Bitcoin may be the longtime darling of the cryptocurrency world, but Ethereum enthusiasts will tell you that the second most valuable cryptocurrency by market cap in fact holds the most potential for innovation in the financial services space. While we don’t take sides, that possibility is intriguing, particularly considering how Ethereum might be leveraged in financial technology. Below, we’ll unpack what’s already being built and the possibilities the technology holds.
Refresher: What is Ethereum?
We’ve covered the basics of Ethereum in a separate post, but there are a few key features worth reiterating before diving into its applications.
- is a protocol that uses underlying blockchain technology to create a platform for developers — one that hosts decentralized applications based on smart contracts;
- is Turing-complete, meaning that programs built on Ethereum can theoretically solve any computational problem. Ethereum itself functions like a distributed Turing machine;
- uses a tradeable currency called ether, which can be used to pay fees on the network;
- expands on many other cryptocurrencies in that its primary function is to power the apps built upon it (called dapps), as opposed to tracking and storing ownership records of the currency;
- is highly flexible, and can therefore fill a number of roles in both fintech and in other industries.
Current Ethereum applications
Given its functionality, Ethereum can theoretically be used to build any application that requires a third-party intermediary — that is, a trusted outside party that can facilitate a transaction or exchange, whether or not money is involved. Ethereum lowers the barriers to entry by making it easy for any developer to code a new application, decreases costs for both developers and users of their applications, and makes transactions on these applications secure and verifiable.
Beyond the above benefits, consumer financial technology can benefit from being built on Ethereum in that these applications actually save consumers money by, for example, cutting out the third parties usually involved in brokering the exchange of assets. One example, a company called Digix, is an “asset tokenization platform” that allows consumers to purchase Digix Gold Tokens with Ethereum. These tokens are cryptographically linked to physical gold that can be redeemed at any time, and in addition to the security offered by any application built on Ethereum, this particular solution cuts out the banks and brokers typically involved with the purchase of gold, reducing the consumer cost of such a transaction.
Crowdfunding is another space that could be significantly affected by apps built on Ethereum. While more traditional crowdfunding platforms take a significant cut of the total amount of money raised (Kickstarter, for example, claims 5 percent), building such a platform on Ethereum leads to lower fees across the board — from the cut taken by the company (WeiFund is one example) to the lack of card processing fees.
In the B2B arena, Ethereum can also be used to build upon what’s already been done, such as in the small business lending space. 4G Capital, for example, offers growing small businesses in Africa instant access to 100 percent unsecured debt funding. The company’s end-to-end credit management system integrates with any mobile money platform, allowing donors to fund a small business with digital currency, which is then converted and sent to the business on 4G’s platform.
Fintech + Ethereum: What’s next
Those disenchanted with the opacity of financial markets love to imagine a corporate finance world run on the public blockchain — and Ethereum’s expanded functionality makes it a (potentially) good platform. The limitation in this vision, however, isn’t the technology, but rather the powers that be: While it’s possible that some of these functions might eventually run on a private blockchain, it’s pretty unlikely that the banks, governments, and other stakeholders would open up this information to public scrutiny. If you’re curious as to what this might (theoretically) look like, check out this demo of UBS Smart Bonds, which are transferred on the blockchain.
That said, banks and the consultancies that advise them are actively investing in blockchain research that will eventually allow them to modernize their processes. In mid-2016, Deloitte announced a partnership with ConsenSys Enterprise, an Ethereum-centric blockchain company. The goal of this initiative is to build a blockchain-based digital bank, which will help “clients reimagine the core banking environment” and position Deloitte to advise bank clients on how to leverage blockchain technology as it develops.
Beyond applications in banking, dapps have the potential to play many different roles in fintech. Vega Fund, for example, a decentralized managed fund, recently published their vision for many ways in which the platform might be used, from crowdfunding to inter-community trading.
Other fintech projects currently under development using Ethereum include:
Drago: A decentralized hedge fund platform and social trading
CryptoFund: Cryptocurrency asset management hedge fund
SmartToken: NFC smart-token with SMS Secure
Token Card: Smart contract powered Visa debit card
Community-Currency: Community currency with zero reserve mutual credit
Ethereum is far from being mainstream, to be sure. But the key takeaway for fintech is that blockchain technology, Ethereum included, will drastically lower the cost of deploying new financial concepts, lowering barriers to entry and encouraging innovative solutions to the problems in financial services.