The fundamentals of cryptocurrency Ethereum explained by Sia Partners

16 August 2017 Consultancy.uk

Cryptocurrencies are not just booming but also diversifying, with today over 1,000 different currencies available in the marketplace. Nye Gordon, a Senior Consultant at Sia Partners, reflects on the rise and fundamentals of Ethereum, after Bitcoin one of the most known cryptocurrency variants.

What is Ethereum?

Ether, which is the cryptocurrency of Ethereum, functions as any other cryptocurrency. It can be used as an anonymous method of making purchases, being spent directly at any online store that accepts it, or it can be sold on an exchange and redeemed in another currency. Cryptocurrencies remain secure by utilising blockchain technology, through which an entire network of members validate each transaction. If any member tries to make a change to a block, everyone else can see where the change happened and decide whether to authorise it.

However, Ethereum is also a network of computers that can transmit data and support the execution of apps or programs. It is built on the same blockchain technology, but instead of just keeping track of payments, you can track computer programs. This is where Ethereum differs from current technology. 

The key difference between Ethereum and the way the internet works today, is that currently, apps and databases are stored on a single server, where, if that server or database is damaged, the data and the web page will be lost. With the blockchain technology that underpins Ethereum, the database is public and distributed across the network. Any machine connected to the network can be used to determine the result of a transaction. The result of this is that Ethereum’s DApps (distributed apps) cannot “go down” due to a single point of failure. With enough computers connected to the network, all DApps built on Ethereum will persist and remain secure, transparent and valid. 

The fundamentals of cryptocurrency Ethereum

How does Ethereum work?

Ethereum’s network differentiates from that of Bitcoin by utilising ‘Smart Contracts’. These smart contracts enable the distributed network by removing the need for a central authority for verification purposes. With these contracts executing what has been agreed to, the traditional role of a middleman is bypassed, and the opportunity for a peer-to-peer based network is clear. 

So, why is having apps built on a distributed platform so important?

  • No central point of failure – With no central authority, there is no vulnerability to DDoS (Distributed denial of service) attacks where a targeted system is flooded with traffic to gain access.
  • Highly reliable – Because the rules of Ethereum are so simple and secure, attackers, malfunctioning computers and even the person who made the app cannot break the rules they agreed to.
  • Cost effective – With no need for centralised servers or data warehouses, costs and fees can be reduced for services built on the Ethereum network.

What can Ethereum be used for?

At this point in time, it is hard to say what Ethereum will be used for, because it can be used for anything that you can write a computer program to do. At the date of writing this, Ether has a market cap of approximately $22 billion, 60% of the market cap of Bitcoin (around $44 billion), with a strong possibility of becoming the largest cryptocurrency over the coming months (an event coined the ‘The Flippening’ among the Ethereum community) as excitement about the technology increases. This excitement comes from the possibilities that Ethereum can provide. DApps can be created to provide a more secure, reliable version of a currently existing website, however the real innovation lies in decentralising existing services. For example, let’s take Uber’s business model:

Uber’s business model

The example above is just one of many where Ethereum’s technology could be applied. Some other examples include disruptive concepts that are already being realised on the Ethereum platform:

Aventus – Aventus is an Ethereum based economic model that eliminates uncontrolled resale and counterfeit tickets in the events industry. In the Aventus system, each ticket would have a unique identifier on the Ethereum blockchain, making counterfeits impossible, pushing down event management costs and enabling price controls on the resale of tickets. In a recent discussion with Alan Vey, one of the founding partners of Aventus, he told Sia Partners that: 

BitNation – The world’s first operational decentralised nation. BitNation provides the same services that traditional governments provide; identification, dispute resolution, insurance etc, but without requiring geographical borders. Since its founding in 2014, BitNation has performed marriages, created land titles and notarised birth certificates through Blockchain. 

Augur – Augur is a prediction market platform that rewards correctly predicted real world events. The accuracy of Augur’s predictions is built on the ‘Wisdom of the Crowd’, the concept that the average prediction of a group will be more accurate than that made by any individual in that group. Being based on a decentralised network, Augur offers users the possibility of creating your own markets, secure from reporting mistakes or outside manipulation.

Golem – Golem is a global, open sourced, decentralised computer. It offers up the combined power of user’s machines to compute any program you can think of. By renting out the computing power of the network, Golem has been used to render CGI, make stock market predictions, research DNA and teach an AI how to play chess.

Enterprise Ethereum Alliance

Ethereum uptake will continue to increase organically as we’ve seen from the increase in both the price of Ether, and the number of ICOs (Initial Coin Offering – how Ethereum-based DApps raise capital for development) that have taken place. However, what has exponentially increased the amount of attention that Ethereum has received, including from the mainstream media, is the EEA – the Enterprise Ethereum Alliance. The EEA, launched in February this year, is made up of Fortune 500 companies, leading consulting firms, start-ups, academics and technology vendors who are working together to build on what they describe as “the only smart contract supporting blockchain currently running in real world production – Ethereum”.

On the 18th of July, the EEA announced that an additional 34 organisations had joined including Mastercard, Cisco and Scotiabank. With this sort of backing, the growing attention Ethereum, and Blockchain in general, is receiving, seems to be more than justified. I, like many others, am looking forward to seeing what comes in the near future.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.