The same technology underlying the efficiency of bitcoin transactions and largely responsible for the online currency’s success could be the key to developing a smarter energy grid. Blockchain, a shared, encrypted ledger maintained by a network of computers, gives bitcoin transactions their unique peer-to-peer quality, making the entire system decentralized without a central repository or single administrator. While the electricity grid still relies on centralized plants generating power sent over long distances, blockchain technology could help modernize the system, making it easier for smaller, distributed networks to connect to the grid and exchange power locally.

These smaller, distributed power generators and storage systems, such as rooftop solar panels and electric-vehicle batteries, are already connecting to the grid in growing numbers. However, when these systems produce excess energy, they are forced to sell it back to utilities, often waiting 60-90 days for compensation. A blockchain-based system would allow local energy producers to trade energy peer-to-peer with consumers instantly. Neighbors could make more efficient use of the energy they produce than selling it back to the grid by simply trading with one another.

Startups have jumped at the prospect of facilitating local energy exchange. Power Ledger’s peer-to-peer product aims to develop microgrids based on a shared system of solar panels and battery storage. LO3 Energy’s system allows people to buy and sell locally generated solar energy within their communities, and the company has already launched a working miniature utility grid project in Brooklyn.

The reason these small-scale systems work is because blockchain tracks energy generation and consumption and facilitates the transactions between individuals. The technology makes possible local energy distribution that is more efficient than transmitting energy over long distances. As a result, neighborhoods can be more resilient to power outages and energy needs are more easily met when demand fluctuates.

While blockchain has opened the possibility for peer-to-peer energy transfer within communities, the implications for the grid at large may be even more significant. If the technology proves scalable, the grid could see an integrated trading system that would permit businesses to trade their option to use electricity during any given time frame, providing massive efficiency benefits for grid operators. Blockchain could also enable customers to switch power suppliers more easily by making existing processes, such as meter registration, quicker and cheaper. The technology could even become the foundation of utilities’ grid-management systems by helping to automatically diagnose network emergencies and reconfigure in reaction to them. Ultimately, blockchain’s success could result in a distributed electricity grid, made up of large and small power-generation systems, that is uniquely equipped to handle our evolving energy needs.