Encore: Tokens for Investing in Renewable Energy Infrastructure

And how these become Virtual Commodities through the usage of energy

This is the “Encore” to a series of articles for grasping tokenization of energy and its implications for decentralized finance and business models in decentralized energy systems in multiple parts: 1, 2, 3, and 4. And this is the last of it ;) Follow <THE SUN PROTOCOL> for a thorough application of everything I learnt over a period of 13 months, and applied research of Token Engineering — coming soon.

I could tell you a story how today it is technically possible to develop self-replicating renewable energy infrastructure: Decentralized energy resources which are equipped with sensors and a computing unit that connects them to the blockchain and their smart contract — let’s call it “Game of Life”. The GoL smart contract(s) would essentially enable

  • micro power purchase agreements with a pool of users (no, not human users — humans don’t consume energy — electrical devices do. These users are also equipped with sensors, computing units and their set of smart contracts — examples are self-owning cars/trucks that do delivery and earn tokens to pay for their creation/replication, as well as anything connected to a socket or electric grid like your entire home etc. Even non-digital-life, as Trent captures in his great keynote/article Nature 2.0, which has an amazing collection of links at the end of it as well).
  • redistribute the income to contributors (which are humans, mostly: manufacturers, installers, maintainers — but none of the intermediaries we know and pay for today, as the supply chain would for most parts be handled by self-owning (ro)bots, i.e. chatbots for digital contract management and procurement; robots for assembly, packaging, and distribution; and of course the self-driving self-owning delivery truck, drone etc.)
  • pay dividends, e.g. in the form of a profit participation certificates, to token holders (which are humans and other smart machines which read the “intelligent investor” — if anything, those machines can do a “thorough analysis” based on data and not care about human sentiments, called Mr. Market. It is highly questionable even, if, by that time, humans would still be allowed to drive or trade by themselves, i.e. without an AI-aided app).

Let’s have a bird’s eye view at this self-owning utility infrastructure, of clean decentralized energy resources. Would the above smart contracts be deemed “securities” or security tokens — or utility tokens of a utility infrastructure? Probably by that time no human would be allowed either to try to classify based on a Howey Test from 1934 . By then we would have come to terms with the fact that smart things have smart contracts (tokens) as part of the product offering:

Thus, you will buy things, not by paying paper money to get a paper receipt/certificate that entitles you to own and/or use stuff, but by having sufficient amounts of digital tokens that will allow usage for a period under (favorable) terms. You will also buy tokens and hold them because they bear dividends. You will hold tokens, that are in essence programmable money, which encode the (tangible and intangible) values of its governing community. You will express consumer sovereignty by choosing the token you pay with, whereby directing what should be produced — and how. You will hold tokens, because you are a network participant, e.g. a contributor who earns tokens, or a believer/supporter — hence, investor — in the values that the token has encoded. That is why.

I will stop telling the story here (actually I didn’t. I just cut and pasted everything to the Appendix, if you want to indulge ;). Because the story is useless for embedding this innovation into cyber-physical systems today, such as energy or real estate. Imagining it might exhilarate us, but it will not help us get there today.

Getting Real

We have the year 2018. We are at the verge of thorough digitalization, because it is technically feasible and economically viable now. But digitalization is not implemented yet at scale. Thus, the technological innovations, especially tokenization, we are building today will only be used by two segments:

  • early adopters (idealists, but also lemmings, scammers, wolf of wall street types, and sometimes confused all-in-one identity crisis which will end with prozac or adolescence) and
  • “non-consumers” of the established system

who will put up with products built on tech that is so early in its maturity curve as to make huge leaps every couple of months.

So in getting real, deciding what is worth doing today, the choice for me personally was hard but obvious: focus on the “non-consumer”.

The global non-consumer of tokenized decentralized energy resources (DER), hence clean locally sourced energy, has three pains:

  1. access to to DER, which is due to lack of capital and high mental costs. This may be changing rapidly with plummeting costs of solar and storage. But in 2018, it doesn’t yet look like that people will be able to shop for DER as they do for furniture. Even if manufacturing costs are down, we will still need companies to figure out and reduce costs of packaging, distribution, installation, and maintenance. The mental costs accrue on the prosumer’s mind due to high administration costs and bureaucracy associated with self-consumption in the developed world. Even that, it seems, will be improving due to the European Directive on Renewables self-consumption and communities, rather soonish.
  2. access to usable technology. Today the apps and open source software you can download in the crypto space require you to be a sovereign individual. There is no app that you can download that will help you become a sovereign individual yet. And no one teaches you that, except your Bitcoin buddy, the hard way. Instead, today, we will still rely on companies that offer “sovereignty services”.
  3. access to legal, liquid exchanges. Retail investors very much grasp the potential of earning passive income through dividends or profit participation in renewable energy infrastructure. Alone in U.S. private investment in renewable energy could reach up to $1 trillion between 2018 and 2030. But that “private” investment is only for accredited and institutional investors: bigger tickets that allow the rich to get richer.

When solutions to these three problems become commoditized, then we make a giant leap towards the future depicted in the introductory story.

With the super powers we have in 2018: ability to plug & play IoT, Blockchain/Smart Contracts (low volume transactions), and data-driven automation via machine learning, the quickest win is a Regulatory Hack for challenge number 3. The reason is because we can create a usable solution to 2 pressing problems today:

  1. 90% of CO2 reduction to meet climate goals can be achieved through Renewables and energy efficiency projects. These projects can be facilitated through decentralized energy resources, which notoriously lack funding — because they do not pay off for the established players, but only for future generations.

2. Future generations have no pension plan, and ours is already riskier than investing in Bitcoin. There is absolutely no reason, why we shouldn’t be able to improve status quo by allowing investing into passive income bearing tokens, and fund tokenized Solar and Energy Efficiency projects worldwide.

Why am I so sure that it is viable and worth it to build this bridge between 2018 and future cryptocommodities? If nothing else the ICO craze of 2017 was a proof for mobilizing huge amounts of Money-over-Internet. The last time that something of this significance happened over Internet, was with with Voice-over-Internet: we saw how a sure-fire money making machine for the established players vanished at once: Long distance calls. The parallels also make clear: you have to learn to love the struggle: Skype was being banned and blocked year over year. It made 3 multi-billion business transactions between 2005 (2 years after release) and 2011. But the one thing that still broke this beautiful disruptors neck was: as a decentralized service, it did not have a decentralized business model (not to mention the degradation since being owned and operated by Microsoft: multiple surveillance scandals and now this).

But we as a society got us an amazing super power since 2003: peer-to-peer borderless communication via Voice/Video-over-Internet. This time it won’t be less amazing, considering it’s Money/Value-over-Internet.

Why not stop at Energy Investment Tokens?

When I think about Solar and Energy Efficiency projects being tokenized, I don’t think of giant off-shore wind farms and solar PV fields — the big guys and current financial systems could have handled those if they wanted to. They have proven they don’t: Because there is no straight-forward per-kWh business case for zero-marginal cost electricity (thought experiment: try pitching clean air, livable climate, and happy digital users to upper management Exxon vs. try pitching free electricity I/O to Apple ;).

The projects we will be able to fund with Energy Investment Tokens will be housing retrofits of the millions of buildings we live in, or new ones in which we can invest for our children or our pension’s sake. There will be community projects in rural areas, across the globe. Until everyone on earth lives within sight distance from a solar rooftop (or better technology that might come along) and storage. (The other day, in Munich, we had a power outage. The only things that kept working had batteries in them. You can’t be seriously planning the digitalization of the electrical grid, and not consider decentralization for resilience).

We will be able to trade these dividend bearing energy investment tokens to make a profit or to buy other things. Why wouldn’t we stop there? We have everything we wanted, right?

Well, we cannot stop, because we will then have in place a blockchain-enabled Decentralized clean Energy Infrastructure with embedded “market protocols,” i.e. a commoditized solutions to all three pain points above. The energy would have been tokenized until then just to keep track and account for the transparency needed for trading Energy Investment Tokens. We might as well use these energy tokens as a means to certify origin and other social and environmentally valuable attributes, as well as use such tokens to incentivize contributors, i.e. manufacturers, distributors, installers, maintainers, operators and users of these decentralized energy infrastructures. A token incentivized community behind a decentralized project, will certainly increase the value of the energy investment token of that project. Given the cryptoeconomics is sound. Because the incentives are programmed into the token, which is embedded into the infrastructure.

A token that incentivizes a community around something so fundamental and commoditized as energy (then decentralized, clean energy), becomes a Virtual Commodity. If that token can be turned to clean energy access anywhere, adding to it atomic swaps, and algorithmic price building you have yourselves a means of exchange, a store of value, which is programmable. For that to become reality you need closed communities within which this means of exchange works. The communities can connect with each other either through electricity or through trade. Both of which are universal needs across the globe.

So, I don’t see how we could ever stop at Energy Investment Tokens. The stakeholders and network participants will naturally grow into using the virtual commodity. Again we will need early adopter closed communities and/or non-consumers of the current system. But this time, the infrastructure will already be in place, decentralized, and blockchain-enabled — tried and tested. Adoption of standardized energy tokens to enable incentive mechanism design as envisioned in the energy token series, should be a sure-fire once the decentralized energy and decentralized exchange infrastructure is in-place.

Why start with Energy Investment Tokens now?

If this is all technically possible, why not start small, under the radar? Why bother with complying with existing regulations, and pushing them to allow new digital technologies? Why not create “utility tokens” for sustainable utility infrastructures?

Well, call it intuition and experience. I have been into peer-to-peer energy sharing since 2010. I will never forget the moment in 2016: One month after the first ethereum-based transaction of peer-to-peer energy took place, I read about the most promising Solar energy sharing network, operational since 2014 (which initially started in 2012) being shut down. That article has been my talisman, ever since, and I read it many times over:

2 of the 4 reasons, Amit mentions, are due to lack of sufficient capitalization; 1 is misaligned partner incentives in the ecosystem; 1 is regulatory environment.

A tokenized decentralized business model will remedy 3 of the issues. In the highly regulated energy sector, you have to deal with regulators anyway — to clear your new business model, even in liberalized energy markets. Because you are dealing with an interconnected, real-time, dynamic system of highest value (in developed world, this boils down to “never change a running system”).

However, on top of the above, a decentralized token-based business model requires a decentralized token-based financing model and an exchange platform. Alas, we have to clear that with the financial regulators as well.

I’m with Amit, when he says:

I’m convinced that when you make it easy for people to do the right thing, they will do it.

Same with regulators allowing new digital technologies: by formulating the requirements for transparency and electronic processes in a technology-agnostic way. This is one of our main asks from both the Energy and the Finance working group in the German Blockchain Association. We are committed to make it easy for regulators to do the right thing.

So tokenizing energy, ultimately is not the issue. Having liquid markets for these tokens is. Liquid doesn’t mean speculators and volatility. On the contrary: A liquid market is a market with many bids and offers, low spreads, and low volatility.

A recent discovery makes me even more certain, that it is the right move — not to ignore existing markets and only to try to create new ones with all might. Because we still need human buyers and sellers in 2018, and those who can appreciate energy tokens are not on new cryptoexchanges, but they are waiting at the flood gates of regulated securities exchanges — for them to be opened.

The nascent crpytomarkets have proven that they are now locked into their early adopter mindsets. Mr. Cryptomarket cannot be trusted to value energy tokens well. They are not attracting any more idealists, but more lemmings, scammers, wolf of wall street types, unfortunately. Those types scare away the potential buyers and sellers of energy tokens. And also, please remind me again: why should anyone favor, in 2018, centralized cryptoexchanges over centralized security exchanges?

Why not wait until cryptoexchanges mature to handle energy tokens, i.e. become decentralized, data-driven, algorithmic exchanges?

Because we don’t have time, and we stand to lose nothing.

Doing…in 2018

That we are in the middle of a paradigm shift in so many dimensions shouldn’t be news to you as you are reading this. So, what does it mean to be “doing” in 2018?

Cryptoeconomics is establishing itself as R&D, and token engineering will establish itself well as an engineering discipline.

Back in December 2017, I established many TODOs as the lead of energy committee and put quite a lot of Freeelio’s runway timewise into bootstrapping a community capable of regulatory dialogue. Two of these TODOs under “[INO] Tokenize all the Things,” Freeelio as a founding member of the German Blockchain Association and I as a founding researcher will keep on exploring:

  • Energy Solidarity Token (formerly known as donation token, which was inspired by Nina Siedler’s “Thank you”-Token): The idea is to showcase what financial efficiency especially developing countries are foregoing by (implicitly) banning cryptocurrencies. I’ more than happy to count SOLShare in Bangladesh among the early adopters:
  • Energy Investment Tokens — the subject of this “Encore” to the initially four part series on establishing standardized energy tokens to create decentralized business and financial models for decentralized, renewable energy systems. Here, I’m very grateful to a group of entrepreneurs and their teams and networks who clearly see the potential, and are ready to explore and learn together. We will share our learnings as best practices from pilots — and we invite regulators to learn with us:

These efforts will continue at Freeelio and the German Blockchain Association. Follow freeelio and Bundesblock for further updates.

I am now committing majority of my time and network to R&D of Virtual Commodities backed by energy, as an advisor to Solarcoin — and as Validator of Tokens & Tech at <THE SUN PROTOCOL>.

Follow <THE SUN PROTOCOL> and subscribe at http://thesunprotocol.io for explainers, technical deep dives, modeling of new financial and business models based on tokenizing energy flows.

Appendix

Actually, in the introductory story, you will not make the token buying/selling decisions. You will be given a basic AI that allocates and trades for you. Instead of a basic income. Because those algorithms will make you token holders of the commons, the basic utility infrastructures of life. Those common tokens — also known as utility tokens — return a basic dividend AND give you access to those infrastructure you need for living a sustainable life.

In school you will only learn how to understand and tweak those algorithms and their data pipeline. The A students will go on to develop more sophisticated AI, which will earn you more tokens of different types, a token portfolio that enables you to discover and live up to your purpose. I don’t think anyone will want to build the biggest tower, or be the president of the united states in the future. The vision that drives me personally is that we have this tokenized world, where people are part of wealth creation and accumulation from birth — instead of being divided into (global) laboring categories, and where we needed a (non-corrupt) state (and UN) to collect taxes and redistribute them, including into investments into basic infrastructures of life.

Even if non-corrupt, a governments today lag behind in their decision making — otherwise I do not have an explanation for why the “developed” world missed the majority of its voters’ living circumstances, which created a public platform for backwards oriented fascists — even in Germany, again. Governments do not only lag behind, they are also unable to make decisions of global importance like acting on climate change. Take the evening and read this eye-opening piece.

So yes, instead of learning about politics, economics, anthropology, maths, computer science, mechanism design, game theory, and many other subjects only in 45 minute siloed cycles,

our children’s children will learn about token engineering and about the algorithms of the basic AI and its data pipeline to optimize their token portfolios.

The alternative is that only a technocratic few — of whom we hope all will have prophet-tempered natures and “don’t be evil” — will develop these token economies, which would be the same future as we live in today (only now is minus the blockchain and AI, which are just tools). More realistic is that those technocrats today, who do have a monk-like otherworldliness to them anyways, keep on open sourcing and helping to educate/onboard as many as possible. But open source only means we have a level playing field. More importantly is that we develop an adaptive data-driven framework for governance.

If we have all of the above, then we have a shot at true utility tokens with sound cryptoeconomics without exuberance(*).

(*)a life without exuberance: no lambos, no famine. Must it be all grey? Or can we still have color without exuberance? And no, utility tokens will not be worthless utility tokens will be exactly worth their utility. When we have commoditized trust, through “Game of Life” smart contracts, and entirely data-driven pricing and data-driven price building on secondary markets; when we have commoditized access to these tools through education and ease of use, then we have what “is the movement of a market from differentiated to undifferentiated price competition and from monopolistic competition to perfect competition.” — called Commoditization.

Utility tokens are programmable money — or what I like to call Virtual Commodities. Like some deemed virtual currencies to be commodities, but some others prefer the term cryptocommodities, but tie it to digital-only cryptocommodities… With Virtual Commodities, I also mean virtualized commodities through their tokenized representation on a blockchain — like energy tokens… or real estate tokens etc. Things that could be owned, but the actual value creation happens through their usage, through their utility — not through their existence.

If you have a solar rooftop, but no one uses its electricity yet, its electronic junk. If you have a house but no one lives in it yet, then it is bricks and mortar.