#3 Energy blockchain – does it make sense?

Blockchain technology receives a lot of media attention these days with promises made that it will revolutionise many sectors. Blockchain is the backbone of cryptocurrencies such as Bitcoin or Ethereum.

As blockchain was developed as an offshoot from the financial sector, it makes sense to compare the possible applications in the energy sector to those developed from the financial sector.

The use of blockchain could remove the need for banks as middle men. Accounts would be based on the distributed ledger, and the transaction would be securely recorded. This would reduce costs and increase transparency.

The energy sector however has a different concept of “middle men”. In many transactions, a physical delivery of gas or electricity is made. As you can see the system is highly complex:

It involves various market participants between buyer and seller, including transmission system operators (TSOs), exchanges, central counterparts, and clearing houses. These may be involved in:

– operating critical transportation / transmission infrastructure; or

– reducing the risk of counterparty default.

Regarding infrastructure, this would be required even under a blockchain and smart contract regime. Assuming that TSOs are “middle men”, in order to be removed either buyer or seller would need to own the linking infrastructure.

Regarding default, such “middle men” are designed to reduce transaction risk. As blockchain seeks to remove third parties to reduce transaction risk, it could be argued that no significant benefit is to be gained through replacing such third parties by using blockchain.

In light of these factors, two questions are key to considering the value of implementing blockchain in the energy sector:

– Who do you want to remove from the transaction? e.g. facilitator, transporter, exchange operator, clearing house

– Why? e.g. reduction of cost, risk, other?

The answers to these should be considered in that the success of blockchain lies in its specific ability to:

– reliably and securely record transactions; and

– automatically execute transaction-specific clauses.

Considerations in implementing blockchain

Certain energy transactions lend themselves well to justify the use of blockchain, such as the trade of Renewable Energy Certificates or Guarantees of Origin, whereby:

– the administrative infrastructure is currently designed to ensure a reliable register of transactions and the prevention of double counting; and

– transactions are separate to the trade of actual electricity, so that there is no (direct) physical delivery component, i.e. the transaction is entirely virtual.

Other transactions are however more complex, such as those requiring the physical delivery of energy. These may currently rely on administrative infrastructure designed to reduce risk, negating any significant benefit which blockchain could offer.

Furthermore, these require physical input from the contracting parties or third parties, potentially undermining the benefit of automatic execution and/or the security of the system.

Takeaways

• As demonstrated by some of the pilot projects, wholesale electricity and gas trading may lend itself to a shift towards blockchain technology.

• Unlike many other physical goods, gas and electricity transport is to a great extent already controlled remotely. Smart contracts could enable the automatic execution of a gas delivery from one party to another.

• Payment could be made automatically by transferring a fiat currency held in escrow or a cryptocurrency. This would significantly reduce the risk of buyer default, and only upon full payment would the title to the gas be transferred.

• Using a framework agreement, blockchain could reduce transaction times, costs and the risk of payment default, and reduce the need for insurance and credit guarantees. Transaction data could be automatically reported, facilitating regulatory compliance and offering market price tranparency.

• This system could be coupled with the automatic matching of gas supply and demand across various timeframes, allowing for highly efficient and low cost electricity gas markets.

• The adoption of blockchain and smart contracts by various sectors appears to be gaining momentum. This is likely to continue.

• Blockchain is a technology still in its infancy and there are no clear trends or limits as to how it could be used in the energy sector. There are many pilot projects which are currently exploring various uses.

• The initial use for blockchain in the energy sector will likely be process optimisation, involving the automation of simple and standard internal processes.

• There are however several takeaways from a legal review of the benefit of blockchain in its current form, in particular smart contracts

– smart contracts are self executing, however cannot replace paper contracts and require a conventional legal framework to have legal effect;

– smart contracts appear to work best when a contract is entirely virtual, rather than requiring physical inputs or deliveries; and

– consideration must be given whether removing the third party from a transaction is of actual benefit in terms of increasing efficiency and reducing costs and risk.

• In testing and implementing a blockchain system, one needs to consider the type (public, consortium or closed), as well as whether one should develop the blockchain internally or outsource it to a blockchain service provider.

• Even where large companies could absorb the risk associated with internally- performed smart contracts, it would need to consider matters such as:

– whether blockchain would be implemented for a core (high risk) or non-core (low risk) business area;

– the degree of control it has over the blockchain;

– data privacy issues the balance between encryption and transparency;

– IP rights over the data (held by the company or the service provider);

– performance assurances from and liability of the service provider;

– the appropriate jurisdiction;

– regulatory compliance obligations; and

– an exit strategy(e.g.data migration assistance).

Source: Andreas Gunst and Kenneth Wallace-Mueller from from DLA Piper

#2 Eight crypto facts 2018

What will 2018 bring for crypto currencies? As cryptocurrencies explode in value, from Bitcoin to Ether, I think we are witnessing the birth of a new paradigm for business, economics and finance. Big companies like Siemens, IBM, MasterCard, WallMart are jumping in to the market as well as big players from logistics, energy, agriculture, food, pharmaceutics and more.

Though in the early stages of the blockchain based economy, there is sufficient evidence we are in the midst of a transformation shaped by the Internet’s growing global network infrastructure: Wifi network proliferation. Decentralised finance. The sharing economy. Peer-to-peer transactions. A new transaction trust mechanism. Mobile commerce. AI. Internet of Things. None of this could happen without the Internet so now on to the next evolution.

Let’s all think bigger. Don’t fear the Blockchain. Let’s shape a better world. I think the blockchain economy means new jobs, millions of new businesses, new careers, new wealth creation, new venture capital, new services and financial products. You get it. Maybe we get to tackle big grand challenges like smarter health care, climate change, clean energy and hunger.

Big ideas deserve big wonderful innovations to make happen.

Some facts that I forecast for 2018:

1 Blockchain enabled services are up and coming. From security, to commerce, to transportation, commerce, trade to energy. Imagine entire cities designed for and enabled by the blockchain. Smart City Initiatives will expand to blockchain applications.

2 Fiat currencies go digital. Central banks and nations will entertain and develop digital assets to be representative of currency. Think digital tokens for Yuan, US Dollars and of course the Euros. The exchange rate of digital to crypto will accelerate economies.

3 Digital energy tokenisation will be more widespread. There is much value hidden in the global energy supply chain. A new market will enable a new economy by digitising energy supply networks that foster innovations and clean energy alternatives.

4 Digital supply chains on the blockchain: Most are quite wasteful and not digital but analog. A more efficient and secure global network of supply chains leveraging the Blockchain will happen.

5 Health data on the blockchain. New companies that use the blockchain to create pools of users that want to enhance their health, prevent disease and support their wellness could create a new global health services ecosystem.

6 Transforming global food production. This is next for transforming the one billion people who do not have clean water or access to food. This could be resolved with Blockchain innovations. First projects will start in 2018.

7 From artists, to musicians to creative makers: The Blockchain Enables Independent Entrepreneurs. Get paid for your creativity in crypto. More people to people direct crypto commerce.

8 The Blockchain transforms finance and investments. What we see already is that funding for startups through crowdfunding declined. We will see new financial products that enable investment, such as Blockchain ETF’s, Crypto Hedge Funds, Funds of Funds, blockchain futures, token peer to peer trades, probably crypto retirement products, A mixtur of digital assets will transform the investing marketplace offering individuals new choices leveraging Blockchain economics.

Get ready for the new Digital Age. Study crypto! It will be important to our children. Why not for you?

Source: adapted from Reuters, BBC, James Canton

#1 My wettest Blockchain dreams!

Dies ist die Kurzfassung des Beitrags.

How I got to know about cryptocurrency:

Four years ago, it was a topic on social media, especially on Twitter. It also came up when we had to design new research programs at City of Tomorrow, a research program I manage focused on digitisation in planning, construction, management, and greening of buildings and city districts, and sustainable city planning.

What are thoughts on digital currencies like bitcoin?

Bitcoin is the least intelligent application for blockchain technology for the moment. Given that 7 transactions per second are only possible on their system, it’s still super slow compared to Visa, which handles 2000 transactions per second. However, bitcoin became very famous over the last years and has helped bring more attention to blockchain technology.

To explain blockchain to people is difficult for me. We still have to learn a lot of vocabulary.

BlockchainEthereumICO, DLT, DAO, NEO, SH-256, hashes… it still needs a lot of effort to explain to my parents what I am doing at the moment with blockchain.

How important, do you believe, is blockchain technology to future developments cross-industry?

Very important.

It could probably disrupt many industries. Banks, real estate companies, and energy utilities are seriously threatened by young cheeky startups. Some people working in the sectors threatened, know about it and are enthusiastic about blockchain technology. It´s just that CEOs do not fully understand the impact and power of blockchain technology.

Through City of Tomorrow, you work with many cutting-edge technologies like virtual and augmented reality, drones, and blockchain. Where do you see the future taking us?

Physicist Nils Bohr once said, “It’s difficult to make predictions, especially about the future”. I may add: and especially about blockchain.

What I see is that we will have to live with many surprises. Blockchain will take its time to be implemented on a scale where we can see that it works. At the moment it’s still at laboratory scale. And we know from other technologies: what works in the laboratory sometimes still has a long way to go to be accepted by the market, accepted by the people.

I see that augmented and virtual reality is slowly taking off, and even now applied to the conservative construction industry. However, the applications are still very limited, the quality is lacking and there are only a small number of use cases.

Artificial Intelligence and self-learning systems could really be of help and at the same time the greatest threat to humanity. Here we have to learn a lot. And also regulate.

Blockchain technology will be implemented in the city of the future for land registration, confirmation of ownership, health services, and food safety, to name only some.

What are some of your biggest concerns around blockchain?

Actually, I have no concerns. But maybe I am much too in love with this technology and don´t see the disadvantages yet. I just see chances, opportunities, and dreams coming true!

What trends are you witnessing in Europe?

Good old lady Europe shows that she has some really capable people who can bring forward wonderful use cases for blockchain and dig deeper into its secrets.

There are slowly – too slow, but we are in Europe – being developed national funding programs for research funding of blockchain technology projects. Incubators are opening, offering accelerators to startups and entrepreneurs. The City of Zug in Switzerland has started their crypto valley and Austria started a Blockchain in the hub, which both show how the scene is developing.

Which industries, in your opinion, will be easiest and hardest to disrupt through the blockchain?

Easiest: Banking.

Hardest: ICT industry.

Why: Banking has, per definition, given the highest amount of trust to their customers. And blockchain technology is all about trust. You don’t have to trust a bank to transfer the money to your kids. You trust the technology. In our case, blockchain technology. The ICT industry will be the hardest to disrupt because this industry will maybe even have new jobs to offer.

While we’re seeing promising blockchain startups across a variety of industries, the technology is still in its infancy and some believe that it will take years for it to mature enough to become viable commercial alternatives. What are your thoughts on this?

I agree. It will take time.

Time to understand what are the best systems we can work on, like ethereum is. It still has many weaknesses.

Time to find out what problems can be solved best with the technology. Is it the complicated applications used by small groups or peers? Is it the large-scale applications involving every citizen on this planet (and his future avatar/digital twins)?

Time to see where the market appreciates the technology. Time to overcome concerns and critics after the crash of some of the cryptocurrencies and after people lost money through failed ICOs.

What are your thoughts on blockchain in energy management as seen in the light of the high energy costs contributed by crypto mining?

I talked to my father about blockchain. We discussed the energy consumption of crypto mining. He told me that the first computers he worked with had some MByte capacity and an enormous energy consumption.

Blockchain technology is in its infancy. Energy consumption is a problem that will be solved. We solved it for computers; why not for blockchain?

What are some blockchain use cases you are most passionate about?

Energy, health, elections, food security, and land registry, to name some of them. My favorite is energy applications and health.

I find it very touching to see that I can have my data back. I won’t have to give it to Facebook in the future. And if they want my data, they have to pay me for that.

Do you believe blockchain has the potential to solve some of the world’s most pressing socio-economic needs?

I am not sure. A technology is as good as its users. It can lead to some layoffs, especially in large industries. But new jobs will evolve. However, I personally think that it will contribute to people having a less direct link between a job and an income. To disconnect that is one of our world’s most pressing needs.

How is the blockchain industry evolving, from what you’ve seen since you first become involved?

We are still in the laboratory scale phase. Some testing applications can involve a few thousand users. It’s the beginning. Still amateur craftspeople style. Internet of 1992.

A crowd of motivated people follow my posts and articles on LinkedIn, and every day there are more of them. This is an indication of how the blockchain topic is gaining momentum.

From your evaluation of blockchain whitepapers, where do you think companies are going wrong, and what principles should they align themselves with?

White papers are sometimes what they call themselves. All white. I sometimes don’t find any intelligent words on them.

My main point: a technology shall solve a problem. And sometimes I don’t find the problem described in white papers.

What is the problem blockchain technology shall solve? That is the first question! And then one has to prove it. In written form. Most whitepapers I see make the mistake of starting with the hypothesis that blockchain can solve every problem of this planet.

Are you personally invested in any blockchain companies?

I am not. I bought some bitcoins and ethers, at the time of purchase valued 1000 Euro. The maximum amount I would allow myself to lose when gambling in a casino.