Blockchain, energy, and ICOs — a new way to fund the energy revolution?

Can blockchain go beyond tracking energy and finance energy startups? Photo by Jimi Filipovski on Unsplash

A little while back we posted on blockchain in energy. The post gained a bit of a life of its own, being picked up by RenewEconomy and resulting in Darius and myself being invited to speak at many an “energy and blockchain” panel and event since. As is so often the case in technology, a lot has changed in the short time since we posted that article so we invited Matt Hale, founder of Divvi and co-founder of Everty, to fill us in. We were delighted when he accepted our invitation and we hope you get as much from his insights as we did. ^GY

Given the amount of press coverage over the past 12 months, you’ve probably heard or come across the term ‘blockchain’ at one point or another. Bitcoin, the most well known blockchain and cryptocurrency, is commonly misrepresented as a plaything of drug cartels and money launderers. But these misconceptions cloud the deeper potential of the technology to revolutionise one of the most fundamental aspects of human interaction: the way we exchange value. If you need to get up to speed on what on Earth blockchain is, there are a number of articles online explaining the basics as well as why you should care.

What is an ICO?

In recent months the phenomenon of Initial Coin Offerings (ICOs) have taken the blockchain world by storm. ICOs, or Token Sales as some prefer to call them, have fundamentally disrupted the funding model for blockchain-based startups around the world. They’ve been described as being everything from democratised venture capital to outright ponzi schemes and scams. But what are they, exactly?

ICO’s are typically explained using the analogy of a blockchain-based Initial Public Offering (IPO), akin to shares in a company being offered on a public stock exchange for the first time except using blockchain-based tokens in place of shares. This analogy isn’t strictly correct though. IPOs are highly regulated events, whereas ICOs have very little in the way of regulatory oversight. Similarly, IPOs are considered to be an offer of securities or equities, whereas ICOs offer digital tokens. (Whether or not tokens should be considered securities is a hotly contested issue, and is worthy of an entire article in and of itself.)

A better analogy for an ICO would be a Kickstarter campaign, where contributors provide the funds required to build the proposed platform. In return, the contributors typically receive tokens that provide some kind of utility specific to the platform. This whole process takes place through autonomous smart contracts on a blockchain, historically usually Ethereum. These tokens can also be traded on online cryptocurrency exchanges once the token sale period has ended. Indeed many contributors hope to trade their tokens on these exchanges for a profit, riding the hype created by the marketing campaign of the token sale team.

To give you an idea of just how big a deal ICOs are, more than $1.7 billion (USD) has been raised through ICOs since the start 2016. One ICO managed to raise $35 million in just 24 seconds, another recently raised more than $200 million in just 60 minutes. These eye watering amounts of money and the short amount of time in which they have been raised is enough to make any industry, no matter how conservative, sit up and take notice.

All-Time Cumulative ICO Funding. Source: Coindesk

Whilst ICOs are extremely attractive to entrepreneurs because they provide early stage funding without any loss of equity or taking on debt, they remain risky for the person contributing the funds. As with any investment, you should do your homework thoroughly and consult a financial services professional before deciding to participate in an ICO.

What’s happening in the energy sector?

So with the ever growing interest in applying blockchain technology to the energy sector, what’s happening with energy-related ICOs?

The leading blockchain players in the energy industry include Grid Singularity, Power Ledger, Grid+ and LO3 Energy. Two of these players, Power Ledger and Grid+, are about to do an ICO. Any ICO will have an associated whitepaper, which is a technical document outlining the platform and vision. Both Power Ledger’s whitepaper (PDF 9.9MB) and the Grid+ whitepaper (PDF 2.7MB) are available on their respective websites and are essential reading if you plan on participating in their ICOs.

Power Ledger are a Perth-based blockchain energy company who are building a platform to facilitate new kinds of energy trading applications. Power Ledger’s value proposition for deregulated markets is compelling. Here they can easily disintermediate the role of the energy retailer and offer peer-to-peer trading of energy. This is accomplished by trading energy for tokens called “Sparkz”. Sparkz are settlement tokens that are pegged to the local fiat currency (e.g. AUD in Australia, USD in the USA). Sparkz can be traded on the Power Ledger platform within defined trading groups through a suite of APIs that interface with smart meters.

One promising use case for platforms such as Power Ledger’s is an embedded network, such as apartment blocks or housing developments, where residents can trade their solar energy with one another in a semi-regulated environment. In fact Power Ledger have implemented several successful trials of their technology under this embedded network scenario in Busselton and Fremantle.

In the case of fully regulated markets, where a retail license is required to buy and sell energy on the national grid (such is the case in most of Australia), the ability for blockchain to facilitate true peer-to-peer energy trading on a wider scale than just embedded networks is somewhat constrained.

Incumbent retailers are likely to be reluctant to adopt a technology that is capable of disintermediating them, particularly as they already have the capability to trade energy amongst their own customer base using their centralised databases and systems. It remains to be seen what incentives an incumbent retailer might have to join a platform such as Power Ledger’s.

To be clear, the Power Ledger platform and vision is about much more than just facilitating peer-to-peer trading of energy. Their whitepaper (PDF 9.9MB) has more information about the other kinds of applications they have planned.

Taking all of this into account, it is unclear what the industry response to Power Ledger’s upcoming ICO will be. Nevertheless, the Power Ledger platform is sure to appeal to more engaged users of energy and it is from here, I think, that we will see the majority of contributions to the ICO.

USA-based Grid+ take an altogether different approach to bringing blockchain technology to the energy industry. Rather than enabling other industry players with new technology, Grid+’s strategy is to become an energy retailer (starting in Texas, California and New England, USA) and undercut incumbent competitors by around 50%, according to their whitepaper (PDF 2.7MB). To achieve this, they plan to use their own hardware solution combined with efficiencies gained in trading using Ethereum.

Grid+’s hardware solution utilises the power of the public Ethereum blockchain network without users requiring technical knowledge nor an understanding of how cryptocurrencies work. This solution is their Intelligent Agent, a computer that pays for the customer’s electricity use in real time by reading from the smart meter. Grid+ claim that onboarding is as simple as making a credit card payment or bank transfer to purchase their US dollar–backed “BOLT” tokens, conceptually akin to Power Ledger’s Sparkz. The Intelligent Agent then reads the customer’s energy use from the smart meter and pays accordingly in BOLTs. The Intelligent Agents can also conduct arbitrage trades on behalf of the customer if the customer has battery storage installed.

Grid+ Intelligent Agent Prototype (from the Grid+ whitepaper)

While their approach is perhaps ambitious, the Grid+ team have significant experience in both blockchain and energy, including a past partnership with European energy giant RWE (now Innogy).

Grid+’s somewhat novel strategy and their intention to appeal to all consumers of electricity with a significant cost saving on their energy bills puts them in good stead for their upcoming ICO. To be clear, the hardware is still in its prototype phase and many aspects of the Grid+ platform (such as the Raiden payment network) are still in development. As such, the platform as a whole does not yet have the same established track record as Power Ledger and so Grid+ will be banking on the experience of their team and their reputation, having come out of leading blockchain development house Consensys, to make up for this.

Buyer beware?

It’s worth noting that not all ICOs in the energy space have robust value propositions. One of the earliest energy-based ICOs was completed by a relatively unknown team from Slovenia called SunContract. Their value proposition centres around creating a peer-to-peer marketplace for trading renewable energy, facilitated through a mobile application that allows users to trade SunContract tokens (SNC).

While this is an admirable goal, SunContract’s whitepaper (PDF 254KB) has some glaring omissions. For one, it proposes no mechanism whatsoever that connects the SNC tokens with the real world. A review of the whitepaper summarised the SunContract value proposition as “A mobile application will magically enable people to buy and sell renewable energy for SNC tokens.” Other proposed features include immediate conversion of SNC tokens to fiat currency and ease of use. Lacking is any detail of how these features will be implemented.

This should have set alarm bells ringing for anyone looking to contribute to this ICO. But despite these omissions, the SunContract ICO still raised over USD$2 million, which is not huge by ICO standards but is still a lot of money compared to what most startups are looking to raise.

As noted above, the SunContract whitepaper highlights an issue that is present with many blockchain projects. That is, any blockchain project that interfaces with the real world has to have a trustworthy interface between the two. In the SunContract case, the issue is easy to spot because there is no mention of an interface at all!

In the case of Power Leder and Grid+ on the other hand, the issue is more subtle. Power Ledger ultimately rely on the fidelity of advanced meter data, which is often controlled by the retailer, feeding into their API as the root of trust in their platform. Whilst at first it seems like Grid+ has solved this problem with their Intelligent Agent, it turns out that the Agent itself also relies on data feeds from the smart meter.

Whilst relying on centrally controlled smart meter data as your input data to a blockchain application is not in itself necessarily a bad thing, it does create a single centralised point of failure in the system. It certainly creates a centralised point of friction if nothing else. As such, when assessing any such blockchain project you should ask yourself “what is the ultimate source of truth in the system, and who controls it?”

Nonetheless, we will be watching the Power Ledger and Grid+ ICOs with great interest as their success (or otherwise) will likely have a big influence on the path forwards for other blockchain energy startups in the near future.

Matt is the founder of a blockchain energy startup and consultancy called Divvi, as well as the co-founder of peer-to-peer electric vehicle charging startup Everty. His vision is to make renewable energy access more equitable using the power of smart contracts and the blockchain. Follow him on Twitter: @halenhew

P.S. from Nexergy: For any readers in Sydney who are interested in exploring these ideas in more depth, there are two up-coming events worth checking out. GreenUps on Tue 29 Aug at EnergyLab is all about blockchain. The Environmental Institute Australia and NZ is also holding a (paid) event on Digital Disruption on 30 Aug—no doubt blockchain will be one of the topics covered. Oh, and if you found this article valuable, please click 👏 to show your appreciation (or click and hold if you think it’s super special). ^GY

Updated 11:05am 25 Aug 2017 to correct a statement that Sparkz represented units of energy.