Applying Blockchain to Transactive Energy
- 1. A P P L Y I N G B L O C K C H A I N T O T R A N S A C T I V E E N E R G Y N O V . 2 0 1 9 B L A C K C H A I N . G U R U
- 2. B L A C K C H A I N . G U R U Architecture There has been an introduction of a wide range of technologies, terming themselves as Blockchains today, making the definition of Blockchain difficult. Cryptocurrency’s blockchains are different from private commercial applications, for example, blockchains developed by the Linux Foundation, IBM etc. Irrespective of the said differences, these technologies share several important characteristics that make a working definition. Each blockchain is made up of peers (computational nodes), initiated by participants, and each of the parties (participants) own a copy of the transaction ledger. Blockchains are broadly categorized as permissioned or permissionless based on whether those computational nodes are on equal footing, primarily with regard to the access they have, like reading, writing or validating the shared transaction ledger. Cryptos such as Bitcoin and Ethereum come under Permissionless blockchains as these cryptos grant all the nodes equal right to perform the said above tasks. On the other hand, Permissioned blockchains or private blockchains limits the data access or the reading, writing or validating privileges of peers on participant identity or role. Definition Transactions and Smart Contracts Transactions on the distributed ledger mostly represent the transfer of a digital token or currency from one point to another or simple said – from one set of participants to another. Transactions are not said to be valid until any blockchain account that is party to them, cryptographically signs it. This process requires access to that account’s secret key and this cannot be faked. Once the transaction is submitted to the network, these transactions are then embedded into blocks, so that the nodes or peers can validate it and add it to the ledger, each block is related or referred to the previous one, resulting in eponymous blockchain. Apart from sending tokens or transferring cryptocurrencies, transactions cam also trigger Smart Contracts : collections of algorithm
- 3. B L A C K C H A I N . G U R U Architecture that maintain internal data about the nodes (peers) and their devices. For instance, it is possible for a smart contract to store a number of kilowatt hours (kWh) of energy produced by a solar array, and expose one function for a smart meter to increment the value and another for the utility to read the value. Traditionally, blockchains have smart contracts stored in them, inside special types of transactions, allow the participating nodes or peer to inspect them. Smart contracts do not have any legal meaning, even if the name has ‘contracts’. These are just applications that are blockchain-specific. these peer’s versions of shared ledger may not match or disagree moment to moment. A consensus protocol is there to reconcile these differences which is designed to overcome mistakes, manipulation and legitimate disagreements. It is the consensus protocol that determines about the on- going adding of the block in the blockchain, and which peers are assigned to validate that block. This process is known as forging, or mining, the block, and can reward the owner of the peer, in addition to transaction fees offered by each transaction included in the block. All these rewards are decided, validated and paid automatically by the blockchain itself. PoW protocol – Proof of Work, is utilized by Bitcoin and Ethereum, the two largest public blockchains. Any peer has the permission to mine a block at any time by just solving a cryptographic math problem based on the ‘difficulty’ level of that block. It is not a traditional mining process and hence the term ‘mining’ means a lengthy, repetitive calculations required by design to solve this problem. There is a strict competition in the protocol, meaning, each peer is racing against time to solve the mathematical problem first, because the protocol specifies that longer chains are “more valid” than shorter Peer Consensus In any blockchain, the peer nodes operations are free and independent of each other. Peers receive transactions that are added/proposed on the network by the other nodes/peers, and new transactions submitted by participants, not yet added to a block, they share them with other peers in order to ensure that all are working with the same information. Depending on the latency in the communication to the blockchain,
- 4. B L A C K C H A I N . G U R U Architecture Associated carbon emissions and the enormous energy consumption required for Pow (the computational activity requires electricity) have been well documented. There are some consensus activities that are less energy intensive, such as PoS - Proof of Stake & PoA - Proof of Authority, in which which the peers have to stake some portion of their holdings of cryptocurrency or their network reputation, in order to forge a block, and lose that portion if their proposed blocks are not accepted. These are the notable alternative of PoW, as they both share the validation characteristics and the self- interest of the validators in pursuing those incentives. All assurances of ledger integrity is lost if a majority of peers fail to follow these incentives for any reason. This phenomenon will be known as 51% attack, in which one or more validators that are working together representing a majority of the computing power in the network attempt to hijack the blockchain. The potential hijackers spend a considerably good amount of their wealth on the main blockchain, in order to purchase physical goods or services. And then they use their validation influence to suggest the network that the transactions never took place, this is done by promoting an alternative chain. If anybody want to perform a 51% attack on a major PoW blockchain network would mean that they will have to rent the necessary resources that will be very expensive, but still can be done. If any PoW blockchain, that has less nodes, Is more exposed to attacks like these as for hijackers its less expensive.
- 5. B L A C K C H A I N . G U R U Architecture The other properties of a true blockchain is Immutability and Transparency. Immutability of the transaction ledger - and its transparency for validators. Immutability is important to make sure that the state of the ledger is well fined and presence of efficient validation – consensus is present. Transparency is a precondition for validation itself since unless a peer can inspect a transaction and its effect on the ledger, it cannot validate it. These properties serves a unique purpose: Responsibilities of managing a transaction network from a single authority is distributed, like commercial platform provider or financial institution, to many. There are several responsibilities that are performed by the peers such as: the computation necessary to process transactions and run applications (smart contracts), hosting of staked collateral, and the hosting of data. Smaller set of validator nodes are distributed the responsibility of transaction validation. Any costs associated are distributed across the network,with these shared activities, bared by the participants. The Blockchain Ledger and Distribution of Authority The Blockchain Approach Below is the illustration of how blockchain supports the energy value chain from point of production to downstream transactions. In the example, John is a producer, seeking to monetize his investment in a rooftop solar array. He aims to achieve this on a daily basis, with minimal involvement, there are few energy enthusiasts with great vision for future who consider it realistic for customers to micromanage their energy asset investments, and either negotiate grid services to a utility or day trade energy. An artificial intelligence (AI)-enabled digital assistant that is managing such transactions, seeking only high-level guidance and permissions from the customer. As a result, to procure day ahead energy and adjust to real-time deviations from the forecast with procurements from the real-time market,
- 6. the agent may forecast energy usage in the home. And the agent may earn additional by bidding the forecasted excess capacity in the reserve market. Mr. John purchases ‘utility tokens’ from the blockchain network in the beginning – it is the tokens that are required by the blockchain provider in order to give permission for platform access, just like charging a rent. For example, an Australian blockchain energy startup, known as PowerLedger, requires their users and energy providers to buy their utility tokens known as ‘POWR’, which are then escrowed in exchange for Sparkz tokens, , which can be used to transact. Another startup – Brooklyn based known as LO3 Energy, requires its customers to purchase their utility tokens known as XRG tokens and they must stake these tokens to a blockchain account or smart meter in order to participate. The staking quantity is directly proportional to the reward a producers gets, that means the more they stake, the more reward they will get. A smart meter is used to measure and record John’s PV array producing power. Blockchain oracle then gets accessed by a software client on the smart meter, connects to the blockchain over the internet or a home area network and submits a transaction, registering the meter read. When validated and performed by the blockchain, the transaction invokes a function on a smart contract, passing the oracle’s identity, the kWh value, and any other attributes of the solar production as inputs. No matter how well designed and programmed a blockchain is, if the oracle doesn’t pass the accurate physical information, then it means nothing. Hence, the oracle is thus a critical part of the digital physical interface. B L A C K C H A I N . G U R U John Bob Utility kwh T Grid Service T kwh Grid Data kwh Example blockchain transaction flow, illustrating the value chain from distributed power generation through monetization. Source: Ben Hertz-Shargel
- 7. B L A C K C H A I N . G U R U The Blockchain Approach ... contd After the oracle’s identity is verified – smart contract is the only external software permitted to invoke it and hence credits John’s blockchain account for the production. That involves either minting tokens denominating energy and its attributes, such as generator type and carbon footprint, or transferring cryptocurrency equal to their local market value. It is seen that most presumptive blockchain platforms have their own tokens in place: Sparks is pegged to local fiat currency, offer by PowerLedger. Another one is Grid+ offers BOLT, this one is a stable currency that is pegged to the US dollar. Energy Web Foundation (EWF) has developed a blockchain known as Energy Web Chain, is a non-profit consortium founded by Rocky Mountain Institute and startup Grid Singularity has introduced their own utility token but on the other hands has shown green signal to other application developers to use their own utility tokens for transactions and also use their own energy. Assuming John is credited with tokenized energy production, he or his software agent is free to monetize it in the transactive market. For instance, his agent may sell the energy or its attributes (for example, credits for being low carbon) to Bob’s agent in exchange for cryptocurrency. The agent may also sell more complex energy products and services, such as day-ahead energy forward contracts or real-time voltage support, to the utility. Verification of energy services may require additional technical data, such as voltage and power quality, which would be captured by her smart meter. This data could be tokenized along with her energy, which is LO3’s approach, or automatically sent to the smart contract governing the service. Compensation would follow only if the physical data is consistent with the service performance requirements, according to the smart contract’s measurement and verification rules. Notably, blockchain solutions for transactive energy do not need to address an entire electric distribution system. Privacy-preserving Energy Transactions, or PETra, for example, is a decentralized control framework for transactive energy on microgrids, developed by Vanderbilt University and Siemens.
- 8. B L A C K C H A I N . G U R U Still there are several unpopular options that may represent energy data on the blockchain. Tokenization – For each unit of energy produced, a unique digital token is minted. This token is then credited to the producer’s blockchain account and is now available to be exchanged (buy or sell). This unique token may have the attributes of energy, like carbon emissions, generation type and power quality. Still, these attributes can be individually tokenized. However, it would require a smart contract to implement each type of token. Creation of token, ownership, transfer and settlement can be managed by a smart contract. It is possible that the energy data may still be embedded into the blockchain without the need of creating a unique token. This can be done by maintained either in the state of a smart contract or in the body of a submitted transaction. In either case, the data can be traded as it is not in any tradeable form, but as always the data can be validated and stored by the blockchain. Energy data can also be hosted in an external database off-chain, with only a small, cryptographic hash of the data stored on the blockchain. This hash would enable validation of the externally hosted data without incurring blockchain storage cost and latency but would not enable blockchain-based transactive energy applications to leverage the underlying data. All of these methods incur ongoing transaction costs, as the submission of data and its access via smart contract are performed through blockchain transactions. Notably, however, the off-chain approach can significantly reduce transaction costs, if hashes of entire datasets are submitted, rather than hashes of individual data. ENERGY DATA ON BLOCKCHAINS
- 9. Known as the youngest and most influential Blockchain expert in the field. She is an Italian-American who first started out as a startupper in the AI and IT business, while still finishing her Economics and Management studies in Bocconi. Eloisa is a renowned author, public speaker, and biz-dev, catering startups and companies wanting to innovate. Currently being the Chapter Director of Bocconi University Startup Grind Chapter, she made valuable connections and became a part of some of the main blockchain associations around the world, namely The Blockchain Council and The NYC Women in Blockchain. She will be featured in the Forbes Italy 30 Under 30 most influential entrepreneurs in 2020. Giovanni Casagrande A known name in the world of cryptocurrency. He has been in the marketing industry for well over 20 years and have switched to the cryptocurrency industry in 2014. He’s a writer, public speaker, investor and Marketing / Growth Hacking advisor in more than 100 successfully projects. His specialty was Economics in the University of Bologna and the knowledge, experience gathered from there has helped him to manage/help many businesses in the industry. 4 years ago he founded Black Marketing Guru, a successfully Growth Hacking startup in Italy. Giacomo Arcaro He has 15 years’ experience in growth hacking, digital strategy, startup and business development. He has advised over 150 startups and has 50 managed employees into a XII Century Church in Italy for the European biggest growth hacking company. He holds the title of ‘Amazon Best Seller Author’ and is been known to be one of the ‘Most Influencial Blockchain Evangelist’ with +200 conferences all over the world. Eloisa Marchesoni 'The Most Influential Fintech Advisor' 'European Best Growth Hacker' 'Number 1 ICO Advisor Worldwide Award' 'An influential Personality in the Blockchain Space' 'Number 1 token model architect for ICOs' 'Top 100 Fintech Leaders and Influencers in Italy'