Blockchain

Blockchain: hype or hope?

It’s the headline-grabbing technology that powers virtual currency and is making inroads into banking, shipping and retail. But what is blockchain and can it change the energy industry?

By Judith Durkin on Nov 8, 2018

The traditional way of buying electricity is simple. Your supplier acts as a middleman. They buy energy from a central grid and charge you for what you use.

Now imagine your house is connected to a local, renewable energy grid. If you run out of electricity from the solar panels on your own roof, the system automatically starts buying excess energy from a neighbour's panels instead.

In this case, there is no middleman sending you a bill, or making a profit. But how do you keep track of how much energy was bought and sold? How do you know which panel it came from? How can you trust that the process is secure?

Enter blockchain.

Blockchain is a technology that securely and independently records the existence and history of a transaction.

It allows parties who have never met to trust that a transaction has taken place without the need for a third party, whether that's an electricity company, a land registry or a bank.

In doing so, blockchain enables the digitalisation of transactions, automating them in a way that wasn't previously possible.

Blockchain was invented in 2008 under the name of Satoshi Nakamoto. The actual identity of the creator remains unknown. It was originally developed for the digital currency, or cryptocurrency, Bitcoin. Now it is starting to impact different sectors including banking, shipping and retail.

What is Blockchain?

Title: What is blockchain?

Duration: 3:15 minutes

[Audio:]

Background music commences.

[Graphic:]

Spinning globe swings in, location pins pop up around the world.

[Voiceover:]

Millions of transactions happen around the world every single minute.

[Graphic:]

Money slides in.

[Voiceover:]

We transfer money.

[Graphic:]

Screen divides into four and images of contracts, a house and a car appear in the other three corners. A question mark appears in the middle.

[Voiceover:]

Sign contracts. Sell houses and cars.

But how can we trust that a transaction has taken place?

[Graphic:]

Man appears.

[Voiceover:]

To guarantee that these transactions have actually happened we use a middleman.

A bank guarantees you sent the money.

[Graphic:]

More people appear.

[Voiceover:]

A lawyer verifies a contract.

A land registry confirms you bought the house.

[Graphic:]

Book slides in with pages turning.

[Voiceover:]

Middlemen keep a record of these transactions and allow us to trust the person on the other side.

[Voiceover:]

But middlemen are costly, can make mistakes, and are not always competent or trustworthy.

[Graphic:]

Pencil erases text and rewrites line. A page is ripped from the book.

[Voiceover:]

And the ledgers that are used to track transactions can be tampered with.

[Graphic:]

The book slams shut.

[Voiceover:]

So what if we could get rid of the middlemen and automate the transactions instead?

[Graphic:]

A lock appears around the book. Zoom out to show that the locked book is on a computer screen.

[Voiceover:]

Enter blockchain.

[Graphic:]

Zoom in to the book. It slides off to the left and new book opens, attached to the first book by a chain.

[Voiceover:]

Blockchain is a huge ledger of transactions made out of computer code that’s stored online.

Just like those held by middlemen, the blockchain ledger can hold a record of different transactions as well.

[Graphic:]

Zoom out to show a chain linking four books together. Underneath the chain each book has been given a date and time stamp.

[Voiceover:]

On a blockchain, transactions are stored in batches called ‘blocks’ that are linked together in chronological order.

[Graphic:]

Values start to pop up above the books and the timeline moves along to the left, adding more links from the right.

[Voiceover:]

The information in each block is encrypted, timestamped and given a unique identifier that’s known as a hash.

Because the hash of one block is determined by the hash of the previous block, the blocks are linked together in a chain forever. In principle, they cannot be changed, edited or deleted.

[Graphic:]

Zoom in on one book which opens to reveal many ones and zeros filling the pages.

[Voiceover:]

If you need to make a change you have to add another transaction block onto the chain. Leaving behind an uneditable record of all past transactions.

[Graphic:]

Zoom out to show a hidden figure standing behind the chain of books.

[Voiceover:]

But how can you guarantee that the person managing the blockchain doesn’t manipulate the data?

[Graphic:]

The figure silhouette becomes a man clutching a book.

[Voiceover:]

Well, while a middleman has full control over the ledger they manage, blockchain ledgers are not under the control of any one individual or institution.

[Graphic:]

The screen zooms out to show many boxes. Each contains a silhouette behind a chain of books.

[Voiceover:]

They are a distributed ledger...

...which means they are held across a whole network of computers.

[Graphic:]

Zoom in again to show a new book being written in.

[Voiceover:]

No one person can add to the chain without the approval of every other blockchain host.

[Graphic:]

Zoom out again to show the whole network of books. The new book is still open and being written in.

[Voiceover:]

When a new record is added, every participant must verify the input before it is accepted.

[Graphic:]

Ticks appear on all the other books, denoting that a new record has been added to all of them.

[Voiceover:]

This is known as the consensus protocol. Once the record has been added to the blockchain, every participant gets a full copy.

[Graphic:]

Zoom in to the chain of books to show an existing ledger being edited. The ledger is blue to indicate that it’s being hacked. The eraser removes some text and then rewrites new text in its place.

[Voiceover:]

This has a key benefit.

If data is stored across hundreds of locations then there isn’t a centralised ledger that a hacker can corrupt or change.

[Graphic:]

Zoom out from close up of book to show other blocks of book chains. One by one a red cross appears in each block to show that the new transaction has not been verified.

[Voiceover:]

A corrupt middleman might edit a record, but any record entered onto a blockchain is verified by all participants, hosted in many locations, encrypted and linked chronologically to all other existing records.

This makes it very difficult to forge records.

[Graphic:]

Man appears followed by a red cross to the right of him.

[Voiceover:]

Middlemen allow us to trust the transactions that we are conducting. But their records can be vulnerable and potentially tampered with.

[Graphic:]

Locked book appears on a computer screen followed by a green tick to the right of it.

[Voiceover:]

Blockchain is less vulnerable.

[Graphic:]

Locked books split off, joined by a web of lines showing that a blockchain network is decentralised.

[Voiceover:]

It is a decentralised, secure and distributed way to store data...

[Graphic:]

The web of books moves to the left and an unhappy lady appears next to it.

[Voiceover:]

...and supporters claim that it is more reliable than our current middlemen.

[Graphic:]

Contracts, a tracking icon and a light bulb icon appear, each with a lock next to them.

[Voiceover:]

And it is a technology that can be used to automate a whole range of transactions from signing contracts to tracking products to buying energy…

[Graphics:]

Fade to white with a Shell logo in the centre.

 

"Put simply, blockchain is a secure, tamper-proof, shared digital ledger," says Arno Laeven, a blockchain consultant, who has led projects for technology company Phillips, the airline KLM and Shell. "Technically it could be used for any number of projects across different industries."

That includes energy. From artificial intelligence to robotics, the energy industry is embracing digital technologies to make processes more efficient, productive and secure.

And security is one of blockchain's key benefits. Its record of transactions cannot easily be edited because the records are not held in one central location. Instead they are held by many parties. No new records can be added without the approval of a certain proportion of the network.

In 2017, Shell set up a blockchain department that is exploring and building blockchain applications throughout the company globally in areas including exploration and production, mobility and renewable energies.

Tracking down fake products is one example. Every year, customers unwittingly buy counterfeit Shell lubricants. To combat this, Shell is exploring using a blockchain platform to track lubricants from production to customer.

As the products move between parties, each can confirm they are receiving genuine products, and Shell can track and monitor supplies worldwide more easily and more securely than currently possible.

Shell Trading has also invested in Applied Blockchain, a London-based start-up that helped the company to build a new internal trading platform underpinned by blockchain technology. The platform aims to improve efficiency by allowing Shell businesses to see real-time trading prices.

On November 1 2018 the trading team successfully executed what is believed to be the first oil products derivative trade on a blockchain platform.

Externally, Shell Trading is also a minority stakeholder in a company called VAKT, a word that means "guard" in Swedish and Norwegian. VAKT is preparing to launch a post-trade processing platform that is run using blockchain.

The end of paperwork

Once an energy trade has occurred, companies still need to exchange physical documents such as contracts. This makes the process slow, costly and with a greater risk of documents being tampered with or duplicated.

Blockchain can digitise and automate paperwork so that complex trades can be processed at a much faster rate, reducing costs and increasing transparency.

"From trading oil to tracking products, blockchain helps us share data in a way that reduces paperwork, improves security and speeds up processes," says Kim Schrik, Shell's Blockchain Product Manager.

It is recognition of this potential that led to the creation of the Energy Web Foundation, a non-profit organisation that aims to accelerate the adoption of blockchain technology across the energy sector. The foundation, of which Shell is a member, analyses the most promising ways blockchain can be used and then provides open platforms that organisations can use to trial and implement blockchain projects.

Solar panels on the rooftop
A decentralised energy grid in Brooklyn, New York. It is developed by LO3 Energy, a blockchain company that has partnered with Siemens to allow energy trading between neighbours. Image: LO3 Energy

Hype or hope?

Still, Laeven is cautious. "Blockchain is definitely being overhyped," he says. "It is not going to solve all business problems and we need to be careful not to shoe-horn it into existing systems where it might not fit."

"Blockchains are not magical," adds David Gerard, author of Attack of the 50 Foot Blockchain, a book critical of the technology. He argues that the only successful use for blockchain technology is the running of cryptocurrencies. 

Jimmy Song, a bitcoin developer and Venture Partner at Blockchain Capital, a USA-based blockchain venture capital firm, agrees. "Blockchain is not always the right tool for the job," he says. "It's like... picking up your groceries from the store using a bulldozer when an ordinary bike will do the trick."

Song says that blockchain is only appropriate if the goal is a secure, decentralised, append-only ledger. For most companies simple shared databases offer more suitable, more scalable and less expensive alternatives. But Schrik feels this discounts blockchain's future potential. "When the internet was first developed no-one had any comprehension that it could be used for things like Uber or Airbnb," she says.

Blockchain also presents legal challenges. "It's a lot of unknown territory," says Schrik. "New technologies typically raise new legal challenges. The law can take a while to address these technologies and support them. We currently lack a mature legal framework for blockchain and are working to evolve this."

Sara Lipuzic, a lawyer for digitalisation at Shell, has been working closely with the blockchain team. "To help address the legal risks of blockchain we need a deep understanding of how the technology will be used," she says. "We examine it on a case by case basis working with legal experts across many different fields."

A blockchain future

Laeven says that blockchain projects must ask one crucial question: "Why is blockchain the right technology to use in this situation?"

Blockchain has proved its worth running bitcoin, but it may take time to impact other areas. "Blockchain is an immature technology. If we make the comparison to mobile phones, we are currently working with a Nokia 3310 from the year 2000," Laeven says. "We'll get to the smartphone era, but it's going to take a while."

So, could blockchain shape the digital future of the energy industry?

"It could," says Laeven. "I don't say this lightly and I've had my doubts in the past. But what this technology enables us to do is very interesting indeed. If we look back on it in 20 years, I think we'll say that it enabled the true digitalisation of this industry."

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