A new paper argues that blockchain could be the change agent renewable energy markets are waiting for.
Blockchain has been described as “the trust machine”. It could also easily be described as “the incentive machine” or “the decentralization machine”. The applications of blockchain in reimagining not just how goods and services are bought and sold, but how entire economies are structured, are potentially vast. This is particularly salient to sustainability and energy markets, in which the three factors of trust, decentralization and incentives are often in short supply in current policies, practices and structures.
This is the message of a paper in a new book, Theories of Change: Change Leadership Tools, Models and Applications for Investing in Sustainable Development, edited by Karen Wendt. Written by Dr. Michal Natora, investment director in industrial information technology at Emerald Technology Ventures, the paper, “Change Through Crypto-Economics”, advocates for a blockchain-based system of market exchange as a means of turbocharging sustainability, especially in the energy space. Natora, who draws upon his substantial background in systems thinking, argues that the “tokenization” of markets will create more effective energy exchanges that empower users to take action.
More than token progress
Start with the underlying idea of tokens, which form the basis of blockchain-based networks. Tokens are the units of exchange of any cryptocurrency, such as Bitcoin, the original and most well-known variety. Under the blockchain framework, tokens are created when participants in the system perform some sort of task, such as solving mathematical equations (as in the case of Bitcoin). Each token has the history of all other tokens indelibly etched into its foundation, so that the “family tree” of every token in the network is visible to every participant. This makes tampering with the chain virtually impossible.
What determines the value of the tokens? As in any open market, it is determined purely by supply and demand. Trust is crucial, however, because all network participants are bound by the same rules. Users don’t have to rely on the validity of information provided by another user, but can verify the information on their own. There is a single, verifiable ledger and there are transparent protocol rules, and this creates trust in participating in the network.
One caveat: not all cryptocurrencies are obtained by completing tasks. Some are acquired by proving the existence of an underlying asset—say, battery storage capacity for solar energy. We’ll get into specifics here later. The point is that one needs to “participate” in the network in some way in order to earn tokens—either by working to obtain them or providing something of value in exchange.
This brings in the idea of incentives. Since everyone who owns tokens needs to participate in the network in some way, everyone has some skin in the game. Blockchain helps to eliminate “free riders”, since the system could be structured in such a way that anyone who utilizes its services—by powering their house with stored solar energy, for example—has to pay in tokens. These tokens then have to be earned back via participation. The incentives baked into the network will affect user behavior, compelling them to contribute to the overarching goal agreed upon by everyone.
These two elements—trust and incentives—both manifest against a backdrop of decentralization. This is one of the most radical elements of blockchain-based markets, and potentially gives the technology the most power in upending traditional networks of exchange. Where in traditional markets a single service provider—say, a bank or a power grid operator—sets the terms of the transaction, in blockchain-based markets the participants themselves set their own terms and transact with each other freely and of their own accord.
They are also not bound by the vicissitudes of the medium of exchange—usually a fiat currency like the US dollar. The currency is the token which, as noted above, stores value equal to a level of network participation based on the consensus opinion of all users. This economic network isn’t subject to the traditional harmful bi-products of so-called animal spirits, such as inflation or deflation. As Natora notes in his paper, “The function of the central authority is replaced by meritocratic contribution of each network participant.” This allows for wholly democratic systems of exchange, granting every player authority and decision-making power.
As the renewable energy-related examples in this piece allude to, Natora’s piece focuses on sustainability as a key beneficiary of the shift to blockchain-based markets. He refers to sustainability in the holistic sense—as a functional mechanism that allows for long-term, efficient and stable utility of the overall economic system—as well in terms of stewardship of natural resources, through the example of energy systems specifically.
According to Natora, blockchain boosts the sustainability of the broader economic landscape by separating it from traditional economic concerns. When the medium of exchange—such as a cryptocurrency token—is founded on network participation, with its value agreed upon by all participants, it cannot be gamed the way a traditional currency can. Its worth remains stable and predictable, allowing for long-term planning on how best to allocate resources toward problems like climate change which operate over a horizon of several decades. Instead of a network participant taking on the mantle of the “investor”, looking to “make a quick buck” by growing her riches through speculation, she has to focus on the enduring stability of the monetary system as a whole.
In this sense, renewable energy systems are primed for a blockchain-based shake-up. Natora conjures up a cryptocurrency that could be used to buy and sell energy across a distributed, decentralized network in which small-scale producers of solar power double as consumers. A producer would need to reliably feed his energy into the grid in order to earn tokens, which he could then turn around and spend on energy for himself.
This could help to balance supply and demand, since some producers—those based in sunnier locales, say—may generate excess power. They would be incentivized to participate in the market, gaining assurance that they would not suffer power shortages during times when they might be using energy in excess of their own generating capacity, since they would have accrued ample tokens. The same principle applies to energy storage—tokens could accrue to those who invest in batteries and are willing to let other market participants use their stored energy in times of need. Those who do not generate power themselves could gain tokens in other ways—say, by cleaning solar panels or maintaining power lines. All this occurs without the need for a “switchboard”—a central authority that sets rates—since anyone with a need for electricity could ante up based on their own requirements and capabilities. In this way they would not only join the market, but actively take part in shaping it.
A new solution to a pressing problem
Natora’s paper provides a useful synthesis of various streams of thought surrounding blockchain and sustainability. Its emphasis on the three intrinsic characteristics of cryptocurrencies—trust, incentivization and decentralization—helps the reader gain a clear sense of what is at stake by leaving our economic future in a state of concentrated control. He elevates the concept of blockchain from a mere technological novelty into a truly revolutionary innovation with potential far beyond that implied by recent headlines about Elon Musk, Bitcoin bans in China and catchy memes like Dogecoin.
Whether the benefits he envisions come to pass depends on the likelihood that current economic actors—especially those who hold the power to shape the current system—will dispense with their authority—or, barring that, find themselves marginalized by an upswell of populist action. As a realization slowly dawns that the old way of doing business could very well fall short in humanity’s effort to tackle the truly existential problem of climate change, new ways of thinking deserve an elevated platform and louder megaphones. It is up to us to ensure we leave nothing on the table in a dynamic marketplace of ideas.