In 2008, Bitcoin, the first established cryptocurrency, was created by an individual (or group) operating under the alias Satoshi Nakamoto. In simple terms, cryptocurrency is a digital medium of exchange (for example, an alternative to the U.S. dollar) that uses encryption algorithms to verify transactions and maintain records. Rather than be monitored by a centralized authority, cryptocurrencies are transacted through a decentralized system—one where they are not controlled by a single institution. When Bitcoin was first made available to the public in 2009, the intricacies of the mining process (one where transactions are verified and new Bitcoins are created) led to the creation of blockchain technology.
While blockchain technology and decentralized applications can transform the energy and sustainability landscape as we know it, just what are blockchains? In this blog, we’ll discuss the key terminology you should be familiar with as well as the different ways blockchains will help advance the energy transition.
What is Blockchain Technology?
Blockchain technology is a type of distributed database (or ledger) that is shared across multiple computer networks (also referred to as nodes). In using a blockchain, users can certify transactions and store data without relying on a centralized authority (such as computer servers or brokers). While blockchains were built for cryptocurrency, their applications extend far beyond — offering strategic opportunities in the energy landscape.
Blockchains are known for their ability to maintain a secure, autonomous, and decentralized record of transactions. After a party requests a transaction be made, that transaction is assigned to a unique block. This block is then broadcasted across the network of nodes, approved, and added to a larger blockchain. Over time, blockchains will continue to grow since each block can only hold a certain amount of information.
As a means of data protection, each block is assigned a unique identifier (also referred to as a hash) that is a sequence of numbers and letters. This hash not only makes it so not just anyone can access the information within a block, but also keeps a record of what block came before it to ensure the proper data sequence is retained. It’s important to note that once a block is added to the greater blockchain and encrypted with a hash, no changes can be made.
The Connection Between Blockchains and Decentralized Finance (DeFi)
Decentralized finance (DeFi) is an emerging financial system that facilitates the movement of capital assets and cryptocurrencies through blockchain technology. Instead of relying on a centralized financial institution (banks, brokers, exchangers), individuals can use smart contracts through blockchains. The appeal? DeFi systems remove the control and friction third parties may have on our capital, also eliminating potential mismanagement of assets. This creates a more open, transparent financial system — built on accessibility, security, and trustworthiness.
Decentralized Autonomous Organizations’ (DAOs) Role in Energy Systems
Decentralized autonomous organizations (DAOs), also referred to as decentralized autonomous corporations (DACs), are a group of individuals who come together and operate under a shared goal. With DAOs, there is a flat organizational hierarchy—meaning all members have an equal say (and rank) in making decisions. With no central leadership, board of directors, or external organization with a final say on decisions, DAOs effectively distribute ownership for any organization—giving all individuals an opportunity to invest and participate in any initiative or community organization. Built on blockchain technology, DAOs were believed to eliminate the manipulation of external funds and human error through an automated system.
In DAOs, community-voted protocols are acted on through the exchange of tokens or non-fungible-tokens (NFTs). In this scenario, tokens represent a live market price while NFTs’ price is subject to demand offers through bidding. NFTs represent something that is unique and cannot be replaced or traded for something of exact value. Some individuals will purchase NFTs in hopes the value will increase, and they can later be sold for profit. Once an individual owns an NFT or form of cryptocurrency, they receive equitable voting rights, direct project and organization investing, automated revenue sharing, exclusive access through NFT authorization, and selling rights to name a few.
Specific to the energy ecosystem, an individual can start a DAO to raise capital, create organization order, and build renewable energy systems that the local community can engage with. These energy systems could include projects such as renewable natural gas development, electric vehicle charging stations, wind or solar farms, hydroelectricity plants, geothermal processing, or nuclear energy setups.
Blockchain’s Potential Impact to RECs and Voluntary Carbon Credits
Blockchain technology can address some of the challenges found in the energy data landscape by creating a more efficient, transparent system—securing and automating data storage and allocation for all affected stakeholders. The transparency of blockchain technology will enable the energy industry to establish a solid foundation, built on trust and digital verification. Since each token or NFT represents proof of ownership for any object (physical or digital), blockchains further create a verified, tamper-proof experience.
For example, someone could own an NFT representing the ownership of a solar farm. Using the blockchain’s decentralized application, this individual could later transfer and sell their NFT to a different party. In the energy ecosystem, blockchains can create digital profiles—distributing actual renewable energy credits (RECs) and voluntary credits to individuals or organizations. Additionally, you could distribute revenue share to the DAO members using airdrops. This means, if an individual were to invest in the solar farm DAO, their account would be airdropped a revenue share for the energy produced.
Blockchains have a unique role to play in optimizing the tracking, distribution, and retirement of RECs and voluntary credits. Traditionally, these credits can be difficult to track from their creation through retirement due to credit travel and trading. However, blockchain can link all credits created to one chain of data—enabling organizations to benefit from a uniform system that processes and retains all critical information on the sourcing, ownership, and retirement of credits. For this to be successfully implemented, more governmental support, communication of builders, community leadership, technological innovation, and user-friendly platforms are required.
Future Markets for Blockchain Technology
Bitcoin and cryptocurrencies, blockchains, decentralized finance, and decentralized autonomous organizations have challenged the markets’ business models to date. Specifically for energy systems, blockchains have the potential to optimize data processing as well as the tracking, verification, and retirement of environmental attributes. But as with all new forms of technology, there’s always a learning curve and process to get buy-in from key stakeholders. What will it look like for the energy landscape? Only time will tell.