Navigant Research Blog

Trust in Blockchain

— October 3, 2017

Trust. You can’t touch it or smell it, but it’s a vital ingredient in every commercial transaction. It exists between companies and their staff, suppliers, and customers. The entire worldwide monetary system is based on the principle of trust. One could argue that trust, above all else, is what binds the modern world together. However, trust is not blind: mistrust will also exist between the parties of financial transactions. Consequently, it is hard to build trust, but it can turn to dust in a matter of seconds.

Part of the attraction of cryptocurrencies, like Bitcoin, is that trust is placed in its consensus mechanism and not between a transaction’s counterparties. Anonymous users exchange Bitcoin without the need to measure a counterparty’s trustworthiness. Blockchain technology creates trust across the entire Bitcoin network through its distributed ledger and consensus-based transaction verification. While Bitcoin receives a great deal of media attention, blockchain technology is coming out of Bitcoin’s shadow as a potential game changer for transactions. Many industries are investigating blockchain’s potential to remove the requirement of central market functions, speed up transaction processing, and reduce overall costs. In addition, there are other use cases outside of transaction management. However, there are many issues with the technology that must be resolved before it becomes a mainstream technology.

Ironically, Trust Could Be Blockchain’s Undoing

Few technologies as immature as blockchain receive comparable media interest. Despite any current large enterprisewide deployments, blockchain evangelists have touted it as a technology panacea. It will likely be years before blockchain applications move into the mainstream. Blockchain startups have attracted billions in investment, yet these companies are exactly that: startups. In some cases, little more than a handful of enthusiasts with a good idea and some seed capital.

And therein lies the problem: blockchain could suffer from a huge trust issue. Not in the creation of trustless networks, but trust in the technology itself. The expectation of blockchain’s potential—driven by an unrelenting hype machine—far exceeds its current ability to deliver. It will likely be 4 or 5 years before we see any large-scale blockchain deployments. In the interim, some startups will run out of capital and close, others’ products will fail to deliver on their promises. What is certain is that blockchain developers will come across many issues converting blockchain from an open source software into something that is enterprise ready, scalable, and able to provide viable alternatives to existing technologies.

Expectations Could Be Set Too High

The problem is that 4 or 5 years is a long time to wait. The hype around blockchain is such that expectations can be set unrealistically high. I expect a great deal of negative press if too many startups fail or if too many projects become encumbered by too many unforeseen technology problems. The industry will lose its trust in the entire blockchain industry. A dollar value can be attributed to companies’ trust in blockchain—it’s currently the total amount pouring into trials and proofs of concept. A breakdown in trust will mean an end to project funding and the end of the road for blockchain.

Blockchain has some unique features that could benefit many organizations in the future. But it is not a panacea. It needs time to overcome its teething problems and to demonstrate its value. The hype surrounding the technology could well be its undoing.

Companies investigating blockchain should do so with the full knowledge that it is an emerging technology. It will take time, patience, and investment to adapt blockchain for enterprise-class deployments.

 

Understanding Peer-to-Peer, Blockchain, and Transactive Energy

— March 9, 2017

Coauthored by Richard Shandross

These days, clean energy media and the utility industry are abuzz with talk about peer-to-peer (P2P) energy, the idea that power generation and consumption can be fully decentralized. More specifically, startups in multiple places around the globe have latched upon the concept of utility customers who own renewable energy resources—prosumers—selling their power directly to their neighbors or others in their town or city. They promise platforms that empower customer choice, support local green energy, and sometimes even save or make the customer money in the process. It’s a very appealing idea, and the customer excitement it generates has not escaped the eyes of utility management. Many utilities are considering their own play in this space, and several have announced products and/or partnerships.

Invariably, the solutions involve blockchain technology. Blockchain is the epitome of decentralization, and some implementations allow users to enter into smart contracts as part of a complete transaction platform. Because of this pairing of P2P energy transactions with blockchain technology, many people equate transactive energy with blockchain P2P. However, transactive energy represents a broad set of activities that includes much more than this type of solution.

Possibility of True P2P Energy Transactions

A more fundamental question is whether true P2P energy transactions are even possible. Traditionally, P2P transactions occur when peers make their resources directly available to other participants without central coordination. There are a few select scenarios in which this can occur between prosumers and consumers (for instance, in microgrids that can be isolated from the main distribution grid). Yet, for the majority of customers, this is not how distributed power transactions will work. Two factors typically prevent transactions that are being labeled as P2P to deviate from true P2P:

  1. Unless the two parties run their own power line between their respective sites—which is highly unlikely—the power generated by prosumers and the power used by consumers must travel over a utility’s distribution network. The operation of this network is coordinated by the distribution utility, not the peers in the transaction.
  2. Because the distribution network is used, the prosumer will be paid for the power it exports, and the consumer will pay for the power it uses, according to the utility tariffs applicable to them. The two parties do not determine the price; rather, they use the blockchain platform to negotiate and implement their own, separate transaction. That transaction is in addition to, rather than in place of, the standard transaction with the utility.

In other words, the distributed nature of blockchain technology does not mean that everything about what is being called blockchain P2P is distributed. The purchase and sale of power on a distribution grid involves centralized control.

We will discuss situations in which a true P2P energy transaction is possible in a separate blog. But for the vast majority of cases, a different type of connection between prosumer and consumer is needed to achieve the goals of customer choice, support of local generators, green energy, etc. An alternative already exists, which is to intentionally include distribution and/or supply companies in the transaction. An example of this would be a model in which:

  • Consumers pay their current retail tariff—including taxes and distribution charge—or a shade below it (as an incentive) for locally sourced power. This tariff could incorporate pricing signals that incentivize behavior that supports grid operation.
  • The distribution network operator receives a small fee for the use of its infrastructure.
  • The supply company earns a small fee for operating the transactive platform—which could be based on blockchain to save on transaction and processing costs.
  • Prosumers are paid a price significantly above wholesale, but below retail.

Role of Blockchain and Transactive Energy

What about the role of blockchain in the electric power industry? That is a big subject, one that is currently under construction by many parties in the industry. Here are a few possible ways to employ blockchain—any of which could have a significant impact on the power industry or portions of it:

  • Data logging: For example, Grid Singularity in Austria is setting up a platform for monitoring and sharing of power/energy production data worldwide.
  • Asset valuation: Another Grid Singularity innovation, the blockchain would store immutable performance data for an asset.
  • Certificates: P2P market ledger for renewable energy certificate trading and purchase.
  • Bill payment: Would allow unbanked customers to pay bills via cryptocurrency. Another use would be third-party bill payments by NGOs, charities, relatives, etc.
  • Conditional energy supply: Smart contracts could be employed to allow condition-based choice of generation sources involving weather, prices, or other complex conditions.

Transactive energy and blockchain are both exciting, emerging technologies that are currently in nascent states. There is potential for them to be employed together to positive effect. However, they should not be equated with each other and, except in rare situations, they do not enable true P2P energy transfer.

 

US Government Struggles with IoT Vision, but Opportunity Exists to Get It Right

— December 21, 2016

CodeThe US government needs to up its Internet of Things (IoT) game, according to a new report that calls efforts so far uncoordinated and lacking a strategic vision. I tend to agree. The report, produced by the Center for Data Innovation, does, however, credit the government for having initiated an array of activities in support of IoT action in the private sector.

Report authors Daniel Castro and Joshua New note the many potential benefits of IoT technology across a variety of economic sectors, such as manufacturing, agriculture, transportation, and healthcare. Noticeably absent, however, is energy (which could be a mere oversight). Nonetheless, the authors characterize current government IoT projects as relatively small scale and one-off.

The report joins a growing number of voices opining about what should be done by government in the wake of the October 2016 Mirai botnet attack. A letter from Senator Mark Warner (D-Va.) to outgoing Federal Communications Commission Chairman Tom Wheeler raised legitimate concerns surrounding wirelessly connected consumer devices. (Warner is a cofounder of the Senate Cybersecurity Caucus.) Wheeler’s response points out the need for postponing next steps until the Trump administration is in place.

Security experts like Bruce Schneier have also told Congress of the imminent need for oversight of the IoT because of the potential for serious dangers if left unchecked. Schneier said the recent botnet attack illustrated the catastrophic risks involved, and he has urged action now while there is time to make smart decisions.

Blockchain to the Rescue?        

Others are suggesting Trump and his advisors consider blockchain technology. The idea would be to leverage the consensus mechanism inherent to blockchain that enables all of the computers in a system to agree on which new data is valid and which is a threat. My colleague Stuart Ravens explored the blockchain concept for distributed energy in a recent report, and the technology could be useful for multiple industries.

While there is ample evidence to be concerned about the federal government’s role in regard to the IoT, officials are at least struggling with the issues and are not clueless to its significance at this point. They see the economic value of IoT technologies and the opportunity to get it right with regulations, especially with a new team in place come January. There is reason to believe the IoT will get the attention it deserves in the coming years, or they could blow it. But at least they are on notice to seize the chance to provide a framework for success, from both a security and an economic perspective.

 

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