The news media has been saturated with stories about Bitcoin, mostly by folks who simply don’t get it. Bitcoin is confounding conventional ideas of currency and value. In the meantime, Bitcoin continues to make financial speculators, large and small, massive profits, while generating enormous media hype and false analogies to the tulip bubble of 1637.
But the real story behind Bitcoin and other cryptocurrencies, which likely will outlast the current mania, is the software behind the virtual money. It’s called “blockchain” and it has the potential to make major contributions to commodity trading, including energy trades.
How significant is blockchain software? Greentech Media reported last month that German industrial giant and major energy player Siemens invested $70 million in a funding round for LO3 Energy, which is developing blockchain for use in microgrid applications. I reported last April that blockchain software provides a digital ledger, an accounting technology, to track business transactions without a central authority, such as a bank, to oversee the transactions.
The Harvard Business Review said, “Blockchain has grabbed the attention of the heavily regulated power industry as it braces for an energy revolution in which both utilities and consumers will produce and sell electricity. Blockchain could offer a reliable, low-cost way for financial or operational transactions to be recorded and validated across a distributed network with no central point of authority.”
In the Siemens transaction, Brooklyn-based LO3 founder Lawrence Orsini said blockchain technology “enables local energy trading over microgrids….” Blockchain is a peer-to-peer database that no one can alter, providing secure accounting for transactions without overseeing middlemen.
According to the Greentech Media account, Siemens and LO3 have been working together for “several years,” and have a pilot project with a microgrid in Brooklyn, connecting some 60 solar generating sites allowing owners to buy and sell with accounts settled by the blockchain software, without transactions going through banks or utilities or other, not entirely secure, financial institutions.
An article in Forbes commented, “Because people don’t trust these companies to keep their data secure or private, they’ve invented a platform that stores and transfers data in a new way, and lets you keep it safe. This technology is called blockchain, and people are excited by its potential applications.”
With blockchain, any party on the chain of transactions (blocks) has access to the entire database of transactions. No single party controls the information. Every transaction – in the peer-to-peer network – is visible to anyone on the system, but no one can alter the data. Once a transaction has occurred, the records are fixed.
A recent Bloomberg article notes that blockchain has already been adopted by gold traders and could “transform other sectors of the global physical commodities markets.” That means it could move to energy fuels commodity markets such as natural gas, oil, and coal, as well as electricity. Blockchain, said Bloomberg, “Could offer a secure means of exchange of raw materials, open up channels of trade among buyers and sellers that had until now have been perceived as credit risks, and provide more transparency and liquidity to a market that has slowly lost favor among financial institutions.”
Bloomberg noted, “Rather than storing data on a server or database, blocks exist on multiple computers and networks in different locations. Should a change come about in the chain, it will immediately and simultaneously be reflected in every copy.”
The article added, “The advantage is that the duplication of digitally distributed ledgers provides a safety mechanism. Cryptographic proofs lock in the transaction order chain in perpetuity, eliminating any disputes over the sequence of events. The blockchain is verified and validated by the high degree of visibility of every transaction, ensuring consensus. With no sole, central authority, everyone in the chain is a manager of equal stature.”
So ignore the hype about Bitcoin and other cryptocurrencies (unless you want to speculate on their fluctuating values), and pay attention to blockchain. That may prove to be the lasting legacy of the Bitcoin hoopla.
— Kennedy Maize