What is Regenerative Finance (ReFi)? The green side of crypto.
Blockchain and climate are two words that many, specially no-coiners don’t associate together. The energy usage of Proof-of-work (PoW) has been top and centre of many media outlets. That said the crypto space is a broad one, where Proof-of-stake (PoS) is gaining prevalence. That leads to an energy usage reduction of over 99%. Blockchain is turning green and leading that change is ReFi, which leverages energy-efficient blockchains to make an impact on combating climate change.
What is Regenerative Finance (ReFi)?
Regenerative finance or (ReFi) is the process of allocating capital to drive a change towards sustainability. In other words, ReFi is making the fight against clime change economically profitable.
A simple way to think of it is as a spin-off of DeFi. Refi not only takes inspiration from its name but also builds from the principles and building blocks of DeFi, but gives it an environmental twist. Take as an example DAOs, although prevalent in the “traditional” DeFi space, in ReFi they take a new role where they act as institutions and markets devoted to making a positive impact on the environment, many of which are non-profit oriented.
At the moment, ReFi is mostly focused on global issues such as combatting climate change. It is a movement that aims to align economic interests with environmental ones, thus creating a systematic sustainable future. It’s a movement that aims to monetize environmentally sustainable projects to make investments damaging our planet less lucrative. There already exists a flourishing ecosystem -pun intended, that is making waves to make the ReFi vision a reality.
ReFi takes what drives the destruction of the environment -money — and spins it 180 degrees to address climate change. To quote Raphael Haupt founder of Toucan Protocol “It is the idea of how to make capital flow to regenerate the Earth in a manner that is scalable, permissionless, and without middlemen”, that is making the carbon market investment ready.
Institutions and governments usually excuse themselves from doing little to stop climate change, stating that they “need to turn a profit” or that “it is not economically sustainable”. ReFi aims to make these kinds of statements a thing of the past.
What we need to keep in mind is that climate affects us all equally, thus climate data -in my opinion- is a public good and should be treated as such, and here is what blockchain technology comes in. What’s more, making climate data available on-chain can help build a more robust green finance ecosystem.
That’s why there are already protocols that are bringing climate data on-chain such as dClimate and Hyphen, using Chainlink’s decentralized oracle networks. Once the data is on the blockchain it’s public and for anyone to use it.
ReFi in action: monetisation
As I stated before, ReFi aims to monetise such data in a way that new protocols can emerge and productise it. What’s fascinating is that one climate data can be used by multiple protocols aiming to make different products out of it. As an example, we have Arbol. Arbol uses climate data to give access to parametric insurance to anyone, parametric insurance meaning that it triggers based on data not by an adjustor. This way for example, if it rains too much or too little and a farmer isn’t able to grow their product, a smart contract, is going to pay him compensation without the need for paperwork and hassle-free.
There is even a carbon-negative blockchain called Celo, which uses mobile phone numbers as public keys, lowering the barrier of entry. Their foundation, the Celo foundation, and their community are laser-focused on fighting climate change, allocating a percentage of the Celo reserve to buy carbon credits, and collaborating with other entities to further sequester carbon.
Tokenised carbon
Another use case for climate data is the tokenisation of carbon credits. Carbon credits are receipts or certificates issued to a project that has offset one metric tonne of carbon. You can think of it as a way of commoditization of CO2. Up until now for carbon credit, an offset registry, such as Standard Verra, would be the only place to register its digital footprint. Still, its databases aren’t open to the public. Blockchain is a superior technology known for being tamper-proof, transparent, tracking ownership, preventing double-spending and immutable. These are the characteristics that make it ideal for improving the carbon market.
Tokenised carbon credits will enable novel uses such as using them as collateral, trading them and more that are yet to be invented. Carbon credits are already a hot market with buyers like Apple, Disney, and JPMorgan Chase, so imagine how many other names will be added to that list once carbon credits can be of further use than they are now. Right now, some protocols already exist that are tokenizing carbon, like Toucan Protocol and Flowcarbon.
But perhaps one of the main advantages of tokenized carbon in front of traditional carbon credits is the exchangeability and interoperability. Not all carbon credits are created equally. There are two types of carbon credits, carbon avoidance and carbon removal. That makes it very difficult to trade, for example, a carbon credit from a reforestation project with a carbon credit from a renewable energy program.
A DAO that is focused on solving this problem is Klima DAO. Klima DAO issues $KLIMA, which is a token given at a discount to whoever deposits a carbon token to its treasury. Then they can either sell for profit or stake in the protocol to increase their KLIMA supply. This mechanism follows the one introduced by Olympus DAO for acquiring protocol-owned liquidity. A KLIMA is backed by BCTs (Toucan’s carbon credits) in Klima DAO’s treasury, which are backed by the price of carbon emission certificates in the real world.
Essentially, the more BCT Klima DAO internalises, the higher the price of carbon emissions will be in the real world, forcing those in the market to adapt to using greener alternatives or pay more. You can think of it as “GameStop-ing” the carbon market.
Carbon Markets and their future
Right now, there exists a voluntary carbon market. These markets are created by companies that want to offset their emissions even though they are not obliged by law. That is because there exists a social incentive for companies to be seen as kind to the environment. Therefore we have market readiness.
That said, it’s very likely that in the future new regulation will enforce net zero emissions goals to institutions, therefore a compliant carbon market is going to be created. These new regulations will likely impose that ESG reporting and that claims such as “We are carbon neutral” be verifiable. Climate disclosure will need to be transparent and for that, there is no better place than a blockchain. Blockchains are ideal to house carbon reports or net zero certificates as NFTs which can be traced to their origins, i.e the project that offsets the carbon.
Another advantage of ReFi in front of traditional finance or traditional climate markets is that the information is updated regularly. That means that when you buy in ReFi you are buying the most up-to-date data thanks to data-driven faster verification. That is important because the data may change, be it because the scientific community considers that there is a better way to measure it or because it has inherently changed as climate data is variable.
Web3 carbon standards
Tokenizing carbon credits has been the standard practice for ReFi. As I stated before or carbon credit, an offset registry, such as Standard Verra, would be the only place to register its digital footprint. That may change with the introduction of the Coorest Carbon Standard. This blockchain native standard makes it possible for Coorest to issue tokens ($CCO2) on their behalf, lowering the barrier of entry. With satellite technology, an individual can sell their carbon credits to anyone, even to another standard like Verra.
This works by a satellite taking a snapshot of the area where the carbon capture project is located. Then the data is brought on-chain by a decentralized oracle network, in this instance Chainlink. After that and if the data suggests the project is actually capturing carbon, a smart contract will issue $CCO2 tokens -equivalent to 1kg of absorbed CO2. Monthly checks will be done to check if the project is in good condition -ie absorbing CO2.
This marks the first Web3 native carbon standard controlled by satellite data and smart contracts. A truly decentralised, trust-less and transparent way to capture carbon to better our planet.
ReFi challenges
As amazing as ReFi is, it is not without challenges. A big hurdle that is facing at the moment is on the hardware front of things. Hardware development for collecting climate data has been relatively stagnant over the years compared to other areas.
Right now, even in highly developed regions like North America and Europe, weather stations may be few and far between. Satellites can sometimes take the extra burden, but there are places where that is not possible due to the terrain or cloud coverage. That is why decentralisation is also a key feature of ReFi.
A possible solution to this comes thanks to the Internet of Things (IoT) which can enable the collection of weather and climate data by not only institutions and enterprises, but also by private individuals, and sell it later in a marketplace. Imagine a small weather station or a collection of sensors that are able to transmit the data that has been collected to an oracle network. People would be incentivised to sell their local climate data by selling it to other interested parties. Think of it as “mining” climate data, but this time the “mining” is contributing to the well-being of the earth. This type of reporting will provide more data points which will be of more quality also.
Although as far as I am aware this mechanism does not exist yet, some DAOs like dClimate are reportedly working on it. Their goal is to bring on-chain high-resolution climate data, to be as precise and fair as possible. Thus creating a climate data ecosystem. That in my opinion would be a major step forward. A way to incentivize people from all over the world to directly contribute to the fight against climate change. This is what Web3 is all about. This is what ReFi is all about.
What’s clear is that ReFi is tackling a major problem on a global scale. Big problems often require expensive solutions, and that is one of the reasons why I think that ReFi has a real chance to flourish -forgive me for the pun… again. Crypto has made possible through the use of tokens to incentivize a cause. Not only that but projects outside of the main ReFi ecosystem are also providing financial help. As an example, we have the grant Floodlight received from Chainlink to provide satellite data on-chain. In ReFi we find a common goal -saving the planet-, willingness, and a way to fund the solution. And that is a recipe for a green future. :)
