The argument for public blockchains in the energy sector
This article is by Jesse Morris and Sam Hartnett. It originally ran on GreenBiz here.
In 2019, more market players than ever — utilities, grid operators, energy companies, software developers — are inching closer to commercial blockchain applications in the energy sector. As they do, an important debate is emerging: Should private blockchains (such as Hyperledger or private Ethereum networks) or public blockchains (such as Ethereum or that of the Energy Web Foundation) form the basis of any energy blockchain technology stack?
Three key attributes can characterize every blockchain, for the energy sector and beyond:
Integrity — who validates transactions and makes governance decisions on the network;
Read access — who or what devices can see transactions on the network; and
Write access — who or what devices can submit transactions to the network.
Pure public blockchains, such as Bitcoin, allow participants to take all three actions, provided they have enough computing power. Pure private blockchains, such as Hyperledger, restrict access in all three scenarios to a defined set of participants. Blockchains such as the Energy Web Chain are something of a hybrid: the chain’s initial design allows any device or user to read and write transactions but restricts who is allowed to maintain network integrity. In the case of the Energy Web, only identified, trusted energy market participants approved by the network’s governance model serve as validator nodes.
This approach intentionally trades a modicum of decentralization in exchange for improved performance and regulatory compliance; the result is essentially a public blockchain that offers some of the more compelling attributes of a private network.
Exposing the fallacy of the private vs. public debate
Too often, the private vs. public question is presented as an either/or decision. The arguments in favor of using a private chain are just as often based on false assumptions about public blockchains. For example, some assume that if you want data privacy, you can’t use a public chain or that if you need high transaction throughput capacity, you need a private network.
More large market participants are recognizing the value blockchain technology can create in the energy sector.
In reality, contemporary and emerging technologies can provide many of the desirable technical attributes of private systems on a public network. Moreover, public blockchains also confer additional benefits that might be harder to neatly quantify yet have tangible impacts on real-world outcomes.
At the Energy Web Foundation (EWF), we believe that public blockchains can offer much more value to the energy sector than private approaches. Our position is that not only can they compete with private networks when it comes to performance, but public networks also offer greater degrees of interoperability and subsequently foster greater innovation while mitigating risks of obsolescence.
Overcoming persistent myths about public blockchains
We typically hear four narratives about why public blockchains such as EWF’s supposedly won’t work for the energy sector. All four prove to be unfounded (or at the very least misleading) upon closer inspection, and they have been widely debunked — by us and others. Here are four common objections:
- Public blockchains use too much energy: Yes, the proof-of-work approach to consensus (in which computers race to solve a computationally complex problem as a deterrent to cyberattack) a la Bitcoin is notoriously energy-intensive. But other consensus mechanisms such as proof-of-stake (in which validators stake tokens to vouch for their good intentions) to which public Ethereum is moving and proof-of-authority (under which validators are permissioned to perform their important role for the network) used by the Energy Web aren’t energy hogs.
- Processing transactions on public blockchains are too expensive: Token-based public networks, if designed appropriately, actually can be incredibly cost-effective, decreasing the cost of transacting compared over centralized networks. (Users pay tokens to cover costs for submitting transactions to the decentralized network, which helps to secure the network from cyberattacks and compensate validator nodes for maintaining the network.)
- Public blockchains can’t scale for commercial use: Over the long term, we may need additional technologies to handle the expected volumes of transactions from an increasingly distributed, decentralized and decarbonized energy system. However, the current generation of blockchain technologies are more than capable of supporting commercial energy blockchain use cases in the next one to three years.
- Public blockchains expose sensitive data: In fact, privacy can be maintained on a public network. Although their methods vary, all essentially encrypt sensitive data and allow only those with the appropriate permissions to view the data. Some methods, such as zero-knowledge proofs, don’t require the data to be exposed to other parties. Dozens of experiments in the greater blockchain industry are bringing even more new technologies to market with this capability.
Applying lessons from the intranet to internet evolution
More large market participants are recognizing the value blockchain technology can create in the energy sector (EWF recently eclipsed the 100-Affiliate mark). For many, history from 30 years ago — the dawn of the internet age — risks repeating itself.
Excited by a novel technology (this time, blockchain) but unsure how to transform their businesses to accommodate increasing decentralization, transparency, data sharing and peer-to-peer transactions, some energy sector organizations such as utilities, grid operators and energy companies are developing proof-of-concepts using private blockchains — walled-off networks where only permissioned entities are able to read, write and participate in maintaining network consensus.
This modern-day path is similar to how many companies, newly introduced to the then-nascent internet, initially moved to capture the communications, data storage and other benefits of that platform while avoiding its perceived downsides (such as interconnectivity or exposing proprietary data). This led to the prevalence of intranets through the 1990s.
Corporate intranets certainly played an important role for many organizations (and to a degree, still do today). But in terms of overall economic and societal impact, they pale in comparison to what the internet has become and enabled. It’s hard to envision how novel business models in the transforming energy sector (such as the aggregation of distributed energy resources) and products (such as smart thermostats) could have achieved the level of success that they have without public communications platforms such as the internet.
We see strong parallels with the evolution of blockchain technology today. Private blockchains can and will have a place at times, just like intranets. Ultimately, though, we believe that public blockchains are capable of unlocking the most value across the global energy sector.
Public networks have characteristics that private networks struggle to provide, and these characteristics are critically important in the energy sector. Here are key factors to consider:
1. Public blockchains offer a variety of compatible resources
Building applications on private networks can be time- and resource-intensive. Everything may need to be built from scratch, including databases, program logic and user interfaces. Developers can access blockchain-as-a-service solutions to speed development in some of these areas, but these solutions add cost.
On public blockchains, developers can take advantage of pre-existing infrastructure and services. This leaves them free to focus on innovative ways to combine services and create new value-adding products.
2. Public blockchains enable interoperable applications
On public blockchains, everyone — and every device — can transact without having to ask permission to participate in the network. In an industry undergoing widespread transformation towards a system where billions of devices may balance the electric grid instead of large centralized power plants, widespread interoperability couldn’t be more important.
Electric vehicles provide a powerful example. Today’s charging infrastructure is generally capable of supporting the roughly 5 million EVs on the road. But that infrastructure is largely siloed, which leads to extremely low asset use and high-friction customer experiences (such as being forced to use different credentials for different charging networks). When we move from 5 million to 50 or even 500 million EVs on the road, this way of doing business simply doesn’t scale.
To prepare for the future, solve both of these challenges and unlock further innovation, what if we had a digital infrastructure making it possible for every single electric vehicle and charging station (from garage outlets to 150-kilowatt charging stations) to become a trusted node on a charging network — regardless who owns or operates it — that could transact automatically on a peer-to-peer basis?
Making a bet on the wrong technology horse can lead to obsolescence and competitive disadvantage.
To achieve this, we need a way for data from EV charging events to be shared across a number of stakeholder groups. Unfortunately, coordinating all these stakeholder groups is a massive challenge because of the sheer number of parties involved: the EV owner; the electricity retailer; the distribution utility; the transmission system operator; the charging station owner/operator; the charging station software vendor; and perhaps other local authorities. How do you get everyone to agree upon the fundamentals of any transaction? Is it even possible for a centralized entity to enforce data sharing and transaction details across this many parties?
This is where public blockchains shine: using a public network, no single entity is in charge of developing or enforcing any transaction, nor does any centralized party have provenance over the data in this ecosystem of stakeholders.
Traditional, centralized IoT platforms and private blockchains are capable of executing complicated transactions. But getting a large number of parties to digitize using a centrally managed ruleset, thereby trusting a single solution provider to maintain the private network and enforce any transaction, is another challenge entirely.
3. It’s cheaper to integrate physical devices with public blockchains
The energy sector runs on incredibly thin margins. This is a major reason business models focused on distributed energy resources have failed to proliferate: the costs of rooftop solar, batteries and digitally controllable loads may have come down over time, but every dollar spent onboarding and integrating these devices to utility networks cuts into the business case. And centrally managing identities, relationships and transactions between users is costly and time-consuming.
In a public blockchain, smart contracts specify exactly how to interact with a particular user or device. Any person, organization or machine can establish a digital identity by simply downloading a piece of open source software. And innovative uses of assets such as tokens and/or artificial intelligence actually can supplant traditional approaches to auditing and verification.
With this architecture in hand, onboarding and integrating new users and devices is low friction. But with private blockchains, new assets and/or users must go through a trusted onboarding process to give network access rights to what is essentially a private database. One or more administrators are required to manage permissions and configurations across the network.
4. Public blockchains mitigate risks of disruption
Private and proprietary platforms are subject to change at the discretion of their owners. If a company is building an application on a private network, it must rely on that provider to maintain service and price levels. Yet examples abound of platform operators changing rules, fees or technical characteristics to the detriment of users or third-party developers.
Governance decisions on public networks are made by a multiplicity of stakeholders, and if designed properly, will reflect popular opinion. Open platforms are not driven by a specific business philosophy (or investment decision) or a need to return value to shareholders; they are driven by a community focused on creating the best possible system. Making a bet on the wrong technology horse can lead to obsolescence and competitive disadvantage.
Considering our experience at EWF, we strongly recommend that energy market participants experimenting with decentralized technologies limit internal debates about private and public blockchains and ask themselves two simple questions. First, what use cases do I believe can create the most value for my organization today and in the future? And second, is my organization making decisions today that will make it difficult to integrate with the next generation of decentralized technologies?