In December of 2017, I wrote an article called Bitcoin is the New Internet Gas Guzzler – Bitcoin is facilitated with a new technology called Blockchain. Blockchain has other applications besides cryptocurrencies. Since blockchain is simply a way of validating agreements between two parties, its applications extend into many difference business fields, including the energy sector.
First let us establish what blockchain does. Blockchain is a peer to peer network. It validates agreements without a third party. Blockchain removes the need for faith and trust in other people and their honesty. Central to blockchain is the hash code, a set of alphanumeric symbols, which in the past has been used to verify such things as computer downloads.
When two independent parties want to make an exchange, they enter all their information into a peer to peer network. This exchange agreement, together with other agreements made at the same time, are bundled into a block. The blockchain is a chain of blocks that contain other agreements that have already been finalized. When a new block is to be added, someone on the P2P network must solve a computer puzzle, the process is called “mining”.
In other words, before the new block is added to the chain, the hash codes generated by the P2P program for each block must be deciphered, and thus “mined”. The hashes for each block are code representing the data in the block and are stored throughout the P2P network; thus, the blocks are verified by peers. When the mining is complete, the new block is added, a new hash is determined for that new block, the new hash is stored in the P2P network, the network validates the new block, and the process is repeated.
The blockchain is an open record/ledger of transactions that have taken place in the past. The P2P network verifies the blocks everytime the blockchain is mined, since the network has the hash codes for all the blocks. If a transaction from the past is altered in a block, then the hash mined for that block will be different than what is already stored on the network. That blockchain will not be accepted. Any peer can add to the chain but no one can alter previous blocks.
This process of verifying all the previous blocks (peer consensus) and mining for the hashes is called “Proof of Work”. That is, you cannot add a new block to the block chain unless you can prove that you have done the mining. This insures that the transactions are all authentic, unchanged, and do not need a third party – like a bank, brokerage house, title company, etc.
In Part 2, I will examine how this new technology can be applied to the energy sector.