Blockchain is currently the talk of the town. A couple of years ago it was assumed that the virtual currency would radically transform the financial industry; now, other industries (including energy) are expected to be disrupted as well. That hasn’t happened yet. Ajaz Shah provides a critical take.
Blockchain is said to have enormous potential for the energy sector and the switch to renewable energy. In a report from July 2016, rating agency Moody’s lists 25 Top Blockchain Use Cases. They include several use cases for the financial industry, alongside potential applications for governments, for example in the fields of identity management, file management, elections, and taxation. In the private sector, blockchain is expected to do wonders in the fields of media, health and energy.
In a recent poll from Germany energy agency DENA, 21% of the interviewed experts called blockchain a “game changer for the energy industry.”
Is blockchain really the next big thing?
In theory, blockchain offers huge potential to process transactions securely and in a decentralized way. But the current debate about blockchain’s potential for the energy industry seems to completely disregard potential problems and dangers. An examination of real-world applications of blockchain, bitcoin and other cryptocurrencies reveals a number of problems that one should be aware of.
The success of bitcoin is still very limited
Bitcoin and blockchain have been around for 8 years, but until now, the financial system has by no means been shaken up.
The price for one bitcoin is highly volatile. There is still not very much that can be bought with the currency. Some hip cafés accept bitcoin as a payment method, but this is mostly a gimmick that few people make use of. One of the biggest successes for the bitcoin community is the (limited) possibility to pay with the currency at the Microsoft Store. A list of other products and services that can be bought with bitcoin can be found here.
The total bitcoin economy has a market cap of about 12.3 billion US dollars. If you compared this to the GDP of countries, it would be between Albania and Nicaragua. Coindesk reports that venture capital has invested more than 1 billion US dollars in blockchain and bitcoin technology, but the investment volumes have been falling recently.
Blockchain is not efficient
Although the industry is comparably small, the system is hopelessly overloaded. The myth of a fast, easy and free way to do transactions is not based on reality. It takes between 15 and 75 minutes until a blockchain transaction is confirmed (depending on the chosen transaction fee). This doesn’t mean you need to wait that long for your coffee when you pay with bitcoins at a hip café – they will sell to you trusting that, within the next hour, the transaction will go through.
Blockchain consumes enormous resources. In order to keep it secure and functional, miners are needed. They use computing power to perform cryptographic calculations and are awarded bitcoins for solving these calculations. Theoretically, every computer can participate in mining, but without high-performance equipment and cheap electricity there is no way to compete in this market.
The mining business is currently dominated by miners from China, where computer chips and energy are cheap. One Chinese mining operation was portrayed quite impressively by Vice Magazine:
This bitcoin mine has a 3% market share. Contrary to the objective of a decentralized currency, the market concentration is quite high in the bitcoin mining industry. More than 50% of the bitcoin mining is currently controlled by just 5 organisations. At the moment a real war of attrition is taking place in the industry.
Pessimistic estimations assume that by 2020, bitcoin will consume as much energy as Denmark. It should be noted that these are only the costs for maintaining the system, not the ecological costs for microchip production. One bitcoin transaction uses 1.6 times the energy that the average US household consumes in one day.
The problem of efficiency cannot be solved with better hardware. Calculations are becoming more complicated – it’s not a bug, it’s a feature.
Scandals around bitcoin and blockchain
The possibility to do anonymous transactions attracts a lot of shady individuals who try to enrich themselves without the fear of repercussions.
Within the bitcoin community, scandals are not uncommon. The biggest bitcoin exchange in its day, Mt. Gox, “lost” over 470 million US dollars in bitcoins in 2014. The company’s CEO was only recently released from jail after serving 10 months.
Quite famous is the case of the Darknet marketplace “The Silk Road,” where it was possible to buy anything from illegal drugs to weapons to the services of contract killers. The website’s operator Ross Ulbrich was arrested in 2013 and sentenced to life in jail without parole. Silk Road was followed by a series of clones, where several administrators took off “just in time” with their users’ bitcoins. In one case, bitcoins worth 12 million US dollars were stolen. Without the anonymity of bitcoin and other cryptocurrencies, marketplaces like these would not be possible.
It may be too easy to blame the actions of criminals on blockchain. But does blockchain really provide the promised security for legitimate business transactions?
“The Dao” is an interesting case in point. It is currently the biggest crowdfunding project of all time and the first decentralized, autonomous organization that exists in the form of a large number of “smart contracts” on blockchain. The organization has no appointed leader or manager; its source code was written by German developer Christoph Jentzsch. The idea is that the business should be conducted completely by the community.
In May 2016, the Dao started with more than 18,000 community members, who invested more than 10 million units of the alternative cryptocurrency Ethereum (ETH) in the organization – more than 160 million US dollars. Just a month after the organization was founded, hackers managed to gain control of ETHs worth more than 60 million US dollars. Curiously enough, the hack was technically within the legal framework of the Dao. The Dao’s and the Ethereum community’s response to the hack is normally considered a huge taboo within cryptocurrencies: they did a hard fork. This meant migrating to another, new blockchain, thus erasing the hack from blockchain’s history. Blockchain’s biggest selling-point, namely its integrity, was infringed by this measure.
So what does blockchain mean for the energy transition?
In theory, blockchain has great potential but is probably going to remain in its infancy for quite a long time. The problem of inefficiency and the wasteful handling of resources isn’t likely to be solved in the foreseeable future. In addition, massive abuse hasn’t been eliminated yet. The anonymity the system offers seems to attract greed and ruthlessness. Current blockchains are also relatively small and can be easily dominated by a few well financed players.
Today, blockchain provides integrity but is neither easy to use nor stable or secure. The further advancement of this technology remains important, so the current debate about blockchain must continue. But there may be a long way to go.
This piece was originally posted (in German) at Energyload.eu.
Ajaz Shah has been active in the renewable energy sector since 2010 in project financing and management. He worked on solar and wind projects with a total capacity of 50 MW in Germany, Spain, Italy, UK and the Middle East. He is co-founder and co-editor of Energyload.