Making sense of Blockchain and its use for energy systems (2): Relationship of cryptocurrencies and blockchain and their link to contracting in energy systems

Since the first post, I came across a great little book on blockchain, cryptocurrencies and bitcoin among other things – it’s short, fun (feels more like talking to a knowledgeable buddy in a bar then a guide, yet is ultimately a guide) and cheap, so it’s a good trifecta for a reference book: The Sceptic’s Guide to Bitcoin, Cryptocurrencies and the Blockchain. Both opened my eyes quite amd made me understand the key limitations and uses of blockchain, so I’ll borrow from it a little below.

Cryptocurrencies and blockchain

Let’s start with some quick definitions:

  • Blockchain is the technology that enables the existence of cryptocurrency (among other things).
  • A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.
  • Bitcoin is the name of the best-known cryptocurrency, the one for which blockchain technology was invented.

90% of stuff being said out there about these three is hype and is used to “wow” people by promising the “train of the future so you better get onboard”. Forgetting that, let’s think about what this particular piece of technology is actually useful for – a technology can do many things but one question everybody seems to forget to meaningfully answer is “why do we need this?”.

To see what the use is, it’s helpful to keep in mind some limitations of this technology in its currently most popular use. Borrowing from The Sceptic’s Guide:

“While technically, Bitcoin’s transaction records consist of a small piece of code which is used to verify the transactions, this code is deliberately extremely limited in what it can do. Effectively, the only thing which is worth doing with it is the original idea: transferring coins…… Now Ethereum is a completely new thing. Here, the transaction of coins is almost a sideshow to the fact that almost arbitrarily complex computer code can be attached to the transaction… the Ethereum developers had a good, long sitdown, and after much soul searching, finally decided that, you know, that original rule that the blockchain is immutable, yeah… that one which is the reason all these things exist… well, it’s only computer code, we can modify it as we want.”

Then let’s see about some limitations. First one I came upon is the size of the blockchain.

BitInfoCharts.com is a treasure chest for data junkies – while it’s nice to scroll through, my eye catches on the blockchain size – measured in Gigabytes… with growth of any given blockchain, it will grow by order of magnitude. Now, in today’s world of fast net links, shouldn’t be that much a problem surely? Or not? Well, open your dictionary (yes!!) after you see this conversation for example, as it mentions:

  • For blockchain scalability they build sharding
  • For data storage they build swarm
  • For fast processing a team build raiden (offchain)
  • For contract execution computing power a team build iexec (offchain)

If one thinks of payment, it boils down to the issue of the number of transactions (as we can assume human ingenuity will solve other issues):

“For the version of Bitcoin in use at the end of 2017, this is around 2500 transactions per block. No matter how

many people want to pay their coffee with Bitcoin in the entire world, only up to 2500 of them will actually

succeed within 10 minutes… The human population is nearing 10 billion, and Bitcoin can sustain 4 transactions per second.”

Here’s a nice little text on why it’s ultimately ridiculous to think of bitcoin as an awesome silver bullet that’ll solve all the world’s payment problems.

A banknote’s value is purely an agreement between people that they will respect the Central Bank of a country, and value is guaranteed by signature of the Central Bank Governor. For cryptocurrencies, value is determined by pure demand and supply, pretty much like stocks, which you’d never use for payment of anything, right?

Some other issues with governance and what cryptocurrencies were made for and how it works out in the real world can be read under a really bad title for an excellent article here.

So, letting go of value and focusing more on usefulness, we have two things to consider – use of tech for making a transaction and the speed of it.

Blockchain and contracting

Blockchain is a decentralized database which chronologically and securely records transactions. The transaction can be of cryptocurrency, but it can also represent the transfer of value on systems like Ethereum and others. Value might be a service, a product or an approval in the form of a Smart Contract.

The four potential uses of blockchains are:

  • Recording Value Exchange (as described briefly above)
  • Administering Smart Contracts
  • Combining Smart Contracts to form a Decentralised Autonomous Organisation(DAO)
  • Certifying proof of existence for certain data (for instance, providing a securely backed up Digital Identification)

A Smart Contract is a computer program that works on the if / then principle. In this way the contracts are administered. So if the painter has painted the wall then he requests it’s inspected. If the person responsible for inspecting the work agrees it’s acceptable quality then the painter gets paid. Smart Contracts can be used for each of these if / then scenarios and recorded on the Blockchain (and can be collateralized with cryptocurrency). This all happens securely because of the use of cryptography in Blockchains to store transactions in Blocks of data that are replicated on multiple servers/computers around the world.

Another example is the delivery of goods allowing clients to buy directly from the supplier because the Smart Contract can provide more trust in the transaction. Payment to a supplier can be staggered and liability transferred to different parties. Take for example a piece of a solar photovoltaic plant. A client could purchase direct from the supplier, pay a portion of the cost when it’s verified the panels have left port in the origin country, transfer liability to the shipping company, release further payment when the plant arrives on site, again transferring liability, this time to the contractor responsible for installation. Then final payment can be issued once the plant has been installed and commissioned.

All these stages can be stored on the Blockchain and provide more opportunity for direct transactions without the need for (often costly) middlemen.

A group of Smart Contracts can be used to create a Decentralized Autonomous Organization (DAO), an organization ran by rules encoded as computer programs using smart contracts. For example, with the Internet of Things (IoT) and the amount of metering and monitors that can be put into buildings, that the building itself cannot be set up as a DAO at the beginning of a project, through the construction phase and beyond to the in-use phase.

Integration of Blockchain and the Building Maintenance System (BMS) could lead to a building’s DAO placing an order for a new light fitting, accepting delivery and liability for it, calling out someone to install it and paying both the supplier and installer. Payment would be made from the DOA’s wallet (bank account) which is connected to wallets of those that live in the building. It’s not a far jump to see that rents could be collected, body corporate fees, and insurance payments all managed autonomously by a building’s DAO. Some Dubai-grown application of this right here.

Project governance can also be captured on the Blockchain. Records of approvals in pre-construction phase but also during the in-use management of the building for voting on various issues requiring approvals. The DAO’s transaction record of money, insurance, voting and ownership are captured by the program rules and are maintained on a Blockchain.

Finally, the creation of a Digital ID allows people to share relevant information that is validated by an authorizing body. Identities of people and/or vendors could be securely recorded in the Blockchain, and additionally used to build reputation for work or contracts over time. This identification and reputation system would allow for people who don’t necessarily know or trust each other to be able to do business. In construction, for example, we can think of having proof of membership to relevant professional bodies to be able to self-certify work, also police security clearance to work at airports, schools and on government contracts.

Blockchain, contracting and energy systems

When a renewable-power plant generates a unit of electricity today, in most of the world, a meter provides data that gets logged in a spreadsheet. The spreadsheet is then sent to a registry provider, where the data gets entered into a new system and a certificate is created. A second set of intermediaries brokers deals between buyers and sellers of these certificates, and yet another party verifies the certificates after they are purchased.

Such a byzantine system racks up transaction costs, while leaving plenty of room for accounting errors that can range from honest mistakes to outright fraud. The lack of transparency also scares many people off entirely.

What if the meter wrote the data directly to a blockchain instead?

The electricity sector is still mostly based on massive, centralized power plants that generate power sent long distances over transmission and distribution lines. Only in the last 5-10 years a growing number of smaller “distributed” power generators and today also storage systems, like rooftop solar panels and electric-vehicle batteries, have been connecting to the grid.

The owners of these systems struggle to maximize their value because the legacy electricity system is so inefficient.

Then there’s the issue of payment for using part of a grid, taking care of who sold what to whom… and in general raises interesting questions as examined here, near the end of the article.

The potential cost-saving and process efficiencies are too compelling to ignore. Some energy companies have calculated the savings of 30 to 60 percent on their structural costs. These savings come mainly from reduced labor costs, reduced manual and semi-automated process-related efforts, reduced capital costs through faster settlements, and reduced technology costs by reducing the dependency on multiple systems.

A cup of common sense for the end 

I remember an article about a smart refrigerator – it would monitor what’s inside him, what’s being put in (oh wait… or did you have to put it in and then find it in a menu on the fridge itself, doubling the amount of time for a seemingly simple task?), and when something was running low it would tell you so and/or try to order items from an online seller?

I am as tech-oriented as one can be, yet I like having my wife letting me know we’re out of eggs or bread, taking a walk to the grocery and emptying the bag of grocery items onto shelves of the fridge without even thinking about it. Any why for goodness sake would I for example want my fridge to have my credit card (for online ordering)???

Not all tech is useful nor is it needed (but if you buy now, you’ll get a set of steak knives!!). Are cryptocurrencies needed? Sure, for specific purposes, and I’d agree that due to severely cut transaction costs, if bandwidth (block size) is solved to be on par or beyond i.e. Visa credit cards, for micropayments of articles in newspapers, parts of a book and similar, done seamlessly so as not to bother the user who just wants to i.e. read – it’s totally on point.

This is not a cryptocurrency blog post. This is a blog post identifying cryptocurrency as applied blockchain technology, and other uses of blockchain technology which can potentially be meaningfully used in the energy sector.

“Smart” contracting (who hates general adjectives like “smart” used without context? Anyone else but me?) – it’s always been and always will be “goods or services for goods or services”, where at least one of the goods is usually (but not necessarily) money, or some form of value which can be used to exchange for further goods and services.

Blockchain is simply a way of utilizing technology to make this centuries old system more efficient, consequently a lot cheaper and faster and in the end run more applicable to transactions which have previously been deemed to small and/or too important/rare to be executed either with payment involved or without a whole bunch of different people (each adding cost) involved.

Technology implementations of this concept will surely be an exciting thing to see, not just from tech standpoint but from awareness standpoint – as transaction processes get redefined, we’ll get to remember that transaction processes were there in the first place (nothing like breaking a habit to blow one’s mind!).

In the next edition, let’s see what can and should be done to ensure this area is regulated in a way which will be a motivator instead of a deterrent, which can spur innovation and creativity while ensuring user safety and minimizing any potential for misuse.

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