The blockchain's emerging role in sustainability
The following article is excerpted from our State of Green Business (SOGB) 2017 report. Published by GreenBiz in partnership with Trucost, it provides a global view of the year's trends in sustainable business.The report is free to download here.
Picture, if you will, a tracking system that discreetly verifies the provenance of products as they move across a supply chain — sending proactive alerts about unexpected detours that could signal potential tampering or environmental conditions that might pose safety issues. Did we mention that it’s virtually tamperproof?
Or, imagine a database that monitors the clean electricity generated by on-site solar panels, issues renewable energy certificates as certain production thresholds are achieved, then distributes them according to predetermined contracts. Automatically.
Most of us would be hard-pressed to deliver an elevator pitch explaining "the blockchain," an emerging technology that could power either of those hypothetical applications along with many other types of financial and non-financial transactions. Yet many are coming to believe this platform could become nothing short of revolutionary, not just in the financial world but for all manner of sustainable business applications starting with the ones imagined above.
Financial services firms and banks are investing heavily in blockchain technology. The venture capital community poured almost $1 billion into related startups between 2014 and 2016.
How’s this for a high-profile endorsement? In an essay published in November, IBM chairman and CEO Ginni Rometty drew this comparison between the blockchain and the "set of arcane standards" that eventually would become the internet: "Few predicted the profound impact it would have on society. Today, blockchain — the technology behind the digital currency bitcoin — might seem like a trinket for computer geeks. But once widely adopted, it will transform the world."
At its heart, a blockchain is nothing more than a digital ledger. Think of it as a decentralized database that records transactions of almost any type and enforces contracts related to them automatically, based on conditions defined by the participants. The transaction history is appended to the "chain" rather than tracked via a paper trail. Because the system is distributed and encrypted, it’s difficult to tamper with or hack.
Naturally, all of the world’s largest financial services firms and banks are investing heavily in blockchain technology. The venture capital community poured almost $1 billion into related startups between 2014 and 2016, about 10 times the amount dedicated over the previous four years.
While the hype level seen during 2016 isn’t likely to last — it sometimes seems every other tech headline is rife with blockchain promises — the next few years will usher a wave of experiments. Where sustainability professionals are likely to see the most action: among utilities or renewable energy developers seeking a more efficient way of pricing and selling clean power; at consumer products companies and retailers seeking a better way of validating supply-chain claims; and among banks and insurance companies interested in verifying the provenance of minerals, commodities or raw materials.
You can expect utilities to play an active role, for example, in testing how blockchain technology might be used to rethink how energy is priced and sold.
"Blockchain has the potential to disrupt power for several reasons: The power value chain relies on a plethora of cumbersome trading and clearing systems to support complex markets, opening the door for a leaner distributed system that can cut out middlemen and lessen associated fees," said Lux Research analyst Isaac Brown. "Furthermore, units of power and energy are a strong fit for smart contracts, as they are concrete and discrete, and meters can feed directly into blockchain logic."
The "owner" of a distributed grid, for example, might be able to sell excess power to virtually anyone within an open market. Or, a blockchain could be used to generate RECs needed to back up certain reporting claims.
In Brooklyn, New York, a startup called LO3 Energy is using the blockchain to manage clean power trading across a solar-fed microgrid that covers a city block.
One experiment to watch closely is in Brooklyn, New York, where a startup called LO3 Energy is using the blockchain to manage clean power trading across a solar-fed microgrid that covers a city block filled with both residential buildings and industrial facilities. The idea is that if one building produces more electricity than it can use, it can allow another building to consume it. "When each piece of the grid has a blockchain, it knows how to react," said Scott Kessler, director of operations for LO3.
In late 2016, the LO3 project attracted a notable new advocate: German energy management giant Siemens, which is considering LO3’s technology as an addition to its own microgrid controllers. The CEO of Siemens’ digital grid business envisions "tremendous opportunities" from this technology for both utilities and corporate customers. LO3 hopes to get at least two more demonstrations up and running in early 2017. "At this point, the only roadblocks to doing this are at the policy and regulatory level," Kessler noted.
Groceries and gemstones
Blockchain technology likewise could prove instrumental for improving a company’s ability to track a product’s entire lifecycle, verifying sources more explicitly and easily than is possible through most of the manual methods used currently.
For example, Walmart is trial-testing a service it developed with IBM to monitor produce in the United States and pork in China. (For now, the test is limited to just two items, but it involves multiple stores.) The goal is to improve food safety by acting more proactively if an item may have spoiled or the source of something is shown to be compromised. Think of it as a shelf-life indicator that also can include information about the farm where the vegetable or pig originated, with data about their operating practices. Radio frequency identification tags, sensors and barcodes, already widely used across many supply chains, are among the methods used to store the relevant data.
"With blockchain, you can do strategic removals, and let consumers have confidence," Walmart’s food safety chief Frank Yiannis told Bloomberg. "We believe that enhanced traceability is good for other aspects of the food systems. We hope you could capture other important attributes that would inform decisions around food flows, and even get more efficient at it."
Walmart is trial-testing a service it developed with IBM to monitor produce in the United States and pork in China. The goal is to improve food safety.
Blockchain also could make it easier to automate supply-chain certification processes. For example, it is central to a software application designed by startup Everledger to verify the provenance of rough-cut diamonds. The system is, in essence, a digital expression of the Kimberley Process, a certification created to curb the sale of gemstones mined within conflict zones such as Sierra Leone, while potentially enabling emerging economies in places such as Israel or India to participate more easily in legitimate, ethical ways. The certifications travel along with the diamonds and can be combined with existing labeling methods, such as shipment barcodes. Indeed, mining giant BHP Billiton plans to start using various blockchain services starting in early 2017.
Everledger Founder and CEO Leanne Kemp took about 18 months to negotiate the relationships needed to help make the service possible. That reality will be one of the bigger obstacles to broader adoption of blockchain applications over the next several years: Participants need to agree on the terms of a transaction or a contract. "What I encourage companies to do is understand the problem they need to solve," Kemp said. "This requires the cooperation of multiple participants."
The benefit: Once the rules are in place, blockchain systems could automate many processes sustainability professionals struggle to manage manually, enabling them to run far more efficiently. Let the negotiations begin.
Companies to watch
IBM — sells a private cloud service that could help organizations develop and get blockchain applications up and running quickly. Its technology is behind pilots by retailer Walmart, for food safety, and Everledger, which certifies the origins of diamonds.
LO3 Energy — its TransactiveGrid system helps automate the trading of power across microgrids. The startup just scored a notable strategic partner, German energy management company Siemens. (A similar company is Australia’s PowerLedger.)
Nasdaq — has been investing in blockchain technology for more than three years. Its Linq service could be the foundation for new business models, such as a system for issuing renewable energy credits automatically.
Provenance — a relatively low-key London firm has piloted the use of blockchain to track tuna supply chains in Indonesia and to monitor produce for British grocer Co-op Food. It wants to make it simpler for companies to verify sustainability claims.
Skuchain — the California startup’s software is behind a test by Commonwealth Bank and Wells Fargo initially focused on trading cotton between Texas and China.