Leading utilities in various countries around the world are experimenting with blockchain energy distributed ledger and trading systems in a bid to stay ahead of the technological curve and adapt to rapidly shifting market and regulatory environments. The rapid rise of “behind the meter” solar and other renewable energy resources and battery-based energy storage systems is fueling the trend, which continues even as concerns regarding the highly touted efficiency and security of peer-to-peer (P2P) blockchain trading systems mounts.
A growing number of ambitious distributed solar energy start-ups are capitalizing on the blockchain systems development trend as well, zooming in on and touting blockchain’s “tamper proof” security and direct, P2P energy trading and bookkeeping capabilities. Such claims are being called into question, however; as news of cryptocurrency thefts emerges and distributed computing insiders highlight the tremendous amount of energy consumed to process Bitcoin and other blockchain-based trading systems that employ a conceptual model of transaction processing known as “proof of work.”
As reported here on Solar Magazine, Israel-based Solar DAO kicked off an initial coin offering (ICO) of its SDAO digital token cryptocurrency on July 27. Billed as the world’s first wholly digital, autonomous closed-end utility-scale solar project investment fund, Solar DAO originally planned on offering as many as 80 million SDAO tokens at a pre-set price of USD1.00 each in two stages: the preliminary ICO that closed Aug. 31 and a second, primary ICO slated for the end of October. That plan has changed, as Solar DAO founder and CEO Dmitriy Solodukha explained in an interview.
The world’s first digital, closed-end solar project investment fund
Several developments led Solar DAO to cancel its ICO plans. The biggest is that Solar DAO raised enough capital – USD448,000 – in the SDAO pre-ICO to launch an initial set of mid-tier solar energy projects, with construction of the first to begin in March, Solodukha told Solar Magazine:
- a 1 MW project in Kazakhstan budgeted at USD40,000;
- a combined 2 MW project in Ukraine (0.5 and 1.5 MW) with a USD80,000 budget; and
- a 250 kW project in Israel budgeted at USD40,000.
Solar DAO’s founders have closed the digital smart contracts that result in the creation of new SDAO tokens, effectively eliminating the ability to create new shares in the Solar DAO closed-end investment fund. SDAO investors bought a combined total of 1,172,767 SDAOs with a USD1.00 face value during the pre-ICO. They have been trading as high as USD2.50 on cryptocurrency exchanges, but on average they have been trading within the USD1.20-1.30 range, according to Solodukha.
Solar DAO’s founders are working with various, undisclosed engineering companies and financial advisers to carry out its initial slate of projects. They are also in discussions with equipment producers and distributors; engineering, procurement and construction (EPC) contractors and services providers.
In addition, they have entered into a partnership with a company that manufactures industrial drones. “They [the drones, or unmanned aerial vehicles] will help us to monitor plants distantly and do almost 100 percent of things people typically do [in terms of solar energy facility maintenance],” Solodukha said. “We want to reduce operational costs and automate processes.”
Project finance for Solar DAO’s initial three projects is being structured so that equity investors put up 10-20 percent of the required capital. The remaining, large majority of financing – 80 percent – will take the form of debt. Solar DAO’s equity shares are being put up as collateral to secure financing, Solodukha explained. Solar DAO’s management team expects the first projects will power up and come online this summer.
An Ethereum-based platform for solar energy finance
The Solar DAO closed-end investment fund and SDAOs were created using the blockchain-based Ethereum systems development platform. Using it, Solodukha explained, Solar DAO’s founders:
- issued SDAO tokens;
- carried out the crowdfunding sale with smart contracts;
- carried out shareholder voting;
- track token holders, and
- transfer tokens.
Ethereum’s own cryptocurrency, Ether, has proved especially popular with investors, ranking either second or third in terms of market value and transaction volume. Furthermore, Ethereum, in contrast to Bitcoin, is a full-blown blockchain systems development platform. Hence, it has emerged as a platform of choice for those looking to create not only new cryptocurrencies, but digital autonomous organizations (DAOs) and commercial ecosystems. That makes Ethereum and derivative blockchain trading systems and cryptocurrencies a particularly attractive target for crypto and cyber criminals.
The risks involved in carrying out an ICO and laying the foundation for a sustainable business based on a DAO are likely to have figured into Solar DAO’s founding members decision to call off the primary ICO. Mitigating those risks continue to be at the forefront of Solar DAO’s agenda.
Solar DAO uses hardware wallets deposited in Israeli bank cells to store SDAOs and other cryptocurrencies rather than cryptocurrency exchanges. “Don’t store lots of funds on crypto exchanges – that’s a well known truth,” Solodukha cautioned. “There have been enough crypto exchange thefts and hacks [to learn as much].”
Furthermore, Solodukha pointed out that there aren’t any Solar DAO smart contracts to hack given the founders have shut them down and they are not, and will not be, running any ICO or token sales.
Blockchain, cryptocurrency developers’ moves to “Know Your Customer”
Solar DAO is taking a new, additional step to enhance the security and maintain the value and integrity of the organization, its SDAO cryptocurrency and its projects as well: it is carrying out a “Know Your Customer” (KYC) process. Carrying out a KYC process is an increasingly common occurrence among blockchain-based trading and cryptocurrency developers, according to Solodukha.
Cryptocurrency developer Datum is undergoing one in advance of carrying out an ICO. As the company explains: “The KYC process is the only way Datum can check the source of funds raised during the token sale, and we do so by verifying each buyer’s identity and residency. This is something that isn’t only required by governments and regulators, but also by the banks, large corporations, and public bodies we’re bringing into the data trading market that is the Datum Network.”
Requiring cryptocurrency investors to file authenticated proof of identity, not to mention addresses, runs contrary to one of the fundamental tenets espoused by systems developers and investors, however – anonymity.
– Datum management explains.
As for Solar DAO, the founding members view the KYC process, along with other steps they are taking to mitigate the risks and uncertainty associated with blockchains and cryptocurrencies, paves the way forward for Solar DAO to create a new private equity fund.
Risk mitigation for blockchain systems developers
Nonetheless, you might well think that banks and other mainstream project lenders would shy away from participating in the financing of projects proposed by a developer whose initial capital base consists of an obscure, newly minted cryptocurrency. Then there’s the “shady” nature and largely unregulated status of cryptocurrencies to begin with, as well as the vertigo-inducing gyrations in the value of Bitcoin, Ether and other of the most popular cryptocurrencies.
Not necessarily the case, according to Solodukha. Solar DAO does not see any real reason banks and other mainstream project finance lenders would not participate in financing Solar DAO projects. Management has a proven track record of success completing, as well as operating, utility scale PV projects, and, in most cases, in the same countries in which Solar DAO intends to develop projects.
Furthermore, “since the very beginning SDAO tokens have been priced in US dollars, not Ether or other cryptocurrencies. That helps us to get rid out of high volatility problem. We have always considered Ether simply as a funding machine and nothing more,” Solodukha explained.
“We usually use domestic banks [when arranging project financing],” Solodhuka elaborated. “In projects in CIS [Commonwealth of Independent States] countries we use local country banks. In Europe, we work with European banks, but we also discuss project financing with banks in Asia. We have good relationships with several companies in [South] Korea who promised to help us out with debt financing.”
“Naturally, we are concerned about regulations, but since the very beginning we have been doing our best to be up to [comply with] all current rules, laws and regulations. That’s why we are launching the KYC procedure for token holders and aim to continue as a private equity fund.”
The recent gyrations in cryptocurrency markets have not affected Solar DAO’s business model in any substantive way, Solodukha continued. comment↓
* Cover image credit: Solar DAO