Does the Energy Industry Need Its Own Blockchain?

If you’re following the world of blockchain, you likely know of two: Bitcoin and Ethereum.

Bitcoin is a digital currency built on an immutable distributed ledger designed for peer-to-peer operation and a secure transfer or store of value. Ethereum is much the same, but with an important difference — the addition of an application layer that supports “smart contracts,” which add programmable, self-executable attributes to this digital exchange of value. This feature can underpin a wealth of decentralized applications (dapps, for short), many of which have been developed for the energy industry.

This feature of programmable money is the key to Ethereum’s broad use today and has led to the current wave of initial coin offerings (ICOs) by allowing a startup to raise money for operations and development through the sale of tokens built on the back of Ethereum. Whereas the token in bitcoin is the bitcoin currency itself, Ethereum’s tokens can represent a digital or fiat currency, a right to participate in whatever micro-economy the company has created, rights to an underlying physical (renewable energy project) or digital asset (think Crypto-Kitties or music copyrights). Today, most blockchain startups looking to address the energy market are using Ethereum as the basis for their platform, though it may have as much to do with the ability to quickly raise money through ICOs than the applicability of Ethereum for the unique needs of the electricity sector.

Despite its popularity, Ethereum remains a fairly immature protocol stack, and when organizations look to develop or deploy a blockchain solution for the electricity system, they have plenty of concerns. In our recent report on blockchain at GTM Research, Grid Edge Analyst Colleen Metelitsa identified a range of disadvantages of current public blockchains when comparing them to traditional solutions. They include:

Transparency: The ledger of transactions is open and shared with all members of the network, which raises data privacy issues in the electricity market. Adding permission levels can address this to a degree. 

Speed and scalability: The strength of the consensus mechanism comes at a cost of transaction speed, data processing redundancy, significant computing power and energy, which can run counter to the needs of a dynamic energy marketplace needing high-speed transactions at low energy costs. 

Regulatory hurdles: Many of the applications identified for the electricity market challenge fundamental regulatory assumptions around utility franchise rights, reporting requirements and customer privacy.

Interoperability: Always an issue in early-stage software ecosystems, blockchains will require standardized ways to pass information securely among each other. There is work underway to create the necessary APIs, middleware and oracles, but these always take time.

How to decide?

Because of these challenges, blockchain-energy companies face complex but critical choices when looking to build their platform. Today, theses can be grouped into three categories:

1. Build on the back of an existing open-source blockchain, such as Ethereum, or a similarly well-defined distributed ledger technology such as Tendermint, IOTA or Hashgraph, and address any limitations with “off-chain” solutions such as sidechains or blockchain “sharding.”
2. Build on an existing blockchain but tailor it to your own requirements. This would include working with the Enterprise Ethereum Alliance or the Linux Foundation’s Hyperledger Project to create blockchain implementations that have unique governance, consensus or permission structures.
3. Build your own blockchain platform, ideally an open-source one so you can tap the global resource of developers.

The Rocky Mountain Institute, seeing an opportunity to participate in this space through collaboration with electric utilities and other market participants, has developed its own open-source blockchain via its nonprofit organization called Energy Web Foundation, through a partnership with blockchain developer Grid Singularity.

Jesse Morris, a principal at RMI, breaks it down this way:

1. Governance. “Eventually, we envision mission critical dapps running on a blockchain for energy. We're actually using dapps to do more than just enhance electricity sector accounting, for example via transactive energy/demand management applications. For these kinds of applications, we're talking about potentially exposing grid reliability to decisions made on a blockchain. In this scenario, do we really think the governance structures (or lack thereof) of public chains like Ethereum or others that rely on a decentralized, anonymous network of miners (eventually stakers) will be sufficiently robust? We don't think so. Under our governance structure, all nodes are white-listed, publicly known entities; we also have a number of other unique governance features that we think solve this issue.”
2. Transaction costs. “Public networks are very expensive right now because of block prioritization and the mining arms race. Yes, public chains have tech development road maps that will ‘solve’ this problem in the long term. But an energy-specific chain based on ‘proof of authority’ can solve this sooner.”
3. Regulator privilege. “We think there needs to be a way for regulators, if they so choose, to be more actively involved as regulators on a chain. Accordingly, we think an energy sector chain should have the ability for trusted, white-listed entities to be given a different chain status so as to conduct more real-time diligence on certain transactions. Again, we are building this feature on our chain and can speak more about it soon.”
4. Interoperability. “There are many interoperability plays out there (e.g., Polkadot). We think these will be crucial for the success of blockchain in energy globally. Any chain for energy needs to be able to interoperate with other chains ASAP. Again, public networks will eventually be able to do this, but a uniquely designed chain with a special governance model can adopt these new protocol upgrades much faster than the public networks.”

The Energy Web Foundation is building its blockchain, the Energy Web, with Grid Singularity and has opened up a testbed, named Tobalaba, for members to trial new applications and use cases.

Others in the blockchain and energy space have taken similar routes, while others haven’t yet disclosed the makeup of their blockchain. Below are a few of the better-known blockchain in energy companies that have described the source of their blockchain.

Building on an existing blockchain

Grid+ is a good example of the camp that advocates sticking with public blockchains. Grid+ uses the public Ethereum blockchain and solves for any of its shortcomings for energy applications by addressing those on the application layer, or off-chain solutions.

IBM's work with blockchain is basically synonymous with Hyperledger, and to date most of its work with blockchain for energy has been built on the back of Hyperledger. Recent activities include trialing applications from grid balancing to carbon credit management.

Ponton is a European software developer that has created two blockchain platforms, the EnerChain for wholesale trading, and the GridChain for blockchain applications in the distribution grid. Ponton has developed its blockchain on Tendermint, but it claims to be technology- and blockchain-agnostic, and will migrate its platform to whatever blockchain emerges as suitable for its applications.

WePower is using the public Ethereum blockchain for its green energy trading and asset tokenization platform. WePower recently noted that its engineering team is “working with Elering (in Estonia) to determine the feasibility of using Ethereum for smart contract application and transparency for the long term.” 

Tailoring an existing blockchain to the industry’s needs

Conjoule builds on Ethereum with the Ethereum Enterprise resource kit to create a permissioned blockchain with proof of authority consensus.

Electron is a good example of the “tailored” model. Electron has a blockchain based on Ethereum but tailored through Enterprise Ethereum Alliance work to have a permissioned, proof of authority blockchain.

Building a new blockchain for the energy industry

Drift originally built its own permissioned distributed ledger with proof of authority consensus for an ESCO service offering in New York, but plans to transition to a more standardized blockchain, likely Ethereum.

LO3 Energy became known through its high-profile Brooklyn Microgrid work, and has now announced the launch of a purpose-built blockchain platform called Exergy. This is similar to the Energy Web in that it aims to be a platform for developers to create applications on and deploy solutions from, and is claimed to be a “blockchain architecture designed from the ground up to align with the physical characteristics of electricity grids at the distribution level, making it possible to secure and transfer the information critical for integration of DERs and operating a truly decentralized grid.”

Power Ledger takes a hybrid approach to its platform. According to the company, “The Public Layer utilizes the Ethereum blockchain and is where the Ecosystem interfaces with third-party token exchanges. The Public Layer and third-party exchanges operate independently and are outside of Power Ledger Ecosystem’s control and provide the most advanced security and decentralization available to the ERC20 standard POWR tokens.” Power Ledger has its own blockchain, called EcoChain, which is “a private Proof of Stake, low-power blockchain developed in-house and live tested in the energy markets during trials in 2016 and 2017.” Power Ledger may move to Ethereum for its blockchain if it meets the demands of the ecosystem.

Where does all this activity lead us? There are competing storylines at play today, one where these early blockchains ultimately give way to single blockchain to underpin the “internet of value,” much the same way TCP/IP ultimately won out over a variety of corporate networking standards and the internationally proposed OSI networking protocol stack, and another where these various blockchains survive for much longer through the adoption of standardized interfaces, preserving their unique features for whichever market they were designed to serve. 

History tends to favor the model where a single standard forces out all others, but blockchain could be different; attributes of the underlying infrastructure, regulatory requirements and commercial pressures could well define a future that does not necessitate a single global blockchain, because in these various use cases and markets, blockchain acts more as a nearly invisible middleware that settles transactions or exchanges data between legacy systems and decentralized networks most efficiently.

What else is going on?

• Romania's Restart Energy raised $30 million in an ICO to build out an energy exchange called Restart Energy Democracy.
• Audi is looking into blockchain and lists “management of local energy grids” among the uses cases being explored.
• More blockchain in Amsterdam, as Dutch startup unchain launches its Blockchain Gateway platform and works with Vattenfall on a proof of concept.
• Australian blockchain firm Enosi released a white paper on a decentralized energy exchange and is pursuing an ICO.
• Robotina is going long on blockchain, launching an ICO to sell tokens for its IOT energy marketplace.
• Verv, based in London, announced a token sale for its peer-to-peer energy trading community platform.
• Here is a good look at Hedera’s Hashgraph alternative to the blockchains of Ethereum or Bitcoin. 
• And here are some lovely visualizations and animations that explain IOTA’s “tangle” alternative to blockchains. 

Oh, and don't forget that Squared members can access all our archived panel discussions from our Blockchain in Energy Forum last month.