Does Ethereum Benefit from Private Blockchains?

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There have been a number of projects and consortiums launched, including the Ethereum Alliance which was joined by many global household brands, such as JP Morgan, Microsoft, BP, Intel and many others.

Some use ethereum’s public blockchain, like the pilot by Siemens in collaboration with a blockchain energy start-up which allows Brooklyn neighbors access to a smart grid where they can sell energy peer to peer.

Some fork ethereum and modify it slightly so that validators require permission to join the network. The best known example being Quorum, an ethereum fork by JP Morgan in collaboration with Jeffrey Wilcke, an ethereum developer who says the fork is very much similar to the public ethereum blockchain, but has private access.

Could quorum become a direct competitor to ethereum? – some ask. Perhaps, but that’s difficult to see because quorum would need a public blockchain which would be very much Ethereum.

Some may argue potential projects may choose quorum instead of ethereum, but, it may well be the case they would have never used ethereum in any event at this stage.

So, instead of taking market share from ethereum, it may be the case quorum is actually introducing new businesses  in a slow manner with some training wheels on, allowing them to have a feel for blockchain technology.

Internet (Ethereum) and Intranet (Ethranet)?

The often used comparison here is that of the intranet and internet. In the early days, businesses were far more comfortable having private internets called intranets, rather than connecting to the public internet directly.

Intranets continue to be used today, just as private blockchains will probably always have their own niche use, but they can connect to the public internet which is far more dominant.

Likewise, private blockchains may eventually connect to the public blockchain, which may become the commons through which all the private blockchains interconnect.

As such, at this early stage, in our view, ethereum based private blockchains benefit ethereum in many ways. The most important one is network effects private blockchains give to ethereum.

Since they are very similar, based on the same core protocol, more developers become familiar with ethereum, management becomes more practically aware of what the ethereum-like capabilities and shortfallings are, more resources become available to improve the core tech and more talent becomes available which knows how it all works.

In the process, the ethereum “pool” widens, shifting focus primarily to this protocol which means any improvements, efficiency gains, any new projects or ideas, are all revolving around ethereum.

As talent attracts more talent, suddenly we may have many private blockchains as well as other projects all revolving around ethereum’s public blockchain which might eventually become dominant like the internet today.

Linux (Ethereum) and Microsoft (Private Blockchains)?

Another way to look at it may be Linux vs Microsoft. Now, some decades later, we can say they really both won since Linux and Microsoft are both widely used, but an entity like IBM could package ethereum and bring it to the masses in an AOL internet form.

The problem is, unless IBM requires individuals to sign up in a similar manner to opening a bank account before individuals are allowed access to the blockchain, then such chain would have to be a public blockchain, something which would encounter a lot of regulatory hurdles if managed in a centralized way.

So one could argue even IBM’s Hyperledger, which is more of a competitor to ethereum because it uses a different protocol, isn’t actually really a serious competitor at this stage because they are raising awareness of blockchain’s capabilities in general.

Sure, they are doing so on a different protocol, which could create friction if they wished to move to ethereum due to not having the same level of expertise and knowledge as would have been acquired by working on Hyperledger, but the difference at this stage might be between that of knowing how to code, not knowing how to code at all, and going from one coding language to another.

The last one is important, but far less than between knowing how to code and not knowing how to code. So, in a way, at this stage, even Hyperledger can benefit ethereum, although far less than ethereum based private blockchains.

The Real Competition, Etherized Pound, Dollar, Euro or Yuan

If ethereum does meet real competition, it would probably come from one of these two sources: some smart kid comes up with an even better way of doing public blockchains, giving them even more new cool features, which  is difficult to imagine because there would be low level out there talks/thoughts of it just as there was in 2013 regarding smart contracts, or, more likely, state fiat issuers could turn their static money into dynamic code.

The Bank of England could, for example, fully digitize the pound, complement its physical cash quality with a digital cash equivalent, furnish it with smart contracts, while maintaining control of its supply levels.

This would be a radical action, but there is talk of it, so it may well happen. If it does, then ethereum can’t easily compete because the pound would in effect become ethereum. Since everyone accepts pound, then why would anyone bother with eth?

Well, the Bank of England might have a more intriguing thought and might actually ask, considering the options available, why not bother with eth? Because if we think of how they could etherize the pound, it becomes slightly difficult conceptually.

They can’t do so by just running one node because if anyone gets access to it then they can bring everything down, potentially unleashing a collapse of the entire nation.

They could run many of such nodes, perhaps in banks, institutions, etc, making it difficult to compromise, but, on the other hand, such institutions could stand up to the Bank of England and just not upgrade their software, so the central bank might be at risk of losing control.

An intriguing idea has now been raised which suggests that the pound or other state issued currency like yuan could be blockchenized by issuing them as an ethereum token.

The proposal is conceptually interesting because it could work and if pilots suggest so then such project would not be competition to ethereum as both would benefit in a complementary way.

That’s because the Bank of England would enjoy a very secure, stable, robust, distributed platform with thousands of nodes which cannot be compromised, while ethereum itself would in effect take the role gold has today, becoming a reserve which powers this global platform upon which the pound, dollars, euros or yuan actually run.

In such world, there may still be other niches. Such as stable coins – especially if monetary authorities mismanage their currencies – or perhaps deflationary currencies, or maybe some individuals just want to use a non-state issued currency. But, if the pound in effect becomes eth, then their role might be very limited.

Thus, looking at the whole picture, at this stage – and probably in the near future of say 5-10 years – private blockchains, in our view, benefit ethereum significantly by increasing utility through network effects. Especially so if the private blockchains are eth based, but they do to some extent even otherwise.

If eth is to have any real foreseeable competition, we think it would be from central banks, but, in our opinion, it may make far more sense for central banks to utilize the ethereum platform rather than re-invent the wheels.

In which case, rather than competing, they would be complementary, with eth playing the role of digital gold, while the pound, dollar, or yuan, becomes dynamic, codable and, from a tech perspective, becomes what we today know as eth.

 

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