Into the Ether: EEA Another Showing of Support for Distributed Ledger Technology

by Morgan Lewis

Morgan Lewis

On February 28, a consortium of 30 companies announced the formation of the Enterprise Ethereum Alliance (EEA), a nonprofit foundation designed to “build, promote, and broadly support Ethereum-based technology best practices, standards, and a reference architecture, EntEth 1.0.”

The initial members of the EEA include large financial services companies, technology vendors, and “blockchain” technology start-ups, among others. The announcement comes at a time when the race to develop a distributed ledger technology that can stand up to the heightened demands of customers and scrutiny of regulators in the financial services industry is more crowded—and potentially more lucrative—than ever.

A “blockchain” refresher

In late 2016, in part one of a two-part series, we published a primer on “blockchain” technologies, which provide for a distributed ledger system that creates a digital record of ownership of an asset that can be used on a peer-to-peer network of computers. One of the hallmarks of blockchain is that it provides a complete, verifiable transaction history that cannot be altered retroactively.For reference, think of a Google Sheet used as a general ledger spreadsheet, but the spreadsheet is shared and duplicated across a network of computers as a whole (so that no single computer can override the information contained on the network), is linked to the underlying assets for which the ledger is accounting, is automatically and continually reconciled to accurately account for transactions involving those underlying assets, and is available to be viewed and verified on demand by the public.

In part two, we discussed some of the business and legal obstacles to widespread adoption of blockchain technologies, focusing on concerns around privacy, scalability, and regulation. As our colleagues noted at the time, “[f]inancial companies have been leaders in promoting distributed ledger technology because of the potential savings in settling transactions and other back-office functions without the need for third-party verification.” Fast forward five months, and the strong participation of the financial services industry in the EEA reaffirms this observation.

What is Ethereum?

Ethereum, similar to the well-known digital currency bitcoin, is a blockchain-based virtual currency and open ledger technology that was introduced in 2013. The publicly available open source Ethereum platform uses the currency “ether” and allows creation of “smart contracts.” These smart contracts include predetermined conditions that, upon occurrence, trigger payment under the underlying contract and create a corresponding transaction record on the blockchain ledger.

How does EntEth 1.0 fit in?

The EntEth 1.0 protocol is not a separate product from Ethereum but rather an enterprise-focused standard that will be based on the open source Ethereum platform. EntEth 1.0 would provide an architecture for stronger enterprise protections to augment the underlying Ethereum platform while retaining the efficiencies and other benefits of the Ethereum technology. With EntEth 1.0, the EEA will look to leverage progress from prior initiatives to develop enterprise-level technology using the Ethereum platform, with the most notable such technology being a platform known as Quorum. The primary end-goal is a “permissioned” (i.e., private) version of the Ethereum platform based on this architecture that can be tailored to the specific purposes and user base of a particular company or group. There is also the possibility for a hybrid structure where these private platforms could integrate with the public Ethereum without compromising the privacy of the particular platform.

Why should we care about the EEA?

Ethereum presents certain advantages over other blockchain technologies such as its complex smart contracting capabilities and its seemingly broad and growing industry support. The EEA is just the latest example that many view Ethereum as a major factor in the potential widespread adoption of the technology. However, because Ethereum is at its core a decentralized blockchain technology, it implicates all of the risks of such technology—including privacy, scalability, and regulation.

The EEA is tasked with taking Ethereum’s potential and capitalizing on it by developing adequate technical safeguards around privacy, confidentiality, scalability, and security. The financial services industry is likely to realize significant benefits in efficiency and security if the EEA is able to accomplish this task in a manner sufficient to meet the requirements of regulators and allow adoption of the technology. According to a recent study, adoption of blockchain technology could lead to annual cost savings of $8 billion to $12 billion for 8 of the world’s 10 largest investment banks as a result of reduced infrastructure costs.

Where do we go from here?

According to the EEA announcement, the “collaborative framework will enable the mass adoption at a depth and breadth otherwise unachievable in individual corporate silos and provide insight to the future of scalability, privacy, and confidentiality of the public Ethereum permissionless network.”

It is yet to be seen whether the EEA can achieve these goals where other similar endeavors have not yet found a way to overcome the inherent risks in blockchain technology in order to allow widespread adoption.

The EEA intends to release a working version of the EntEth 1.0 protocol during 2017.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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