“Blockchain”. That word has, in the past year, become part of any modern executive’s jargon. Much was written and said. Expectations were massive but, as of today, we fail to see the materialization of all the pitches that were sold. An issue that is even more noticeable in the energy world, a highly regulated environment – which makes it very resilient to any change, no matter how little. Let’s try to find out how the dream of decentralized energy is looking like.
Cryptos: the blockchain barometer
One doesn’t need to look very far to find out the state of the blockchain world. Since the crypto bubble burst, the two largest cryptocurrencies (by market cap) lost most of its value. Nevertheless, due to their very nature, they tell two very different stories.
Fig.1 – Price of Bitcoin (BTC) and Ethereum (ETH) since October 2017
Bitcoin is the original cryptocurrency. It’s older, fully international and by now in use by most sectors of economy (including the illegal ones). Although, at this stage, it shows no resemblance to what it was envisioned to be , its resilience as a financial asset is clear, as shown by the support price it has achieved. Nevertheless, issues like the following ones, led to the massive devaluation of BTC in the past 10 months:
- The lack of foresight when it came to the security knowledge and investment required to maintain a decentralized currency, allowed for a massive sequence of hacks that erased thousands of millions of USD – from private wallets up to entire exchanges;
- The string of controversy and lawsuits, ranging from obscenely millionaire scams to companies losing their money due to incorrect wallet addresses;
- The profit-taking escape of investment firms (and the sheep effect felt in retail trade), that were only in to ride the massive momentum that BTC achieved early this year;
- Although it apparently is now below break-even, revenue for BTC miners was just massive in the past six months, with average hash rates almost tripling since January while transactions remained constant after the burst (see image 2), in another words, the supply/demand imbalance doesn’t help;
 There are many concerns that BTC is everything but decentralized, particularly when it comes to mining, and that its use is more harmful than positive. I won’t delve into that, and I’ll leave such speculation to the reader.
Fig.2 – BTC transactions vs. Hash rate since November 2017 [source: blockchain.com]
Ethereum (or Ether/ETH) on the other hand, is a supporting cryptocurrency used by decentralized applications and systems to pay for transaction fees and other services on the Ethereum blockchain network. Also, in this network, instead of mining BTC, nodes earn Ether by spending computational capacity. Ergo, ETH value is mainly associated to the degree of development (and use) of the Ethereum network.
Although it’s a “functional” currency (unlike BTC its appeal is not in the decentralization power it offers), ETH (like all the others) was caught in the upwards price spiral which, together with the quality and maturity of its framework, drove a massive interest in running ICO’s based on it (ICO is a fancy name for crowdfunding). This means that, right now, most blockchain projects are assembled over this network, so the fact that ETH value has dropped so much is a clear indicator that blockchain projects are having a hard time taking off (see in image 3 how transaction volume does not correlate to funds raised). To make matters worse, is the fact that, since ICO’s were raised in ETH, the more it drops, the more funding money (in fiat) they lose. This has originated a huge dump of ETH on the spot market (the public cryptocurrency exchanges) by blockchain projects, in a move to secure their funding in fiat currency.
In the long term, while some claim that the only thing Ethereum needs is stability and time, others claim that the network cannot scale fast enough and that the existing projects based on it are not growing, which will eventually lead to other networks and technologies picking up Ethereum’s spot. Also, governments are now inventing ways to subject crypto assets to taxation, which is bringing more uncertainty into an already uncertain market.
Fig.3 – ETH transactions vs. ICO fundraising since November 2017 [sources: etherscan.io, coinschedule.com]
Energy focused blockchain projects
LO3 is probably one of the oldest (and most renown) energy blockchain initiatives. It has been around since 2015, when it connected neighbors with (and without) solar panels in Brooklyn New York in a microgrid. The project checked all the boxes and hit all the right keywords and was soon out of Brooklyn and in the international scene.
Right now, the flagship product of LO3 is its Exergy platform, with which it tries to leverage the recognition and experience it has achieved to try the first push into the creation of a major parallel energy market based on microgrids. Locally there are many smaller projects pursuing the same goal (of all shapes and sizes) and, as all initiatives like this, there’s no clear path on how it plans, with a single platform, tackle the differences in geographic conditions, differences in technological and grid quality, different market maturities and, specially, how to ensure the regulatory framework doesn’t ruin their business model.
The Energy Web Foundation (EWF) appeared to help solve this problem (partially), by trying to bridge the gap with institutional agents while speeding up the development of apps in this segment (by open sourcing their technology). The end goal is medium-term standardization, so that complex blockchain based systems can begin to emerge, instead of just small isolated small systems and experiments.
Climatecoin (a mostly-spanish company) is an interesting use-case for blockchain in energy, operating in a market which is closely related to energy, but not constrained by it. Their aim is to become the go-to P2P trading platform for carbon credits by pinning their token to the CER system. Although there has been much publicity, including the possibility of buying their token from a local store through another platform called Tikebit, I was unable to find any real applications or implementation for this technology.
Fig.4 – Energy token price index and volume (POWR/PYLNT/SNC/ETK) since January
If we focus on projects that went for an ICO, things just get out of hand (as we can clearly see in image 4 from the massive value drop). Although it’s hard to pinpoint exactly how many energy related ICO’s have happened if we look at one of the many ICO listers, in this case ICObench, we find that this lister is tracking 137 energy-related blockchain projects searching for serious funding. Of these, 68 have already finished their funding rounds. It goes without saying that, with the amounts raised, we fail to see the materialization of this investment.
Nakamoto’s foundational paper considered bitcoin a way to avoid the “weaknesses of the trust-based model”, therefore erasing the costs of mediation and (perhaps unintendedly) anarchizing currency in the process. The energy grid is an inherently centralized system and it desperately needs a make-over to deal with the new mish-mash of technologies and to allow distributed generation to flourish and stimulate new R&D investment.
Nevertheless, the existence of large producers and a national grid is also a technical requirement of power networks as we conceive them, as they provide a much necessary baseload and backup protection. If they must always exist, then they must be maintained. And if they are not maintained by a sustainable business model, then they will be maintained by taxation. Therefore, I believe that, if Blockchain is to thrive in the energy world, it cannot be an us versus them battle. It cannot be disruptive, it has to be cooperative.
And, in my own opinion, this is exactly the reason why there isn’t a real scaled-up proof of concept around Blockchain technology in the energy world. Nor in many other worlds for that matter. All we’ve seen so far is insane sums of money raised, through financial assets that have since the January lost almost 10x their value and no tangible results.
Until recent and established agents get together and accept to operate a large system (not just sign a paper, take a photo, get some hype one the media or paying a fee) in a decentralized way (where the trust between agents is established by the system without clear supervision), building standards together that allow the existing large players to design business models adapted to this new market reality (yes, huge companies will still need a place too), Blockchain will only keep on finding more and more political and institutional barriers.
Hugo Martins |Analyst