Token Model for Energy — Part 1: Review of the Power Ledger token model

Part 2

This is the beginning of a series of post on the “right” or minimal token model design for the energy sector. Without the ERC20 Token specification, the plethora of ICOs would not have been possible on the Ethereum network. Since the initial rush, quite a few best practices on token design and ICO structuring emerged as well, which should be adopted and adapted to token sales in the energy domain.

In the initial two posts, which will be reviews of current whitepapers intended at token sales in energy sector, we dig deeper into what the pioneers in the energy sector have come up with. Part 3 will be a digest of best practices we’ve seen so far in other ICOs and discussions, which seem suitable for the energy sector . Finally, in Part 4 we’ll have a wrap up post of side by side comparison along with a recommendation for token models for energy. That recommendation will be reviewed and improved upon by the Energy Working Group of the German Blockchain Association. So stay tuned!

PowerLedger Token Sale

TLDR:

  • Solid team with energy background, which includes Australian blockchain app developer firm Ledger Assets
  • Moving from private EcoChain to an Ethereum-based Consortium chain — but no sufficient details are given on either.
  • Many ideas on applications, however only a few are detailed (or edited properly)
  • Very well written intro — especially because it hosts gems like “why society needs an energy trading platform” Spoiler: it solves a very prominent (even, or especially, in Germany!) problem of subsidies for solar rooftops and resulting side effect of rising network usage prices for the rest of the population who cannot afford solar rooftops. If you would allow the rest consume the excess solar power at competitive prices traded locally, then the burden is not so krass at least in the neighborhood of subsidized solar rooftops.
  • Overall, the impression is that people in the solar business, or solar roof top owners who have heard about “Blockchain” could be interested in being part of this token sale for its utility, especially in Australia
  • As of now too speculative for the rest: as it is also stated in the Whitepaper, whether the tokens and the network could be used at all in other markets is absolutely dependent on the local regulations — even in “deregulated”/liberalized markets (speaking here from Germany, which has an energy market that is being liberalized for 20 years now, and we are nowhere near a liberalized market, where you are allowed to deploy apps like p2p energy trading via software download — we’re working on it, but we are not there yet).

The Whitepaper of PowerLedger does have a Disclaimer. I am not a lawyer, so I could not tell whether it is helpful or not. But we do have a diverse team at Bundesblock who will be able to give good recommendations in the final part of this series. Any lawyer will tell you it is a must to have a Disclaimer.

Ideologically, tokens align the incentives of the founders, developers, users, investors, and any other types of contributors of value-add to the network. And mostly, anyone interested in participating in the token sale is as much skeptical as speculative about future outcomes. At this point in time, in this niche of the niche space of energy-related token sales, it is a given that the Whitepaper is written “in good faith, but no warranties or guaranties are given.” Still putting effort into creating a small print disclaimer, made me look more closely for effort they’ve spent on establishing that good faith in the writing of the rest of the Whitepaper.

I must say I’m disappointed in that regard, as the writing was obviously rushed, which made me wonder how many independent reviews and feedback it has gotten before being released to the public/community. So that information is completely missing.

(And I will make the few corrections and suggestions available to PowerLedger separately — this review is not about the quality of the writing, but its content, specifically its token model design)

A Gem from the Intro

The introduction lacks conciseness when it comes to explaining blockchain concepts and usage (but that’s hard without scaring off the not-so-technically-inclined). It is aimed at the energy sector, who have seen their fair share of Decentralized Energy System concepts in the past decade. And Power Ledger does a good job in explaining why this time around it will be different, utilizing the characteristics of blockchain:

Reimagining the network as a decentralized and trustless trading platform

The image of the distribution grid as a trading platform instead of a copper platform, is truly inspiring — to many utilities though it may just be frightening. It already inspired a Dutch grid operator, Enexis, who are willing to give it a try: Disruptive Infrastructures towards basic income. However, the inspiration comes from a very creative innovator Jan Peter Domernik, and it is still up to the grid company decision makers to adopt that creative vision as company strategy, and possibly run it through many political instances and regulations.

Now, companies like Power Ledger are giving everyone the opportunity to express their beliefs by investing in a token that encompasses these ideals. The question is does the token design trigger enough of these idealists as token sale participants. If so, then Power Ledger might even raise enough funds to finance privately owned & operated physical grid connections between the solar rooftops that they are connecting virtually. (Which in developing countries by the way, is a good business model: here is my superhero example of Solshare in Bangladesh.)

However, nothing in that regard is mentioned in the Power Ledger Whitepaper. So, typically I asked myself, how far are they willing to go? And why is there not more of these potentials embedded in the token design and incentives?

PowerLedger’s Token Model and Embedded Incentives

The token model consists of two tokens: POWR and Sparkz. The rest is not so clear — and I do my best to relay what I understood (and writing about it clearly helped).

POWR tokens (tokens of the sale) are purchased on crypto exchanges. PowerLedger itself buys POWR on exchanges, and distributes them as rewards to electricity producers and consumers who settle their production & consumption through the PowerLedger platform. So both producers and consumers are incentivized, with the “incentive formula being weighted towards renewable energy generators.” The more users participate on the platform, the more PowerLedger has to buy POWR, so this kind of creates a base demand for POWR. But how does PowerLedger pay for buying those tokens? By “charging a small fee for all p2p transactions on the platform” and “part of that fee is used to purchase POWR tokens” for distributing as rewards. What happens with the other part?!

That brings me to the other question that should be answered in a Whitepaper, what is the business model of PowerLedger? Also in my opinion a Whitepaper intended for token sale, should inform whether mentioned quantities are thought through— or not. What formula? How big is a small fee? What percentage is retained? It is ok, if they cannot quantify yet. But then how do you attach an initial value to the token when offering it? Gut feeling? If the numbers exist, I believe it is fair to share them — for transparency reasons.

One thing is certain: if you are doing a token sale, you are committing to be a transparent company “to whom it may concern” from Day 1. The more transparent, the more value you get from the future participants and supporters of your network. That’s how the token sale designers are incentivized. The best performing token sales were the most transparent and responsive ones in their communication.

POWR encompasses two more (indirect) incentive mechanisms:

  • Connecting with charity: you can gift electricity by transferring POWR (with which they can buy Sparkz to pay for electricity — we get to Sparkz later) and the charity’s intended usage is enforced.
  • “Access priority to Asset Germination Events” . I looked it up and still have no idea what an Asset Germination Event could be, Google neither, but it is “defined” somewhere in the Whitepaper. (I also had no idea what Ethereum guys meant by “Oracle” and why not call it something less Matrix-like and more CS-like — now we are building one at Freeelio. New concepts need other peoples trust, to give them a chance and look deeper. But those people need more than a few lines as an explanation to get going on… Maybe — hopefully — that parsimonious explanation style changes during the run towards the token sale. Btw. they just now created a dedicated site for it: https://tge.powerledger.io/.)

If you are developing and deploying an application in the PowerLedger network then you must possess POWR tokens, too. In this context, POWR can be seen like some form of a token-based software licence. I like this part in connection with POWR being a reward as well, which most probably would result in a DApp hacker installing a solar panel on their balcony to pay for the platform use :) Is it an incentive? Maybe if you are a big “Application Host” in the network, e.g. a utility, energy service provider, or housing association, then it may pay off for you to install renewable energy sources and connect them to the platform — to pay for your participation costs as Application Host to develop and deploy apps on the PowerLedger platform.

This by the way shows the beauty of token model. Let me make an anecdotal point: Some from the Blockchain community might still be mistaken that P2P energy sharing came to life with the Brookly Microgrid. In fact, that was around the same time as one of the more successful P2P energy sharing platforms, Yeloha, went bankrupt after years! of successful community and network growth! What an irony, right? The intriguing part is: Yeloha had so much demand, and growth potential that they started financing solar projects themselves. And as Amit Rosner writes in that very valuable post: the primary reasons for Yeloha’s end were solar projects’ financing model and uncertain regulations.

The token model as designed by PowerLedger could remedy exactly that financing bottleneck for renewable growth through setting the right incentives. However, the uncertain regulations still remain (— unless we unite globally to change that. And not just regarding tokens and blockchains — but also regarding energy transition! )

Sparkz — the usage (or payment?) token — “are currently purchased and redeemed using fiat currencies with individual trading platforms hosting closed-loop exchanges for energy and Sparkz.” This explanation I don’t get really, and if I try then the above explanation of POWR and the rest don’t quite add up. So that citation I ignore now as a “left over” from token design versions, or it may mean that Power Ledger on EcoChain (their private blockchain as of today) uses Sparkz in that way…I don’t know, if I’m missing a crucial point please do comment!

Sparkz tokens are issued against escrowed POWR tokens via a Smart Bond, and used by the Application Host to on-board its customers. POWR to Sparkz ratio for 3rd party developers [why not Application Hosts?!] may be adjusted depending on the customer feedback and reputation.

That would be a nice one to incentivize utilities with notoriously bad customer relations. It would cost them more to give bad service to customers on this platform :) But that’s not what can really be inferred from the Whitepaper. Instead I’m wondering why 3rd party developers are treated any differently then Application Hosts?

In liberalized markets (i.e. without the need to go through utilities and other market actors referred to as Application Hosts) POWR tokens can be directly converted to Sparkz. But still it begs the question, why?

1 Sparkz equals 1 unit of electricity. “Sparkz maintain a steady exchange rate between local market electricity prices and the exchange priced POWR token.”

“Local market electricity prices” is what got me alarmed. Are they suggesting P2P power trades be settled with Sparkz on the platform, whereas the electricity they have just traded for Sparkz is still coupled to a local electricity tariff? And they are coming up with all these entangled ways just to enable P2P trading in vertically integrated markets? Would it not be wiser to push for deregulation or at least a regulatory sandbox? Who is paying in “real life” for the difference in price? And what vertically integrated utility company in a not liberalized market would want to buy POWR?! If there is an incentive for them to replace the local electricity price they can ask for, with something more complicated contstruct comprised of PWR, Smart Bond, and Sparkz — but in the end they still receive the same cents per kWh, — then by all means, the Whitepaper is the place to explain that in detail.

The following is what I “understand” — and it does not really make sense what so ever: It seems that a utility (Application Host) would buy POWR, which is held in a Smart Bond to generate Sparkz as the utility “onboards” its existing customers onto the PowerLedger platform. The Sparkz are “needed” for settling the electricity exchange: in which the utility sells Sparkz, the consumers buy Sparkz to pay for their electricity consumption, and prosumers earn Sparkz for the power they traded. Customers can redeem Sparkz for cash via the utility company. And it gets better:

Smart Bond will ensure consumer protection in the event of the failure of an Application Host (i.e. bankruptcy)…

If the regulated utility company becomes bankrupt, I don’t believe that this strange construct will protect anyone.

So why is this design so complicated? If you forget about users’ experience and only focus on how to make POWR appreciate in value through the game of numbers within the regulatory boundaries of their energy systems, then all of a sudden it does make “some”sense. Everything is designed such that the network would fuel the demand for POWR. This is great news for speculators, but if you are a prospect user of this network you will be scared off by these complications — especially if you are a vertically integrated utility company in a regulated market without any intrinsic incentive to go through that hassle — unless the regulator says so.

So the whole Sparkz / Smart Bond construct seems to be only to somehow make it work in a regulated market where the utility is still the boss of everyone. And it seems like PowerLedger is trying some sort of a utility lock-in? I don’t know. If you got it — please do comment.

In a liberalized market as the authors admit:

POWR tokens can be used directly in P2P trading between prosumers and consumers.

I would not recommend designing a token that tries to incentivize a regulated — hence unincentivizable — stakeholder. That distorts the beauty of the token model, don’t you think?

The next two sections on applications and blockchain infrastructure are kept short — as this series is really on token design in the energy sector; and not the quality of the specific ICO (the team, partners, environment, …) or the whitepaper itself. Nonetheless, they do add to the token strength:

Listed Platform Applications can effectively redesign Power Markets

Many of the ideas are sound and target the inefficiency in electricity market design, data exchange and processes, which do need an overhaul — globally! However, there are not many applications which aim for the network effects — other then P2P trading.

But again: the explanations of the applications are poorly delivered. I’m willing to cut the pioneers who are challenging the status quo — and really improving it — some slack. Still they should mobilize their close network and community to improve the Whitepaper at the very least. If not even that works out then I’m concerned that the token will only be supported by speculators — which does put the company efforts until now at jeopardy!

This would be a shame. We need strong communities world-wide if we hope to see the transition to decentralized clean energy powered by cryptoeconomics in the next decade.

Blockchain Technology and the utilized DApp Stack are poorly described

Poorly here really means inconsistent. Which may result from Power Ledgers current transitioning from Bitcoin Blockchain based private EcoChain to a “hybrid public and Consortium based blockchain”. As in they use Ethereum for POWR token processes — and “a feeless Ethereum blockchain” for the applications. Do they mean Proof of Authority or some own adaptation? It’s not clear.

In any case I’m curious how the POWR to Sparkz (especially the Smart Bond that does that) works if both are on different blockchains. Especially in case of the Direct P2P version in liberalized markets where one is supposed to be able to settle transactions with POWR.

In the future, when Casper, the proof-of-stake consensus protocol is deployed, PowerLedger would move all business to public Ethereum, it says in the Whitepaper.

Just one thought to leave with: how will token models be affected through such changes in the blockchain infrastructure level?

Take away

Power Ledgers token model and applications are mirroring the status quo in regulated energy markets quite closely. I would call it “controlled disruption” (with an understanding smile) based on a passage in the Whitepaper:

The level of disruption from the Ecosystem is able to be controlled by Application Hosts [read: incumbent utility] ensuring rapid and early adoption of the technology whilst supporting Utilities’ needs to migrate at a speed that works for their organization

This does not capture the full potential of token model as a new business model for decentralization and liberalization. Could the step-wise transitioning work? Maybe. But is it incentive enough for the token sale participants? Depends on their values.

Looking forward to your comments and feedback, regarding token design and ITO structuring in general. And also please do share your understanding of the Power Ledger token model if it differs from what I relayed here. Stay tuned for next week’s Part 2: A review of the Grid+ Token Model (which differs as day and night, just to give you an idea how big this design space really is).