Blockchain: Environmental Hero or Villain?

Blockchain is viewed by many as one of the biggest tech disruptions in this century. It’s popularity initially driven by greed has evolved pass that and could end up building something much more important than wealth. It has the potential to revolutionize the way governments, institutions, and corporate work. In the recent years the implementation of blockchain has been increasing across wide range of industries.

Blockchain has the potential to solve the worlds’ most pressing environmental challenges by harnessing the technological innovation to transform the energy market and improve process efficiencies. However the largest blockchain network — Bitcoin is often criticized for wasting energy and polluting environment. Bitcoin, Ethereum and multiple other minable altcoins are responsible for significant power consumption. The environmental criticism of cryptocurrencies often neglects to put the issue in the context of wider technological applications of blockchain. After all, Bitcoin is just one of many uses of this technology.

What is Blockchain

Blockchain is a digital distributed ledger that is the foundation of Bitcoin and most cryptocurrencies. Information on blockchain is secured by cryptography and can be accessed using private keys and personal cryptographic signatures. Because it is decentralized it does not depend on a central authority for safekeeping, in fact Bitcoin network is public and allows anyone to join.

The transactions are being verified by computers in the blockchain network (known as nodes). Nodes use a consensus protocol to agree on ledger content. Some nodes are mining nodes, these group outstanding transactions into blocks and add them to the blockchain. They do this by solving a complex mathematical puzzle that is part of the Bitcoin program, and by including the answer in the block. The miners are being rewarded for their work with miner reward — Bitcoin.

This process is very resource-intensive; it requires substantial computing power and energy to maintain the blockchain. Cumulative power being consumed by the miners in Bitcoin network, as estimated by Digiconomist, is 54TWh per year, which is equivalent of annualized energy consumption in Bangladesh or 168 million people.

Bitcoin mining resembles gold mining, it imitates the property of scarcity of competing for limited resources that will eventually not be available. In this process thousands of individual devices compete to become the first to solve the cryptographic puzzle. Whoever solves it first, gets the reward. Everyone else just wasted the electricity on doing pointless computations. The consensus protocol encouraging wasteful energy consumption and used in this process is called Proof of Work. It is connected with the incentive given to miners in exchange for the energy they spent to enhance stability, security and safety of the network.

More than Bitcoin

There are however, different ways to validate transactions and achieve the distributed consensus. Bitcoin competitor Ethereum is considering a move to a Proof of Stake based protocol, which uses a different process to confirm transactions. Although purpose of those algorithms is the same the process to reach the goal is different. In Proof of Stake there is no block reward to be earned and the validators do not have to use their computing power. Instead the creator of the next block is selected in a deterministic way — based on their stake — the amount of coins the person has for the particular blockchain. Transaction fees are validators’ reward. Removing the high-powered computing from the consensus algorithm makes Proo-of-Stake more energy efficient than Proof-of-Work.

There are many ways to structure a blockchain using various types of blockchain (private, premissioned, etc) and different consensus protocols such as Proof-of-Authority or Proof of Burn, and most of them do not require much energy. In fact most blockchain solutions remove the need for high energy consumption by not using Proof-of-Work protocol and thus not needing mining.

Blockchain for good

Fortunately, this allows blockchain to be one of the emerging technologies that can be used to repair some of the world’s environmental challenges. In September 2018, the World Economic Forum issued the Building Block(chains) for a Better Planet report, that identified 65 existing and emerging blockchain use-cases addressing six of today’s most pressing environmental challenges: climate change, natural disasters, biodiversity loss, ocean-health deterioration, air pollution and water scarcity. Many of these opportunities extend far beyond “tech for good” considerations and are connected to global economic, industrial and human systems.

Blockchain can be applied in various ways to save energy and help the environment. Three applications that show a lot of promise are: peer-to-peer exchange of energy, electric vehicle charging and exchange of goods.

Decentralization of energy

World decarburization relies on the emergence of renewable energy resources that are inherently distributed and intermittent. The capacity to tap into them is often related to the ability to manage the supply and demand efficiently. Blockchain could simplify the co-ordination of decentralized electricity resources among individuals along with their platform and networking capabilities. Transition to decentralized utility system at scale using blockchain includes solutions such as peer-to-peer transactions, dynamic pricing and optimal demand-supply balancing. Platforms can collect data from the households via smart sensors estimating energy demand. This would transform the way that energy is produced, stored and consumed.

Several pilot studies involving small to large-scale energy projects are currently underway around the world. In New York, neighboring householders are selling power to each other in a blockchain provided by technology provider, LO3 Energy. In Australia and New Zealand also, Perth start-up Power Ledger enables neighbors to buy and sell surplus power.

Closer look

Usage of smart contracts to coordinate distributed energy resources is one of possible solutions. This would require each participating household to install a smart meter to record energy consumption patterns. Once the most efficient schedule of energy for that individual home is established it can be synchronized with demands of the rest of the households within the network. By using smart contract for coordination, a blockchain based platforms can use a decentralized optimization algorithm to manage the energy demands of the users within the constrains of the energy grid. The algorithm can optimize distributed networks on day-ahead or hour-ahead schedules without relaying on a centralized operator.

A simple aggregation step on a smart contract can enable local solutions to come together and optimize the energy distribution for the whole network. This could be appied to a handful of houses, a neighborhood or an entire city.

Other solutions — Supply chain

Blockchain is a game changer for the supply chain management; it allows to transparently track all types of transactions. Every time a product changes hands, from production line to recycling, it is documented, creating a permanent history of a product. Leaner and more automated practices can reduce process waste and achieve cost savings. Companies such as Walmart and Maersk have already jumped on the blockchain supply chain bandwagon to optimize supply and sustainable production. For example, Walmart uses blockchain to track pork sourced from China, data collected include origin of each piece of meat, where it was processed, stored and what is its sell-by-date. Other retailers like Nestle and Unilever, use blockchain to drive fair and responsible business by providing more information about how each item was produced to their customers, particularly identifying whether a product has been ethically and sustainably sourced.

Blockchain and Electric Vehicles

One of the recent applications of blockchain is a peer-to-peer electric vehicle (EV) charging solution. The lack of chagrin infrastructure is one of key challenges to widespread adoption of EVs. Charging posts are usually installed and operated in a centralized fashion by utility companies. Efforts are being made to improve the charging infrastructure globally. Decentralizing the economic model and allowing individuals to share their charging pols with the public can speed up the process. Private owners can utilize their charging stations during idle times and earn revenue by letting other EV owners use it. The utility company can fulfill the role of a facilitator, providing the posts and access to the charging app. In Germany Innogy Innovation Hub has already taken its solution to the market. The offered mobile app — Share&Charge enables its users to share their charging posts and lets the EV drivers find nearest charging points.

Room to grow

I am always interested in the rise of new technologies in the energy sector. Blockchain, although still in its infancy, offers exciting new possibilities. As the technology matures, unavoidably new challenges associated with its adoption will arise. Regulatory, security and scalability issues will require addressing and defining clear solutions to move the technology forward. I look forward to be part of it and watch how it unfolds.