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Sunday
Jan172016

Blockchain and the Rise of the Machine Economy

On Christmas Eve, I received some correspondence on using blockchain in the Internet of Things. I have long been convinced that blockchain would be important in smart energy. Dr. Lynne Kiesling has been a leader in calling for the use of blockchain in power markets to create neighborhood energy resilience. This new letter has gotten me wondering how it might be used much more widely.

Blockchain names a suite of technologies that replace central authority with shared moments of reality. Essentially, blockchain is just a record, or ledger, of digital events — one that’s “distributed,” or shared among many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased.

Imagine being in the check-out line at Target and credit card approval system goes off line. So you and the cashier whip out your smart phones and take a picture of the credit card by the receipt. The guy behind you in line, and the bagger take a picture as well. Nobody knows where your money is coming from, or why you are buying what you are, but there are now four identical records of the transaction. If any record is changed, it no longer lines up with the others. Together we create a journal entry in a ledger that cannot be faked or changed, and we did it without central authority or even mutual trust.

Blockchain works without compromising privacy. Participants can record the fact that the event happened, and even that it happened correctly, without knowing or being able to expose confidential details about the subject matter or the parties involved. This explains how bitcoin, the best known of the blockchain technologies, enables black-market transactions; despite the public nature of the ledger, the users themselves can remain completely anonymous.

One key emerging use of the blockchain involves “smart contracts.” Smart contracts rely on the decentralized network to confirm that a contract of any kind was executed properly (or even to execute it automatically), without revealing any confidential information about the parties or the transaction.

While the idea of blockchain is simple enough, it can be difficult to implement. The publicity around bitcoin, including its well-publicized failures, may make it harder for blockchain to gain wide acceptance. Bitcoin does not use a particularly good approach to blockchain. There are better.

The roots of the technology which makes blockchain possible go back to the 1970s. At that time they were already working on elements as fault-tolerant systems, consensus principles and distributed systems. By some definitions, blockchain is in constant use within each of the major cloud infrastructures. Microsoft, Bosch, Samsung, and IBM already have notable efforts on applying blockchain within the internet of things.

The IBM open source work on blockchain has attracted the participation big banks.

http://www.coindesk.com/ibm-launches-open-source-blockchain-project-backed-by-linux-and-big-banks/

The purpose of the Energy Mashup Lab is to develop open source software for systems that can self-assemble into microgrids. This self-assembly is based upon the minimal integration required for Transactive Operation, that is, using a micromarket to operate a microgrid. Nodes in a microgrid buy or sell power over time, and power use is aligned with power supply by the market. This smooths the power consumption within the micromarket, even as it prepares the micromarket as a whole to engage with larger markets. Transactive operation is well understood and long tested in power markets.

A node is either a buyer, a seller (generator), or a trader (storage) (The Lab has identified 8 types of Agents as both necessary and sufficient) than any system can participate in the micromarket, so long as it has a budget. The aggregate of a market is a single market position for the microgrid as a whole, enabling any microgrid to participate in a containing microgrid, also operated as a micromarket. Fractal micromarkets are the *only* mechanism for smart energy that both protects privacy and provides defense in depth cybersecurity.

A key issue in Transactive Operation, especially within a small microgrid, is where is the market? Who keeps track of the transactions? In a larger market, such as that for bulk power generation, there are extensive means to approve participation and to assess penalties for non-performance. In the smallest micromarkets, all parties share common ownership, and so some security and authority issues are minimized.

In local microgrids, say for the neighborhood or the industrial park, it becomes necessary to track transactions accurately. If each house in a neighborhood is a microgrid, then, in contrast to the inside-the-house market with a single owner, the neighborhood market will have multiple owners with multiple interests. All houses could participate in a cloud-based micromarket, accepting a third-party referee, but that means that the neighborhood fails if the communications connection. A neighborhood blockchain market can run even if the cloud communications are interrupted

This spring, Alex Puig is putting together a conference in London to explore the implication of the use of blockchain in the Internet of Things (IoT). Blockchain is seen as the basis of a machine economy supporting three fundamental roles in this economy. (1) Blockchain can track identities in the IoT, including descriptions, locations, and services proffered or needed by each system. The relations between systems, and how they work with each other can be tracked through registration of smart contracts, eliminating the need for intermediaries when a device buys information or hires services from any other device. And of course, blockchain can support payments, even nano-payments, upon successful negotiation of contracts between systems.

In the machine economy, smart devices become independent agents. The services exchanged potentially reach far beyond services that humans buy now. Automobiles could negotiate for higher-speed highway passage. A washing machine could negotiate for the best price on a replacement part, and then order it. Systems could negotiate for temporary use of Wi-Fi. A vending machine not only monitor its own stock, but could barter for bandwidth with passing phones to report and to solicit bids from distributors, and then pay upon delivery of new items.

Blockchain is a natural addendum to micromarket for Transactive operation of microgrids. Such markets already anticipate additional services in congestion, and distribution management. While this use is new, it has been long anticipated. General application of these concepts may take us far deeper into the machine economy.

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