Jon West, Senior Associate, Reddie & Grose
Blockchain technology often has a bad reputation when it comes to energy efficiency and sustainability. The narrative is dominated by the high energy demands of generating and verifying transactions for cryptocurrencies such as Bitcoin. However, not all blockchains are created equal in this respect. And cryptocurrency is arguably one of the least revolutionary applications for the underlying technology known a blockchain.
Blockchains are ledgers that are stored digitally on a multitude of computers, usually referred to as nodes. Each node stores a complete copy of the ledger, with every update to the ledger being replicated across all of the copies of the ledger held by the respective nodes. There is no single node that holds a version of the ledger that is any more authoritative than any other, which is why blockchains are referred to as distributed ledgers. It is the mechanism (known as a consensus algorithm) for providing this authority that has led some blockchains to become energy-intensive systems.
The energy issue
The Bitcoin cryptocurrency is still the most recognisable implementation of blockchain, and it was developed with the use of a proof-of-work consensus algorithm. Proof-of-work requires the nodes to race against each other to solve a computationally difficult problem, with the winner then being entrusted with the generation of a new block of the blockchain and selecting the transactions to be verified and included in that block.
However, the processing power required to be spent by the winning node, as well as the processing power effectively wasted by all of the other competing nodes, represents a significant quantity of energy. As of May 2022, it was estimated by Digiconomist that the annual energy consumption of Bitcoin was over 200 Terra watt-hours per year, which is significantly more than the annual consumption of Thailand.
Ethereum is another cryptocurrency that has also been using proof-of-work, but is currently in the process of transitioning to the use of a proof-of-stake consensus algorithm, which they estimate will be around 2,000 times more energy efficient than their current proof-of-work implementation.
Proof-of-stake typically selects the “winning” node from a pool of nodes that hold the most blockchain tokens, on the basis that an attacker would need to significantly invest in the tokens to be able to attack the blockchain, while those having a large stake in the blockchain would typically have an interest in its stability and security.
A wealth of opportunity
By sidestepping the computing power race, consensus algorithms like proof-of-stake, or the proof-of-authority used by Energy Web, dramatically reduce the energy expenditure required for the blockchain to operate and open up the viability of blockchain use cases across the energy ecosystem.
One example use case could be using the immutable nature and traceability of blockchain transactions to certify the provenance of sustainable or low carbon sources of energy, as well as associated carbon offset schemes in end-to-end energy distribution. Utilities providers can streamline payment processes both with the energy generators and end-users, resulting in more efficient operations.
Private owners of renewable energy sources could trade excess energy in a peer-to-peer fashion using the blockchain to show transparent and up-to-date pricing as well as record the sale and clearing of the traded electricity in this microgrid. This could also be extended to electric vehicle owners that have vehicles fitted with vehicle-to-grid charging technology to sell stored energy back into the network at times of peak demand.
Taking the peer-to-peer sale of energy to the extreme, this could potentially be scaled up to provide energy from the once wholesale grid suppliers directly to end-users, cutting out inefficiencies represented by intermediaries.
Standardisation and IP considerations
Many of these use cases will be enacted on a national or international scale, and so it is likely that standardised blockchains and systems will need to be agreed upon and implemented so that all stakeholders can participate in a common system, rather than the inefficiencies of a fragmented network.
In a similar manner to the standardisation of telecommunications, this would likely benefit from the creation of a standards body to define the core technology and processes to be used. In this framework, innovative companies file patent applications to protect their new ideas for improving the efficiency etc. of this core technology and the related processes.
If adopted into the standard, companies would be able to claim royalty payments from those implementing the technology on a pricing level that is considered to be fair, reasonable, and non-discriminatory, commonly referred to as FRAND.
Blockchain technology is expected to provide a significant benefit to the energy industry in the coming years, but protecting the investment required to bring about these benefits needs careful planning. Intellectual property law restricts patents from being granted for inventions that are considered to be nothing more than a business method. While these inventions will of course be beneficial for businesses, patent law requires there to be some technical advantage provided by the concept.
For example, this could be innovation directed to the core blockchain technology that bring improvements in the scalability of the technology to manage high data volumes in real time. An alternate example could be applications of blockchains to other systems, for example to facilitate improvements in control of the electricity grid itself.
The landscape of blockchain technology is fertile ground for innovation that turns perceptions of its energy consumption on its head. More untrodden ground is yet to come for blockchain pioneers, who should already be considering the ways in which they can protect their investments as they break ground into a new era of energy technology.