Blockchain: Proposition of a New and Sustainable Macroeconomic System

Blockchain and the common good

In 2008, an individual or group under the pseudonym “Satoshi Nakamoto” published the paper “Bitcoin: A peer-to-peer electronic cash system”, describing a protocol that enables the verification of digital assets through a “blockchain” (Nakamoto, 2008). The true innovation within this paper was the solution of the so-called double-spending problem. Before the publication of Nakamoto’s paper, it was not possible to verify whether a digital asset had been replicated and spent multiple times. The newly introduced blockchain protocol, however, enabled the tracking of the sequence of a digital asset’s ownership from the inception to the current owner and, thereby, made digital ownership reliable and unambiguous.

Four blockchain applications promoting sustainability

Although blockchain is still in its technological infancy, it is rapidly being developed into mature applications and blockchain-based innovations might drive ecological and societal advancements in the near future. In the following, the possible contribution of blockchain to the creation of a sustainable economy is to be examined. In principle, four possible applications are imaginable: First, it is possible to apply blockchain in order to achieve efficiency increases. Second, blockchain can be used to track resources. Third, resource pricing systems, implemented through cap and trade or Pigovian taxes, could benefit from the use of blockchain. Fourth, complementary currency systems incentivizing individuals and corporations to act in a sustainable manner could be implemented. See Figure 1 for an overview of the different blockchain applications.

Figure 1: Blockchain applications for achieving sustainability

Application 1: Resource Efficiency Increase.

Increasing overall efficiency through the application of blockchain is one of the technology’s more basic possible impacts. One promising area is the electricity market, a highly complex sector with many middlemen and clearing mechanisms (Clancy, 2017). Blockchain exhibits the potential to cut out energy companies, energy traders, and payment providers, making the system less costly and more efficient (Hasse et al., 2015). In combination with smart meters, the blockchain system can be utilized to transmit payment transactions, record these tamper-proofed and control electricity flow and storage, thereby managing payment as well as energy flow via smart contracts deployed into a blockchain infrastructure. Furthermore, peer-to-peer (P-2-P) trading becomes feasible. Local energy producers, such as households using a photovoltaic system, are able to sell their energy directly to neighbors without any middlemen. Thus the flow of electricity can be directed more effectively to short-distance consumers, reducing energy transportation losses and the need for energy storage (Dabbs, 2017). Through this, an increase of systematic grid performance is to be expected and it has the potential to become an important cornerstone in the transition to sustainable electricity transformations, such as the German “energy transition” that aims to cover 60% of nation-wide energy consumption through renewables by 2050. Blockchain startups, such as GridSingularity, are currently developing DApps (Decentralized Applications) to enable such automated energy system. The relevance of such a vision is illustrated by the startup LO3’s recent partnership with the German electricity infrastructure giant Siemens (Keane, 2017). Also, it becomes feasible to introduce “roaming” tariffs for the anonymous and automatized charging of electric vehicles. Innogy SE, a subsidiary of the German electric utilities company RWE, is currently trailing blockchain-powered charging stations (Lielacher, 2017). From this vantage point, the application of blockchain to the Internet of Things (IoT), a network of smart devices, will not be far off. Apart from the electric market and IoT, the sharing economy can also become a great beneficiary of the blockchain technology. For instance, companies such as Uber or Airbnb may become dispensable, as the blockchain system allows two contractors or middlemen (P-2-P) to interact directly. In the case of decentralized car sharing, advantages are that drivers are empowered to work independently from a central institution like Uber while riders benefit from reduced prices. First decentralized car sharing startups, such as ArcadeCity or Lazooz, are working on developing DApps. Furthermore, a sustainable and fair economy can be supported by using blockchain-powered tools, such as crowdsourcing or P-2-P lending, to finance sustainable assets (e.g. through the blockchain startup Sun Exchange). All these blockchain applications support the transition to a more electrified, efficient and sustainable economy. However, fundamental ecological issues are not directly tackled.

Application 2: Resource Tracking.

Blockchain technology allows the tracking of transactions and creates tamper-proof validation systems without the need of centralized authorities. Transactions are infinitely and openly recorded and cannot be altered, contributing to a transparency and trust in the provided information (Dabbs, 2017). These attributes make blockchain highly interesting for environmental groups. For instance, the PEFC forest certification organization is currently investigating whether blockchain can be used to track the origin of timber (Düdder & Ross, 2017). Also, in the for-profit sector promising solutions contributing to sustainability are presently being developed. For instance, the startup Provenance intends to design a blockchain system that is able to track all used materials, including the dimensions of quality, quantity and ownership, over the whole supply chain in real-time. Basically, Provenance is trying to achieve a digital passport for any product, which enables consumers and producers to track the whole production process (Provenance, 2015). Further, IBM in cooperation with a consortium of big food companies, such as Nestlé, Unilever and Walmart, has developed a trail based on Hyperledger blockchain technology, which follows a similar approach as Provenance with the goal of increasing food safety. The use of the technology establishes substantial trust in the supply chain and opens the possibility for real-time intervention (Lardinois, 2017). Thereby, it becomes possible to attach digital certifications, such as emission allowances or proof of origin records, to materials (Hasse et al., 2015). For example, BHP Billiton is partnering with Everledger to track the origins of diamonds to enhance compliance with regulations concerning “blood diamonds” (Clancy, 2017). Also, NASDAQ intends to introduce blockchain-powered solar energy certificates that can be sold anonymously via NASDAQ’s platform. Ensuring the validity of certificates and empowering consumers in their purchasing choice is a big step forward. If reliable information about the input and processing of products was available, the idea of a bottom-up push towards economic sustainability, as intended by de-growth movements, could become reality. If the idea of transparent supply chains became mainstream, no company could refuse to keep their supply chains in the dark. This may lead the economy to a better version, nevertheless the problem of an economy in the right scale cannot be reached with this blockchain application type alone.

Application 3: Resource Pricing.

Blockchain provides several possibilities to establish a cap and trade system (a regulatory tool that typically comprises the issuance of a limited amount of use rights for a certain resource and the creation of a market to trade those rights). From a company-side perspective, it is possible to create efficient credit management platforms. For instance, IBM partnered with the company Energy-Blockchain Labs to develop a “Carbon Credit Management Platform” on the basis of the Hyperledger blockchain for the Chinese carbon market. According to Energy-Blockchain Labs, the application of blockchain makes cost reductions of up to 30 percent feasible (IBM, 2017). Other benefits of the application of blockchain and smart contracts are that transparency, auditability and credibility of the Chinese carbon market can be increased (Göß, 2017). Further applications, in particular on the side of regulators, are possible. The creation of an automatized cap and trade system regulated by smart contracts to prevent policymakers from chasing self-serving political agendas is becoming a highly conceivable idea. For instance, a system could be implement that automatically aligns the license creation, thus avoiding an over- or undersupply of certificates and thereby keeping market prices in a politically pre-defined range without the need of policy interventions. Other interesting combinations of blockchain and cap and trade systems have been proposed, such as a “Regulation by Reputation” in combination with a cap and trade system (D’Angelo, 2014).

Application 4: Complementary Currency.

Compared to the previously described blockchain applications, the introduction of cryptocurrencies aiming at incentivizing sustainable behavior seems less tangible. Those at sustainability aiming cryptocurrencies in general do not intend to replace, but to complement conventional fiat currencies. There are several approaches in development, mostly based on the blockchain solution Ethereum, to implement cryptocurrencies with an ecologically-driven mission statement. EcoCoin, for example, envisions a community-based cryptocurrency, in which the EcoCoin community decides “case by case” what is worth supporting and what can be bought with EcoCoins. The hope is that thereby ecological and sustainable trading is supported. Another example is SolarCoin, which essentially is a point scheme, similar to air-miles, that rewards the production of solar electricity. However, the ecological impact of such a point system can only be limited. On the contrary, EarthDollar aims at changing the whole economic system. For instance, it intends to support Natural Capital Accounting (NCA) instead of conventional financial accounting. Furthermore, it aims to solve “problems like world hunger, sustainable energy, poverty, and climate injustice” (Earth Dollar, n.d.). However, how this is supposed to be achieved by introducing a cryptocurrency, is not elaborated any further. EarthDollar also states, “We do not in any way impose our values on anyone. We just offer people an alternative choice” (ibid.). This highlights the main issue of all such newly implemented cryptocurrencies: the question of intrinsic value. While big cryptocurrencies, such as Bitcoin, can provide value by having achieved network effects and broad acceptance, this is probably not achievable for the hundreds of newly created cryptocurrencies. Some solutions, such as the cryptocurrency bitNatura, try to answer this question by backing the currency with real assets. Nevertheless, the question arises why anybody should substitute fiat money for cryptocurrencies that promote sustainability. Current models cannot answer this question convincingly, but rather rely on the argument that people will participate due to philanthropic motives. So far, only sustainability-driven cryptocurrency that follow a bottom-up-sustainability approach are in existence. But what about cryptocurrencies following a top-down sustainability approach?

The foundations of a new macroeconomic system?

The following paragraph discusses the concept of a government-backed, complementary cryptocurrency system that aims at fixing systematic shortcomings of the current financial system. The introduction of a government-backed cryptocurrency would generate instant acceptance through the states’ sovereignty. Despite all criticism, the current financial system has its rationales. It is an incentive system that greatly promotes efficiency. However, the current economic system does not take into account the depreciation of natural capital. A complementary currency could be a chance to complement the current, for efficiency striving, financial system with an incentive system for sustainability. Thus, the logic of the current financial and economic system could be altered in a way that efficiency, as well as sustainability, are promoted at the same time. How could such a system look like? Based on the blockchain technology, it is imaginable to create a macroeconomic incentive system that promotes the transformation to a circular economy. The conventional economic system draws raw materials from nature, transforms these into products, and in the end, disposes these products in nature (Ellen MacArthur Foundation et al., 2015). This “take-make-dispose” model is called a linear economic model and is criticized for its resource wastage. While the linear model can incorporate recycling, materials in such a system have not been designed for reuse or regeneration, resulting in significant material degradation and accumulation of waste in the environment. In contrast, the circular model envisions a waste-free system and aims for eco-effectiveness. The aim is to establish an economy, which functions in loops and maintains materials ecological value over time. This concept is also called a “cradle-to-cradle” economy (McDonough & Braungart, 2010). To devise such an economy, it is necessary to generally think of the economy in circular systems and products have to be designed in a way that allows them to re-enter the economic cycle after being disposed of. In a cyclical economy, it can be distinguished between technical and biological components (ibid.). Technical components must be constructed so that they can be easily recovered or upgraded. For instance, the production of washing machines could follow modular concepts so that parts can be replaced or updated easily and the economy should shift increasingly from selling products towards offering product services. Biological components must be composed of non-toxic elements, which can be easily returned to nature through biologic degradation. For instance, any packaging should be manufactured from materials that are compostable or can be fully recycled for the production of other products (see Figure 2).

Figure 2: Schematic illustration of resource flows in a circular economy[i]
Figure 3: Blockchain-based financial system promoting sustainability

Remarks

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  • Blockchain knowledge: We wrote a Medium article on how to acquire the necessary blockchain knowledge within a workload of 10 working days.
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Our two books: the first one on blockchain and the society and the second one on blockchain and finance

Authors

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund, 21e6 Capital and Blockchain Founders Group — companies active in venture capital financing for blockchain startups and crypto asset investment management. The expertise of Prof. Sandner includes crypto assets such as Bitcoin and Ethereum, decentralized finance (DeFi), the digital euro, tokenization of assets, and digital identity. You can contact him via mail (m@philippsandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

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Philipp Sandner

Philipp Sandner

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Professor | Lecturer | Author | Investor | Frankfurt School Blockchain Center