Ethereum Soars After JPMorgan, Intel, Microsoft And Others Form Blockchain Alliance

Step aside bitcoin, there is a new blockchain kid in town.

In recent days, the world"s second most popular digital currency, Ethereum, has been surging (despite its embarrassing hack last June when some $59 million worth of "ethers" were stolen forcing the blockchain to implement a hard fork to undo the damage), prompting many to wonder if some big announcement was imminent. It appears that yet again someone "leaked" because on Monday, an alliance of some of the world"s most advanced financial and tech companies including JPMorgan Chase, Microsoft, Intel and more than two dozen other companies teamed up to develop standards and technology to make it easier for enterprises to use blockchain code Ethereum - not bitcoin - in the latest push by large firms to move toward the holy grail of a post-central bank world in which every transaction is duly tracked: a distributed ledger systems.

In total, some 30 companies are set to announce on Tuesday the formation of the Enterprise Ethereum Alliance, which will create a standard version of the Ethereum software that businesses around the world can use to track data and financial contracts. This will be a huge boost to the recently sagging credibility of the technology, which suffered substantial damage during last summer"s previously noted hack, when nearly half the value of Ethereum was wiped out overnight.

According to Reuters, the Enterprise Ethereum Alliance (EEA) will work to "enhance the privacy, security and scalability of the Ethereum blockchain, making it better suited to business applications", according to the founding companies. Members of the 30-strong group also include Accenture Plc, Banco Santander, BP Plc, Credit Suisse Group AG, UBS Group AG, Banco Bilbao Vizcaya Argentaria, ING Groep NV, Bank of New York Mellon Corp , Thomson Reuters Corp (and startups ConsenSys and BlockApps.

The fascination with ethereum, or bitcoin for that matter, is familiar to fans of the digital currencies: the EEA joins a growing list of joint initiatives by large companies aiming to take advantage of blockchain, a shared digital record of transactions that is maintained by a network of computers rather than a centralized authority, eliminating the need for a central information clearinghouse. The technology is viewed as being harder to corrupt or hack because of its reliance on many people rather than just a single authority.

Companies in a wide range of industries are hoping that it can help them streamline some of their processes, such as the clearing and settling of financial securities.

About 70 financial firms are involved with a R3 CEV, a New York-based startup focused on developing blockchain technology for the finance industry, while technology firms such as IBM and Hitachi are part of the Hyperledger Project, a group led by the Linux Foundation. The EEA underscores the enthusiasm around the nascent technology, but also highlights some of the hurdles that companies must still overcome before they can deploy blockchain on a large scale. This includes ensuring that the technology can support the vast number of transactions processed by large corporations, while being secure enough to meet their stringent security standards.

The new Ethereum alliance has been described by some of its backers as a way to insure that the IBM-led blockchain effort is not the only option for businesses looking to use the technology. Other companies like R3 and Chain have also been developing alternative blockchains.

Several banks have already adapted Ethereum to develop and test blockchain trading applications. Alex Batlin, global blockchain lead at BNY Mellon, one of the companies on the EEA board, said over the past few years banks and other enterprises have increased collaboration with the Ethereum development community, facilitating the creation of the EEA.

“We are pretty equally spending our time across the different chains,” said Alex Batlin, the global head of blockchain at Bank of New York Mellon, which is joining the Ethereum alliance.

Unlike some other collaborative efforts, members do not need to pay a fee to participate in the EEA, for now.

Ethereum was introduced in 2013 by a developer named Vitalik Buterin, then 19, who had previously worked on Bitcoin. Since its official release in 2015, the Ethereum network has been the target of hackers and theft.  Yet it has also won a large following among programmers who view it as a new and sophisticated way for groups of people and companies to initiate and track transactions and contracts of all sorts. That has led some companies to bet that Ethereum will win the race to become the standard blockchain for future business operations.

“In every industry that we come across, Ethereum is usually the first platform that people go to,” said Marley Gray, the principal blockchain architect at Microsoft.

Today"s announcement may be just the vote of confidence Ethereum needed by major corporations to catapult it in popularity, and perhaps even overtake bitcoin which suddenly seems like "yesterday"s" technology. Indeed, as the NYT adds, the creation of the Ethereum alliance shows a continuing commitment among big companies to making the technology work, in large part because it promises to create much more streamlined databases that require less back-office maintenance.

It is already reflected in the price, which has soared on the news, and is up 25% over the past week.

The move may be just the beginning if most corporations adopt Ethereum as the distributed ledger standard: accenture released a report last month arguing that blockchain technology could save the 10 largest banks $8 billion to $12 billion a year in infrastructure costs — or 30 percent of their total costs in that area. Accenture is one of 11 companies on the governing board of the Ethereum alliance.

And while the Ethereum network has an internal virtual currency known as Ether, charted above, the value of which has risen and fallen over the last two years (and is now soaring), Ethereum is much more than just a system for tracking currency. It also allows people to write what are known as smart contracts into the Ethereum blockchain. Two companies could, for instance, create a contract that would automatically send money to one of them if a particular news authority reported that the Chicago Cubs won the World Series or that “La La Land” won the Oscar for best picture. (As the last example shows, what would happen if the authority was wrong is a more difficult question.)

Because of its capacity for smart contracts — and other complicated computing capacities — Ethereum is viewed as more agile and adaptable than Bitcoin.

As with Bitcoin, however, anyone can join the Ethereum network and see all the activity on the Ethereum blockchain. The companies working on the Enterprise Ethereum Alliance want to create a private version of Ethereum that can be rolled out for specific purposes and open only to certified participants. Banks could create one blockchain for themselves and shipping companies could create another for their own purposes. The purpose of the alliance is to create a standard, open-source version of Ethereum that can provide a foundation for any specific use case.

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For those who are new to Ethereum and are curious about the distinctions between that technology and bitcoin, below is a quick primer courtesy of CryptoCompare:

1. In Ethereum the block time is set to 14 to 15 seconds compared to Bitcoins 10 minutes. This allows for faster transaction times. Ethereum does this by using the Ghost protocol.

2. Ethereum has a slightly different economic model than Bitcoin – Bitcoin block rewards halve every 4 years whilst Ethereum releases the same amount of Ether each year ad infinitum.

3. Ethereum has a different method for costing transactions depending on their computational complexity, bandwidth use and storage needs. Bitcoin transactions compete equally with each other. This is called Gas in Ethereum and is limited per block whilst in Bitcoin, it is limited by the block size.

4. Ethereum has its own Turing complete internal code... a Turing-complete code means that given enough computing power and enough time... anything can be calculated. With Bitcoin, there is not this form of flexibility.

5. Ethereum was crowd funded whilst Bitcoin was released and early miners own most of the coins that will ever be mined. With Ethereum 50% of the coins will be owned by miners in year five.

6. Ethereum discourages centralised pool mining through its Ghost protocol rewarding stale blocks. There is no advantage to being in a pool in terms of block propagation.

7. Ethereum uses a memory hard hashing algorithm called Ethash that mitigates against the use of ASICS and encourages decentralised mining by individuals using their GPU’s.

These Are Barclays' 13 Commodity "Black Swan Threats" For 2017

In a special report by Barclays" Michael Cohen, the analyst lays out what he believes are the 13 commodity "black swan threats" for the current year, divided into two "shock" categories: supply and demand, split evenly between bearish and bullish.

Investors, Barclays warns, will have to balance the risks of unforeseen macroeconomic shocks and their effect on demand (bearish price) with potential geopolitical shocks disrupting the supply side of the market (bullish price). A tightening commodity inventory picture, especially in oil, will likely exacerbate how the market prices supply risks even if no physical supply disruption occurs.

The potential threats, which range from a trade war with China, to a default in Venezuela, to riots in Chile, all have a common denominator: politics: "we assess several black swan threats to the supply, demand, and transit of commodities that could potentially move markets in 2017. Our analysis illustrates an important point: politics are likely to matter just as much as economics" and not just any politics: "in particular, the new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities."

Those who have been following Trump"s twitter feed are all too aware of this.

While we realize the futility of "identifying" black swans in advance, something which is by definition impossible, nonetheless here is what Cohen warns:

In 2016, few people predicted a Trump election or Brexit, not to mention that the Chicago Cubs would win the World Series or that Leicester City would take the Premier League title. And commodities markets were not without their own set of surprises as well. OPEC cut production with non-OPEC countries for the first time in 10 years. Weather whipsawed natural gas, and Trump’s election inspired a late metals complex rally on the basis of hopes for new infrastructure spending. In fact, when all was said and done, 2016 was a pretty good year for commodities, with the asset class posting its first annual advance since 2010.

Commodity market black swan events come in many forms, and the market may take years or an instant to price them in. Technological innovation caused the US shale gas revolution, the Great Recession caused structural demand destruction, while geopolitical strife has disrupted commodity supplies overnight. We all know that markets will surprise in some fashion in 2017, so we attempt this review to shine  a spotlight on the specific commodity market risks that clients should watch.

Where could the surprises come from: "Watch these spaces: China, Russia, the Middle East and Turkey are likely to surprise the commodity complex in 2017."

Below is the summary list of the proposed "black swans"

Breaking down the list, Barclays says that generally "it sees risks skewed to the upside in 2017, based on several supply-side risks."

Given the scenarios laid out below we view supply driven disruptions in 2017 as being more likely than demand side Black Swan events. Although commodity price disruptions may mean higher prices in the short-term there is a risk they result in lower medium-long-term prices. A supply disruption that results in a higher futures curve could result in the sanctioning of new projects or increased producer hedging activity, eventually putting downward pressure on prices in the long-dated contracts. There are, of course, supply-side risks that would be bearish for the market as well, such as higher production from Libya or the Neutral Zone."

Demand events less likely but more structurally impactful. Given the relative liquidity in global commodity markets we see supply related outages being shorter in duration compared to potential demand side risks. We see demand side events, such as those driven by economic weakness, as less likely but events that would have a longer term structural impact on commodity prices to the downside.

As noted above, the two big categories laid out by Barclays are as follows:

Threats to Commodity Supply:

• Iran/US rhetoric escalates and leads to more Iranian ballistic missile testing (oil): It should come as no surprise that Trump’s pledge to dismantle the Iran nuclear deal (JCPOA) ranks as one of the most significantly bullish risks towards oil markets this year.... We do not believe that the reimposition of sanctions would lead to an abrupt cut in Iranian exports, but the threat of new US sanctions will likely slow the pace of investment needed for Iran’s oil sector to mitigate the decline from existing oil fields. Commodity market effect: Heightening geopolitical tensions would likely have a short-term price effect (threat to transit via the Strait of Hormuz), and a dampening of investment prospects would threaten Iran’s ability to attract foreign investment.


• Venezuela defaults on its 2017 debt obligations, causing a cash crunch and production shut-ins (oil). After demonstrating its willingness to pay over the past three years, Venezuela could default on 2017 debt obligations. This would cause creditors and business partners to step back and banks to freeze PDVSA’s bank accounts. The ensuing liquidity crunch could prevent PDVSA from making payments to partners that are necessary to facilitate day-to-day operations. Although PDVSA employees would still receive payment in VEB, a deepening of the economic crisis could increase social and political tensions. Commodity market effect: A production shut-in of this nature would be bullish for the oil market and likely push the curve into backwardation in short order. Roughly two-thirds (1.5 mb/d) of Venezuela’s oil production (2.2 mb/d) is heavy and extra-heavy crude oil, so a disruption is likely to be a bearish for light-heavy spreads. The effects of the disruption would likely be more pronounced in the US, which imports nearly one-third of Venezuela’s production (predominantly heavy oil). We would expect the WCS-WTI spread to strengthen markedly.


• Large-scale water contamination issue caused by wastewater disposal incident in major oil and gas producing state (natural gas): Following the events in Flint, Michigan, this year, there is a renewed focus  on the right to safe drinking water. An event in a major natural gas producing state such as Pennsylvania, Oklahoma or Texas, where it was concluded that the wastewater from hydraulic fracking wells had contaminated drinking water would result in major public outcry and likely affect production levels. The market could see a temporary or even permanent ban on fracking activity, such as in New York State, or significantly more stringent and costly regulations. Commodity market effect: The back of the natural gas curve could strengthen significantly as producers limit supply. New regulations would likely increase producer costs.


• Riots in Chile over the 2017 general election results halt production at mines across the country (copper). Protestors decrying the election results might occupy railways, ports, and other critical infrastructure, affecting all 5,700kt of Chile’s copper production. Although the risk of political turbulence is low in Chile, the risk of riots and political protests affecting copper production is high and real. In 2016, protests by workers in Peru, Chile, and Indonesia resulted in disruptions to several hundred thousand tons of planned copper supply (see Copper Disruption Tracker: November brings more disruptions, Chilean production drop). Commodity market effect: Disruptions are a well-known phenomenon affecting the copper market, which already incorporates a limited amount of these in its pricing outlook. However, they have the potential to provide a short-term boost to prices if the supply affected is large enough. Any disruptions above our 1mnt allotment have the potential to shift the market into a substantial deficit, which could provide a more sustainable boost to prices, given plateauing production post-2019.


• An aggressive Russia further pushes into Ukraine, resulting in a disruption to the country’s iron ore production. Ukraine is a small but regionally significant producer of iron ore, supplying the domestic steel market and nearby European and Russian mills. Iron ore production in 2016 was approximately 74mnt. Any conflicts in the region could halt the country’s iron ore production and exports, resulting in stronger European reliance on Brazilian exports and a tightening global balance. Any outages of iron ore production, assuming crude steel production remains constant, would result in a strong positive headwind to prices.  Commodity market effect: The severity and length of any supply disruptions from regional Russian aggression would ultimately determine the price effect. A rerouting of any exports to European would have knock-on effects, forcing Europe to reply more on Brazil, thus reducing Brazilian supply available to China. The disruption to global supply chains could be bullish for iron ore in the short term, but bearish in the long term as Russian and European steel production contracts from the ensuing economic fallout.

On the other side, Barclays notes that the major black swan risk for commodity demand is an unexpected economic downturn in any of the major commodity consuming nations. Namely, investors will continue to focus on the Chinese economy. Our economists continue to see solid GDP growth for the country in 2017 and are forecasting 6.3% in 2017 and 6.1% in 2018. Moreover, our China economists continue to see upside, not downside, risks to growth. That said, economic shocks do happen, and China is not immune from the unforeseen. A Chinese hard landing scenario resulting from heightened capital outflows, geopolitical tensions, or a global trade war remains possible, if unlikely.

Threats To Commodity Demand

• Trade war with China escalates into geopolitical tensions, interrupting global commerce (cross-commodity). In an attempt to reduce its trade deficit with China ($365.7bn in 2015), the US might implement a tariff schedule designed to halt the flow of Chinese imports. With the US taking the lead, other developed nations with sectors similarly threatened by China, such as the EU steel sector, may implement a range of tariffs, quotas, and other barriers to trade. China might respond by taking a more aggressive stance in the South China Sea, leading to a standoff that halts the flows of global commerce in and out of China. Commodity market effect: Such a scenario would effectively slow global trade, affecting global GDP estimates across the board. Countries with economies heavily weighted towards manufacturing would have drops in industrial energy and metals demand, while energy used for the transit of goods would also fall. In the short term, the event would put downward pressure on prices across the commodity complex. However, over the longer term, the strains in global trade would result in more regionalized commodity markets, resulting in higher levels of price volatility.


• Metals hit the hardest if China weakens: Given the leverage of iron ore and copper to the Chinese economy (60% and 50% of global demand, respectively, 70% of iron ore seaborne trade), any risk to the Chinese economy would have large and serious negative effects on the prices for the two commodities. A stimulus-driven revival in the Chinese economy led a metals sector recovery in 2016. Although China retains significant reserves of iron ore and copper and is a major producer for both commodities (third-largest for both commodities), its vast levels of consumption require significant imports to fuel demand. Commodity market effect: The loss of the primary consumer for both commodities would likely result in a bifurcation of the global market, with domestic Chinese prices reaching record highs, while global prices ex-China plummet to new lows. Oil and gas effects would likely to be limited due to infrastructure build-out and continued robust car sales. Based on a historical GDP/oil demand rule of thumb, a reduction in GDP growth by one percentage point would likely shave 80-100 kb/d off of China’s oil demand.  Precious metals, particularly gold, may benefit from a risk-off move over the heightened geopolitical tension.


• Elon Musk might deliver the Model 3 on time and customers love it or 2017 experiences a major and concentrated battery technology breakthrough. Though our equities analysts expect that there will be delays on Model 3 delivery, as they highlight in 4 Tweets to Expect from Elon Musk, of course, the opposite could occur which might lead market participants to price in a more rapid EV adoption in to their outlook. In our view, even if this were to occur, we would expect the effect on gasoline demand to be quite limited in 2017 and even in the medium term, as we elaborated in Affirming Upward Bound (p. 43). EVs still hold only a minuscule (0.1%) share of the global vehicle stock. That said, markets have a tendency to price in future developments and this development or a battery technology breakthrough that pushes prices far below current levels could turn the tide on how the market perceives EVs" medium-term effect on oil demand. Similar to technology that cracked the code in shale plays, we do not expect this development to be concentrated in the timeframe of one year, but given our definition of a ‘black swan’ it is of course a possibility.


• A broader US/Mexican trade war might make US natural gas exports into  Mexico uneconomic due to new tariffs (natural gas). A NAFTA trade-related fight could result in gas relations between the US and Mexico becoming strained (under NAFTA there is no tariff on basic petrochemical goods, which is the category under which natural gas falls). Given an oversupply in global gas markets, a new tariff put on US gas exports to Mexico would make LNG imports more economic in some regions of Mexico than US pipeline gas. Higher domestic gas prices in Mexico due to new tariffs might spur the government to accelerate programs to develop its own largely unproven shale gas resource base. Commodity market effect: A drop in US exports to Mexico would lower natural gas prices. In the short term, US gas would have to price lower to compete in Mexico, given the additional tariff. Longer term, the gas curve could come under pressure as developers cancel proposed infrastructure projects to transport additional volumes of US gas into Mexico.


• A Fukushima-type incident in China turns public opinion against nuclear power, causing a short- to medium-term tightening in global thermal fuel markets, especially LNG and coal. China’s aspirations to grow its nuclear generation profile have already encountered issues with large-scale delays, cost overruns and questions about safety and adequate regularity oversight. A nuclear incident with large-scale social effects would cause all other nuclear plants to shut down until adequate inspections were done. In the meantime, China would need to boost thermal generation, causing global LNG, coal and even oil markets to spike under the unexpected demand similar to what occurred after Japan’s Fukushima disaster in 2011. Commodity market effect: In the short to medium term, LNG, coal and oil markets would all receive a boost as China’s imports skyrocket due to downed nuclear capacity. With the future of nuclear in China called into question, long-term gas and LNG projects would receive a boost. China would likely gain newfound interest in pipeline gas projects with Russia and Central Asia, while another generation of LNG projects in the Asia Pacific would also benefit from new Chinese buyers.


• North Korea nuclear tests: Continued nuclear and missile test would draw the ire of President Trump. North Korea carried out a number of these tests in 2016. According to a recent assessment by CFR, North Korea is likely to obtain the ability to strike the US with a nuclear weapon during the next president’s term. In the past year, it has enhanced enrichment capabilities, added to its nuclear warhead arsenal, and accelerated proliferation activities in the Middle East. Pessimistic assumptions indicate the regime has 13-21 nuclear weapons as of June 2016 and even more fissile material. Commodity market effect: Missile testing would have a secondary and bearish effect on Chinese economic growth and likely put a damper on air travel to/within Asia.

Finally, Barclays lays out two potential transit threats.

• China deploys a rig to drill in the disputed waters of the South China Sea: Given President-elect Trump’s China stance, as well as his cabinet appointments and the aftermath of the Hague ruling, China could exert its right to sovereignty over territory in the South China Sea. The seizure of a drone in mid-December 2016 may be a precursor to further conflict. Although China concluded new trade agreements with Vietnam and the Philippines in September and October, respectively, the potential for conflict remains. The region is more important for the role that it plays in energy transit than future oil or gas supply. The nearby Strait of Malacca transits almost 30% of the world’s oil and about half of global LNG trade. Further conflict in the area would threaten the ease of transport for those energy resources and damage China’s ability to sustain economic growth. Commodity market effect: Tension in the S. China Sea with either regional neighbours or the US dampens China’s economic prospects (bearish demand), but could be bullish for oil and global gas prices, as these commodities would have to find sub-par routes to market.


• Further terrorism in Turkey: In the aftermath of the coup attempt on Turkish PM Erdoganseveral months ago, the tension between Kurdish groups and the government is intensifying at the same time the divisiveness of the political institutions is growing. The assassination of the Russian ambassador to Turkey could bring Moscow and Ankara more in line with one another in some respects, but the threat of terrorism in Turkey as a result of Turkey’s alliances in proxy conflicts in Syria and Iraq is likely to worsen in 2017. As we highlighted in Turkey Quarterly Outlook, 18 November 2016, Erdogan’s arrest of journalists, deteriorating institutional quality, and worsening judicial independence hurt the investment environment. In addition, barriers to growth include banking sector headwinds, unfavourable capital inflow dynamics, and continued currency depreciation. Commodity market effect: On the one hand, a slowdown in Turkish economic growth would be bearish for global gas and oil markets. A contraction in diesel demand could cut 50-75 kb/d off the country’s oil demand of 950 kb/d in 2016. On the other hand, a more serious bullish effect would come from Kurdish or jihadi groups targeting energy infrastructure