energies

Article
When Is Blockchain Worth It? A Case Study of
Carbon Trading
Fangyuan Zhao * and Wai Kin (Victor) Chan *
Tsinghua-Berkeley Shenzhen Institute, Tsinghua University, Shenzhen 518052, China
* Correspondence: [email protected]




Received: 5 March 2020; Accepted: 9 April 2020; Published: 16 April 2020


Abstract: Blockchain, as an emerging technology and a disruptive innovation, has attracted attention
from both academia and industry. However, there are many potential risks associated with it, such
as the technical risk, the legal risk and the privacy risk. A comprehensive risk analysis is crucial
for cost-effective deployment of blockchain technology. Important adoption decisions, including
when to deploy blockchain, how to plan the investment, how to transfer current businesses onto
blockchain, and how to price the blockchain service depend on this risk analysis. Yet very little
study exists concerning the blockchain adoption planning with risks analysis. This research presents
a cost-and-risk analysis framework and an adoption planning method for the case of blockchain
application in carbon trading. Design requirements implied by the analysis are inferred and the
architecture of a novel hybrid blockchain system is proposed. The system leverages the advantages of
blockchain technology and incorporates institutional risk control framework. The optimal adoption
strategy of this system is derived through modelling of users’ and the organizer’s behavior.

Keywords: blockchain; risk analysis; system design; innovation adoption; carbon trading

1. Introduction
The concept of “chained blocks” was firstly proposed for solving the double-spending problem in
Bitcoin, after which “blockchain” gradually emerged as a generic term. Blockchain is a distributed
ledger technology (DLT) that connects different parties over the internet to provide a reliable record of
transactions, without giving control to a third party. A blockchain is essentially a distributed database,
with information replicated across many nodes through peer to peer communication and maintained
jointly by the collective according to a consensus protocol. Data are encapsulated in “blocks”, which
are chronologically ordered and cryptographically chained to form the immutable chain. Blockchain
technology offers several desired properties: one point failure issue of centralized systems is eliminated
through replication and distribution of data; transparent data shared directly among all nodes restrains
data manipulation and monopoly; information on blockchain is temper-proof and traceable; and it
is more resistant to technical failures and malicious attacks. In addition to facilitating transactions,
blockchain technology evolved to power the smart contract, which is generally considered as the second
generation of blockchain applications. Business logic or contract terms are coded in a smart contract,
which is stored on a blockchain and executed by nodes when the predefined trigger happens. Therefore,
smart contracts on blockchain are automatically executed and enforced, fostering collaboration between
untrusted peers without requiring a central agency.
Due to these unprecedented advantages of blockchain technology, many entrepreneurs and
governments are rushing into the adoption or promotion of the technology for fear of missing the
opportunity or losing the competition. There are, however, various risks associated with the blockchain
technology. Indeed, blockchain transforms business models from human-based to algorithm-based
models, exposing firms to new risks regarding business continuity, data confidentiality, cyber attacks,

Energies 2020, 13, 1980; doi:10.3390/en13081980 www.mdpi.com/journal/energies

Energies 2020, 13, 1980 2 of 28

technology failures and more (Deloitte, https://www2.deloitte.com/us/en/pages/advisory/articles/

blockchain-risk-management.html). Adverse events and unforeseen risks could undermine all the
benefits of blockchain. In the short history of blockchain, exchanges and wallets breaches, exploitation
of smart contracts bugs and other incidents have occurred numerous times and caused enormous
loss and panic. For example, millions of dollars were lost in the Mt. Gox and the DAO hacking
events. Blockchain has also been abused by evildoers to commit crimes, such as the initial coin offering
(ICO) scam, money laundry and trafficking. Frequent crimes and attacks are serious concerns to
governments, and consequent strict regulations in some jurisdictions have hindered the development
of blockchain technology. Therefore, it is imperative to analyze risks along with benefits when
considering deployment of blockchain technology. Investment in incorporating blockchain technology
is not worthwhile until the benefits overpass the risks. Successful integration of blockchain requires
a thorough plan for timing, investment, adjustment, pricing and coordination of the legacy and
blockchain systems. However, the blockchain adoption strategies based on risk analysis have not been
fully developed.
In this paper, we focus on the case of blockchain application in carbon cap-and-trade scheme (CAT),
to analyze risks and adoption planning of blockchain technology. In a CAT program, the right to emit
greenhouse gases (GHG) is issued in the form of “carbon credits”. These credits are traded between
regulated companies for compliance with the emission targets set by the regulator. The carbon market
is an ideal testbed for blockchain technology for the following reasons: (1) the potential of blockchain
technology for improving the CAT has been recognized and proposed by many researchers and policy
makers; (2) carbon credits can be easily digitalized and represented on the network; (3) despite the lack
of a physical form, carbon credits are associated with real emissions or emission reductions. If carbon
trade is placed on blockchain, speculation and crimes on completely-virtual-blockchain-based assets
can be partially avoided, as carbon credits are backed by physical activities.
The paper consists of several parts:
1. First, a comprehensive benefits and risks analysis of blockchain integration in CAT is conducted.
The cost-and-risk structures of current CAT and a blockchain-based CAT are compared.
2. To effectively address newly introduced risks, we design an architecture of a novel hybrid
blockchain system. It combines features of blockchain technology and approaches of traditional
risk management. This designed architecture could be a primary prototype for deploying
blockchain into regulated industries, where legal requirements are priority to business processes.
3. Given constructed cost-and-risk structure and designed blockchain architecture, we build a
blockchain adoption model. The optimal timing, business shifting, investment, adjustment and
pricing strategies are derived through system organizer’s and users’ optimization. The model
provides a planning methodology for blockchain adoption.
4. Overall, this paper provides an integrated analysis, design and planning framework for blockchain
adoption in the carbon trade and other industries.
This paper is arranged in the following manner: Section 2 reviews the related literature; Section 3
conducts cost and risk analysis of deploying blockchain to CAT; system design considerations and a
hybrid blockchain-based CAT system are proposed in Section 4; adoption models of system organizer
and users are constructed in Section 5; the optimal adoption trajectory and strategies are derived in
Section 6; Section 7 concludes.

2. Related Literature
Most of research on blockchain focus on technical challenges and improvements [1–3],
cryptocurrencies and related economic and legal issues [4–7], smart contracts [8–10], design of
consensus protocols [11–13], and application of blockchain in different industries. Recently, there
has been a surge of discovery on how blockchain could impact supply chains [14], healthcare [15,16],
energy [17,18], payment [19], insurance [20,21], security [22–26], transportation [27], intellectual
property [28], privacy protection [29,30], contract management [31,32] and more. Blockchain has also
Energies 2020, 13, 1980 3 of 28

been proposed to be combined with other technologies, such as Internet of Things [33], big data [34],
machine learning [35], and artificial intelligence [36]. Blockchain is even believed by technology
enthusiasts to be an innovation as disruptive and transformative as the Internet has been [37–40].
Despite the extensive work exploring the application of blockchain technology to different
industries and businesses, there is limited research on risks associated with blockchain deployment
and its implications for system design. Studies related to blockchain risks mainly focused
on cryptocurrencies [41,42] and technical risks [43,44]. Several articles [45–47] discussed
implementation and design considerations of blockchain technology, including interoperability,
cost, performance, security, confidentiality, operational capacity, regulatory and governance issues.
Some researchers [48,49] analyzed blockchain adoption from a macro perspective of technology
acceptance and innovation diffusion.
There is limited research on applying blockchain technology to carbon trade and energy certificates
markets. Some early work focused on conceptualization and direct deployment of existed blockchain
systems in emission trading. In [50], an anonymous Bitcoin-based emission trading system and
five functions of it were conceptualized. Based on that work, a decentralized carbon emissions
trading infrastructure (D-CEIT) was designed and compared to current carbon trading systems in [51].
SolarCoin was introduced in [52]. It is a blockchain system where solar electricity generation is
rewarded with electricity-backed cryptocurrency and traded through the transparent consensus ledger.
It is demonstrated that a 99% reduction of electricity usage could be realized through substituting the
Proof of Work (PoW) with the Proof of Stake Time (PoST) consensus protocol. Robert Leonhard [53]
focused on voluntary personal carbon trading systems and proposed a hypothetical carbon market
on blockchain where individuals conducting emission reduction activities are issued with carbon
credits by virtual associations comprised of climate scientists. Another conceptual model [54] is a
smart contract-based carbon market, where companies voluntarily offset their emissions by funding
carbon-offset projects vetted by universities. It identified some issues of blockchain-based carbon
markets, including administrative costs, verification costs, legal liability, insider trading, tokens as
securities, and cryptocurrency price volatility. The networking of carbon trading systems of different
jurisdictions and the institutional framework was studied in [55], in which the “transaction unit”
performs as the medium of inter-jurisdictions exchange.
Another direction is on experiments and case studies of blockchain application in carbon trading.
In [56], the use of blockchain technology for peer to peer energy-based credits transactions was
explored. By conducting an experiment on a microgrid of several solar energy-powered buildings
within an eco-district of France, authors concluded that in spite of the distributed nature of blockchain,
many real-world scenarios require a permission role, who is in charge of ensuring clear separation of
duties and enforcing Chinese walls. The permission role can be managed by a central authority or
system operators, consistent with the feature of consortium blockchain. In [57], the immutability and
transparency of blockchain were utilized for building a reputation system to address management and
fraud issues of the emission trading scheme (ETS). A case study was conducted on Multichain, an open
blockchain platform and the proposed system is evaluated against conventional ETS. Some benefits of
blockchain were concluded: transparency forces participants to conduct themselves in a responsible
and accountable manner; information credibility helps in the monitoring and verification of credits
source and ownership then protects the system from fraud and double counting issues; a certain level
of privacy can be sustained. Drawbacks include redundant storage and possible resistance of the
transition from participants. Two cases of applying blockchain technology to certificates trading were
analyzed in [58]. It identified several benefits of introducing blockchain, including lower transaction
cost, increased reliability, transparency and security.
Most of these research concerns benefits of blockchain for carbon trading, while studies about
constraints and risks are rare, except for [59], which identified the administrative costs, unit quality
and information asymmetry, and governance of mitigation commitments as the main constrains of
Kyoto Protocol, where blockchain technology can play a role for improvement in Paris Agreement.
Energies 2020, 13, 1980 4 of 28

They proposed some requirements and factors for integration of blockchain technology, including
number of users, system throughput, security and privacy. To the best of our knowledge, analysis of
potential risks and its implications for design considerations and adoption planning are yet to be fully
explored in the area of blockchain application.

3. Cost and Risk Analysis of Blockchain Integration in CAT

In this section, we analyze how blockchain technology could transform the cost and risk structure
of CATs. Issues of current CATs and how blockchain could mitigate them are analyzed and summarized
in Table 1.

Table 1. Problems of current cap and trade schemes (CATs) and blockchain’s potential

Problems of Current CATs Blockchain’s Potential

Transactions are automatically processed on
blockchain according to pre-defined protocols.
If connected to IoT devices and production
management systems, blockchain can access
The implementation, including credits registration,
real-time emission data and would be able to
transaction settlement, emission verification and
automate carbon accounting process. Both could
compliance inspection, requires complex
significantly improve the efficiency and reduce the
administration and extensive manual intervention.
administration cost. On the other hand, blockchain
suffers from the scalability problem with the
increase of transactions, which puts upward
pressure on the transaction cost.
The monitoring, reporting and verification (MRV)
mechanism in CATs is not only cumbersome but Blockchain prevents double accounting and fraud
also vulnerable to fraud claims [60,61] and double claims to a certain extent, by providing an
accounting problems. The hidden data also raise immutable and auditable record.
trust issues among participants.
Blockchain avoids one point failure and improves
the security through information and verification
A centralized registration agency is susceptible to decentralization. If appropriately designed,
hacking and corruption [62]. privacy and transparency can be controlled flexibly,
constructing trust among regulated companies and
making the system more attractive to them.
As smart contracts on blockchain are automatically
Many CAT schemes lack an effective punishment executed, rules of CATs can be encoded in the
mechanism or it is poorly executed, diminishing algorithm and punishment can be enforced,
the effectiveness of carbon markets [63]. ensuring the effectiveness and authority of the
trading scheme.
Regional carbon markets are operated in more Cross-chain technology of blockchain provides
than 50 jurisdictions. Information silos are opportunity for networking of carbon markets of
exploited for value added tax fraud [64] and different nations and regions or of different types
carbon leakage [65,66]. of credits.

Despite the benefits that blockchain brings to emission trading scheme, myriad risks raise
accordingly, especially in the nascent stage of blockchain technology. New risks associated with
incorporation of blockchain include:

1. Legal risk
Blockchain protocols might be inobservant to legislations and regulations; the property right
of carbon credits on a blockchain need further legal enforcement; without a central authority,
the legal liability of improper and erroneous operation of blockchain remains unclear; there are
potentially illicit activities on blockchains, such as money laundering.
Energies 2020, 13, 1980 5 of 28

2. Technical risk
Technical challenges, such as large-scale communication, big data storage, and imperfect
encryption technologies hinders the performance of blockchain.
3. Protocol risk
The implementation of arrangements of CAT programs relies on predefined blockchain protocols.
All the terms and conditions of the cap-and-trade scheme should be applied and enforced
consistently by the protocol. Any error in the protocol may get the system off the track or even
against the initial purpose of the program. Carelessly designed protocols also incur problems of
scalability, security and data integrity.
4. Cyber risk
Insufficient encryptions are at risk from hackers; outside oracles-smart devices and production
softwares are vulnerable to malicious attacks and malfunctions, resulting in corrupted data fed
into the blockchain; the key pairs representing identities on blockchain can be stolen or destroyed.
5. Privacy risk
If automatic carbon accounting is conducted, commercially sensitive data, such as production
and operation data, are stored on blockchain, which impose information leakage risk.
6. Validation risk
Risk of consortium blockchains can be incurred by wrongly selected malicious validation peers.
7. Market risk
As a newborn technology, blockchain may be subject to resistance from users. Insufficient
transactions on blockchain would harm the market liquidity.

The cost-and-risk structures of current CAT and blockchain-based CAT are summarized in Figure 1.
The main costs and risks of a traditional CAT are listed in the second column. The changes of the costs
and risks caused by the introduction of blockchain are listed in the third column. Blockchain offers an
opportunity to reduce the administration cost of traditional carbon CATs, which is signaled by the
small green arrow in Figure 1. Whereas, the transaction cost may be scaled up along with the increase
of transactions, due to the scalability limit of blockchain. In Figure 1, the yellow arrow signifies possible
higher transaction cost of a blockchain-based CAT, if the scalability issues is not appropriately handled.
The larger green arrow in Figure 1 means the listed risks of traditional CAT systems, including the
fraud, collusion, cyber attack, inefficacy and carbon leakage risks, can be mitigated by blockchain
technology. However, blockchain introduces new risks, including the legal, technical, protocol, cyber,
privacy, validation and market risks. The red arrow in Figure 1 means the increase of these risks.
In summary, a blockchain-based CAT, compared to a traditional CAT, has lower administration cost,
possibly higher transaction cost, lower traditional risks, and higher new risks.

Figure 1. Cost and risk structure of current and blockchain-based CATs.

4. Architecture Design for a Hybrid Blockchain System

Considering the transformed risk structure, we propose design requirements of a blockchain-based
CAT system, and design the organizational architecture and main functionalities for the system.
Energies 2020, 13, 1980 6 of 28

4.1. Design Requirements

1. Risk management
Based on the risk analysis in Section 3, risks of the blockchain-based system should be effectively
controlled to guarantee the correct implementation of CATs. In centralized systems, intermediaries
typically take on the risks, while on blockchain, risk management relies on predefined protocols.
Unfortunately, not all the risks can be predicted and a flawless protocol does not exist. Blockchain
technology itself at this stage is not able to handle exceptions. Therefore, a responsible party is
needed to manage risks and to serve as the last resort.
2. Blockchain protocol
The blockchain system essentially provides transaction service to carbon traders. System
performance, including throughput, latency and scalability should be acceptable to users. These
properties are determined by the consensus protocol to a large extent. Therefore, the protocol
should be able to facilitate a large number of transactions with a low latency. In addition,
the protocol should be energy-efficient, as the purpose of carbon cap-and-trade schemes is to
reduce emissions and to address climate change. Therefore, the proof of work (PoW) protocol
used by Bitcoin and many blockchains is not suitable. More efficient protocols, such as practical
Byzantine fault tolerance (pBFT) and Ripple protocols are possible options.
3. Identity management
A trading system should conform to applicable laws and regulations, such as the anti-money
laundering (AML) and know-your-customer (KYC) legislation. Besides, credits allocation
and compliance verification also require known identities of participants. Hence participants’
identities should be registered on the blockchain system, and kept invisible to other traders,
unless the user reveals it on purpose.

4.2. Organizational Architecture

According to the requirements of identity management and risk control in carbon trading, a certain
degree of central control, monitoring and safeguarding are necessary for the blockchain-based system.
Therefore, a hybrid system combining the features of blockchain technology and institutional risk
control would be appropriate. We design the three-tier organizational architecture for the hybrid
blockchain system, as shown in Figure 2. With this structure, the immutability and reliability of
blockchain technology are retained and risks are under control. There are three roles in this architecture:

• Organizer: an overriding committee, takes charge of authorization, access control, audit,

supervision, disputes settlement, and safeguard, but does not intervene the normal operation of
the system. The committee consists of regulators, institutions and other appropriate members.
It is an added layer to a typical blockchain for risk management.
• Validators: verify transactions and maintain the blockchain ledger, providing service to carbon
traders. Validators are elected by participants of the carbon CAT program, and can include
academic institutions, non-governmental organizations (NGOs) and other professional agencies.
They collectively verify data under the witness of all participants. If any validator conducts
improper activities, it can be removed from the validation group through the majority vote
by participants.
• Users: carbon traders are system users as well as witnesses of the commitment, compliance,
and punishment execution on the system.
Energies 2020, 13, 1980 7 of 28

Figure 2. An overview of the organizational architecture.

4.3. Main Functionalities

Primary functionalities of a blockchain-based carbon trading system include:

1. User registration: The organizer validates identities and authorizes participants. A pair of keys
(public key and private key) is assigned to an authorized user for accessing the system.
2. Initial allocation or auction: The organizer node broadcasts the emission cap of each participant,
which is then recorded on the blockchain. Each participant can use her private key to decrypt
the message and get the cap. The allocated or auctioned carbon credits are transferred from the
organizer node to each user node.
3. Registration of certified emission reductions (CERs): Each emission reduction project is registered
on the blockchain with a unique ID and all the related information for identification. GPS and
satellites could be utilized as oracles for monitoring and inspecting projects. Blockchain provides
a traceable and auditable record of emission reduction projects.
4. Transaction: The validation nodes are full nodes on the blockchain, storing complete blockchain
ledger. They process and record transactions collectively. User nodes, as light nodes, do not need
to store the ledger and can request information from validation nodes.
5. Emission accounting: Automatic emission accounting can be realized through outside oracles,
such as IoT devices and production management systems, which connect to and upload
emission-related data on blockchain.
6. Commitment enforcement: At the end of each compliance period, user nodes transfer their credits
to the organizer node for commitment. Validation nodes examine the amount of committed
credits according to the recorded cap, and execute pre-defined punishment.

5. Modelling of Blockchain Adoption in CATs

In this section, we model the adoption of the hybrid blockchain system proposed in Figure 2, from
the perspectives of the organizer and of individual users (participating companies). The modelled
scenario is as following:
Existing centralized carbon trading system is the legacy system and still operates. The organizer
can develop and provide a blockchain-based carbon trading system to individuals. According to
the cost-and-risk structures of traditional and blockchain-based CATs in Section 3, the legacy and
the blockchain systems have different costs and risks. Each individual can decide the amount of
transactions to put on each system. The organizer can impact individuals’ decisions through pricing
two systems.

5.1. Individuals’ Model

Intuition: Individual users have carbon management goals and certain transaction demands
to meet their goals. Facing two options—the legacy system and the blockchain system, individuals
Energies 2020, 13, 1980 8 of 28

allocate their transactions on two systems. Both systems have registration fees and transactions fees,
which are determined by the organizer and are known to individuals. The legacy system has been
operated for a long time, so it is stable and predictable. The blockchain system offers potential benefits
of lower transaction cost and risk, while it’s a newborn technology and people are not familiar with it.
The market risk, particularly liquidity risk of the blockchain system might be high, if users hesitate
to migrate onto it. Therefore, there is extra perceived risk of the blockchain system, dominated by
the herd effect—individuals feel that the blockchain system is safer and more acceptable if more
transactions are put on it.
At each period t during a fixed time horizon [1, T ], individuals’ model is shown in Figure 3. The
model is explained in the following:

• Conditions: Each individual i has a known transaction demand dit . Registration and transaction
fees of the legacy and blockchain systems, Lrt , Lst , Ptr and Pts are given by the organizer. The risk of
the legacy system, r1 is stable, including uncertainty due to verification and lack of transparency.
The systematic risk of the blockchain system, r2 (t) can be reduced overtime, and is known to
individuals. The extra perceived risk of the blockchain system, r p can be mitigated if more
r
transactions are put on it. The resulted perceived risk is measured by ypt , where yt is the total
amount of transactions on the blockchain system.
• Decisions: An individual i allocates its transactions on the legacy system and the blockchain
system with amount of xit and yit , respectively.

Figure 3. Individuals’ model.

Table 2 list parameters and variables of individuals’ model.

Table 2. Notations of variables and parameters of individuals’ model

Notations Meaning
mt Number of individuals in carbon market at period t.
dit The transaction demand of individual i at period t. It is assumed non-decreasing over time t.
Decision variables
xit Amount of transactions that individual i put on the legacy system.
yit Amount of transactions that individual i put on the blockchain system.
Legacy system
Lrt Registration fee of the legacy system at period t, given by the organizer.
Lst Transaction fee of the legacy system at period t, given by the organizer.
r1 Risk of the legacy system.
Blockchain system
Ptr Registration fee of the blockchain system at period t, given by the organizer.
Pts Transaction fee of the blockchain system at period t, given by the organizer.
r2 ( t ) The systematic risk of the blockchain system.
rp
rp Basic perceived risk of the blockchain system, can be mitigated by more transactions to yt .
Energies 2020, 13, 1980 9 of 28

5.2. Individual Optimization

At each period t during a fixed time horizon [1, T ], with transaction demand dit , individual i
allocates amount of transactions xit and yit , respectively, on the legacy and the blockchain systems.
Individual i’s total cost Hit includes registration and transaction fees it needs to pay for two systems.
Its total risk Rit includes the risk of the leagcy system xit2 r1 , the systematci risk of the blockchain
r
system y2it r2 (t), and the perceived risk of the blockchain system yit ypt . Individual i’s disutility Git is the
summation of total cost and total risk. The cost function, risk function and disutility function of period
t are defined in Equations (1).

Hit ( xit , yit ) = Lrt 1{ xit >0} + Lst xit + Ptr 1{yit >0} + Pts yit
rp
Rit ( xit , yit ) = xit2 r1 + y2it r2 (t) + yit (1)
yt
Git ( xit , yit ) = Hi ( xit , yit ) + Ri ( xit , yit )
At period t, individual i’s optimization problem is to minimize its total disutility by allocating
transactions on the legacy and the blockchain systems. Mathematically, the optimization problem of
each individual can be written as:
rp
min Git = Lrt 1{ xit >0} + Lst xit + Ptr 1{yit >0} + Pts yit + xit2 r1 + y2it r2 (t) + yit
xit ,yit yt
s.t. xit , yit ≥ 0 (2)

xit + yit ≥ dit

∗ , . . . , y ∗ ):
Proposition 1. At each period t, there is a Nash Equilibrium of individuals’ behavior, given by (y1t mt t
(2r1 dit + Lst − Pts )y∗t 2 −y∗t r p
yit∗ = 2(r1 +r2 (t))y∗t 2 −r p
. The equilibrium total transaction amount on the blockchain system is y∗t =
√
2r1 dt +mt ( Lst − Pts )+ [2r1 dt +mt ( Lst − Pts )]2 −8r p (mt −1)(r1 +r2 (t))
4(r1 +r2 (t))
. Required conditions for the Nash Equilibrium are: (1)
Existence of yt ; (2) Feasibility of yit : 0 < yit < dit ; and (3) Optimality of yit∗ : Git (yit∗ ) < min( Git (0), Git (dit )).
∗ ∗ ∗

The derivation of Proposition 1 is shown in Appendix A. The required conditions are expressed
explicitly in Equations (A5)–(A7) in Appendix A.
The equilibrium total transaction amount on the blockchain system y∗t is resulted from the
interactions among traders. However, it stays unaffected by individuals’ decisions, instead, it is
determined by the total transaction demand dt , number of traders mt , the risks r1 , r2 (t), r p and the
transaction fee difference Lst − Pts of two systems. More transactions will be put on the blockchain
system, with a higher demand, or a higher price advantage of the blockchain system.
(2r1 dit + Lst − Pts )y∗t 2 −y∗t r p
Under the equilibrium situation, trader i puts the amount of yit∗ = 2(r1 +r2 (t))y∗t 2 −r p
transactions on the blockchain system. User i would put more transactions on the blockchain system,
with a higher demand dit , the price advantage of the blockchain system Lst − Pts , or the total transaction
amount on the blockchain y∗t . On the contrary, a higher fundamental perceived risk of the blockchain
system r p would reduce their preference for the blockchain system.

5.3. Organizer’s Model

Intuition: The legacy system has steady operation cost and risk. The organizer needs to determine
the time and investment for developing a blockchain-based carbon trading system. The average
operation cost of the blockchain system scales up with the increase of transactions, due to the inherent
replication feature and the scalability limit of blockchain technology. Risks of the blockchain system are
classified as systematic risk and controllable risk. Controllable risk includes design risk and validation
risk. Design risk is raised up by imperfect system configurations, regarding the consensus protocol,
cyber security and privacy. Validation risk comes from the validation group of a consortium blockchain.
Energies 2020, 13, 1980 10 of 28

Once the blockchain system is built, the organizer can invest in system update and infrastructure
improvement. Updating the system lowers the average operation cost and the design risk. Based on
the hybrid architecture designed in Section 4, transactions are processed by a collective of validation
nodes. the organizer pays for the setup of the validation group, which impacts the validation risk.
Given total transaction demand of all individuals, the organizer optimizes transaction amount on the
legacy and the blockchain systems.
An overview of the organizer’s model at period t of the time horizon [1, T ] is shown in Figure 4.
The model is explained in the following:

Figure 4. Organizer’s model.

Conditions:

• The legacy system: c1 is the average operational cost, including credits registration, transaction
processing and clearing, and compliance validation; r1 is the risk imposed by the fraud, collusion,
cyber attack and other issues of the centralized system.
• The blockchain system: c2 (t) is the fundamental cost that remains unchanged unless exogenous
technology breakthrough occur; r2 (t) is the systematic risk, including regulatory and technical risk,
which can only be mitigated by exogenous legislation improvement and technology innovation;
r3 is the basic design risk, which can be reduced by sound system design and infrastructure
improvement; r4 is the basic validation risk, which can be reduced by a better validation
configuration.
• Individuals’ demand: dt is the total transaction demand of all individuals. dt = ∑im=t 1 dit

Decisions:

• Organizer decides the investment It for system update, including blockchain redesign and
infrastructure (communication and computation) improvement. The effect of investment
accumulates and mitigates the design risk r3 to tr3 I .
∑ j =1 j
r4
• Organizer decides to spend Vt for validation setup, which mitigates the validation risk r4 to Vt .
• xt is the total transaction amount on the legacy system.
• yt is the total transaction amount on the blockchain system.

Intermediate variables:

• Ct is the average operational cost of the blockchain system at period t. It includes cost of
processing registration, and transaction clearing and settlement. To reflect the scalability issue
of blockchain with the increase of transactions, we adopt a linear function of the fundamental
cost c2 (t) and transaction amount yt to measure the average operational cost: Ct = c2 (t) +
1
t y . The slope is reciprocal to total investment on the blockchain system, since system and
I t
∑ j =1 j
infrastructure improvement could mitigate the scalability issue.
• Rt is the average comprehensive risk of the blockchain system at period t. Rt = r2 (t) + r3
+ Vr4t .
∑tj=1 Ij
r3 r4
It is the summation of the systemic risk r2 (t), the design risk , and the validation risk Vt .
∑tj=1 Ij
Energies 2020, 13, 1980 11 of 28

Table 3 summarizes parameters and variables of the organizer’s model.

Table 3. Notations of variables and parameters of the organizer’s model.

Notations Meaning
δ A discount factor between periods. 0 < δ < 1.
dt Total transaction demand of all traders at period t.
Legacy system
c1 Average operational cost of the legacy system.
r1 Risk of the legacy system.
Blockchain system
c2 ( t ) The fundamental operational cost of the blockchain system at period t. Non-increasing
over time.
r2 ( t ) The systematic risk of the blockchain system at period t. Non-increasing over time.
r3 The basic design risk of the blockchain system.
r4 The basic validation risk of the blockchain system.
Decision variables
xt Amount of transactions on the legacy system at period t.
yt Amount of transactions on the blockchain system at period t.
It Investment on blockchain system update at period t.
Vt Investment on validation setup at period t.
Intermediate variables
1
Ct Average operational cost of the blockchain system at period t. Ct = c2 (t) + t yt .
∑ j =1 I j
r3 r4
Rt Average comprehensive risk of the blockchain system at period t. Rt = r2 ( t ) + t I + Vt
∑ j =1 j

5.4. Social Optimization

The optimization problem of the organizer is to minimize total cost and risk of two systems within
a fixed period [1, T ]. At each period t (1 ≤ t ≤ T):
The organizer determines investment It on system update and Vt on verification setup. Given
total transaction demand dt , the organizer decides the amount of transactions should be put on the
legacy and blockchain system, xt and yt . The total cost Ht includes the investment on update It and on
validation setup Vt and operational cost c1 xt + Ct yt of two systems. The total risk Qt includes the risk of
the legacy system r1 xt2 and the risk of the blockchain system Rt y2t . Social disutility St is the summation
of total cost and total risk. Organizer’s cost function Ht , risk function Qt and disutility function St at
period t, and total disutility S of the optimization horizon [1, T ] are defined in Equations (3).

1
Ht ( xt , yt , It , Vt ) = c1 xt + It + Vt + Ct yt = c1 xt + It + Vt + (c2 (t) + yt )yt
∑tj=1 Ij
r3 r4 2
Qt ( xt , yt , It , Vt ) = r1 xt2 + Rt y2t = r1 xt2 + (r2 (t) + + )y
t
∑ j =1 I j Vt t
(3)
St ( xt , yt , It , Vt ) = Ht + Qt
T
S( x1 , . . . x T , y1 , ...y T , I1 , . . . IT , V1 , . . . VT ) = ∑ δt St (xt , yt , It , Vt )
t =1

Mathematically, the optimization problem of the organizer is written as:

T
1 r3 r4 2
min S = ∑ δt [c1 xt + It + Vt +yt (c2 (t) + ∑t yt ) + r1 xt2 + (r2 (t) + t
∑ j =1 I j
+ )y ]
Vt t
j =1 I j
xt ,yt ,It ,Vt t =1
(4)
s.t. xt , yt , It , Vt ≥ 0
xt + yt ≥ dt for all t.

This is a multistage optimization problem. Assume that the optimal strategy is conducted in all
periods, it can be solved backward from t = T to t = 1, as shown in Appendix B.1. The solution is:
Energies 2020, 13, 1980 12 of 28

For 1 < t < T, √

√ p
Mt = c 1 − ( c 2 ( t ) + 2 r 4 + 2 1 − δ r 3 + 1 )

Mt
 0
 0 < dt < − 2r , Mt < 0
1

2r1 dt + Mt Mt
y∗t = 2(r1 +r2 (t))
dt ≥ max (− 2r , 2rM(tt) )
1 2
0 < dt < 2rM(tt) , Mt > 0

 dt

2
t −1
r r
r3 + 1 ∗ r3 + 1 ∗
1 − δ t j∑
It∗ = y − Ij = (yt − y∗t−1 )
=1
1 − δ
∗ √ ∗
Vt = r4 yt
For t = T,
√ p
M T = c1 − ( c2 ( T ) + 2 r4 + 2 r3 + 1)

 0
 0 < dT < − M T
2r , MT < 0 1

2r1 d T + MT
y∗T = 2(r1 +r2 ( T ))
d T ≥ max (− M T MT
2r , 2r ( T ) )
1 2
MT

 dT 0 < dT < , MT >0

2r2 ( T )
T −1 y∗
IT∗ = r3 + 1y∗T − ∑ r3 + 1(y∗T − √ T −1 )
p p
Ij =
j =1 1−δ
√
VT∗ = r4 y∗T
In the optimal solution, we define an intermediate parameter Mt , as in Equation (5). Mt captures
the difference between the cost of the legacy system and the overall fundamental cost and controllable
risk of the blockchain system. Therefore, Mt reflects the relative advantage of the blockchain system.
( √ √ √
c1 − ( c2 ( t ) + 2 r4 + 2 1 − δ r3 + 1) 1≤t<T
Mt = √ √ (5)
c1 − ( c2 ( t ) + 2 r4 + 2 r3 + 1) t=T

6. Adoption and Pricing Strategies

6.1. Adoption Trajectory and Market Capacity

Basing on solutions to social optimization of each period in previous section, we can plot the
optimal strategy for adopting blockchain technology:
√ √ √ Mt
(1) From t = 1 to t = t∗ − 1, if Mt = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1) < 0 and dt ≤ − 2r ,
1
∗ ∗ ∗
the optimal solution is yt = 0, It = 0, Vt = 0. During this period, the blockchain system should not
be developed.
Mt
(2) The timing for blockchain deployment t∗ satisfies dt > − 2r , equivalent to 2r1 dt + c1 >
√ √ √ 1
c2 (t) + 2 r4 + 2 1 − δ r3 + 1. By assumption, c2 (t) is non-increasing and dt is non-decreasing, thus
all t > t∗ satisfy the inequality, meaning the system will not be shut off once launched.
√ √ √
(3) From t = t∗ to t = T − 1, Mt = c1 − c2 (t) − 2 r4 − 2 1 − δ r3 + 1,

2r1 dt + Mt Mt Mt
(
dt ≥ , Mt > 0; dt ≥ − 2r , Mt ≤ 0
y∗t = 2(r1 +r2 (t)) 2r2 (t) 1
Mt
dt 0 < dt < 2r2 (t)
, Mt >0
r
r3 + 1 ∗
It∗ = (y − y∗t−1 )
1−δ t
√
Vt∗ = r4 y∗t
√ √
(4) At the last period T, MT = c1 − c2 ( T ) − 2 r4 − 2 r3 + 1, with feasibility assumptions (A22)
in Appendix B.2,
Energies 2020, 13, 1980 13 of 28

2r1 d T + MT MT
(
dT ≥
y∗T = 2(r1 +r2 ( T )) r2 ( T )
MT
dT dT < r2 ( T )
y∗
IT∗ = r3 + 1(y∗T − √ T −1 )
p
1−δ
√
VT∗ = r4 y∗T
From step (2) of this optimal adoption trajectory, Proposition 2 can be derived. It indicates that
the timing for blockchain adoption depends on the transaction demand and the relative advantage
of the blockchain system. The transaction demand dt∗ and cost advantage of blockchain c1 − c2 (t∗ )
should be large enough relative to the risks, r3 and r4 of the blockchain system.

Proposition 2. Under the assumptions that c2 (t) is non-increasing, and that dt is non-decreasing, the optimal
√
time t∗ that the blockchain system should be developed satisfies: (1) 2r1 dt∗ −1 + c1 ≤ c2 (t∗ − 1) + 2 r4 +
√ √ √ √ √
2 1 − δ r3 + 1, and (2) 2r1 dt∗ + c1 > c2 (t∗ ) + 2 r4 + 2 1 − δ r3 + 1.

Proposition 3. The optimal adoption strategy is to keep the average operational cost and the overall controllable
risk of the blockchain system unchanged by updating the system and setting up validation adaptively.

Proof of Proposition 3. With the optimal adoption strategy in step (3), average operational cost of the
V∗ y∗ √
blockchain system, including transaction cost and verification cost, Ct + yt∗ = c2 (t) + t t I ∗ + r4 =
t ∑ j =1 j
q √
c2 (t) + 11+−rδ3 + r4 is kept constant by investment and setting up verifiers unless technological
innovations occur. In each period, the organizer should invest in system update at the scale
in proportional to the increment of transaction on the blockchain system and set up verifiers in
proportional to the expected transaction amount of this period, which in turns eliminates the increase
impetus of average transaction cost triggered by the increaseqof transaction. Total controllable risk,
√
including cyber risk and operation risk, ( t r3 I ∗ + Vr4∗ )y∗t 2 = r3 r13−+δ1 + r4 is also managed to remain
∑ j =1 j t
unchanged by system update and validation setup.

Proposition 4. The capacity of the blockchain system is the maximum amount of transactions that should be
put on the blockchain system under the optimal situation and current technology conditions. If the amount of
transactions on the blockchain exceeds that capacity, √
the social
√
optimality can not be reached. The capacity of
√
c −c (t)−2 r −2 1−δ r +1
the blockchain system is measured by 1 2 4
2r2 (t)
3
. When the blockchain system is cost-effective
and safe (c2 (t), r2 (t), r3 , and r4 are small enough), the capacity would be larger than the transaction demand dt .
That is the time that the legacy system could be abolished and completely replaced by the blockchain system.
√
Proof of Proposition 4. When the relative advantage of blockchain Mt = c1 − (c2 (t) + 2 r4 +
√ √
2 1 − δ r3 + 1) > 0, the optimal amount on the blockchain:

2r1 dt + Mt Mt
(
dt ≥
y∗t = 2(r1 +r2 (t)) 2r2 (t)
Mt
dt 0 < dt < 2r2 (t)

√ √ √ √ √ √
Mt c1 −(c2 (t)+2 r4 +2 1−δ r3 +1) c1 −(c2 (t)+2 r4 +2 1−δ r3 +1)
The threshold is 2r2 (t)
= 2r2 (t)
. If dt < 2r2 (t)
, all the
√ √ √
c −(c (t)+2 r4 +2 1−δ r3 +1)
transactions should be put on the blockchain system. While if dt ≥ 1 2 2r2 (t)
,
√ √ √
2r1 dt +c1 −2c2 (t)−2 r4 −2 1−δ r3 +1
2(r1 +r2 (t))
transactions should be put on the blockchain system and the rest
√ √ √
2r2 (t)dt −2c1 +2c2 (t)+2 r4 +2 1−δ r3 +1
2(r1 +r2 (t))
should be put on the legacy system. Therefore, the blockchain
√ √ √
c −(c (t)+2 r4 +2 1−δ r3 +1)
system capacity can be denoted by the threshold 1 2 2r2 (t)
. It increases with cost
Energies 2020, 13, 1980 14 of 28

difference (c1 − c2 (t)) and decreases with risk of the blockchain system r2 (t). If at some time t0 that the
blockchain system is cheap and safe(c2 (t) and r2 (t) are small enough), such that dt < 2rM(tt) holds for
2
all t > t0 , the legacy system can be abolished and completely replaced by the blockchain system.

6.2. A Case Study of the Optimal Adoption Trajectory

A numerical case study of the adoption trajectory is conducted. Values of parameters and
exogenous variables of the model are set according to Table 4. The setting conforms to model
assumptions that c2 and r2 are non-increasing and dt is non-decreasing.

Table 4. Values settings of parameters and exogenous variables

Parameters/Variables Value
t 15
r1 0.15
r3 , r4 0.25
δ 0.6875
c1 41.5
c2 [50, 50, 40, 40, 32, 32, 32, 25, 25, 25, 18, 18, 17, 17, 16]
r2 [0.25, 0.25, 0.25, 0.2, 0.2, 0.2, 0.16, 0.15, 0.15, 0.15, 0.14, 0.13, 0.11, 0.11, 0.11]
dt [20, 20, 30, 38, 38, 44, 44, 45, 50, 60, 61, 62, 63, 65, 65]

Figure 5 displays dynamics of exogenous situations and corresponding optimal strategies.

Exogenous variables, blockchain technology cost and risk c2 , r2 are in blue and transaction demand
dt is in yellow. Intermediate variables Mt and blockchain system capacity y0t are shown in green.
Solutions of decision variables, optimal amount on the blockchain system y∗t , optimal investment
for the blockchain system update It∗ and optimal investment on validation configuration Vt∗ are
represented in red. Other variables under optimal condition, including average operational cost of
the blockchain system Ct , total investment on blockchain ∑t It , and total risk of the blockchain system
Rt y∗t , are shown in black.

Figure 5. Adoption Trajectory.

Energies 2020, 13, 1980 15 of 28

From Figure 5, we can find following situations consistent with aforementioned Propositions:
(1) From period 1 to 2, the optimal strategy is not developing the blockchain system and putting
all transactions on the legacy system, due the high cost and risk of blockchain technology.
(2) The blockchain system should be adopted at period 3, when the cost c2 and risk r2 of blockchain are
mitigated and transaction demand dt is relatively high. This is the point that the blockchain technology
is worth to be deployed. (3) After the launch of the blockchain system, from period 3 to period 7
transactions are allocated to both systems. The optimal amount on blockchain system y∗t should not
exceed its capacity y0t . The capacity of the blockchain system increases with reducing cost and risk of
blockchain technology. (4) At period 8 and 9, the capacity of the blockchain system overpasses the
transaction demand, at which the legacy system should be idled but should not be abolished, in case a
sudden increase in the transaction demand. (5) At period 10, the legacy system should be rebooted,
since the transaction demand increases to be higher than the capacity of blockchain system. This reboot
implies the necessity to retain the idling legacy system for several periods as a backup for the blockchain
system. (6) After period 11, the blockchain technology is mature enough and the capacity of blockchain
system is much higher than that of the transaction demand. The legacy system can be dissolved
for cost saving. (7) the organizer should invest in system update and validation configuration in
each period to improve the capacity of blockchain system for accommodating increasing transaction
demand. The investment in update It∗ is determined by the increase of transaction demand between
two consecutive periods and the investment on validation Vt∗ is determined by transaction demand of
that period. (8) The average transaction cost on blockchain system Ct decreases with the reducing cost
c2 and risk r2 of blockchain technology. The scalability issue of blockchain should be eliminated by
updating the system, without impacting the average transaction cost on blockchain system. (9) Total
risk of the blockchain system Rt y∗t is also mitigated by the investment on system update, as it is much
more flat and steady than the increasing transaction amount y∗t on the blockchain.

6.3. Adjustment during the Adoption

If the aforementioned optimal trajectory of adoption is not followed in the beginning or the
estimates of some variables, such as dt , c2 (t) and r2 (t), deviate from true values, the strategy should be
adjusted during the adoption process. This forms a new optimization problem. Since the investment
in the blockchain system before the adjustment-time, denoted as I0 is sunk cost, it should not be
considered in the new optimization problem. While it still impacts the transaction cost and risk of the
blockchain system.
If at time t = t a , the adjustment or re-planning is considered, the adjustment optimization problem
is formulated as:
T
1 r3 r4 2
min S = ∑ δt−ta [c1 xt + It + Vt +yt (c2 (t) + I t
yt ) + r1 xt2 + (r2 ( t ) +
I0 + ∑tj=ta Ij
+ )y ]
Vt t
xt ,yt ,It ,Vt t=t a 0 + ∑ j=t a Ij
(6)
s.t. xt , yt , It , Vt ≥ 0
xt + yt ≥ dt for all t.

As the multistage adoption optimization problem is solved backward one period before another,
the adjustment optimization problem can be considered as a portion of that problem from t = T to
a −1
t = t a , given I0 = ∑tt= 1 It . Therefore, the adjustment algorithm can be derived from the solution of
adoption optimization:
q
1. Start with t = T, run adoption optimization, get y∗t and calculate r13−+δ1 y∗t − I0 .
q
2. If r13−+δ1 y∗t − I0 > 0, go backward one period to t = t − 1 and run (1) again.
q
3. If r13−+δ1 y∗t − I0 ≤ 0, t + 1 is the re-investment point.

This derives Proposition 5.

Energies 2020, 13, 1980 16 of 28

q q
r3 +1 ∗ r3 +1 ∗
Proposition 5. The optimal re-investment point tr satisfies 1− δ y tr −1 ≤ I0 and 1− δ y tr > I0 .

Before the optimal re-investment point, additional investment on the blockchain system is not
needed since the existing investment is too large, deviating from the optimal value. After this point,
more investment is required
q to improve the capacity of the blockchain system and to accommodate
increasing demand. If r13−+δ1 y∗t > I0 holds for all adjustment periods t ≥ t a , it implies the previous
investment in the blockchain system is smaller than the ideal value and additional investment is
required immediately at the adjustment start time t a .
The solution to adjustment optimization is shown in Appendix C. The adjustment algorithm
provides a method for re-planning or correcting the adoption strategy. If the optimal trajectory is not
followed previously or estimates of key features turn out to be inaccurate, this algorithm can be used
to adjust adoption strategy accordingly.

6.4. Pricing
the organizer needs to decide the registration fee Lrt and transaction fee Lst of the legacy system,
and the registration fee Ptr and transaction fee Pts of the blockchain system. In the period of t < t∗ ,
the blockchain system should not be built, pricing is not considered.

Proposition 6. Carbon traders’ decisions are impacted by the difference of transaction fees of the legacy system
and the blockchain system Lrt − Ptr . Through differentiated pricing, the organizer can guide individuals to behave
in the social optimal manner.

Proof of Proposition 6. Recall Proposition 1: under equilibrium conditions of individuals’

optimization, total transaction amount on the blockchain system, y∗t satisfies Equation (7). Given
parameters mt , dt , r1 , r2 (t) and r p , y∗t is determined by the difference of transaction fees of the legacy
system and the blockchain system Lrt − Ptr . Therefore, the organizer can influence individuals’ decision
by controlling Lrt − Ptr .

r p ( m t − 1)
2(r1 + r2 (t))y∗t + mt ( Pts − Lst ) − 2r1 dt + =0 (7)
y∗t

Recall social optimal adoption trajectory in Section 6.1. During period t∗ < t < T,
under equilibrium conditions of Proposition 1, the social optimal transaction amount on the blockchain
system y∗∗
t is re-presented in Equation (8).
√ √ √
2r1 dt + c1 − c2 (t) − 2 r4 − 2 1 − δ r3 + 1
y∗∗
t = (8)
2(r1 + r2 (t))

To achieve social optimality through pricing, let individual optimality y∗t in Equation (7) equal to
social optimality y∗∗
t in Equation (8):

√ √ r p ( m t − 1)
mt ( Lst − Pts ) = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1) +
p
(9)
y∗∗
t

From Equation (9), we can find that the optimal price advantage of the blockchain system Lst − Pts
is negatively related to y∗∗ ∗∗
t . The larger is yt , the smaller the price difference should be. This can be
rp
explained by the perceived risk y∗∗ . Increase of transactions on the blockchain system reduces the
t
perceived risk, therefore, the target amount of transactions on the blockchain can be directed even the
transaction fee is higher.
Energies 2020, 13, 1980 17 of 28

√ √ √
Recall the relative advantage of blockchain system, Mt = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1).
Plug Mt in Equation (9), we can get:

2r p (r1 + r2 )(mt − 1)
mt ( Lst − Pts ) = Mt + (10)
2r1 dt + Mt

The price advantage of the blockchain system Lst − Pts is positively related to the systematic risk
r2 (t) and the fundamental perceived risk r p of the blockchain system. It signifies that the blockchain
system should be priced cheaper to lead enough transactions on the system, when its systematic
risk and perceived risk are relatively high. The price advantage of the blockchain system Lst − Pts is
not monotonous in terms of the relative advantage of blockchain system Mt . With the decreasing of
the fundamental cost of the blockchain system c2 (t), the relative advantage of blockchain system Mt
increases, while the price advantage of the blockchain system Lst − Pts firstly decreases then increases.
This is due to the optimal capacity of the blockchain system, which has been presented in Proposition 4.
As the amount of transactions on the blockchain system reaches its capacity, the transaction fee
of the blockchain should be priced higher to limit the increasing of transactions, for mitigating its
scalability issue.
Since the organizer does not have complete information about each trader’s transaction demand,
it can only estimate the demand of the majority and conduct pricing strategy accordingly. Trading
behaviors of participants with higher or lower demand than the average cancel out to a certain extent.
Therefore, the pricing strategy can affect major players in the market and guides the mainstream.

7. Conclusions
In the case of carbon trade, we discuss both benefits and risks that blockchain technology would
bring. Integration of blockchain not only potentially improve the efficiency and effectiveness, but also
changes the cost and risk structure of carbon markets. New legal, technical, protocol and other
risks will be imposed, and should be managed appropriately for the functional and secure operation.
Combining risk control requirements and features of blockchain technology, a hybrid blockchain-based
carbon trading system and an associated organizational framework are designed. To apply blockchain
to commercial applications, we believe that a consortium blockchain is more appropriate and an
agency or a committee obligated to risk control and disputes resolution is currently indispensable.
The adoption model of the organizer shows that the blockchain system should be developed at
the point that the technology is mature enough, when the fundamental cost and systematic risks are
adequately low. Transactions should be gradually shifted from the legacy system to the blockchain
system, with the decrease of cost and risks of the blockchain system. Additional investment on update
and validation configuration is required to maintain certain average cost of the blockchain system,
due to its scalability issue with the increase of transaction amount. The investment strategy can be
adjusted during the adoption process according to its effects and transaction demand. The legacy
system could be completely replaced by the blockchain system, when blockchain technology evolves
to have superior performance and controllable risks. Combining adoption models of the organizer and
of carbon traders, we prove that the organizer can impact traders’ choices and achieve the optimal
business shift trajectory through differentiated pricing of the transaction fees of the legacy system and
the blockchain system.
This research provides a framework for cost-effective analysis and technology update planning of
deploying blockchain in various industries. It may rise attention of firms and governments to consider
blockchain from both sides and help them make more rational decisions about whether, when and
how to incorporate blockchain technology into existing businesses. It is worth noting that benefit
and risk analysis of introducing blockchain technology is distinctive to various use cases, asking for
understanding of both the technology and the businesses.
Energies 2020, 13, 1980 18 of 28

Author Contributions: Conceptualization, F.Z.; methodology, F.Z.; formal analysis, F.Z.; validation, W.K.C.;
writing—original draft preparation, F.Z.; writing–review and editing, F.Z. and W.K.C.; supervision, W.K.C.
All authors have read and agreed to the published version of the manuscript.
Funding: This research received no external funding.
Acknowledgments: The authors thank Xin Guo at University of California, Berkeley for valuable support on the
model formulation and language editing.
Conflicts of Interest: The authors declare no conflict of interest.

Abbreviations
The following abbreviations are used in this manuscript:

DLT Distributed ledger technology

ICO Initial coin offering
CAT Cap-and-trade scheme
CER Certified emission reduction
GHG Greenhouse gas
MRV Monitoring, reporting and verification
KYC Know-your-customer
AML Anti-money laundering
pBFT Practical Byzantine Fault Tolerance

Appendix A. Individuals’ Optimization

rp
min Git = Lrt 1{ xit >0} + Lst xit + Ptr 1{yit >0} + Pts yit + xit2 r1 + y2it r2 (t) + yit
xit ,yit yt
s.t. xit , yit ≥ 0
xit + yit ≥ dit
r s
 1 2
 Git = Lt + Lt dit + r1 dit

r
when yit = 0
Git = Git2 = Lrt + Lst (dit − yit ) + Ptr + Pts yit + (dit − yit )2 r1 + y2it r2 (t) + yit ypt when 0 < yit < dit
 G 3 = Pr + P s d + d2 r ( t ) + d
 rp
it t t it it 2 it y +d when yit = dit
−it it

We firstly deal with min Git2 :

rp
min Git2 = Lrt + Lst (dit − yit )+ Ptr + Pts yit + (dit − yit )2 r1 + y2it r2 (t) + yit
yt
s.t. 0 < yit < dit
Take first derivative,

dGit2 yt − yit
= 2(r1 + r2 (t))yit + Pts − Lst − 2r1 dit + r p
dyit y2t
dGit2 yt − yit0
Let = 0 ⇒ yit = yit0 where 2(r1 + r2 (t))yit0 + Pts − Lst − 2r1 dit + r p =0
dyit y2t

r p y−it 2r p y−it
Let f (yit ) = 2(r1 + r2 (t))yit + Pts − Lst − 2r1 dit + (y 2 , then f 0 (yit ) = 2(r1 + r2 (t)) − (y 3,
it + y−it ) it + y−it )
and f 0 (yit ) is increasing in (0, +∞) as shown in Figure A1.
Energies 2020, 13, 1980 19 of 28

Figure A1. f 0 (yit ).

All possible situations are discussed in the following:

2r rp
(1) If f 0 (0) = 2(r1 + r2 (t)) − y2 p ≥ 0, f (yit ) is increasing in (0, +∞). f (0) = Pts − Lst − 2r1 dit + y−it .
−it
(1.1) If f (0) ≥ 0, Git increases in (0, +∞).
(1.2) If f (0) < 0, Git is decreasing in (0, yit0 ) and increasing in [yit0 , +∞), where yit0 is the only
positive solution to f (yit ) = 0
2r
(2) If f 0 (0) = 2(r1 + r2 (t)) − y2 p < 0,
−it q
r p y−it 0 = 3 r p y−it − y
f 0 (y0it ) = 0 → r1 + r2 = (y0 + y )3
→ y it r +r2 −it
it −it 1

f (yit ) decreases in (0, y0it ) and increases in [y0it , +∞).

f (y0it ) = 2(r1 + r2 (t))y0it + Pts − Lst − 2r1 dit + (r1 + r2 (t))(y0it + y−it )
= 3(r1 + r2 (t))y0it + (r1 + r2 (t))y−it + Pts − Lst − 2r1 dit
r
r p y−it
= 3(r1 + r2 (t)) 3 − 2(r1 + r2 (t))y−it + Pts − Lst − 2r1 dit
r1 + r2

(2.1) If f (y0it ) ≥ 0, Git increases in (0, +∞).

(2.2) If f (y0it ) < 0, f (0) ≤ 0, Git is decreasing in (0, yit0 ) and increasing in [yit0 , +∞), where yit0 is
the only positive solution to f (yit ) = 0
(2.3) If f (y0it ) < 0, f (0) > 0, Git is increasing in (0, y1it ), decreasing in (y1it , yit0 ) and increasing in
[yit , +∞), where y1it and yit0 are two positive solutions to f (yit ) = 0 and y1it < yit0
0

Summarize
 all above conditions, the solution to min Git2 , yit00 satisfies:
r1 + r2 (t) − r2p ≥ 0
(
0 0
(1) If y−it
y 00 = yit if yit < dit
 Ps − Ls − 2r d + r p < 0 it
t t 1 it y
dit if yit0 ≥ dit
−it
where yit0 is the only positive solution to f (yit ) = 0.
 rp
r1 + r2 (t) − y2−it < 0
 (

00 yit0 if yit0 < dit
(2) If f (y0 ) < 0 yit =


 s
it
rp dit if yit0 ≥ dit
s
Pt − Lt − 2r1 dit + y ≤ 0
−it
where yit0 is the only positive solution to f (yit ) = 0.
 r 
r1 + r2 (t) − y2p < 0 0 0 0
yit if yit < dit , Git (yit ) ≤ Git (0)

 

 −it
(3) If f (y0it ) < 0 yit00 = dit if yit0 ≥ dit , Git (0) ≥ Git (dit )
 

 s r 
Pt − Lst − 2r1 dit + y p > 0
0 Otherwise
−it
0
where yit is the larger positive solution to f (yit ) = 0.
(4) Under other conditions, there is no positive solution to f (yit ) = 0. yit00 = 0.
Energies 2020, 13, 1980 20 of 28

Git2 (yit00 ) is compared with Git1 and Git3 to determine the solution to min Git , and min Git =
min( Git1 , Git3 , Git2 (yit00 )). Since Git2 (0) > Git1 and Git2 (dit ) > Git3 , the solution to min Git , yit∗ equals to
dGit2
0, dit or yit0 , where yit0 is the only(or larger) positive solution to dyit = 0.


 0
 if yit0 not exists, Git1 < Git3 ; 0 < yit0 < dit , Git1 < min( Git2 (yit0 ), Git3 ); yit0 > dit , Git1 < Git3
∗
yit = yit0 if 0 < yit0 < dit and Git2 (yit0 ) < min( Git1 , Git3 )
if yit not exists, Git < Git ; 0 < yit < dit , Git3 < min( Git2 (yit0 ), Git1 ); yit0 ≥ dit , Git3 < Git1
0 3 1 0

 d
it

Assume that for all i, yit∗ = yit0 , where yit0 satisfies Equation (A1):

y∗−it
2(r1 + r2 (t))yit0 + Pts − Lst − 2r1 dit + r p =0 (A1)
(y∗−it + yit0 )2

Take summation of Equation (A1), y∗t = ∑im=t 1 yit∗ is the only or larger solution to Equation (A2):

r p ( m t − 1)
2(r1 + r2 (t))y∗t + mt ( Pts − Lst ) − 2r1 dt + =0 (A2)
y∗t
q
2r1 dt + mt ( Lst − Pts ) + [2r1 dt + mt ( Lst − Pts )]2 − 8r p (mt − 1)(r1 + r2 (t))
y∗t = (A3)
4(r1 + r2 (t))
Plug Equation (A3) back to Equation (A1), we can get Equation (A4):

(2r1 dit + Lst − Pts )y∗t 2 − y∗t r p

yit∗ = (A4)
2(r1 + r2 (t))y∗t 2 − r p

The feasibility is guaranteed with following conditions:

(1) Existence of y∗t :

[2r1 dt + mt ( Lst − Pts )]2 − 8r p (mt − 1)(r1 + r2 (t)) ≥ 0 (A5)

(2) Feasibility of yit∗ : 0 < yit∗ < dit →

(
[2(r1 + r2 )y∗t 2 − r p ][2r1 dit + ( Lst − Pts )y∗t − r p ] > 0
(A6)
(2r2 dit − Lst + Pts )y∗t 2 + r p (y∗t − dit ) > 0

(3) Optimality of yit∗ : Git2 (yit∗ ) < min( Git1 , Git3 ) →

r p yit∗ (y∗t − yit∗ − 1) − y∗t Ptr > 0

(
r p (y∗t −yit∗ )(y∗ −d ) (A7)
(r1 + r2 (t))yit∗2 − (2r1 dit + Lst − Pts )yit∗ + y∗t (y∗t −yit
it
∗ +d )
it
+ (r1 + r2 (t))d2it + ( Lst − Pts )dit + Lrt < 0
it

Given these conditions, there is a Nash Equilibrium for all traders in each period t, given by
∗ , ..., y∗ ):
(y1t mt t

(2r1 dit + Lst − Pts )y∗t 2 − y∗t r p

yit∗ = ,
2(r1 + r2 (t))y∗t 2 − r p
q
2r1 dt + mt ( Lst − Pts ) + [2r1 dt + mt ( Lst − Pts )]2 − 8r p (mt − 1)(r1 + r2 (t))
y∗t =
4(r1 + r2 (t))
Energies 2020, 13, 1980 21 of 28

Appendix B. Social Optimization

Appendix B.1. Multistage Optimization

T
1 r3 r4 2
min S = ∑ δt [c1 xt + It + Vt +yt (c2 (t) + ∑t yt ) + r1 xt2 + (r2 (t) + t
∑ j =1 I j
+ )y ]
Vt t
j =1 I j
xt ,yt ,It ,Vt t =1

s.t. xt , yt , It , Vt ≥ 0
xt + yt ≥ dt for all t.

Equivalent to:

T
1 r3 r4 2
min S = ∑ δt [ It + Vt + c1 (dt − yt )+yt (c2 (t) + ∑t y t ) + r1 ( d t − y t )2 + (r2 ( t ) + t
∑ j =1 I j
+ )y ]
Vt t
j =1 I j
yt ,It ,Vt t =1
(A8)
s.t. 0 ≤ yt ≤ dt
It , Vt ≥ 0 for all t.

Take first partial derivative,

∂S r +1 r
= δt [2(r1 + r2 (t) + 3t + 4 )yt − 2r1 dt + c2 (t) − c1 ]
∂yt ∑ j =1 I j Vt

∂S T y2
= δ t − (r3 + 1) ∑ δ i i i
i = t ( ∑ j =1 I j )
∂It 2

∂S r y2
= δt − 4 2t
∂Vt Vt
This multistage optimization problem is solved backward from t = T to t = 1.
At t = T, ∑ Tj=−11 Ij is given and It = It∗ for all t < T:

y2 T
∂S
= δ T − (r3 + 1) δ T T T ∑ Ij =
p
=0→ r3 + 1y T (A9)
∂IT ( ∑ j =1 I j )2 j =1

∂S r4 y2 √
= δ T − δ T 2T = 0 → VT = r4 y T (A10)
∂VT VT
∂S r +1 r
= δ T [2(r1 + r2 ( T ) + 3T + 4 )y T − 2r1 d T + c2 ( T ) − c1 ] = 0 (A11)
∂y T ∑ j =1 I j VT

Plug Equations (A9) and (A10) in Equation (A11),

√ √
2r1 d T + c1 − c2 ( T ) − 2 r4 − 2 r3 + 1
= y0T
2(r1 + r2 ( T ))
√ √
Let MT = c1 − (c2 ( T ) + 2 r4 + 2 r3 + 1)√.
√
c1 −c2 ( T )−2 r4 −2 r3 +1
If y0T > d T , meaning d T < 2r2 ( T ) √
= 2rM(TT ) , y∗T = dT .
√ 2
c2 ( T )−c1 +2 r4 +2 r3 +1 MT
If y0T < 0, meaning d T < 2r1 = ∗
2r1 , y T = 0.
If MT > 0,
MT
y0T
(
dT ≥
y∗T = 2r2 ( T )
Mt
dT 0 < dT < 2r2 ( T )
Energies 2020, 13, 1980 22 of 28

If MT ≤ 0,

0 < dT < − M
(
T
0
y∗T = 2r1
y0T dT ≥ − M
2r
T
1

Therefore,


 0
 0 < dT < − M T
2r , MT < 0
 1 T −1 √
∑
2r1 d T + MT
y∗T = d T ≥ max (− M MT
IT∗ = r3 + 1y∗T − Ij , VT∗ = r4 y∗T
p
T
2(r1 +r2 ( T )) 2r1 , 2r2 ( T ) ) ,
MT j =1

 dT 0 < dT < , MT >0

2r2 ( T )

If the optimal strategy is followed from t = 1 through t = T − 1, IT∗ ≥ 0 is guaranteed with the
monotonicity assumptions of variables in Section 5. This will be proved in Appendix B.2.
At t = T − 1, ∑ Tj=−12 Ij is given and It = It∗ for all t < T − 1:

∂S y2T −1 y2T
= δ T −1 − ( r 3 + 1 ) δ T −1 T − − ( r 3 + 1 ) δ T
T
=0 (A12)
∂IT −1 ( ∑ 1 I j )2 j =1 ( ∑ j =1 I j )2

∂S r4 y2 √
= δ T −1 − δ T −1 2T −1 = 0 → VT −1 = r4 y T −1 (A13)
∂VT −1 VT −1
∂S r +1 r
= δ T −1 [2(r1 + r2 ( T − 1) + 3T −1 + 4 )y T −1 − 2r1 d T −1 + c2 ( T − 1) − c1 ] = 0 (A14)
∂y T −1 ∑ j =1 I j VT −1

Plug Equation (A9) in Equation (A12),

s
y T −1 1−δ
= (A15)
∑ Tj=−11 Ij r3 + 1

Plug Equations (A13) and (A15) in Equation (A14),

√ √ √
2r1 d T −1 + c1 − c2 ( T − 1) − 2 r4 − 2 1 − δ r3 + 1
y0T −1
=
2(r1 + r2 ( T − 1))
√ √ √
Let MT −1 = c1 − (c2 ( T − 1) + 2 r4 + 2 1 − δ r3 √+ 1).
√ √
c1 −c2 ( T −1)−2 r4 −2 1−δ r3 +1
If y0T −1 > d T −1 , meaning d T −1 < 2r ( T −1)
= 2rM(TT−−11) , y∗T −1 = d T −1 .
√ 2 √ √ 2
c2 ( T −1)−c1 +2 r4 +2 1−δ r3 +1 M T −1
If y0T −1 < 0, meaning d T −1 < r1 = − 2r1 , y∗T −1 = 0.

M T −1

 0

 d T −1 < − 2r1 , MT −1 ≤ 0
√
q
2r1 d T −1 + MT −1 M M r3 +1 ∗
y∗T −1 = 2(r1 +r2 ( T −1))
d T −1 ≥ max(− 2rT−1 , 2r (TT−−11) )
1 2
, IT∗ −1 = 1− δ y T −1 − ∑ Tj=−12 Ij , VT∗−1 = r4 y∗T −1 (A16)
M

 d d T −1 < 2r (TT−−11) , MT −1 > 0

T −1 2

Similar to t = T, IT∗ −1 ≥ 0 is guaranteed with with the monotonicity assumptions, if optimal strategy
is conducted previously.
At t = T − 2, ∑ Tj=−13 Ij is given and It = It∗ for all t < T − 2:

∂S y2T −2 y2T −1 y2
= δ T −2 − ( r 3 + 1 ) δ T −2 T − 2
− ( r 3 + 1 ) δ T −1
T − 1
− (r3 + 1) δ T T T = 0 (A17)
∂IT −2 ( ∑ j =1 I j )2 (∑ I j )2 j =1 ( ∑ j =1 I j )2

∂S r4 y2 √
= δ T −2 − δ T −2 2T −2 = 0 → VT −2 = r4 y T −2 (A18)
∂VT −2 VT −2
Energies 2020, 13, 1980 23 of 28

∂S r +1 r
= δ T −2 [2(r1 + r2 ( T − 2) + 3T −2 + 4 )y T −2 − 2r1 d T −2 + c2 ( T − 2) − c1 ] = 0 (A19)
∂y T −2 ∑ j =1 I j VT −2

Plug Equation (A12) in Equation (A17),

s
y T −2 1−δ
= (A20)
∑ Tj=−12 Ij r3 + 1

Plug Equations (A18) and (A20) in Equation (A19),

√ √ √
2r1 d T −2 + c1 − c2 ( T − 2) − 2 r4 − 2 1 − δ r3 + 1
y0T −2 =
2(r1 + r2 ( T − 2))
√ √ √
Let MT −2 = c1 − (c2 ( T − 2) + 2 r4 + 2 1 − δ r3 √+ 1).
√ √
c1 −c2 ( T −2)−2 r4 −2 1−δ r3 +1
If y0T −2 > d T −2 , meaning d T −2 < 2r2 ( T√−2)
= 2rM(TT−−22) , y∗T −2 = d T −2 .
√ 2
√
c2 ( T −2)−c1 +2 r4 +2 1−δ r3 +1 M T −2
If y0T −2 < 0, meaning d T −2 < 2r1 = − 2r1 , y∗T −2 = 0.

M T −2

 0

 d T −2 < − 2r1 , MT −2 ≤ 0
√
q
2r1 d T + MT −2 M M r3 +1 ∗
y∗T −2 = 2(r1 +r2 ( T −2))
d T −2 ≥ max(− 2rT−2 , 2r (TT−−22) )
1 2
, IT∗ −2 = 1− δ y T −2 − ∑ Tj=−13 Ij , VT∗−2 = r4 y∗T −1 (A21)
M

 d d T −2 < 2r (TT−−22) , MT −2 > 0

T −2 2

Similar to t = T − 1, IT∗ −2 ≥ 0 is guaranteed with with the monotonicity assumptions, if optimal

strategy is conducted previously.
Run this optimization method one period before another, we can go from t = T all the way to t = 1.
√ √ √
At t = 1, let M1 = c1 − (c2 (1) + 2 r4 + 2 1 − δ r3 + 1),

M1
 0
 d1 < − 2r , M1 ≤ 0 r
1
r3 + 1 ∗ ∗ √ ∗

∗ 2r1 d1 + M1 M1 M1 ∗
y1 = d1 ≥ max(− 2r , 2r (1) ) , I1 = y , V = r4 y1
 2 ( r 1 + r 2 ( 1 ))
M1
1 2 1−δ 1 1
 d1 d1 < , M1 > 0

2r2 (1)

Assume the optimal strategy is conducted in all periods from t = 1 to t = T, the solution to the
multistage optimization problem is as following:
√ √ √
For t < T, let Mt = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1)

Mt
 0
 0 < dt < − 2r , Mt ≤ 0
1

2r1 dt + Mt Mt
y∗t = 2(r1 +r2 (t))
dt ≥ max (− 2r , 2rM(tt) )
1 2
0 < dt < 2rM(tt) , Mt > 0

 dt

2

r 3 + 1 ∗ t −1
r r
r3 + 1 ∗
∗
It = yt − ∑ Ij = (yt − y∗t−1 )
1−δ j =1
1 − δ
∗ √ ∗
Vt = r4 yt
Energies 2020, 13, 1980 24 of 28

√ √
For t = T, let MT = c1 − (c2 ( T ) + 2 r4 + 2 r3 + 1)

 0
 0 < dT < − M T
2r , MT < 0 1

2r1 d T + MT
y∗T = 2(r1 +r2 ( T ))
d T ≥ max (− M T MT
2r , 2r ( T ) )
1 2
MT

 dT 0 < dT < , MT >0

2r2 ( T )
T −1 y∗
IT∗ = r3 + 1y∗T − ∑ r3 + 1(y∗T − √ T −1 )
p p
Ij =
j =1 1−δ
√
VT∗ = r4 y∗T

Appendix B.2. Feasibility of the Solution

The feasibility of this solution is examined in this part.
√ √ √
1 d t + Mt +
(1) For t < T, y∗t = min(dt , ( 22r
(r1 +r2 (t))
) ), where Mt = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1).
Since dt is non-decreasing
q t) and r2 (t) are non-increasing overtime, y∗t is non-decreasing.
and c2 (q
r3 +1 ∗ t −1 r3 +1 ∗
It∗ = 1− δ y t − ∑ j =1 I j =
∗ ∗
1−δ ( yt − yt−1 ) ≥ 0. So It is always feasible if the solution is
followed from the beginning t = 1.
√ √
(2) For t = T, y∗T = min(d T , ( 22r(r1 d+Tr+(MT ))
T +
) ), where MT = c1 − (c2 ( T ) + 2 r4 + 2( r3 + 1 +
1 2
√ q
r3 +1 ∗ y∗
√ 1 )). I ∗ = r3 + 1y∗ − ∗ √T −1 ≥ 0, implying
r +1
3 T T 1−δ y T −1 . To keep it feasible, we assume that y T − 1− δ

√ 2r1 d T + MT + 2r d + M T −1 +
1 − δmin(d T , ( ) ) ≥ min(d T −1 , ( 1 T −1 ) ) (A22)
2(r1 + r2 ( T )) 2(r1 + r2 ( T − 1))

Appendix C. Adjustment Optimization

(1) Before the re-investment point t < tr , It = 0, the optimization can be simplified to:

1 r3 r
min St = Vt + c1 (dt − yt ) + yt (c2 (t) + yt ) + r1 (dt − yt )2 + (r2 (t) + + 4 )y2t
yt ,It ,Vt I0 I0 Vt
s.t. 0 ≤ yt ≤ dt
Vt ≥ 0

Take first partial derivative,

∂St r +1 r
= 2(r1 + r2 ( t ) + 3 + 4 )yt − 2r1 dt + c2 (t) − c1
∂yt I0 Vt
(A23)
∂St r y2
= 1 − 4 2t
∂Vt Vt

Let two equations in (A23) equal to 0, we have:

√
2r1 dt + c1 − c2 (t) − 2 r4
y0t = r3 +1
2(r1 + r2 ( t ) + I0 )
√
Let Nt = c1 − (c2 (t) + 2 r4 ),

Nt
 0
 0 < dt < − 2r , Nt < 0
1
√

2r1 dt + Nt Nt
y∗t = 2(r1 +r2 (t))
dt ≥ max (− 2r , Nt ) , It∗ = 0, Vt∗ = r4 y∗t
1 2r2 ( t )
Nt

 dt 0 < dt < 2r (t) , Nt > 0

2
Energies 2020, 13, 1980 25 of 28

(2) After the re-investment point t ≥ tr , the optimization is similar to that of adoption optimization.
√ √ √
Let Mt = c1 − (c2 (t) + 2 r4 + 2 1 − δ r3 + 1),

Mt
 0
 0 < dt < − 2r , Mt ≤ 0
1

2r1 dt + Mt Mt
y∗t = 2(r1 +r2 (t))
dt ≥ max (− 2r , 2rM(tt) )
1 2
0 < dt < 2rM(tt) , Mt > 0

 dt

2
∗ √ ∗
Vt = r4 yt
t −1
r
r3 + 1 ∗
∗
It = yt − I0 − ∑ Ij for t ≥ tr
1−δ j = tr −1
r
r3 + 1 ∗
= (y − y∗t−1 ) for t > tr
1−δ t

References
1. Lin, I.C.; Liao, T.C. A Survey of Blockchain Security Issues and Challenges. IJ Netw. Secur. 2017, 19, 653–659.
2. Karame, G. On the security and scalability of bitcoin’s blockchain. In Proceedings of the 2016 ACM SIGSAC
Conference on Computer and Communications Security, Vienna, Austria, 24 October 2016; pp. 1861–1862.
3. Herrera-Joancomartí, J.; Pérez-Solà, C. Privacy in bitcoin transactions: New challenges from blockchain
scalability solutions. In International Conference on Modeling Decisions for Artificial Intelligence; Springer: Berlin,
Germany, 2016; pp. 26–44.
4. Fry, J.; Cheah, E.T. Negative bubbles and shocks in cryptocurrency markets. Int. Rev. Financ. Anal. 2016,
47, 343–352. [CrossRef]
5. Dyhrberg, A.H. Hedging capabilities of bitcoin. Is it the virtual gold? Financ. Res. Lett. 2016, 16, 139–144.
[CrossRef]
6. Briere, M.; Oosterlinck, K.; Szafarz, A. Virtual currency, tangible return: Portfolio diversification with bitcoin.
J. Asset Manag. 2015, 16, 365–373. [CrossRef]
7. Gump, A.; Leonard, C. Blockchain: regulating the future of finance. Int. Financ. Law Rev. 2016, 35, 1.
8. Luu, L.; Chu, D.H.; Olickel, H.; Saxena, P.; Hobor, A. Making smart contracts smarter. In Proceedings of the
2016 ACM SIGSAC Conference on Computer and Communications Security, Vienna, Austria, 24–26 October
2016; pp. 254–269.
9. Idelberger, F.; Governatori, G.; Riveret, R.; Sartor, G. Evaluation of logic-based smart contracts for blockchain
systems. In International Symposium on Rules and Rule Markup Languages for the Semantic Web; Springer:
Berlin, Germany, 2016; pp. 167–183.
10. Kosba, A.; Miller, A.; Shi, E.; Wen, Z.; Papamanthou, C. Hawk: The blockchain model of cryptography and
privacy-preserving smart contracts. In 2016 IEEE Symposium on Security and Privacy (SP); IEEE: Piscataway,
NJ, USA, 2016; pp. 839–858.
11. Milutinovic, M.; He, W.; Wu, H.; Kanwal, M. Proof of luck: An efficient blockchain consensus protocol.
In Proceedings of the 1st Workshop on System Software for Trusted Execution, Trento, Italy, 12–16 December
2016; pp. 1–6.
12. Chalaemwongwan, N.; Kurutach, W. State of the art and challenges facing consensus protocols on
blockchain. In 2018 International Conference on Information Networking (ICOIN); IEEE: Piscataway, NJ,
USA, 2018; pp. 957–962.
13. Pass, R.; Seeman, L.; Shelat, A. Analysis of the blockchain protocol in asynchronous networks. In Annual
International Conference on the Theory and Applications of Cryptographic Techniques; Springer: Berlin, Germany,
2017; pp. 643–673.
14. Korpela, K.; Hallikas, J.; Dahlberg, T. Digital supply chain transformation toward blockchain integration.
In Proceedings of the 50th Hawaii International Conference on System Sciences, Waikoloa Village, HI, USA,
4–7 January 2017.
15. Yue, X.; Wang, H.; Jin, D.; Li, M.; Jiang, W. Healthcare data gateways: Found healthcare intelligence on
blockchain with novel privacy risk control. J. Med. Syst. 2016, 40, 218. [CrossRef]
Energies 2020, 13, 1980 26 of 28

16. Peterson, K.; Deeduvanu, R.; Kanjamala, P.; Boles, K. A blockchain-based approach to health information
exchange networks. In Proceedings of the NIST Workshop Blockchain Healthcare, Gaithersburg, MD, USA,
26–27 September 2016; Volume 1, pp. 1–10.
17. Aitzhan, N.Z.; Svetinovic, D. Security and privacy in decentralized energy trading through multi-signatures,
blockchain and anonymous messaging streams. IEEE Trans. Dependable Secur. Comput. 2016, 15, 840–852.
[CrossRef]
18. Pop, C.; Cioara, T.; Antal, M.; Anghel, I.; Salomie, I.; Bertoncini, M. Blockchain based decentralized
management of demand response programs in smart energy grids. Sensors 2018, 18, 162. [CrossRef]
19. Peter, H.; Moser, A. Blockchain-applications in banking & payment transactions: Results of a survey.
Eur. Financ. Syst. 2017, 141–149.
20. Gatteschi, V.; Lamberti, F.; Demartini, C.; Pranteda, C.; Santamaría, V. Blockchain and smart contracts for
insurance: Is the technology mature enough? Future Int. 2018, 10, 20. [CrossRef]
21. Lamberti, F.; Gatteschi, V.; Demartini, C.; Pelissier, M.; Gomez, A.; Santamaria, V. Blockchains can work for
car insurance: Using smart contracts and sensors to provide on-demand coverage. IEEE Consum. Electron.
Mag. 2018, 7, 72–81. [CrossRef]
22. Mainelli, M.; Milne A. The Impact and Potential of Blockchain on the Securities Transaction Lifecycle.
SWIFT Institute Working Paper No. 2015-007. Available at SSRN 2777404. 2016. Available online:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2777404 (accessed on 1 March 2020).
23. Lee, L. New kids on the blockchain: How bitcoin’s technology could reinvent the stock market. Hastings
Bus. LJ 2015, 12, 81. [CrossRef]
24. Santo, A.; Minowa, I.; Hosaka, G.; Hayakawa, S.; Kondo, M.; Ichiki, S.; Kaneko, Y. Applicability of Distributed
Ledger Technology to Capital Market Infrastructure; Japan Exchange Group: Tokyo, Japan, 2016.
25. Pinna, A.; Ruttenberg, W. Distributed Ledger Technologies in Securities Post-Trading Revolution or
Evolution? ECB Occasional Paper. 28 April 2016. Available online: https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2770340 (accessed on 1 March 2020).
26. Benos, E.; Garratt, R.; Gurrola-Perez, P. The Economics of Distributed Ledger Technology for Securities
Settlement. Available at SSRN 3023779. 2017. Available online: https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3023779 (accessed on 1 March 2020).
27. Yuan, Y.; Wang, F.Y. Towards blockchain-based intelligent transportation systems. In Proceedings of the
2016 IEEE 19th International Conference on Intelligent Transportation Systems (ITSC), Rio de Janeiro, Brazil,
1–4 November 2016; pp. 2663–2668.
28. Xu, R.; Zhang, L.; Zhao, H.; Peng, Y. Design of network media’s digital rights management scheme based on
blockchain technology. In Proceedings of the 2017 IEEE 13th International Symposium on Autonomous
Decentralized System (ISADS), Bangkok, Thailand, 22–24 March 2017; pp. 128–133.
29. Zyskind, G.; Nathan, O. Decentralizing privacy: Using blockchain to protect personal data. In 2015 IEEE
Security and Privacy Workshops; IEEE: Piscataway, NJ, USA, 2015; pp. 180–184.
30. Dorri, A.; Kanhere, S.S.; Jurdak, R.; Gauravaram, P. Blockchain for IoT security and privacy: The case study
of a smart home. In Proceedings of the 2017 IEEE International Conference on Pervasive Computing and
Communications Workshops (PerCom Workshops), Kona, HI, USA, 13–17 March 2017; pp. 618–623.
31. Weber, I.; Xu, X.; Riveret, R.; Governatori, G.; Ponomarev, A.; Mendling, J. Untrusted business process
monitoring and execution using blockchain. In International Conference on Business Process Management;
Springer: Berlin, Germany, 2016; pp. 329–347.
32. Governatori, G.; Idelberger, F.; Milosevic, Z.; Riveret, R.; Sartor, G.; Xu, X. On legal contracts, imperative and
declarative smart contracts, and blockchain systems. Artif. Intell. Law 2018, 26, 377–409. [CrossRef]
33. Rifi, N.; Rachkidi, E.; Agoulmine, N.; Taher, N.C. Towards using blockchain technology for IoT data access
protection. In Proceedings of the 2017 IEEE 17th International Conference on Ubiquitous Wireless Broadband
(ICUWB), Salamanca, Spain, 12–15 September 2017; pp. 1–5.
34. Chen, J.; Xue, Y. Bootstrapping a blockchain based ecosystem for big data exchange. In Proceedings of the
2017 IEEE International Congress on Big Data (Bigdata Congress), Honolulu, HI, USA, 25–30 June 2017;
pp. 460–463.
35. Outchakoucht, A.; Hamza, E.; Leroy, J.P. Dynamic access control policy based on blockchain and machine
learning for the internet of things. Int. J. Adv. Comput. Sci. Appl. 2017, 8, 417–424. [CrossRef]
36. Dinh, T.N.; Thai, M.T. Ai and blockchain: A disruptive integration. Computer 2018, 51, 48–53. [CrossRef]
Energies 2020, 13, 1980 27 of 28

37. Walch, A. The bitcoin blockchain as financial market infrastructure: A consideration of operational risk.
NYUJ Legis. Pub. Pol’y 2015, 18, 837.
38. Davidson, S.; De Filippi, P.; Potts, J. Economics of Blockchain. Available at SSRN 2744751. 2016. Available
online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2744751 (accessed on 1 March 2020).
39. McWaters, R.J.; Galaski, R.; Chatterjee, S. The Future of Financial Infrastructure: An Ambitious Look at How
Blockchain Can Reshape Financial Services; World Economic Forum: Cologny, Switzerland, 2016; Volume 49.
40. Adams, R.; Parry, G.; Godsiff, P.; Ward, P. The future of money and further applications of the blockchain.
Strateg. Chang. 2017, 26, 417–422. [CrossRef]
41. Moore, T.; Christin, N. Beware the middleman: Empirical analysis of Bitcoin-exchange risk. In International
Conference on Financial Cryptography and Data Security; Springer: Berlin, Germany, 2013; pp. 25–33.
42. Möser, M.; Böhme, R.; Breuker, D. Towards risk scoring of Bitcoin transactions. In International Conference on
Financial Cryptography and Data Security; Springer: Berlin, Germany, 2014; pp. 16–32.
43. Li, X.; Jiang, P.; Chen, T.; Luo, X.; Wen, Q. A survey on the security of blockchain systems. Future Gener.
Comput. Syst. 2017, 107, 841–853 [CrossRef]
44. Moubarak, J.; Filiol, E.; Chamoun, M. On blockchain security and relevant attacks. In Proceedings of the
2018 IEEE Middle East and North Africa Communications Conference (MENACOMM), Jounieh, Lebanon,
18–20 April 2018; pp. 1–6.
45. Mills, D.C.; Wang, K.; Malone, B.; Ravi, A.; Marquardt, J.; Badev, A.I.; Brezinski, T.; Fahy, L.; Liao, K.;
Kargenian, V.; et al. Distributed Ledger Technology in Payments, Clearing, and Settlement. FEDS Working
Paper No. 2016-095. Available at SSRN 2881204. 2016. Available online: https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2881204 (accessed on 1 March 2020).
46. Staples, M.; Chen, S.; Falamaki, S.; Ponomarev, A.; Rimba, P.; Tran, A.; Weber, I.; Xu, X.; Zhu, J. Risks and
Opportunities for Systems Using Blockchain and Smart Contracts; Data61; CSIRO: Sydney, Australia, 2017.
47. Xu, X.; Weber, I.; Staples, M.; Zhu, L.; Bosch, J.; Bass, L.; Pautasso, C.; Rimba, P. A taxonomy of
blockchain-based systems for architecture design. In Proceedings of the 2017 IEEE International Conference
on Software Architecture (ICSA), Gothenburg, Sweden, 5–7 April 2017; pp. 243–252.
48. Lakhani, K.R.; Iansiti, M. The Truth About Blockchain. Harv. Bus.Rev. 2017, 95, 118–127.
49. Folkinshteyn, D.; Lennon, M. Braving Bitcoin: A technology acceptance model (TAM) analysis. J. Inf. Technol.
Case Appl. Res. 2016, 18, 220–249. [CrossRef]
50. Alkawasmi, E.; Arnautovic, E.; Svetinovic, D. Requirements Model for a High-Privacy Decentralized Carbon
Emissions Trading Platform. In Proceedings of the 2012 IEEE International Conference on Green Computing
and Communications, Nagapattinam, Tamil Nadu, India, 30–31 March 2012; pp. 450–453.
51. Al Kawasmi, E.; Arnautovic, E.; Svetinovic, D. Bitcoin-based decentralized carbon emissions trading
infrastructure model. Syst. Eng. 2015, 18, 115–130. [CrossRef]
52. Johnson, L.; Isam, A.; Gogerty, N.; Zitoli, J. Connecting the Blockchain to the Sun to Save the Planet. Available
at SSRN 2702639. 2015. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2702639
(accessed on 1 March 2020).
53. Leonhard, R. Developing the Crypto Carbon Credit on Ethereum’s Blockchain. Available at SSRN
3000472. 2017. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3000472 (accessed
on 1 March 2020).
54. Leonhard, R. Forget Paris: Building a Carbon Market in the US Using Blockchain-Based Smart Contracts.
Available at SSRN 3082450. 2017. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3082450 (accessed on 1 March 2020).
55. Macinante, J.D. A Conceptual Model for Networking of Carbon Markets on Distributed Ledger Technology
Architecture. Carbon Clim. Law Rev. 2017, 11, 243–260. [CrossRef]
56. Imbault, F.; Swiatek, M.; De Beaufort, R.; Plana, R. The green blockchain: Managing decentralized energy
production and consumption. In Proceedings of the 2017 IEEE International Conference on Environment
and Electrical Engineering and 2017 IEEE Industrial and Commercial Power Systems Europe (EEEIC/I&CPS
Europe), Milan, Italy, 6–9 June 2017; pp. 1–5.
57. Khaqqi, K.N.; Sikorski, J.J.; Hadinoto, K.; Kraft, M. Incorporating seller/buyer reputation-based system in
blockchain-enabled emission trading application. Appl. Energy 2018, 209, 8–19. [CrossRef]
58. Khatoon, A.; Verma, P.; Southernwood, J.; Massey, B.; Corcoran, P. Blockchain in Energy Efficiency: Potential
Applications and Benefits. Energies 2019, 12, 3317. [CrossRef]
Energies 2020, 13, 1980 28 of 28

59. Franke, L.A.; Schletz, M.; Salomo, S. Designing a Blockchain Model for the Paris Agreement’s Carbon Market
Mechanism. Sustainability 2020, 12, 1068. [CrossRef]
60. Martin, P.; Walters, R. Fraud risk and the visibility of carbon. Int. J. Crime Justice Soc. Democr. 2013, 2, 27–42.
[CrossRef]
61. Frunza, M.C. Fraud and Carbon Markets: The Carbon Connection; Routledge: Abingdon-on-Thames, UK, 2013.
62. Lohmann, L. Regulation as corruption in the carbon offset markets. In Upsetting the Offset: The Political
Economy of Carbon Markets; Mayfly Books: London, UK, 2009; pp. 175–192.
63. Aakre, S.; Hovi, J. Emission trading: Participation enforcement determines the need for compliance
enforcement. Eur. Union Politics 2010, 11, 427–445. [CrossRef]
64. Frunza, M.C. Aftermath of the VAT fraud on carbon emissions markets. J. Financ. Crime 2013, 20, 222–236.
[CrossRef]
65. Di Maria, C.; Van der Werf, E. Carbon leakage revisited: unilateral climate policy with directed technical
change. Environ. Resour. Econ. 2008, 39, 55–74. [CrossRef]
66. Aichele, R.; Felbermayr, G. Kyoto and carbon leakage: An empirical analysis of the carbon content of
bilateral trade. Rev. Econ. Stat. 2015, 97, 104–115. [CrossRef]

c 2020 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access
article distributed under the terms and conditions of the Creative Commons Attribution
(CC BY) license (http://creativecommons.org/licenses/by/4.0/).