Christoph Burger: Blockchain: From Processes to Hybrid Platforms - The Case of the Energy Industry

So basically when Raj contacted me on whether I could contribute to that session, we were discussing a little bit how we could do that. And then I thought, let me try to lead you a little bit through the process of where blockchain applications are at the example of the energy market as, and then to discuss a little bit the outlook and current hurdles. So as Raj said, I'm a senior lecturer at SMT. You see here, we are a business school in Berlin and I had a life before S T.

So I was working five years in industry five years as a consultant and five years independently, advising small and medium enterprises for private equity. And since 2002, 2003, I'm with EMT. Now I got in contact with blockchain technology in 2015, and then that sounded always very interesting. And the question was, but what can one do with that technology in the business context? So basically what we did in 2016, we started the poll in Germany and we asked energy executives in 2016 about what might be the role of blockchain technology in the future.

And you can see here the structure of the server respondents, or from big players to small players and the whole value chain, more or less represented. And when we looked at the results, we found that at those days, about 80% said, well, this is either game changer or dissemination likely. And we did other polls in other industries and we basically find the same result there. And then when we ask them, well, how do we deal with that technology? You can see that there are basically two kind of strategies. One is I try to test and experiment with the technology.

So about 50% and the other 50% say, well, we wait and see, we let the others make the mistakes. And then we overtake them in the second step. We asked them those days, where do you see the applications? And when analyzing these applications, we found that basically you can think of blockchain applications from a business perspective. In two regards, one is simply you asked yourself, can I reduce process costs with the help of this technology? And when we looked at the, the, the answers of our participants, we find here the bigger the bubble, the more that application was mentioned.

So for example, we can save cost and billing. We can save cost and metering and data transfer. We can save costs in mobility, recharging and stuff like that. And the second idea you can think of when trying to apply blockchain in your business context is in a way, how can I use that technology to organize networks? And here the energy executive mentioned decentral generation peer to peer trading trading platforms. And I would like to take that categorization to lead you a little bit through the business models, the applications that were developed there on and how we stand right now.

So the first idea was basically by name and he had the idea in the energy market. You have an issue of proof of origin, is that electricity really renewables based on it. So his idea was whenever you produce solar electricity, this will be connected to the blockchain. And then you earn solar coins as a proof of origin. And then you can use that for loyalty systems for payment and so on. And you might say, this is a great idea, but of course the, the downside is how can I integrate that in a broader sense, and not only as a loyalty system.

So ideally one could think of that might be linked to regulatory efforts, which is not the case yet. So that was Swar. Another idea was with Christo and he had the idea, we set up blockchain based E platform where we can connect private E charging stations and public recharging stations. And with slack, it, they, they developed a, a lock and this lock is connected to the blockchain on Ethereum. So whenever you use it, it's completely cute here when you are using it.

And when you're not using it, and with such a platform, you can save infrastructure costs, or you can also sell your excess electricity to other market players and so on. So here charging as process optimization, another one is project called tender and tender was the, the it platform, the blockchain platform for energy and entertain. And Michael Merz had the idea that now we use these tender permission platform to enable peer-to-peer wholesale trading. So right now you have to go through a wholesale trader and then the trader is connecting supply and demand and charters the fee, therefore.

So what Michael Merz did with Ponton, he set up this peer tope platform, and here you can see the companies that joined that platform. Now, the question is, is the blockchain platform fast enough for very short, wholesale trading? And that is not the case. So what he did in that example, he simply used blockchain as a communication platform. So whenever you are locked on that platform, you see supply and demand, and then you still have to do your, your trades and link it to your current network while doing so he is claiming that participants can save process costs of up to 90%.

So here can see that blockchain is used not as, as the trading platform, but it's used as a communication platform. And the reason for that is not only the speed in that case, the reason for that is also that if you want to participate as a trader, then you have to undergo certain regulations. And if you would want to do that, that kills the incentive for all these different parties then. So that is another use case of process optimization, saving up to 90% of costs for peer-to-peer wholesale training.

Another example is here from Jojo Hubbard, electron, which is a London based startup, and they used blockchain solutions to allow for flexibility markets. So they had several projects and each project they did. So to say tailor made one was the record in Craig Britain and network innovation allowance, where it's basically, you have created the shared asset register for energy asset data. Whenever you want to change your suppliers in the energy market, this is a very cumbersome process. And to exchange information in there, and with that common layer, you can streamline that process.

You can reduce the hurdle of that information usage to one single point. Another one is here, where they had a business energy, industrial strategy, flexibility competition for a marketplace platform. And another one is here, a pilot and demonstration program for the federal office of energy, where they set up day changes of forecast of consumption and generation. Whenever you do that, you find that basically what George was doing is basically developing a platform on a blockchain as a service model, right? So you had several projects.

And by doing that, you develop a platform which is in a case, an operating unit, and where you then built different applications that enhanced the value of that platform. Another example I wanted to give you is energy web energy web foundation did actually the other way around. So basically what they did is they set up first the, the platform and that platform is a permission platform. And they integrated here, small players and medium and small players and big players as well. And they developed this energy web chain on this energy web chain.

You might say, this is like an operating platform. Then you have now different applications. What we heard, like, for example, the energy web origin, this is the idea of fornia or the energy web flex. This is the idea of Jojo Hubbard, and there are also trading applications there as well. So they started from a, from a platform model. They have now a test network. And in this test network, they have hackathons where basically everybody is invited to participate in that network to test their applications and then to run it.

And they are currently now also involved in a project with a German energy agency data where they now put also the real assets registry in Germany on that platform. So to make that real life application now at this stage, now, when we look at these developments, what can we see when first you would argue, we started with transactions platform. You might say the process applications.

And I gave you an example of energy in the energy market, where you simply try one single process and try to reduce the process costs because you are cutting out intermediaries and can serve that with, with less cost in the it market. We know that actually from Airbnb or Uber, a second thing that is developing. We see blockchain as a service, and I gave you the example of electron UK based, which is in the energy market, but we also know blockchain as a service from many other. It incumbents be that IBM they offer for example, trades with together with mask, but also SAP. You can name them.

And when we look at these developments, we find that basically where the trend is going to is so-called innovation and hybrid platforms, meaning a little bit the idea of iOS developer, where basically in the apple world, you have a transaction platform, but you have also apps that you can choose on. And it's both. So in innovation platform and the transaction platform. So we see that in the it world here with red hat and Linux, or here in the, in the energy world with energy web, which is then in addition, token based.

Now let us have a little bit an outlook or what might be, what might be next. When we look at the blockchain in perspective, what we find is in terms of regulation, that's usually a big issue. And in the beginning, the startup said, well, you know, the whole regulation has to be turned upside down. And because now everything is decently possible. Now we see that these startups recognize that our legislation has some use.

Yes, know your customer, anti laundering legislation is useful. So they try, of course also now to comply to the legislation. The other trend that we see is that the regulatory bodies are also now aware of these blockchain applications. And you simply might say it took them two or three years to understand this technology. And now they are also allowing, for example, debt certificate issuing on the blockchain and stuff like that. So they are aware of that and trying to find the solution of the open spaces, a second trend that we see.

And I think that is very important if we think about implementation, is this blockchain as a service. If we look at blockchain as a service from IBM, SAP billion and so on, basically, and we have these permission blockchains, we see that there are no regulatory hurdles whatsoever. This is simply a decentral it solution.

For example, in the case of IBM and trade lens, where you have to pay then a subscription fee to access the information of that supply chain and where you might pay an additional trade fee, whenever you do a trade or sell something so that you can do without any regulatory hurdles. And that might be also a reason why that is one way solution where dissemination is rather more likely than when you have permission less. Now a third trend is on tokenization because when we look at back one year ago, you might have said that tokenization is dead.

Now in the last months we saw Bitcoin and ether and all the other tokens rising again. And that might be also due to the Corona crisis, which helped us to understand that first of all, the current banking system might printing money. So supply is going up. And now when we try to compare that to Bitcoin, where we know this is only 21 million Bitcoins, then the attractiveness of Bitcoin certainly becomes even more aware. And we can see the rise of Bitcoin as, as a view on Bitcoin, as digital gold. A second thing is which is going on, and I'm sure you are aware of that.

That Ethereum, for example, changed the validation algorithm from proof of work to proof of stake and PO is doing that the same. So therefore all these smart contract solutions, which had in the past, the problem of scalability have increased their scalability or have set the groundwork to increase scalability. And with that, we can assume that dissemination will be much more likely as in the case, for example, of the permission blockchains. And the last thing is I think that we will see these raise for hybrid platforms on an industry level. I mentioned the trade lands from IBM.

I mentioned the energy web token as an industry application. And we will see here that platforms will develop beyond the finance market, but also now into energy market, supply chain, market insurance, market streaming markets. And so on.

Now, this sounds all gloomy. The question is, well, what are the, the hurdles? So let's have a focus on the hurdles. Why is it not taking off yet? Or why is it not taking off faster? And I would say there are four layers of hurdles. One is the blockchain technology. So the blockchain technology in the past. And I mentioned that with Ethereum 2.0 PO right now in the past, had been very slow with this proof of our concept. Now we see that change to prove of stake. We see that change to power change to shouting, and therefore we can expect the scalability issue to be solved.

So you might say that still takes some time to set up the, the blockchain applications, the business models behind that, but we might see a lot of traction in here and that is true for permission less, but of course now in permission, anyway, the second hurdle is company knowledge because most managers still do not know the blockchain technology. It's still linked to Bitcoin. It's still linked to money laundering. It might be an esent technology, which is not the case at all.

So therefore what we see and we do that also at the business school, we teach many managers about this blockchain technology, not from an it perspective, but that they can understand and use that technology to their benefit. What I said, process cost optimization or setting up platforms. But even if we have understood that, and I mentioned that in this trend that we now go to hybrid platforms. The next question is, as a company, we want to set up platforms then, and to set up a platform is a huge thing, right?

I mean, first of all, you need to give up some power because on a platform you have to invite other players, suppliers, customers might be even competitors to join so that you reach industry acceptance. And if you think about that, this is not something you simply can do from the innovation department. This is something where the, the management board of a company has to be behind and trying to set up that model. So let's assume we can do that. And that is usually some time and take some time to get the traction. Then the last layer of implementation hurdle is tokenization acceptance.

We did interviews within a project where we involved, it's called 80 block. It's a project for the German ministry of economics. And there we asked the, the players, well, where are the hurdles of blockchain applications? And some guy told me, you know, I have never seen a CFO who wants to have a token on his balance sheet. So you might say that from a CFO perspective, there has been a lot of sentiment. Here's my timer that my 18 minutes are over a lot of sentiment against to have a tokenization on the balance sheet.

When we watch now some news we see that companies actually started in the last month changing that perspective, and they basically did their cash management away from the dollar to Bitcoin. And now they find that as a software company, they find basically that the software company.

Now, if you look on the balance sheet has a higher share higher value based on the Bitcoin than on doing the software. So you might also say that based on that one, many things are changing and you would argue that tokenization acceptance will grow potentially slowly, potentially steadily, but we can see that in all these four layers, implementation hurdles, which are still there, it's quite a lot of work to do, but you might say it's worth proceeding. When you look at the, the opportunities that blockchain technology offers for you.