An article by Amy Westervelt, Energy Web Foundation
When I say “blockchain,” what comes to mind? Is it a positive association? Maybe reclaiming ownership of your personal data? Or unlocking financial services for the world’s unbanked?
If you’re a climate advocate, a few negative opinions might sit higher on your list.
Blockchain has been heralded as a transformative tool for everything from healthcare to press freedom. But its environmental impact has drawn nearly as much attention, for good reason. Bitcoin, the best-known blockchain, requires a staggering amount of electricity to operate—based on one analysis, equal to the annual consumption of Ireland. On Ethereum, a network popular for enterprise applications, a single transaction can consume as much power as the average U.S. household does in a day.
So is it safe to say blockchain is a net negative for carbon emissions?
Happily, the answer is no. Blockchain and its applications are evolving, both of them in a positive direction for the climate. Moving forward, blockchain technology will not only use less energy, but it will also actively support the carbon reduction goals of governments, utilities, and businesses alike. In other words, blockchain can clean up its own energy footprint, while at the same time accelerating a low-carbon energy future for all.
To understand how, it’s helpful to understand what makes blockchain technology unique, and what new functionality it enables. A blockchain is a complete, self-updating, distributed record of interactions between participants in a network. These participants, or “nodes,” each store a copy of this record and update it every few seconds. Since all nodes have uninterrupted access to the shared record, everyone references the same, complete history of events at all times.
What makes this different from other networks? On a blockchain, no one has to rely on anyone else’s version of events. Records don’t have to be exchanged or compared to ensure that they match. And once events have been written to the chain, they can’t be altered. Each update, or “block,” is linked cryptographically to the block before it. This means attempts to change or replace blocks break their links to the rest of the chain, alerting the entire network.
"Blockchain is becoming a key tool for the world’s largest energy companies in transforming how we buy, sell, and use electricity."
So a blockchain is a new type of network: both transparent and immutable. These benefits are what make blockchain exciting. But so far, providing them has required a huge amount of energy. To keep the Bitcoin and Ethereum networks secure, the process of adding blocks is deliberately difficult. To do so, a node must compete with others to solve a complex mathematical problem requiring enormous computational resources in a system known as Proof of Work. Along with the right to add a block, the winner earns a handsome cryptocurrency reward. This has created serious growing pains for blockchain; as crypto prices rise, more nodes participate, compounding electricity use even further.
Luckily, the nascent blockchain industry is rising to meet this challenge. Technological advances have yielded more-efficient alternatives to Proof of Work that provide the same transparency and security benefits. Ethereum, for example, is replacing Proof of Work with a protocol known as Proof of Stake, in which nodes place deposits on the blockchain in exchange for the right to add blocks. These deposits are forfeited if malicious behaviour is detected. This shift is planned later this year; according to Ethereum’s founder, it will cut energy consumption by 99%.
In addition to efficiency improvements, blockchain is becoming a key tool for the world’s largest energy companies in transforming how we buy, sell, and use electricity. Why? Because it can help utilities, grid operators, renewable energy developers and buyers, and others orchestrate the many players in our increasingly complex energy system (producers and consumers of traditional and renewable energy alike) much more cheaply, reliably, and securely.
Let’s look at a simple example: markets for Certificates of Origin. A Certificate of Origin, or CO, is an instrument verifying renewable electricity generation that allows its purchaser, typically a corporation or city, to demonstrate progress towards sustainability goals.
The lifecycle of a CO is long and complex: an MWh of renewable energy is generated, recorded as a CO, added to a registry, bundled with others for sale, sold and transferred, then claimed and finally retired. This process is often administered by brokers and other intermediaries; their fees are typically around five percent of each CO’s value. These costs prevent smaller renewable generators and CO buyers from participating, which limits the market size. And the sheer number of steps involved creates doubt among participants in the system’s integrity; time lags and loopholes regularly cause double-counting, where the green attributes of a given certificate are claimed more than once.
"To leverage distributed, renewable, local energy production, tomorrow’s grid will need to orchestrate a much larger participant pool with maximal security and reliability, all while keeping electricity prices affordable."
A blockchain-based system for tracking and trading COs can eliminate these pain points, making markets more transparent and lowering barriers to entry. Pieces of self-executing code, known as smart contracts, can match buyers and sellers automatically, and embed additional data, such as avoided carbon metrics, in each CO produced. Digital identities can be assigned to producers, buyers, and COs themselves, eliminating the risk of double-counting. And emerging privacy solutions can be used to shield sensitive information, pricing, ownership, and bidding behaviour while ensuring overall network transparency.
But blockchain can do more than just optimize existing operations. Our current electricity system — where power comes primarily from central generation units — is nearing its expiration date. Our future grid will operate, increasingly, bottom-up. In it, neighbours will sell excess rooftop solar production to one another, electric vehicles will help balance the grid, and smart appliances will power up or down based on price and carbon signals. This won’t be driven by policy alone, it will be mandated by the limitations of our ageing, twentieth-century infrastructure and the demands of a growing population. To leverage distributed, renewable, local energy production, tomorrow’s grid will need to orchestrate a much larger participant pool with maximal security and reliability, all while keeping electricity prices affordable. Blockchain can help meet its needs for scalable communication, command, and compensation layers. And in the process, it can create value for participants (households, businesses, and communities) that contribute to the grid, either by supplying energy or using less of it.
In the past, “blockchain” has been a dirty word in climate circles, but that’s swiftly changing. The blockchain industry isn’t just cleaning up its act, it’s providing the glue we need to hold together an increasingly decentralized and decarbonized grid.
Amy Westervelt is passionate about helping companies navigate disruptive technology. Currently, Amy is a Senior Associate at the Energy Web Foundation (EWF), where she works with utilities, startups, and investors to leverage blockchain technology in the energy sector. Prior to EWF, she was part of Rocky Mountain Institute’s in-house innovation hub, the Office of the Chief Scientist.