This post is part of the continuing Paths to Transactive Energy series. You can find them all listed by clicking on the matching metatag at the bottom of each post.
When we start a conversation about Transactive Energy, most thoughts go immediately to government-backed currency, such as Dollars or Euros. The second thought may be digital currencies for which there are wide exchanges that can be immediately converted to a government backed currency. I name transactions made using these currencies as bankable transactions, because the proceeds of a sale can be deposited directly into a bank. Large transactive energy markets, such as those for the bulk power market operated in North America by the ISOs and RTOs, have to use bankable transactions.
At the other end of the scale, in a transactive market operating a home microgrid, perhaps entirely off the grid, do not need to ever be bankable. A non-bankable currency is merely an abstract representation of value. My refrigerator is unlikely to be able to buy itself a new water filter based on its day-trading with the air conditioner. I, as the owner, may use nominal dollars to allocate priorities, but that is to make it easier for me to think about priorities, and not to give the paper shredder an allowance. When the currency does not need to be bankable, there is no advantage to using a digital currency that relies on an off-premises cloud.
The real purpose of cryptocurrencies in transactive energy is not to be bankable, but to manage information flows in markets. I use the term cryptocurrency to distance this conversation from blockchain which, while the best known and most well established technology, is not the only one, and whose limitations are right where transactive energy at small scale needs strength.
A cryptocurrency is first of all a distributed database. This database protects its information from meddling by distributing information across multiple systems to create a consensus ledger. Database systems relying on consensus transactions inherently can embrace “lazy commits” and “eventual truth”. (These features are why blockchain in logistics management is a hot topic right now). With the right technology, a cryptocurrency can be support high-performance transactions performed with very small CPUs. Some well-known cryptocurrencies, such as bitcoin, require expensive computations so as to limit counterfeiting and “mining”. If a home were operated using a cryptocurrency market, many transactions would be for less than a penny, and the IoT requires lightweight hardware.
The functions of a cryptocurrency database are identity, contract, transaction, and payment.
Parties must first identify themselves. In Credit Card transactions, a party uses a government supplied ID to establish a banking relationship. A government-issued ID is often required to prove identity for all but the most trivial transactions. The IoT cannot bear such overhead. A cryptocurrency supports establishing a local identity for each party.
Agreements are not enforceable in the world of normal commerce without a contract. A contract may require registration at the court house to be enforceable. Many bitcoin-reliant markets require extensive authentications surrounding an agreement, even within their veil of anonymity. There is no courthouse for the Internet of Things, but a distributed consensus database can provide the next best thing.
Transactions represent the moment that a thing of value is actually exchanged for a promise of payment. This may be in fulfillment of a pre-existing contract, or it may be as a result of actions on the fly. In essence, their needs to be a consensus about meter readings.
Payments, the exchange of coin, must be recorded in the database because being virtual, they have no existence unless recorded.
In the simplest ownership scenarios, there may be no need for the security benefits of a consensus database. In my house, all transfers are from my pocket to my other pocket, and I may not require validation. I may still want a standards-based micromarket to give me access to a wider market of systems, i.e., a community battery system for use in my house, for wider integration options.