In search of opportunity, blockchain entrepreneurs tend to hunt for one or more targets:
- Traditional legacy institutions taking “tolls” on transactions
- Costly inefficiencies arising out processes or markets that are complex and distributed
- Atomizing ownership of assets, from the tangible (barrels of oil) to the intangible (carbon credits)
Pickings are easy in the energy industry, as this list could be applied to nearly every aspect of energy generation, transmission and consumption. Finding her quarry, the entrepreneur excitedly conceives of a solution, finds a few coders with sufficient familiarity with Ethereum, Solidity and ERC-20 tokens, and begins building her platform.
Blockchain is a solution in search of problems -- a magic hammer in which nearly every aspect of the modern economy looks like a nail.
In a country where everyone is encouraged to become an entrepreneur, what better time than now, when the path to raising capital for a new venture is not through Sand Hill Road, or the burdensome “diligence” of lenders or investors, but through the crowdfunding mechanism of an initial coin offering (ICO) or, more precisely, a ”token generation event.” And every ICO starts with a common document: a white paper.
We read a lot of these. Not to invest, mind you, but to better understand how blockchain may or may not take part in the ongoing transformation of the electricity system.
It’s a valuable exercise. In other sectors, venture capitalists have the rare privilege of access to thousands of business plans, presented confidentially in conference rooms limited to partners and advisers. But the current world of blockchain startups explodes this paradigm and opens up the investment process to everyone. It differs from other crowdfunding platforms in that the blockchain offers a kind of standardization and transparency, along with a borderless digital means of transferring value (cryptocurrency), that is unrivaled in history.
The entrepreneurs post their white paper on a website, start a countdown clock to their ICO, post video Q&A sessions with the founders on YouTube, and set out to raise millions of dollars for their enterprise. But with this great power comes great responsibility, and so far, most of the white papers out there are pitiably irresponsible.
If your goal is to offer fractional ownership of exotic cars (BitCar ICO), the bar for your white paper’s explanations may not be too high. But if you are setting out to transform one of the most critical infrastructures in human history, then we’d like to see you do your homework.
Below is our humble, subjective list of what to include in your energy blockchain white paper.
To start, some tips and questions that aren’t unique to energy-blockchain startups but remain worth noting, considering how many ICO white papers lack them. In quick order:
Is the ICO the sole source of funds for the company, or are you raising equity elsewhere?
Are there any restrictions on how the proceeds can be used (or dumped by founders) in the near term?
If you’re going to say something like the following in your white paper, ask an attorney what that means for token buyers in the U.S. “The token holders will be rewarded with dividends of profit sharing in the form of Ethereum every quarter. We hope that in this way, a long-term source of income will be available to our token holders, therefore also increasing the capital value of our tokens itself.” The answer may surprise you.
Enumerate your risks! We never see this, but there’s a reason it’s required in public company reporting. You have many risks, such as threat of regulation, insufficient number of participants in the marketplace, financing risk, cybersecurity risks, volatility of cryptocurrencies, technology development risks, commitment of key team members, etc. We could go on, but these white papers tend to act as though everything will flow like champagne in a Vegas fountain once the tokens are generated.
Treat the white paper as a professional document. Hire a copy editor, include sufficient explanations of how your platform functions, source your market data, explain your assumptions on revenue growth. Investors (we hope) will get wiser and more demanding as ICO-funded companies fail or disappear. Expect them to be tougher on you as time goes on.
- Don’t compare yourself to Uber. It’s not realistic, and these days it’s also kind of gross.
Now on to the energy-specific blockchain white paper suggestions.
Define your market in terms specific to the energy industry. Too many white papers just use generalizations about “unlocking value” in the energy industry and “democratizing access” to markets and projects. That’s meaningless. Make it clear you understand the market you are operating in and how it currently functions.
Be clear about how ownership of tokens may result in gains or losses. Many blockchain-in-energy startups must create a market in which their tokens are traded. Immature markets or exchanges come with significant risk, as there is no experience data to draw on. How are token values established? Under what conditions do token values increase or decrease? What is necessary for there to be real liquidity in these exchanges?
Make clear the critical points of “trust” outside the blockchain. Though the blockchain ledger may be theoretically secure and immutable, there are sources of data (digital meters, for example, or customer private wallets) that must be trusted and secure to ensure accurate data is recorded or value is transferred. A complete description of the platform cybersecurity should be considered essential.
Describe in sufficient detail the tokens in the platform. That seems simple enough, but there are many types of tokens, and how they are utilized can be quite different (application tokens versus asset-backed tokens, for example). Am I buying access to a platform, a share of an energy asset, a reward for verified behavior, or am I buying actual units of energy?
Describe the lifecycle of a token in your ecosystem. If tokens are created as electricity is generated, how are they then traded and retired? What does settlement look like, and have all aspects of verification been made clear?
Be clear about the regulatory paradigm in which you will be operating. If you plan to be a competitive electricity retailer, which markets are open to you? If you plan to offer peer-to-peer trading in microgrids, how will you avoid infringing on utility franchise rights?
Define the hardware requirements for your blockchain application. Does it require a specially designed meter? Will you use off-the-shelf monitoring equipment and software? How much diligence have you done to ensure the systems will perform as expected?
Focus on your initial application set. There are many potential blockchain applications in the energy sector, and too many white papers attempt to tackle them all. Instead, delve deep into the applications you intend to employ first, and simply define your later intentions.
Have a team with experience in your part of the energy market. This may seem obvious, but you might be surprised how many blockchain energy teams have great depth of expertise in blockchain and virtually none in energy. The energy market is challenging -- just ask the multitude of failed technology startups that have come before you. Build a team that can navigate energy’s unique barriers.
When in doubt, illustrate. Diagrams and illustrations of the flows of energy, value, data, settlements, etc., will go a long way in revealing how your platform works.
Inclusion of all the items on this list still does not make your ICO a good investment. But it may just allow your investors/token purchasers to take less of a shot in the dark when buying into your vision.
Scott Clavenna is the co-founder and chairman of GTM. Shayle Kann is a senior adviser to GTM. For more on blockchain concepts in energy, listen to our podcast explainer "Consensus."
Below is a list of firms whose white papers the authors compiled as background: