Ethereum Is a True Game-Changer

 | Jul 24, 2014 | 4:30 PM EDT
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Last March, in the column "Creative Destruction," I wrote about the nascent and growing peer-to-peer lending systems being developed that are going to radically challenge the way banking services operate, especially mortgage banking.

In this column I'll briefly discuss the new technology, Ethereum, upon which peer-to-peer systems will operate. And we'll look at how it is going to radically alter not only the entire financial services infrastructure but the metanarrative upon which modern economies, capital markets, corporate structures, sovereign currencies, monetary systems, and governments are founded.

Ethereum is the brainchild of Vitalik Buterin, and it was introduced conceptually just this past February at Bitcoin Miami.

It's a game-changer that presents the real possibility of producing an existential crisis for all of the companies in the financial services space, including the money centers, and even the applicability and functionality of sovereign currencies and centralized monetary policy management systems.

By now, you are aware of the existence of the digital currency called bitcoin. It is, however, widely misunderstood, even by people who have great familiarity with it. The real value in the bitcoin system is not the bitcoins it produces. Those are merely derivatives of the block-chain trust network technology that is brought into existence by the computers being paid for with existing sovereign currencies and deployed to create it. The bitcoins are a byproduct of that creation, a means of rewarding the technology builders with something that may be of transferrable value.

The real value in the bitcoin technology is its ability to allow for the time-stamping of documents and the transfer of those documents from one place to another or for the transfer of ownership of them and any collateral associated with them.

The bitcoin technology, however, is a closed loop and a finite system that by design makes it impossible for it to present a real threat to either established banking systems or sovereign currencies, because it establishes a wealth concentration, as measured in bitcoins, that is grotesquely and permanently weighted to the early creators and adopters of the system architecture; even more so than the existing sovereign currency system.

Bitcoin is best thought of as a test case for the establishment of a robust and expandable block-chain trust network. That's what Ethereum is, and it's most easily thought of as bitcoin 2.0. Bitcoin was the hype. Ethereum is the reality.

Two days ago, the creators of Ethereum began raising capital for the creation of the genesis technology that will bring the model into existence. They are doing do so by issuing 2,000 ethereum units, called ether, in swap for each bitcoin a supporter supplies to the developers. Those bitcoins will then be used to pay for the initial work to be done in order to birth the Ethereum system; which is expected in about a year.

In addition, Ethereum is designed to operate on an open-mesh networking system that can function at the base level of the Internet and independently of the centralized access points used today; such as DSL and cable system providers.

This system is best thought of as an overlay to the existing Internet that will allow for the operation of truly secure trust networks, which the Internet's protocol is incapable of supplying. These trust networks can be secured from government intrusion as well and are being advanced by multiple private groups throughout the world.

Microsoft (MSFT) and Cisco Systems (CSCO) are both working on the creation and establishment of mesh networking systems that present real and immediate business challenges to the existing Internet service providers (ISPs).

The largest publicly traded ISPs are Comcast (CMCSA), Time Warner Cable (TWC), Verizon Communications (VZ), and AT&T (T).

As the mesh networking systems are implemented throughout the U.S., the cost of accessing the Internet will almost certainly fall below the fixed costs incurred by these companies to supply it, and as a result, it is probable that they will be forced out of that business. I don't know how long it will take, but it is something that both investors and growth speculators in them need to be aware of now.

Ethereum, in combination with the rise of peer-to-peer lending networks, provides an even larger existential challenge in the near future to the established financial infrastructure globally.

I will write more about the implications of this. For now, everyone should at least familiarize themselves with the Ethereum concept, because it is going to affect everything in the capital markets. 

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