Decentralizing Sustainable Development: Unblocking blockchain for sustainable development
Can blockchain technology be the key to a more sustainable future? This is the question currently raised by various blockchain developers, environmental specialists and policymakers, as illustrated by the OECD Blockchain Policy Forum[i] which Policy Shift attended last September. This forum was the first major international conference to take stock of blockchain’s impacts across the full range of government activities and public priorities.
To begin, it is important to define what blockchain technology is and what its primary use is. Blockchain is a combination of already existing technologies (distributed ledger technology and cryptography) which stores information, verified by cryptography, among a group of users and often without a central base, so that data can be transmitted confidentially. This technology ensures greater trust between the parties using blockchain – who otherwise have no reason to trust one another - so that they are sure the stored data remains private and protected.
Source: OECD Blockchain Primer (2018)[ii]
Blockchain is most often known for its digital financial asset applications, like Bitcoin or Ethereum, but blockchain technology is poised to have an impact of a wide range of sectors. Among them, blockchain is deemed to have a significant impact to help achieve the Sustainable Development Goals (SDGs) – especially because working toward the SDGs requires revitalizing sustained and sustainable economic growth, through experimentation and innovation.
In this context, it is necessary to consider the overall benefits of blockchain and how the technology can contribute to meeting the Sustainable Development Goals. Before looking at the advantages of blockchain, we will first explore the environmental impact of blockchain and various ways that this impact can be mitigated. Second, we will investigate the applications of blockchain that can be used to achieve the SDGs, and, finally, examine the relationship between blockchain and green investment.
The environmental impact of blockchain vs. the wider benefits of blockchain
First of all, it must be stressed that given the significant and ever-increasing total electricity use of bitcoin mining (that equals that of countries such as Switzerland)[iii]; blockchain is a well-known example for a negative environmental footprint. In that regard, the Bank for International Settlements highlighted that “the quest for decentralized trust has quickly become an environmental disaster” in its 2018 Annual Economic Report.
Source: BIS Annual Economic Report, June 2018. https://www.bis.org/publ/arpdf/ar2018e5.pdf
In its Blockchain Report published in July 2018[iv], the French Senate mapped the energy use of Bitcoin according to the distribution of miners across the globe (see below) and concluded that the impact in terms of greenhouse gas emissions is all the greater since most mining farms are currently located in China, where carbon intensity is the highest in the world. Taking this into account, reducing the energy usage of the blockchain remains a major challenge to overcome.
To respond to this challenge, several options are currently being considered. One of them is reviewing the current consensus approach (i.e. the “proof of work”). For example, Ethereum is considering implementing the “proof of stake”, where miners on the blockchain would use their economic stake to prove transactions so they would not perform energy intensive calculations. Some engineers are also working on developing less energy-intensive network architectures. A few projects have already emerged, such as the GEAR project which aims to be the first closed loop blockchain solution to green energy and renewables focused investment[v]. Another initiative, SEED (which stands for “Sino Eco Energy Development”[vi]), is an eco-friendly blockchain project launched in Singapore where people can participate in two ways: by directly participating in an eco-friendly energy business project or by proving they are taking action to reduce carbon emissions (via the ZERA Airdrop, an eco-friendly proof of work).
Therefore, given that blockchain technology remains relatively new, other methods and network architectures, based on renewables for instance, are likely to emerge which could considerably reduce its energy usage. On the other hand, as a system that organizes and stores information, blockchain technology ensures a wide number of benefits, among them:
The fact that the blockchain is a decentralized, transparent and verifiable system ensures trust among peers as well as the integrity of the technology. Given all of these benefits, the blockchain has a host of opportunities in a myriad of sectors, and most notably with regard to sustainable development.
What are the applications of blockchain to achieve the SDGs?
The United Nations Development Program (UNDP) has provided a few examples describing how blockchain can help sustainable development policy. Although applications are numerous (non-profit donations; healthcare; direct democracy systems; humanitarian aid distribution systems; trade; education…)[vii], we have identified a few examples:
Development aid effectiveness: Questions are often raised about the efficacy of capital deployment in achieving economic development given issues of corruption and the gaps in welfare service provision in some countries. Blockchain technology can contribute to automate service transactions without the need for costly intermediaries as well as to use the data to track results and measure the impact of subsidies. One of the first successful tests was conducted in February 2018 by Dorcas, a network of aid agencies, which partnered with Disberse[viii], a fund distribution platform for global aid, built on the Ethereum blockchain technology. One of the main benefits was the traceability of funds through the creation of an immutable record of transactions, which implied direct cost savings. This partnership is now working on a larger pilot (the first test was realized between the Netherlands and Albania), with more organizations involved, a broader geographic reach and larger amounts of money.
Digital identity: According to the World Bank (2017), 1.5 billion people in the developing world lack proof of legal identity, which represents a serious obstacle to participation in social, economic and political life. Target 16.9 of the SDGs aims to achieve “legal identity for all, including birth registration” by 2030. This way, the benefits of blockchain could allow for secured and resilient digital identity systems. For instance, the ID2020 Alliance, co-founded notably by Gavi, the Rockefeller Foundation and Microsoft, aims to combine the power of blockchain and biometrics to provide a global identity solution[ix].
Remittances (i.e. cross-border flows that migrants make back to their families in their home countries) and financial inclusion: the World Bank estimates that while officially recorded remittances to low- and middle-income countries reached USD 466 billion in 2017, about 7.5% of each remittance transaction goes toward transfer fees – due to inefficient financial infrastructures. Blockchain technology would remove the need for intermediaries, significantly improve the speed of transactions and, combined with identity verification, ensure more transparency in the process (which would help regulators)[x].
Transparent supply chain management: In a context where companies have increasingly fragmented supply chains, where products require raw materials from diverse locations and delivery channels are more and more complex, blockchain technology provides a great potential of traceability and financial transparency throughout the supply chain. For instance, the company Everledger[xi] uses the blockchain to create an ecosystem of trust within the diamond industry through digital provenance tracking and certification, providing for the facilitation of responsible and ethical sourcing of diamonds and ensuring that conflict diamonds, in accordance with the 2003 Kimberley Process, do not enter mainstream markets.
Renewable energy: While traditional power grids are centralized - which can be a source of inefficiency in energy distribution – and power utilities often setting the prices in the markets, blockchain technology can enable decentralized energy systems. This in turn reduces the need to transmit electricity along long distances and for energy storage. Local mini grids and markets underpinned by blockchain technology can back up existing suppliers, and also ensure independent, consistent, and affordable energy in underserved areas. The UNDP has emphasized that “combined with renewable energy and the Internet of Things, blockchain allows communities to produce their own electricity, to keep profits local, and even provide back-up electricity to the main grid”.
Property rights: According to Oxfam (2013), up to 2.5 billion people depend on indigenous and community lands, which make up over 50 percent of the land on the planet. However, they legally own just one-fifth of this land. A 2013 World Bank report has noted that more than 90 percent of Africa’s rural land is undocumented, making it highly vulnerable to land grabbing and expropriation with poor compensation. That same report emphasized that it would cost African countries USD 4.5 billion spread over 10 years to scale up these policy reforms and investments. In this context, applying the blockchain technology to land registry would ensure the immutability of registry data as guaranteeing it is up-to-date thanks to the integration of digital identities. The technology would provide landowners with greater confidence in the registry. For instance, BitLand, in Ghana, aims to unlock land capital through the democratization of real property ownership thanks to the blockchain[xii].
Waste management: Blockchain technology could make it easier for recycling companies and governments to track shipments of waste, in terms of volume, cost and profit. In addition, it can be used to assess the impact of each company, location and individual participating in a recycling program on the blockchain. Such a program would be based on offering a reward in the form of a cryptographic token in exchange for depositing recyclables. In a context where China decided, in 2018, to stop accepting imports of recycling from Europe and the United States, blockchain technology would help companies understand the economic value of their waste streams and better meet their sustainability goals.
A focus on green investment: could blockchain unblock climate finance?
While international financial regulation authorities, national governments and the financial industry are working to mobilize finance for sustainable growth, the blockchain technology, characterized by its reliability, auditability and speed, may have significant impacts in various areas of climate finance (see Policy Shift’s article on the World Bank’s Innovate4Climate Summit, June 2018).
For example, one important application would be the storage of legal documents in the blockchain, which would ensure the tracking of environmental data and show whether governments and companies apply the provisions of environmental treaties, as well as climate finance agreements. Another application would also be the tracking of the carbon footprint of each product in order to determine the amount of carbon tax to be charged on at the point of sale.
With regard to catastrophe bonds and swaps, blockchain-based contracts would ease the processing and settlement of financial transactions by automating the payout process. Blockchain could therefore be used to authenticate all kinds of transactions while reducing costs and increasing the market. More generally, climate-driven financial transactions would be more widely traceable and the blockchain would ensure the assessment of low-carbon investments, thanks to the chain of custody information contained in the distributed ledger. Another important implication of blockchain for responsible investment lies in enabling investors to vote in real time (and therefore removing potential inefficiencies in the proxy voting chain). This could then provide direct conduits to reflect ESG (economic, social, governance) preferences and delegate their votes to NGOs, for instance. The blockchain, by allowing real-time tracking of ESG data, could help investors propose resolutions to the general assembly of a company and vote.
Finally, by providing an alternative method of capital raising with the ICO (Initial Coin Offering), blockchain technology could also allow for more sustainable projects to be financed. Several projects have already been launched, most notably “Earth Token”[xiii] and “Climatecoin”[xiv]. Earth Token is based on the fact that natural capital, which is worth over USD 120 trillion, is untapped and undervalued. In order to connect producers of “natural assets” with companies and consumers, Earth Token aims to provide a natural asset exchange blockchain platform enabling certified project developers (waste, energy, solar, wind farms projects, carbon sequestration projects, avoided emissions projects) to list their products (carbon credits, renewable energy credits) on the blockchain and allowing companies and consumers to address climate change adaptation.
The way forward
Blockchain technology is full of promises and can ensure transparency, trust and efficiency in a wide array of sustainable development projects. As the UNDP pointed out in its 2018 report, “the blockchain can serve as an infrastructure and tool for that accountability. It can help bring together different organizations, engender powerful new partnerships between public and private sector organizations, and allow their joint initiatives to grow quickly and effectively”. Yet, it is important to keep in mind that it is a nascent technology under relatively strong downward pressure, associated primarily with energy consumption. In addition to high energy consumption, it also faces the following challenges:
Legislative barriers: To acquire legitimacy, blockchain technology needs to be subject to national legislation, failing which its development will encounter legal barriers and not be sustainable in the longer term or at the upscale level. Very few jurisdictions to this day have adopted blockchain-related legal frameworks, with the exception of France which has allowed trading of unlisted securities using blockchain with the DLT ordinance dated 8 December 2017;
Infrastructure: A quality level of information and communication technologies is necessary, otherwise the lack of appropriate infrastructure can constrain the reach of the technology;
Data integrity and security: Though the decentralized nature of the blockchain reduces the risks of successful cyber-attacks, they could still pose a threat. Because of this, UNDP advocates for appropriate data security protocols and procedures to be put in place.
In spite of these obstacles, the blockchain can be used in various ways to contribute to sustainable development. Its many important applications, both ongoing and under construction, show that it has significant potential to support innovative projects, in particular within the development and climate finance sectors.
Sources
French Senate, Rapport sur les enjeux technologiques des blockchains, 20 juin 2018 : https://www.senat.fr/rap/r17-584/r17-5841.pdf
GSMA and UK Aid, Blockchain for Development: Emerging Opportunities for Mobile, Identity and Aid, 2017
Institut Louis Bachelier, La blockchain au service du climat, 11 October 2018 : https://www.louisbachelier.org/ilb-web-tv-la-blockchain-au-service-du-climat/
OECD, OECD Blockchain Primer, 2018: https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf
UNDP, The Future is Decentralized: blockchains, distributed ledgers and the future of sustainable development, March 2018: http://www.undp.org/content/undp/en/home/librarypage/corporate/the-future-is-decentralised.html
Definitions
Carbon intensity is the amount of carbon by weight emitted per unit of energy consumed. When there is only one fossil fuel under consideration, the carbon intensity and the emissions coefficient are identical. When there are several fuels, carbon intensity is based on their combined emissions coefficient weighted by their energy consumption levels (source: U.S Energy Information Administration Glossary of Terms).
The Bitcoin blockchain utilizes a “consensus model” called Proof of Work, which requires the miner to compete against other miners to create and broadcast blocks for approval. If successful, they are rewarded in Bitcoin. There are other consensus mechanisms like the Proof of Stake, the Proof of Authority or the Proof of Burn – all of these are variations on the means for the network to agree on changes to the ledger (source: OECD Blockchain Primer).
The Internet of Things is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction (source: IoT Agenda).
A cryptographic token is an accounting unit that is being used to represent digital balance in a certain asset, whilst the ownership of a token is evidenced by the aid of certain cryptographic mechanisms, for example — digital signature. Cryptographic tokens include stocks, digital obligations, currencies, ownership rights and rights for a service. In the case of recycling, it would take the form of a financial reward such as a currency.
Catastrophe financial contracts transfer the financial risk resulting from a natural disaster from an insurance company to investors, in the case of bonds, or another insurer, in the case of swaps. They allow investors to directly back insurance risks and insurance companies to mitigate their exposure risk to climate change. In 2017, the catastrophe bond market has grown to about 30 billion USD.
Blockchain-based contracts, or smart contracts, are strings of code that execute automatically when given conditions are met.
Proxy voting is a mean that all eligible members of a company have an opportunity to vote on matters for decision proposed to a general annual meeting, with a vote being cast on behalf of a shareholder rather than that shareholder participating physically in a public shareholder meeting.
An ICO is a means of raising capital over the Internet and is generally used to finance a technology start-up. Instead of stocks listed on an exchange, investors are offered digital assets or “tokens” whose eventual value and usability are closely tied to the financed pro
References
[i] http://www.oecd.org/finance/oecd-blockchain-policy-forum-2018.htm
[ii] OECD, OECD Blockchain Primer, 2018: https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf
[iii] The Guardian, « Energy cost of mining bitcoin more than twice than copper of gold », November 5th 2018: https://www.theguardian.com/technology/2018/nov/05/energy-cost-of-mining-bitcoin-more-than-twice-that-of-copper-or-gold
[iv] French Senate, Rapport sur les enjeux technologiques des blockchains, 20 juin 2018 : https://www.senat.fr/rap/r17-584/r17-5841.pdf
[v] Forbes, « When cryptocurrency goes green, blockchain can save the environment », May 28th 2018: https://www.forbes.com/sites/andrewrossow/2018/05/28/when-cryptocurrency-goes-green-blockchain-can-save-the-environment/#52c7c4e448f7
[vi] https://seedfoundation.io/page/main_eng
[vii] US Aid, Primer on Blockchain : how to assess the relevance of distributed ledger technology to international development: https://www.usaid.gov/sites/default/files/documents/15396/USAID-Primer-Blockchain.pdf
[viii] http://www.disberse.com/
[ix] https://id2020.org/partnership/
[x] The Economist, « The battle for the remittances market », May 3rd 2018 : https://www.economist.com/special-report/2018/05/03/the-battle-for-the-remittances-market
[xi] https://www.everledger.io/industry-applications .
[xii] http://landing.bitland.world/
[xiii] Earth Token’s whitepaper : https://earth-token.com/pdf/impactChoice-Earth-Token-Whitepaper.pdf?v=1#zoom=70
[xiv] Climatecoin’s whitepaper : https://climatecoin.io/
