Three key highlights of the report:
- The energy sector is transitioning from fossil fuels to clean energy sources, necessitating new investments and industry workflows.
- Blockchains can better digitize and track the ownership of energy infrastructure and cash flows while oracles can connect existing energy infrastructure and data to blockchains to support new hybrid smart contract applications.
- Hybrid smart contracts allow companies to transfer ownership, issue rewards, and settle contracts in a more transparent, efficient, and globally accessible manner using data such as IoT sensor outputs, weather patterns, and user consumption profiles.
The energy industry is currently in the midst of a major transformation focused on moving from fossil fuels to clean energy sources. The main drivers behind this transition center around managing the harmful effects of climate change and building sustainable economies that are compatible with natural ecological systems.
A new report from leading European research institute Tecnalia and Chainlink Labs highlights how blockchain technology and oracles can provide hybrid smart contract solutions that help the $1.5+ trillion dollar energy industry accelerate its transition to clean energy.
A number of technological innovations have accelerated the demand for clean energy, making products such as at-home solar installations and electric vehicles more affordable and practical for retail consumer adoption. Furthermore, governments around the world have put forward various domestic and international energy policy frameworks aimed at bringing together a diverse range of stakeholders to meet shared energy goals.
From these initiatives have arisen new challenges, such as how to keep an increasingly distributed grid in balance while steadily increasing the share of intermittent renewable generation. Not only does this introduce technical questions for grid management, but it also comes with economic considerations regarding how to keep energy costs low throughout the transition process.
Another challenge is how to attract the investment needed to build new clean energy solutions or upgrade existing infrastructure. While government financial incentive programs are one means for attracting investment, there’s also an opportunity for blockchain and oracle technology to open up clean energy investment opportunities to a wider pool of investors, as well as help support more reliable green investment valuation methodologies and more efficient management solutions for clean energy projects.
Blockchains serve as shared backends through which global ledgers of data, assets, and contracts can be managed between multiple independent parties. They present a novel way to digitize clean energy investments as cryptocurrency tokens, with ownership able to be easily tracked and traded around the world.
Smart contracts—programs running on blockchains with “if x happens, execute y” logic—expand the functionality of cryptocurrency tokens by attaching unique properties to their issuance, trading, and ownership. For instance, a smart contract-based token can represent access to the cash flows of a particular clean energy project. Smart contracts can also be used to settle energy-based contracts parametrically—based on energy prices and IoT performance output, for example.
However, to make clean energy solutions on blockchains a reality, a supporting technology known as an “oracle” is required. Oracles are entities that provide smart contracts with any data and computation that they cannot inherently access on their native blockchain. More specifically, oracles provide a way for smart contracts to ingest external data inputs, send message outputs to external systems, utilize off-chain computations, and interoperate across blockchains. This allows smart contracts to be triggered by or directly influence external systems, opening up more advanced types of hybrid “on-chain/off-chain” smart contracts.
Through the use of oracles, many new hybrid smart contract use cases become possible that can accelerate the transition to clean energy. For instance, hybrid smart contracts can be used to:
- Issue carbon credits or consumer rewards based on meeting predefined energy objectives. For example, oracles can be used to verify the carbon sink in a specific geographic area over a specified period of time before issuing a carbon credit. Oracles can also be used to confirm user consumption data from Demand Side Management (DSM) programs before awarding special NFT rewards.
- Tokenize energy commodities and energy project cash flows, which can then be used as collateral in various decentralized finance (DeFi) applications. Oracles can bring utility to these tokenized assets by providing them with on-chain valuations, such as by creating decentralized energy benchmarks from an aggregation of spot prices, OTC transactions, futures contracts, and auction bids. Oracles can also provide trusted ratings to green investment vehicles, such as through an aggregation of values assigned by auditors, independent rating agencies, and regulators. From these benchmarks and ratings, energy derivatives contracts can be settled, loans can be issued based on energy asset collateral, and fair market exchange rates can be established prior to large trades.
- Automate the settlement of parametric energy contracts. For instance, energy conversion contracts are used to guarantee certain performance or uptime requirements of renewable energy installations, i.e. wind turbines achieving specific outputs during certain weather conditions. Smart contracts can be used to automate rewards and penalties between a manufacturer and/or installer and its client, with oracles supplying the installation’s performance output and relevant meteorological data used to evaluate if the installation met its KPI targets.
- Interact with blockchains from existing backends based on any type of user-defined logic. Oracles facilitate this on-chain/off-chain connectivity by serving as blockchain middleware, enabling enterprises in the energy industry to connect to any blockchain using their current systems. Enterprises can use oracle middleware to verify activity recorded on blockchains, trigger the execution of smart contracts, issue cryptocurrency/digital asset payments, and document activity on a blockchain for historical records.
These are just a few of the many different energy industry functionalities unlocked by blockchains and oracles. To get a deeper understanding of the potential blockchain, oracles, and hybrid smart contracts hold for the energy industry, we encourage readers to download the new report Managing Climate Change in the Energy Industry With Blockchains and Oracles. This is a joint report from Tecnalia, a European industry leader in multi-sector research and development, and Chainlink Labs.
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