Published on December 12th, 2017 | by Michael Barnard0
Bitcoin’s Hot But Blockchain For Cleantech Is Interesting
December 12th, 2017 by Michael Barnard
This past week, Bitcoin blew past $19,000 per coin and started consuming more electricity than 159 countries’ individual annual demand, with an estimated 32.53 TWh of electricity consumption according to one widely cited estimate.
Bitcoin is one of a bunch of what are referred to as cryptocurrencies, in that they are on-the-internet currencies protected and enabled by cryptography. Right now, a bunch of people are spending about $1.6 billion per year to get $13 billion of revenue in Bitcoin. The total cryptocurrency market is worth about $400 billion right now, with Bitcoin representing about half of that.
Bitcoin is very interesting for cleantech for two reasons. One is obvious: the primary currency sucks a lot of electricity, and more electricity demand is good for investment in renewable generation. Of course, a lot of the electricity still comes from carbon-rich fossil fuels too. The second is the underlying technology, blockchain, which has a number of interesting uses emerging in the cleantech space.
This is the first block in a chain of articles I’ll be researching and writing over the coming weeks. In it, you’ll get a quick overview of the technology and applications. Future articles will dive deep into what blockchain is and isn’t, the major flavours of blockchain technology, and case studies of different uses. This is also part of my series exploring grid innovation, which started with 7 Reasons The Future Is Electric.
While the underpinning philosophy of Bitcoin as the first post-Westphalian, non-fiat currency fascinates me, I’ll try to keep my geopolitical and historical musings to the minimum relevant to cleantech.
So, what’s blockchain?
There’s a lot of confusion about this. It’s not that hard if we look at basic functional and non-functional features.
Blockchain is just an accounting system at heart. It keeps track of transactions, just like a list of purchases in a spreadsheet. And it makes those transactions available over the internet. It actually doesn’t add much in the way of new functionality. Pretty much anything you can do with blockchain you can do with a database and basic web technology.
Non-functional features are where blockchain starts getting interesting. The most obvious is that there is no central database. Instead, the ledger is independently hosted by a bunch of different people and organizations and synchronized between them.
The second interesting non-functional feature is that transactions are securely linked in a chain using public key and private key encryption. Blocks of transactions are trusted and easy to verify because you can go back down the history of transactions to the first transaction and know each link in the chain is there.
The third interesting non-functional feature is that in keeping with the distributed nature of the ledger, there is no central guarantor of fidelity. Instead, there is a mutually validating network of distributed nodes which keep each other honest.
Finally, each block in the chain is a set of transactions and a reference back to the previous block which are run through a hashing algorithm to give a unique resulting hash for that particular set of data. That means that it’s easy to verify that the block hasn’t been tampered with and to go backwards through the chain.
Really, that’s all blockchain is. A bunch of people with computers agree to run nodes which mutually validate a distributed ledger of transactions.
There’s a functional extension of the technology which is, to my mind, where it really starts getting interesting. One of the biggest standards is Ethereum and it has implemented something called smart contracts. Basically, it developed a Turing-complete programming language which lives in its blockchain technology.
In the simplest example, a smart contract is constructed between two people which has a computer-verifiable outcome that triggers payment. Say a programmer agrees to add an online ad framework to a webpage for a client. The contract specifies the cryptocurrency amount, source, destination, and escrow account for the payment. It specifies a timeframe — say, a month — and an executable test — in this case a check of the URL for the existence of the ad framework. The contract is signed by both parties. In a month, the contract tests for existence of the ad framework. If it’s there, it transfers the payment amount from escrow to the programmer. If the ad framework isn’t in place, it transfers the cryptocurrency back to the client. The test can be anything the two people agree to that the program can verify, and since the language is Turing-complete, that’s a lot of things.
Users of blockchain don’t have to do all the heavy lifting of maintaining copies of the blocks, finding the hashes, and synchronizing with other nodes. Like a banking application, there are apps and websites that allow users to put transactions into the pool for the people who run the computers to push into blocks.
There are a bunch of hidden nuances to all of the above of course. Most blockchains run on proof-of-work, which is to say that blockchain is protected by making it artificially hard to create a block, hence Bitcoin’s power use. An emerging approach is proof-of-stake, where honest participants own at least 51% of the assets. It’s a lot less computationally expensive. That may become relevant in later articles, but for now, it’s a wrinkle.
Similarly, the entire blockchain concept is a solution to a computer science problem from the 1970s that was formalized in 1982 as the Byzantine Generals’ Problem. At heart, it’s a question of how a bunch of systems can collaborate with trust when malicious actors are trying to disrupt the system. Proof-of-work and proof-of-stake are different solutions on top of blockchain to that problem.
The proof-of-work piece is interesting because the nodes that figure out the next hash get paid, typically in the cryptocurrency in question. That’s how Bitcoin comes into being in the first place. A bunch of nodes called miners are all competing to find the hash for the next block and the one that wins gets to create it and gets paid for it. The rest just spent a bunch of money on computer power and electricity with nothing to show for it. Bitcoin is designed so that it gets harder and harder to discover the hash with each block and that combined with the current high value of Bitcoin means a lot of people are competing globally, hence the electricity consumption.
The last nuance is that there are implementations of blockchain technologies that do have a central trusted authorizer. Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies hosted by The Linux Foundation. It gets around the competition for finding hashes by centralizing that piece into a consensus Cloud with other nodes verifying the work done by the consensus Cloud.IBM is very big in enterprise blockchain exploration as a main contributor to Hyperledger Fabric, one of the open source blockchain frameworks hosted by The Linux Foundation and sells its own IBM Blockchain based on Hyperledger Fabric. This simplifies the deployment and allows value chains to be created and joined more easily.
What does this have to do with cleantech?
Unless you are a computer nerd (which is one of the things I am), blockchain by itself is a pretty uninteresting technology. It’s ledgers and contracts, which have been around forever. It’s ledgers and contracts on computers, which have been around since the 1950s. It’s computer banking and electronic funds transfer, which has been available to consumers since the 1990s.
Outside of the Tulip Craze bubble surrounding Bitcoin right now, where it’s interesting is that there is no bank involved. It’s like the Protestant Church vs the Catholic Church. In the Catholic Church, the priest is the intermediary between God, scripture, and the churchgoer; while in the Protestant Church, the churchgoer has a personal relationship with God and scripture. One of Martin Luther’s key innovations was that dis-intermediation.
This can mean a lot of things, but one of them is if you hate paying transaction fees to banks, you don’t have to. Lots of people seem to think this is exciting, but instead, you’ll pay transaction fees to the cryptocurrency nodes, so it’s not really an economic advantage. Certainly, with Bitcoin transactions costing up to $13 and taking 10 minutes, that’s not such a value proposition. In places with bank-to-bank transfer clearances measuring in days, that has some advantages, but not in retail paying for a cup of coffee. Bitcoin is the most extreme example due to its architecture. Ethereum is less expensive but it still ranges from $0.50 to $1.50 per transaction. This might come down considerably, however. And it’s also at one level replicating transactions through multi-currency Paypal and email money transfers through banks.
The more important for cleantech is the value chains it enables. The most obvious ones right now are electricity trading and carbon pricing.
There are several emerging blockchain applications which are trying to allow producers of electricity to contract directly with consumers using smart contracts and leave the utility out of it entirely. This falls apart somewhat when you consider that the utility still owns the transmission and distribution grids and electricity is a heavily regulated utility in most places.
But many utilities are exploring this because they can become enablers of smart contracts in which they get a cut of the transaction to pay for grid costs without having to do as much administration of the payment process. Order-to-cash is a huge part of utility computer systems, and accounts receivable departments in utilities are constantly dunning consumers, turning off their electricity and turning it back on. The hope for the utility is that the smart contract enforces all of the payments and they don’t have to. Potentially big savings there.
At least one startup has a pilot to allow people with lots of solar panels to sell electricity to their neighbors, effectively net metering on steroids. There are a lot of individuals excited by that, but I’m more interested in major utility-scale flows of electricity. Renewable energy is growing by leap and bounds because major wind and solar farms are being built that generate TWh of electricity annually, not because of solar panels on a house.
It’s very interesting in parts of the world with crappy electricity systems and markets. Building a utility payment structure on blockchain is a leap to the future where one doesn’t exist, where the fiat currency is in freefall such as Venezuela, or where emerging distributed microgrids are powering areas poorly served, such as many parts of Africa and India.
It’s like the emerging economies leaping over the entire wired phone service to cellphones. The problem with this value chain model of course is that it’s aimed at the poor, so there’s an odd counter-dynamic related to wealth generation in that major corporations will look at it as a charity or marketing opportunity at best, but that doesn’t prevent local entrepreneurs from building their own from the open-source frameworks and enabling app-based transaction systems for cellphones. It’s possible to imagine micro-utilities emerging to link a set of islands in the Indonesian archipelago to share solar power without any government involvement, which does point to an interesting problem in a traditionally regulated commodity.
Carbon pricing is interesting too. I’m advising a startup that is focused on building a cryptocurrency for carbon-credit trading. It took me two hours of exploration with them to understand the value creation proposition, which isn’t atypical for a lot of blockchain and cryptocurrency applications. After all, if you can do it easily with a database in the Cloud, webpages, and apps, you have to truly understand the value chain in order to find an application where blockchain adds transformative value. Similarly, Energy Blockchain Labs in China is working with IBM to build a carbon-trading solution using Hyperledger.
So, that’s blockchain. It’s a distributed, dis-intermediated, secure ledger and contract system that lives in the Cloud. It’s the basis of the first truly post-national currencies. It’s the object of intense exploration for innovative disruption of current value chains. And cleantech is one of the areas that’s heavily into it. For people interested in more of the details and background, I strongly recommend the Quora set of of answers to the question “What is a blockchain?” Also, the original Bitcoin whitepaper by the pseudonymous Satoshi Nakamoto is worth reading.
Future articles will pull apart various examples to explore the business models and look at additional strengths and weaknesses. I might even explore the implications of post-Westphalian non-fiat currencies in one article just to get it out of my system. As always, I’ll pay close attention to the comments, so let me know of other examples, any mistakes I’ve made, and areas you are particularly interested in.
Follow CleanTechnica on Google News.
Latest Video from CleanTechnica.TV