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Blockchain technology provides a new way of valuing water

David Barbeler investigates blockchain technology, the new way of putting a value on business assets.

It’s just hours out from what Professor Greg Morrison from Curtin University’s School of Design and the Built Environment in Perth, WA describes as a “huge meeting” with stakeholders for Australia’s most advanced water-related blockchain project. A worrying thought crosses his mind: “I don’t think we’ve got enough food for everyone”.

Such is the interest in the Fremantle blockchain project at present that Morrison’s concerns don’t lie in whether key potential stakeholders such as the Water Corporation WA will jump on board with the consortium; it’s catering.

Because, as far as he’s concerned, blockchain technology will complement the water industry in a number of different ways in the near future. It’s just a matter of exactly how.

Interested in blockchain? Don't miss 'Exploring blockchain as an alternative decentralised architecture for water trading in Australia' on Thursday, 9 May at Ozwater'19.

“That’s not my opinion. That’s a dead certainty,” Morrison said.

“The important thing is to enable utilities to be involved in our project and hopefully they have foresight and can see where the business opportunities lie.”

Let’s backtrack

What is blockchain? Everyone’s heard of bitcoin, but let’s put that aside for now. The applications of blockchain technology extend far beyond cryptocurrencies.

As Ryan Wavish, CEO of Marchment Hill Consulting, explained it, blockchain is a form of distributed ledger technology (DLT).

“It’s useful to record the transfer of assets within a business network in a shared ledger that provides a single ‘source of truth’ for the participants in the business network,” Wavish said.

Essentially, blockchain is a decentralised database shared among a network of peer-to-peer computers. All computers in the network must approve an exchange before it can be recorded and all computers are connected.

It’s a little bit like double entry accounting; just with a lot more computers confirming each exchange.

What makes it so special, however, is that it’s extremely secure. As yet, no one has been able to crack it. This means data stored in the blockchain is resistant to modifications or tampering.

“It has a certain inherent safety which provides trust. It’s a very safe ledger,” Morrison said.

Improving the industry

The technology is great at cutting out the middleman. It makes transactions and exchanges faster without the need for oversight. This equates to savings in both time and resources.

Jason Lee, Strategic Advisor at the Blockchain Centre, said it can be used to facilitate water transactions. It can also be used to track and record water quality through each stage – from the source to the consumer.

Wavish added that blockchain could act as a “trusted source” for various stakeholders, including auditors and regulatory bodies.

He said potential applications of the technology included water rights trading (providing additional security and efficiency in regulatory compliance processes), smart contract payments and settlements (reducing transaction settlement time), and peer-to-peer trading (energy-intensive water treatment could be used in peer-to-peer trade in energy).

And while you were told to forget about cryptocurrencies just a little earlier, capital raising using blockchain technology isn’t out of the question through Initial Coin Offerings (ICOs), Wavish said.

Use cases

So that’s the theory out of the way. But what are some tangible, practical examples of blockchain being put to good use in the water industry?

Well, the good news is that “Australia is actually relatively advanced when it comes to trials of blockchain technology in the water sector,” according to Wavish.

First off the bat is blockchain energy trading company Power Ledger’s project to integrate distributed energy and water systems in Fremantle (of which Morrison is the lead researcher). This project received over $2.5 million in Federal Government funding in late 2017.

Then there’s marketing company Civic Ledger, which received $80,000 in government funding to develop a blockchain enabled peer-to-peer trading platform that leverages smart contracts and token management systems to monitor water trading.

“Civic Ledger has also reportedly secured a contract with South East Water [in Victoria] to explore the potential of a blockchain based micro-trading platform for the trading of rainwater,” Wavish mentioned.

How to capitalise?

As there are a number of blockchain projects and trials already started in the energy sector, Wavish said utilities and companies should consider taking part.

“Getting involved in subsidised trials is a good place to start,” Wavish suggested.

“With a strong energy-water nexus, there would be scope for more blockchain projects involving both energy and water, like the one underway in Fremantle.”

When looking to be involved in a project, Morrison said firms shouldn’t necessarily think about overhauling their existing systems to incorporate blockchain. Instead, they need to figure out how it could improve existing systems.

“I would argue we’re not challenging the system; we’re complementing it,” he said.

Barriers and risks

One of the biggest barriers for companies looking to adopt blockchain technologies will be ensuring necessary health standards and regulations are adhered to.

The high start-up cost of developing a blockchain project is another potential barrier, according to Lee, who is also the Director for Australia and New Zealand for Foundation.

“Also, it may require a level of expertise. You’ll need to source talent to manage this technology. For example, engineering, computer science and cryptography.”

Another issue, added Wavish, was raised in a recent study conducted with AGL and IBM into the applicability of DLTs to track peer-to-peer trading in electricity.

“The study found that DLTs are currently not suitable for high-frequency and very high-volume transactions,” Wavish said.

And just like all projects involving new and innovative technology, there is risk that it won’t provide the benefits expected.

“And you have to get it right from day one as it may affect communities,” Lee said, “ensuring that it works with existing IT systems may be a challenge.”

The future

Still, where there’s risk there’s reward. And the big benefit for utilities, according to Lee, would be cost efficiency over the long run.

“Blockchain can be a cheaper alternative to the current system of allocation and distribution that water energy currently has if it’s able to track the effectiveness of how water is distributed and avoid wastage,” Lee said.

Wavish added that the more the sector explored this technology the more it would learn.

“It is still very early in the evolution of the technology and breakthrough applications of blockchain are likely to occur in other sectors first,” he said.

“Keeping an open mind and looking for the opportunities that emerge in other sectors will be key to transitioning the benefits to the water sector.”

The moral of the story? Those late to the party may miss out on more than just canapes.

First published as 'The new valuation of water' in Current magazine May 2018.