you want privacy and you’re not interested in getting into advanced cryptography or at least moderately complex cryptoeconomic mechanisms, then you probably want a server rather than a blockchain.”

Buterin asserted that those working on private blockchains have two choices when faced with the challenge. They can work to minimize the links to shared information leaked in the blockchain, or develop advanced solutions that make privacy mathematically provable.

He went on to note that both options present challenges and those interested in actively participating in finding solutions will need to think creatively.

Overall, however, he was optimistic that Ethereum will provide solutions to these obstacles, describing the sheer scale and complexity of the task the platform seeks to deliver.

Buterin wrote:

The long-term goal for Ethereum 2.0 and 3.0 is for the protocol to gradually and fully maintain a blockchain capacity of Visa-scale transaction processing levels, or even several orders of magnitude higher, using a network consisting of a large enough number of users running nodes on consumer laptops.