Token Model for Energy — Part 2: Review of the Grid+ token model

Part 1

Hope you will enjoy the second post of a series on the “right” or minimal token model design for the energy sector, as much as I did writing it: The Grid+ token design from their Whitepaper does have a few twists you did not expect from an energy token. So, I don’t necessarily see it as an energy token, but it has some nice incentives built into it. Including one, which is really important to get a handle on: How do you design to “influence” the speculation on the token value on exchanges, such that it is of use to the network?

For the ones looking for an energy token example, you will find more in the first part of this series (and in the PowerLedger response). But mostly, stay tuned for Part 3, which should be out sometime in August…

Ethereum everywhere.

The dual-token design of Grid+ is covered on 5 pages.

I read through the entire 62 pages of the whitepaper. My comments are with the team in their slack. I’m urging myself to solely focus on the token design here, but will share a few impressions, before we get started:

  • Main innovation is on the crypto network access and protocol level, and hence valuable to the Ethereum community at large, not just its application in the energy domain
  • Why they choose energy seems more likely to be due to its wide-spread potential: if regular energy users (a lot of people: grid connection still more widespread than smartphones) start using crypto without even realizing it, then we would have reached mainstream
  • However, there are so many ways how and why this may not pan out, so that I question whether they are not jeopardizing the innovative development plan by betting on the decentralized energy as the application domain (don’t get me wrong, I personally want them to make this progressive development for use in the energy domain — see my parting thoughts at the end)
  • Then there is this dynamic of being a Consensys Formation: some of the team and some of it’s advisers already developed (1) Transactive Grid — which was then taken over by LO3 (2) Co-tricity — which was then taken over by Innogy and spun-off into Conjoule (3) and now this whole development is being carried out again with another (undisclosed) Energy Enterprise. Will the outcome be different this time? I’d be more then pissed, if I were to invest in this, maybe even with contributions beyond token purchase, and see that it gets commercialized an buried with hidden IP by a single entity. So Grid+ needs to be very transparent about their open source licensing strategy, based on past ConsenSys history in the energy domain.
  • The bootstrapping depends on collaboration with utilities, yet the GRID token clearly disrupts utilities — and the value of GRID token depends on spawning new utilities on the Grid+ platform. Compared to PowerLedger’s “controlled disruption” offer, this seems to scream “C’mon now. Your strategy guy said you have to disrupt yourself — we’re here to help you with that”. Fair enough. Though Grid+ should know that culture eats strategy for breakfast, and often the project’s budget and human “resources” for lunch. It is extremely important to know with whom to partner.

In theory, a well-designed token model will take care of such incentive alignment. Whilst I certainly don’t mean that an energy token must take into account incentives of some incumbents, the GRID+ token design is mostly ignorant of energy stakeholders and their incentives.

Instead, they aim for bigger fish: stable token and payment channels — or more precisely“making Grid+ a prominent hub for stable token (USD) commerce” on the Raiden network.
No, I did not see this coming.

I leave the whole speculation and due diligence whether this could work out (and if it does it is really as huge as it sounds) to the crypto traders and ConsenSys Due Diligence.

However, there is yet one aspect of the business model I have to refer to so we can understand the token design: Grid+ (or their users, or the software agent, this is not clear from the writing) will buy electricity cheap on the wholesale market (like every retailer does) and offer electricity to Grid+ users at a “Grid+ price” (this is wholesale price + a markup, like every retailer does). However, if you are a Grid+ user that also holds GRID tokens, you will get the electricity at the cheapest wholesale price, without the markup.

You are assuming though, that whoever is trading on the wholesale market will actually be a good trader and score the cheapest price for electricity: the Grid+ team? the “AI optimized” software agent? (Of which there is only a placeholder in the roadmap that says there will be another roadmap for it sometime in the future) — or you, the mainstream energy user? The Grid+ team is aware and warns that this is no small feat, as the whitepaper points out rightly:

  • “Wholesale markets trade what are called “forward contracts”, which is a contract promising to deliver energy at some future time. Therefore, there are considerable counterparty risks when interacting in a market where some participants trade forward contracts. This risk has manifested itself a number of times and has cost market participants and consumers large amounts of capital”
  • “Wholesale markets have much higher degrees of complexity, largely driven by the fact that load on the electrical grid must match, nearly exactly, the generation at any given point in time.”

Ok, let’s assume, Grid+/agent/user is capable to score cheap wholesale prices, then the incentives are webbed into the tokens as follows:

GRID tokens (tokens of the sale) will be of fixed supply, created at once, and sold during the token distribution event. That fixed amount of GRID represents a “fixed amount of wholesale electricity [that] is accessible to GRID holders at any point in time.” So what you are buying in the token sale is a promise that your electricity bill is considerably reduced in the future (with all of the risks mentioned above).

Once you redeem 1 GRID for x kWh, 1 GRID is “burned” (removed from your balance as well as from the total GRID token supply). This redemption function is a function of the total supply, which means: the less GRID tokens are in circulation the more kWh at wholesale price can be redeemed with one GRID token. Since it is digital money you can have “infinitesimal” units of GRID for transaction.

If you do not have GRID or run out, then you pay the Grid+ price for the electricity you use, namely the wholesale price + a markup. They assume that a typical retailer today puts a markup of about 50% on the electricity price you pay, and will undercut it. It’s not clearly stated by how much.

Nor are the numbers of total supply of GRID and redemption function thought through. The whitepaper at this point solely gives an example.

BOLT token (payment token) is how you pay when you do not have GRID tokens and have to pay the Grid+ price (wholesale+markup). You probably would always try to pay with GRID because it is always cheaper. Unless you don’t have GRID tokens and/or their prices on the exchanges have skyrocketed so you would not try to buy them anymore. Then you need BOLT. And remember Grid+ team aims at undercutting the cheapest retailer in town always. 1 BOLT is worth 1$ worth of electricity (it is unclear, what the rates will be when they “expand to Germany and Australia” — but it does not have explicit linking to local electricity prices as the Sparkz token of PowerLedger platform has).

BOLT tokens are also access tokens, which means you must buy BOLT to on-board the Grid+ platform in the first place. Once you on-board, with your Grid+ device (a hardware/software agent that handles all the crypto-stuff [as well as the electricity stuff] transparently, conveniently for the mainstream user) it automatically opens a payment channel and deposits your BOLTs in the Grid+ Raiden hub (I did not find the definition of a Raiden hub, not in the whitepaper nor in the — please comment if you have a pointer! — but this Grid+ Raiden hub and the stable currency nature of BOLT are a big deal. I guess the hubs in the Raiden network take care of liquidity for all the transactions that are being made before being finalized on Ethereum. For this value-add, they receive transaction fees. One revenue stream for Grid+ will be the transaction fees on the Raiden network — but not for Grid+ users, their payment channels are “free”).

Your electricity usage is automatically paid for at the Grid+ prices through the BOLT deposits you made on the payment channel — minus the amount you accounted for through redeeming electricity with GRID at wholesale prices. This whole thing is automated through the Grid+ device and smart contracts, so as a user who doesn’t care you will only realize you now have a really cheap electricity bill. I guess they will make the appropriate marketing for mass market — as an early adopter user though, you’ll have to learn to love the struggle ;) When your deposit runs low, you will be notified to top it up (like prepaid), if you don’t: lights out.

BOLT tokens are also a stable currency. BOLTs are created when Grid+ user deposits fiat — USD in the beginning — with Grid+. To be concise: with “Karabraxos” — a vault smart contract one can view at Karabraxos.eth Also when you consume electricity, the appropriate amount of BOLT “returns” to Karabraxos automatically through the payment channel. When you redeem any unused USD deposit, appropriate amount of BOLTs are destroyed.

All in all this is a smart design undoubtedly — and it works as monetizing the open source software development of all the cool stuff that is really needed to increase usability of Ethereum network.

Knowing the energy domain, though, with all the established incentives to keep as much unwanted parties out of the wholesale party, — and as the authors acknowledge, the inherent complexity of wholesale energy trading, — and often times undigitalized, manual processes in trading, that will lame Grid+ speed — I did wonder, whether their time and efforts are better put to use in another domain. But that’s their beer.

Some parting thoughts…

I buy the GRID token because I want the Grid+ team to build this whole infrastructure, and constructs of smart contracts etc. We can put AdptEVE, our AI-aided energy app we’re developing at @freeel_io, as the software agent inside the Grid+ device — or reuse the code and smart contracts to work with other devices such as our partner Smappee . Because this is open source development, right? However, what are the repercussions if Grid+ would take my money (among many others’ who all invest with the same or different agendas, we won’t know), develop this, and put up a commercial use licence later: Would we have been scammed?

I also like the more “mindful speculation” value of GRID, which I can manage with more brains: For example, I buy GRID to support the development roadmap, but live in Germany, where they won’t be redeemable for wholesale electricity at least 18 months or more. But US Grid+ users want to buy more GRID, to make sure they can ensure the lower wholesale price on their virtual electricity bill. If the Grid+ secured wholesale price is cheap, the price of GRID goes up. So I follow wholesale purchase performance of Grid+ (or of the Grid+ agents? They need to clarify this more). I will either hold on to my GRID because I believe they will be in Germany at some point. Unless the price goes up, then I might sell some. Unless I know the EEX wholesale prices with the excess renewables which regularly push the price to zero will make my GRIDs very valuable here, so I hodl some more… Long story short: I have a nice token at my hands, I like to trade with as a crypto and energy domain nerd.

This immediately makes energy&crypto nerds a better trader than mindless half-hour-in-and-out day traders, who can be very dangerous to the project and the network one tries to incentivize with the token. So it additionally brings “more mature market” to the whole speculative aspect of the crypto-asset.

I like this a lot. This is certainly one of the token design patterns to note down.

Which brings me to the write up of the third part of this series: Token design patterns, best practices for ITO structuring and their use in a “minimal” Token Model for the energy sector. At this point, all I know is there’s going to be a lot of digesting — and I might come out with a few iterations, and initial versions…Thanks in advance for sharing your perspectives and feedback! It helps immensely to improve our collective understanding of the potential in this space. Which we know is huge — but have a hard time to put one label on it:

It will take some time until we realize all its parts and find a name for it we all can live with and which is “not-false.” Until then exchanging our perspective is the best we can do for fast progress.