Blockchain for Energy: Hope or Hype?

The real nature of Blockchain

In the summer of 1896, George Carmack found evidence of a huge quantity of gold along the banks of the Bonanza Creek river in the wild Northwest of Canada. The moment he claimed the first, most promising, strip of ground, the news rumored out of the local police office reaching big cities like Seattle and San Francisco.

In a blink of the eye a huge crowd of over 100,000 people marched up to the mountainous and rather inhospitable Yukon territory moved by the force of buzz and the fear of missing a unique opportunity.

A couple of years later, the vast majority of them had lost all the money and only a few hundreds had really reached some financial stability. Then, rumors of gold discovered elsewhere spread over and the mass moved away following new sirens.

The fascinating, and even a bit romantic, story of the gold rush may resurface when you think of Bitcoin and Blockchain. Someone like George Carmack found a solution potentially disruptive and valuable that definitely worked for him and his purposes but when the news spread out a stampede of people wanted to take the solution out of the context and make it work for themselves. With checkered fortunes.

The trigger of the gold rush is the same trigger of the Blockchain hype today. Eager interest around Blockchain took root a couple of years ago and its use is today advocated in nearly any business domains. Energy is no exception.

But is there any real substance behind the hype? Let’s try to find it out.

A Blockchain Refresher

Back in 2009, the Bitcoin project had a clearly declared goal: replacing cash with electronic cash enabling a peer-to-peer online payment system outside the control of financial institutions. To implement this solution, Bitcoin creators set up a mechanism where each coin—more in general, each amount of money—has a certain origin. Any user of the system owns money only if that money was sent his way through a previous financial transaction.

The Bitcoin system is therefore a sequential list of transactions. At its core, each transaction has an input and an output. The input is the sender’s address and the amount of money being transferred. The output is the receiver’s address. In the Bitcoin’s system, you can only spend the money you have. This is obvious in a strictly regulated system, but Bitcoin was designed to work outside financial institutions. For example, when you wire money through your bank account the transaction is validated and guaranteed by a central system known as SWIFT. In Bitcoin, the role of SWIFT is assumed by the internal infrastructure.

So far so good.

Bitcoin’s transactions are stored in a way that links them one another to the point that anybody can easily trace back the history of an amount of money. Any new confirmed transaction is added to the linked list. More precisely, to make the system scalable, but also for other internal reasons we see in a moment, multiple transactions are grouped into container structures simply called the block. Each block contains multiple transactions. In the end, at the storage level blocks, not individual transactions, are linked to one another. The overall chain of blocks is called the Blockchain.

What’s Special with Blockchain?

What makes the Blockchain particular is how the creators solved the problem—specific of the digital monetary context—of ensuring that no amount of digital money can be double spent. At the very end of the day, a digital amount of money is a computer file and, as such, it can be copied over and over again making everyone a potential billionaire. To avoid that, Bitcoin creators added an additional mechanism that serves two purposes.

First, it checks every submitted transaction for compliance with integrity rules of the platform. For example, it checks that any addresses are correct and that the money being spent is effectively owned by the sender. Any amount of money must be the output of at least one transaction and can be the input of at most one transaction. In other words, say Bob wants to spend 100 coins. Those coins must have been assigned to him as the output of one or more previous transactions. Any part of that amount can be then assigned to someone else as part of exactly one transaction.

Second, the transaction must be made immutable and permanent so that once Bob has spent it he has no more chances to spend it again. This particular problem is addressed with the mechanism of the proof-of-work. Such a mechanism consists in solving a mathematical puzzle—a problem that requires heavy exponential computation. Once verified and written to the Blockchain, the transaction becomes very hard and expensive to alter thus making nearly impossible to double-spend the involved coins. Quite disruptively, the proof-of-work doesn’t come from a central authority but is provided by the majority of voting members on the network. These users are called miners.

In the context of Blockchain, the word immutable is often used, but it is relevant to note that “immutable” here doesn’t mean what dictionaries tell it means: unchanging over time or unable to be changed. Can a segment of the Blockchain be rewritten at some point?

To overwrite a given block, a user has first to complete the proof-of-work for the new version of the block. Next, he has to replace the reference to the former block in the Blockchain. Unfortunately for him, that means recalculating the proof-of-work for all of the subsequent blocks that in the current version of the Blockchain depend on the altered block.

It’s theoretically possible, but economically unsustainable at least for normal people. In fact, a 51% attack in which someone reverses a Blockchain back to a given date and overwrites the history may be doable for (rogue) governments or even wealthy (and still rogue) organizations. Theoretically, in fact, it only takes to publish a new set of transactions with the brute force (read, computing power) of approving it over the rest of the peer network. For the normal people, the Blockchain is immutable but it is not 100% immune from cyber-attacks though those attacks are really close to the-day-after scenarios.

The Promises behind Blockchain

In a nutshell, the Blockchain is a special type of database where all transactions are sequentially recorded. The Blockchain works as a digital ledger—just a modern version of that old-fashioned paper book where accountants reported detailed financial information. The Blockchain of Bitcoin has its content distributed across all the nodes of the network and new content spreads across the network in a broadcast manner. There’s no single server that could be compromised and the distributed content is hard to tamper with and any tampered content will realistically be promptly detected. The lack “by design” of a central authority has brought many to see in Blockchain the potential to shake the pillars of consolidated business areas, most notably all those where some layers of “certification” are required. The hope (or the hype) is that by putting information in the Blockchain the industry at large can reach the same level of security and reliability of transactions than Bitcoin.

As far as energy is concerned, the hope (or the hype) is that by putting information in the Blockchain more efficient trading can be performed without the costs of intermediaries that prove identity and certify transactions. The first use of Blockchain in the energy industry dates back to 2016 but doubts exists that Blockchain is really a breakthrough for our industry.

The story of this article doesn’t end here. Stay tuned for more!

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