Digitising Oil - Energy Ledger
As the current global financial system deteriorates, the imputed value of digital assets increases. Bitcoin's imputed value has increased as an alternative to fiat currency and has been asserted with the narrative of digital gold, embedded with the notion of using blockchain technology to move and store value.
The supply chain industry in parallel has also looked to distributed ledger technologies as the basis for how they want to progress with tracking and moving assets as the entire industry has come under pressure during the global health crisis.
In the year 2021 the usage of distributed ledger technology to manage assets with value is not a new revolutionary concept. What we've learnt is that blockchains that are widely adopted for supply chain use must either A) be one of the first movers in the entire cryptocurrency space; B) provide superior technology or a protocol that no other company can copy that allows them to attract a multitude of cliental or C) Maintain a footing in a niche industry/field that is at a precipice of massive expansion.
Many narratives have been developed amongst different blockchains to emphasise their ability to be energy efficient and sustainable, as the world has shifted towards utilising renewable resources and "green energy".
The president of the European Central Bank, Christine Lagarde, inadvertently incentivised this narrative throughout the entirety of the cryptocurrency space in 2018 when she stated:
"Bitcoins mining, which is this accelerated and augmented use of computers to actually determine the value and incentive the functioning of the mechanism, is energy angry."
Seeds of this narrative around bitcoin's consensus mechanism (mining) has led to most blockchains moving to or developing their own more sustainable consensus mechanisms such as proof of stake. Blockchains such as Ethereum have begun the process of migrating from a proof of work consensus mechanism (mining), to a proof of stake consensus, not only to make their blockchain energy efficient but scalable.
The agenda for renewable resources and energy isn't confined to the financial sector, nor is it confined to the distributed ledger technology industry, it is a global issue that involves everyone and everything. One particular industry of interest is the oil and gas industry. Organisations such as the world economic forum have had their focus directed towards reinventing the oil and gas industry outlining key points for members of the sector to follow in their bid to not only curve climate change but to preserve these finite resources.
"....when compared with other industries, the oil and gas sector lags significantly behind. The prevailing industry culture is often suggested as a key roadblock to advancing digitalisation. Another structural reason is data silos and fragmentation – this prevents communication between different pieces, functions, operators and the supply chain, greatly limiting opportunity to fully embrace digitalisation"
I've outlined the oil and gas industry in particular due to it being a relatively untapped market when it comes to blockchain networks developing use cases to help progress the industry. The majority of the cryptocurrency space have not attempted to even place a footing in this industry with the exception of one blockchain in particular.
What is Energy ledger?
Energy ledger is a platform for enterprises to track and manage oil containers on the blockchain. With there being scarcity for the storage of oil above land, oil needs to be efficiently produced, transported and stored. In turn this in hand leads to better preservation of oil and helps to protect the environment by not enforcing unnecessary production.
"Crude oil markets need to be managed to understand the scarcity for Oil."- Energy Ledger Whitepaper.
The importance for oil storage was shown to have a direct effect on global trading markets. In 2020, CEO and founder of Energy Ledger William. G. Pete, identified a potential for Crude Oil markets to fall into contango or backwardation due to a lack of computer systems developed to manage and understand the scarcity of storage for crude oil.
To understand what backwardation and contango is, as well as the effect a blockchain network can have solving the former, we have to understand how barrels of oil are traded with value on the open market.
The Value of Oil
Oil has been globally established as a commodity. Commodities are raw materials such as precious metals, or agricultural products such as coffee and grained food. However the price of commodities such as Oil are subject to influence of geopolitical events. For example a country with a large reserve of oil that undergoes war may cause the price of oil to either rise across global markets as there is shortage available to access/trade on the open market i.e. lower global supply, or the price may subsequently fall if they over produce oil to either raise funds to aid military efforts, therefore saturating the global market.
The organization of the Petroleum Exporting Countries (OPEC) is a group of 14 countries, not including Russia, China, the United States of America as well as the majority of Europe, whom have come together to regulate the price of oil based on their nation's supply. Saudi Arabia, Iran, Nigeria, and the United Arab Emirates are some of the countries included in the organisation. The initiative was formed to ensure that their finite supply of oil was not depleted senselessly via means of cheap production. Most countries outside of Europe will have their own oil reserve, however if they all produced oil in large amounts, the price of oil would fall due to a high supply above ground. OPEC agreed to limiting barrels of oil production to just 39 million a day. Non OPEC members were shown to produce 53 million barrels of oil a day. These figures may have changed due to the global health crisis.
Oil barrels from various companies are represented as a form of stock that can be traded on open markets. For those who live outside of America, some stocks can be bought as "future contracts". These contracts are agreed upon dates in future in which a person agrees to buy or sell an asset at a specific price. Spot trading relates to a person agreeing to purchase or sell an asset at the current present day/time market price.
Contango (can be thought of as forwardation) is the point at which a future's contract price is higher than the spot trading contract price. This is normal when dealing with a finite asset, in which over time due to scarcity the price of an asset should increase. Future contract prices will be higher than spot trading prices due to a "cost of carry". The cost of carry relates to the expenses to store a commodity, for oil this is the barrel or storage unit that is required once it's been extracted from the earth. The advantage of contango occurring is for market arbitrageurs, these are people who will buy at a spot price and sell at future contract price, but then buy back the asset if the market value at the time of the future date is lower than what they had agreed to sell at.
Backwardation is the point in which spot trading price is higher than that of the future contract price. This can be due to a high demand at the current moment for an asset or the asset conjuring immediate perceived scarcity. An example of this occurring is at the announcement of the pandemic/lockdowns, the price of oil dropped due to decreased demand as most people were not utilising it for example petrol vehicles.
Future contract prices will continue to crash as people expect demand to fall due to lockdowns.
Logically, people will sell their oil at spot trading prices to buy the future contract prices if they were devalued due to the global crisis. However a phenomena occurred in which the price of oil went negative, and people instead of paying for the asset ( i.e. barrel of oil) instead they were purchasing just the cost of carry -people were paying companies to store oil on their behalf.
Oil indexes such as WTI had oil prices in 2020 fall negative briefly. This may have occurred due to insufficient data in relation to crude oil to track. So there may have been an overproduction of oil produced which lead to less storage available, and oil wasted. A momentary storage supply crisis.
Energy ledgers Solution?
Energy Ledger work with the initial goals of providing:
- Cryptocurrency token (ELX) that can be used as an incentive behind the storage of crude oil. The ELX token supply (714 million) was chosen to represent the number of oil barrels that can realistically be stored above ground at any given moment in the Strategic Petroleum Reserve -an emergency stockpile of petroleum maintained by the United States Department of Energy (DOE).
- A public blockchain on the Ethereum network that solidity developers can launch open source software revolving around the energy ledger token;
Energy Ledger have developed a ,currently pending, patent. The patent would substantiate value to the ELX token, as it is based on blockchain solutions capable of attributing electronic coins or digital currency or blockchain smart contract oral data points to a containers potential and actual crude oil contents. With this patent if approved, the ELX token will be the focal point for oil and gas industry to focus their solutions around in relation to management when utilising blockchain.
- A consulting firm for private enterprises that utilises the blockchain
-Liquid level sensors for containers that are tamper proof, with their status recorded on the blockchain.
Energy Ledger Enterprise Platform
Energy Ledger are working on a platform for enterprises to utilise to manage crude oil on the blockchain. A company (user) will be able to issue administrators with a designated role of either, an Auditor; Operator; Exporter; Importer and Processor. These roles represent the stages of the supply chain that need to be monitored. Each role's status can be visualised on the blockchain in which if a breakdown occurs it will make it easier for the end user to visualise where this has occurred and be able to make adjustments.
These users can be governments or companies who are looking to track more than one of their supply chains. The user will be able to demote or promote the administrators on their supply chain depending on their history with getting certain tasks completed.
Incentive to hold the ELX token?
The enterprise platform aims to direct a lot of value for the ELX token in which a structured fee system is used to complete tasks in the supply chain. The fee can be paid with the ELX token. A portion of the tokens that are taken as payments will be used in the staking pool to help pay out rewards for those who have staked their tokens.
Enterprises if they want to use the enterprise platform will have to purchase ELX tokens from the open market.
Operations to utilise the platform will be based in fiat currency, so as the price of ELX fluctuates so does the amount of tokens needed to be purchased. The rewards pool APY will change depending on price, this is to maintain sustainability. (Though this personally suggests a potential fixed apy reward in fiat value?)
I would first like to write that I am not affiliated with the company or members of the Energy Ledger team. I choose to write about projects I enjoy researching and think have good potential from an investment standpoint!
I would also like to disclose that I have bought and do hold ELX tokens as of the time of writing this blog!
To summarise my thoughts on the project overall I would like to state that over the last 12 months I have been shilled (yes shilled) with an overwhelming amount of supply chain networks and blockchains that aim to work and revolutionise energy and supply chain industry. However this was the first time I had found a project that aimed to work with companies in the Oil and gas industry, so that difference in target audience peaked my curiosity.
When researching a project, there are five criteria I look for: Protocol; Team; Roadmap; Tokenomics; Partnerships.
In relation to the protocol I would like to reiterate that I liked what I read in the whitepaper, it aligns with the current direction I personally believe the world is heading towards i.e. the aim of making natural finite resources sustainable and more efficiently produced. This was evident with the global meeting of ministers at Cop26 that took place in November 2021.
In relation to the team, the CEO and founders are verifiable with their LinkedIn profiles available to see via the Energy Ledger website. I was surprised how young the founders of Energy Ledger were when researching, as I myself happen to also be relatively young, so it was cool to see young innovators in an industry that is predominantly populated very much established into their careers. Researching more about the team I found an interview CEO William Pete did on the Cryptocurrent YouTube channel (highly recommend watching). The cryptocurrency industry is a very young in general and many of the CEO's of the leading blockchain networks that dominate the space today were also young when they first started their projects i.e. early 20s such as Vitalik Buterin founder of Ethereum (who was around 18-19 yrs old) and Charles Hoskinson founder of IOHK and Cardano. So I am willing to see what William Pete and Lucas Hoath - as well as the team at Energy Ledger are going to build in the foreseeable future and will be rooting for them to succeed.
However in relation to roadmap design, this wasn't showcased on the website which is something I think needs to better communicated for people researching the project as to mainly see what has been built and what the team are looking to expand upon. However I have been following Energy Ledger on social media i.e. Twitter, and the account is active and posts regular updates announcing partnerships.
Now the Tokenomics is something I do like. The justification behind the supply chosen was something I could reason agree with from an investment standpoint. With the project currently having a low market cap, it is appealing as an investor to see that the supply will not be a factor in stopping the price of the token from reaching a very high figures.
To minimise risk if you're looking to invest, investing at a single million digit market cap (current Mcap is £3 million) will provide enough risk to reward size security for the average retail investor to not have to put forth large sums of cash into the token to see sizeable returns.
Recently (via their twitter) Energy Ledger announced an enterprise partnership with SURFCO. With the project being relatively new and still developing it's ecosystem, this is a good step in the right direction for us investors to see. It reinforces faith in the project that there is development ongoing and that Energy Ledger are slowly, however small, are gaining footing in one of the largest industries in the world.
Future Expectations for 2022
My future expectations for the project over the course of 2022 is to see the release of the mainnet, and perhaps announcements of 3-7 different enterprises using either their platform or seeking consultancy.
I would like to see a road map on the website or an alternative to this could be a monthly AMA in which one of the members of the team just answers community questions. I am a firm believer that community engagement is an important factor for any project in the cryptocurrency industry to thrive and gain recognition.
My final expectation for the course of 2022, is partnerships with other blockchains in the blockchain industry to help expand the use case for the ELX token. Individual networks unless backed with extraordinary funding tend to die out quickly due to not having the resources available to scale upwards. However leveraging different networks, to increase revenue as well as to gain access to potential clients for their consulting firm and enterprise platform could be a game changer. A potential partnership could be Energy Web (not saying that it is, or will happen, it is simply a suggestion!) It's also a great way to gain more widespread attention from retail investors.