Can Flowcarbon Create a Virtuous Tokenomic Cycle for Carbon Credits?
Introduction
Free market ideology and environmentalism are often at odds with each other.
But some economists think that a free, voluntary carbon credit market could help clean up the planet.
The idea is to create a market where entities can offset their negative impact on the environment by purchasing credits supplied by projects that have a positive impact on the environment. For example, a company whose factory releases 5 tonnes of CO2 into the atmosphere can purchase credits that represent 5 tonnes of CO2 that a forest captured from the atmosphere last year.
Unfortunately, the voluntary carbon market has not yet lived up to its promise. Carbon capture projects have been criticized for low quality, lack of longevity, and negative impacts on local communities (Bloomberg). Markets are disorganized, archaic, and lack adequate incentives (Time). To make matters worse, in the past year Toucan Protocol brought millions of questionable carbon credits onto the blockchain, damaging the reputation of projects looking to leverage blockchain-based decentralized finance (DeFi) to generate more investment in carbon credits (Carbonplan).
Flowcarbon aims to address these issues by requiring higher standards for the carbon credits it brings onto the blockchain, including:
- Tokenizing only carbon credits that are unretired, meaning that they represent 1 ton of captured CO2 which has not yet been used to offset carbon emissions.
- Tokenizing only carbon credits that are nature-based, meaning that they represent carbon captured through reforestation, restoration, or conservation — as opposed to clean energy projects which are viewed as less optimal for fighting climate change.
- Tokenizing only carbon credits that represent carbon captured in the past five years.
Flowcarbon’s Goddess Nature Token (GNT) will represent 1 carbon credit that meets Flowcarbon’s high standards for tokenization. GNT derives its value by being backed 1:1 by United Nations REDD+ certified carbon credits.
Upon minting, GNT will be instantly integrated into the Celo blockchain’s decentralized finance (DeFi) applications. Moola Market will enable lending and borrowing against GNT at token launch (Business Wire). GNT is a fungible token, meaning that one GNT can be traded and swapped for another.
Tokenomics
By bringing carbon on-chain, Flowcarbon aims to further develop and improve the real-world voluntary carbon market (VCM).
The steps of the model include:
- Investment flows to a conservation or restoration project (example) with the aim of protecting or removing carbon from the environment.
- The project’s developer hires a third party to quantify how much carbon the project is protecting or removing from the environment.
- A credit-granting agency such as Verra issues verifiable carbon units (VCUs), a digital certificate that represents one tonne of carbon removed or reduced, to the project developer. Now the project developer holds a supply of carbon credits and can decide how to sell these credits on the market.
- If the conservation or restoration project’s VCUs meet Flowcarbon’s standards (to be nature-based, less than five years old, and unretired), each singular carbon credit is minted by Flowcarbon as a unique GCO2 token. Each Goddess CO2 token is backed 1:1 by a specific carbon credit, meaning that the token can be swapped back for the real-world credit and used in a different real-world or digital credit-trading market.
- Flowcarbon bundles the unique GCO2 tokens to mint groups of fungible GNT tokens, each one backed 1:1 by a GCO2 token. GCO2 tokens are each unique and cannot be used interchangeably, so GNT serves as a liquidity mechanism for carbon offsets. The fungible GNT token can also be redeemed for its GCO2 token which can be redeemed for a real-world carbon credit to be used in a different market.
- GNT tokens can be used in a number of ways, both to offset carbon emissions as well as for collateral within dApps in the Celo blockchain ecosystem. More info about these use cases is presented here later.
- Bridging carbon credits to the Celo blockchain will reduce the available supply of nature-based VCUs in the traditional world. At the same time, the innovative new regenerative finance (ReFi) use cases on Moola Markets and other Celo applications will increase demand for tokens. These two factors may push up the market price for nature-based VCUs and increase incentives for more project developers to invest in new conservation and reforestation projects.
As Flowcarbon’s regenerative cycle continues, more and more nature-based carbon offset credits will be brought onto the market, representing land that has been conserved or restored within the past five years.
Liquidity
GNT will be available on the Celo blockchain for financial activities like trading, depositing, lending and borrowing. In explaining why they chose Celo, Flowcarbon’s Co-Founder and Chief Blockchain Strategist Phil Fogel said,
“Celo is carbon-negative, and the value of natural resources is built into its ethos, making it the most natural foundation for building solutions to climate change on-chain. Celo’s founders live and breathe this mission in a way that no other layer-1 ecosystem does.” (Flowcarbon)
Liquidity pools will be opened for GNT-CEL (Celo’s native token) as well as GNT with stablecoin pairs such as cUSD, cEUR, and cREAL (Brazilian Real). Uniswap v3 has been approved for deployment on Celo and will feature GNT liquidity pairs (Business Wire).
Trading Liquidity for Quality
Because Flowcarbon has higher standards for the carbon credits they will tokenize than other protocols such as Toucan or KlimaDAO, there will initially be fewer GNT tokens in circulation than these other protocols.
When Toucan developed its Base Carbon Tonne (BCT) token’s liquidity pool in consultation with KlimaDAO in October 2021, the aim was to optimize the pool for deep liquidity and fungibility. The barriers to entry were made purposefully low.
As Toucan’s blog states,
“Since launch, the original goals of deep liquidity and fungibility have been achieved. The BCT-USDC and BCT-KLIMA pools have (as of writing) a combined total of $26.75 million of liquidity. These are some of the deepest liquidity pools on the Polygon blockchain, and the deepest carbon offset liquidity pools anywhere- on-chain or off.”
Toucan’s purposefully-low barriers to entry has led to millions of questionable carbon credits being bridged on-chain (Time). Holders of BCT and KLIMA (which was pegged 1:1 to BCT) had no way of knowing where their underlying carbon credit came from. Projects representing a wide variance of points on the climate-friendly spectrum are all bundled together as BCT. BCT may represent a carbon credit from a Chinese hydroelectric dam project from 2008 or the preservation of a portion of the Brazilian rainforest in 2020.
According to Carbonplan,
“Organizations like Toucan or KlimaDAO risk becoming the dumping ground for (carbon) credits that have already been weeded out by more conscientious buyers.“
This controversy caused Verra, a leading carbon credit issuer, to ban the conversion of retired Verra credits into crypto tokens, which has significantly constrained BCT liquidity (Verra). In response, Toucan recently approved a governance proposal intended to raise the standards of the carbon offsets it tokenizes (Toucan). But Toucan has already tokenized millions of questionable carbon credits. The reputation of the protocol and perceived value of the BCT token may be irreparably damaged.
Although Flowcarbon faces competition from Toucan for partnering with projects to supply high-quality credits to bring on-chain, the fact that GNT as an asset has a fresh start is a significant value proposition compared to BCT.
By requiring higher standards for the carbon credits it bridges on-chain, Flowcarbon is constraining its protocol liquidity in favor of alignment with best practices to combat climate change. With less available liquidity, there will be less DeFi activity leveraging GNT on the Celo blockchain than if more tokens were brought into circulation due to lower tokenization standards.
Flowcarbon’s strategy appears to be favoring long-term, real-world utility over fast DeFi growth.
This strategy is well-designed for a crypto bear market. As Byron Gilliam of Blockworks wrote recently,
“Easy money is fun, but it’s nothing to build a whole new industry on. To build the new industry we are all hoping for, crypto needs less self-referential tokenomics and more real-world utility.”
Distribution and Unlocks
100% of available GNT tokens have been pre-purchased by early investors. Flowcarbon has not released information about how many tokens have been purchased. The token launch date has not been announced, but is anticipated for June 2022. There is no lockup period for GNT.
GNT is an asset-based token backed 1:1 by an underlying carbon credit, so the token launch price will be pegged to the market price of the underlying carbon credits at the time of launch. The Nature Based Carbon Offset market price for 1 tonne of CO2 capture was $9.20 at the time of this writing. After a GNT token is minted on the Celo blockchain, its price will vary on DeFi exchanges according to market forces and will no longer be pegged to the real-world value.
The supply of GNT is limited by the number of real-world carbon credits that are available and which meet Flowcarbon’s criteria to be brought onto the Celo blockchain. New tokens will be unlocked as conservation and restoration project developers supply new nature-based VCU’s for Flowcarbon to bridge on-chain. Put another way, the growth of GNT token supply depends on new investments to remove carbon from the environment.
Flowcarbon is following a similar tokenomics model as Toucan, whose BCT token is 1:1 backed by carbon credits.
Value Creation and Value Capture
Flowcarbon is creating value by bringing carbon credits onto the Celo blockchain, thereby unlocking the assets for use as collateral in lending and borrowing.
At launch, Flowcarbon’s GNT token will begin trading at the market rate for its underlying asset, a nature-based carbon offset.
In terms of value capture, GNT token holders will be able to deposit their GNT to earn compound interest at a variable rate paid in the form of additional GNT. It is not yet known where the GNT yield rewards are being generated from, since 1 GNT is backed by an actual ton of carbon credit.
Depositors can also borrow assets against the value of their GNT in cUSD, cEUR, or cREAL. Moola Market’s credit delegation feature allows GNT depositors to underwrite loans to other Celo addresses which are not required to deposit additional collateral in order to borrow (Flowcarbon).
GNT’s competitive advantage over other carbon-based tokens is the quality of the underlying assets backing the token 1:1. Entities who want to offset their carbon emissions in line with the Paris Climate Accords and other climate change-fighting norms will feel more confident buying GNT than BCT since GNT represents unretired, nature-based, and more recent vintage carbon credits than its competitors. Flowcarbon states that their underlying carbon credits will be held in a bankruptcy-proof special purpose vehicle managed by a third party, with regular audits (Lite Paper).
Flowcarbon’s competitive disadvantage for value capture is also its high standards for carbon credits to bridge to Celo. They are more selective than their competitors and so will exclude many projects, limiting token supply. Although limited supply could lead to higher overall demand for GNT, this demand may not translate to transaction volume in DeFi marketplaces because GNT liquidity may not be thick enough to withstand large trades. GNT holders could face volatile price swings and illiquidity as a result.
In summary however, the GNT token just brings carbon credits on chain without adding a log of value on top. Compare it to Toucan rather than Klima DAO.
Demand Drivers
Given its limited supply, the token will create and capture value if it attracts new demand for carbon credits. By bridging carbon credits to the Celo blockchain, Flowcarbon unlocks several new utility opportunities compared to what is available in existing markets:
- Businesses and individuals can permissionlessly acquire GNT tokens to offset their carbon emissions.
- Holders can deposit GNT and earn yield on their deposits as protocols make stablecoin loans to users that are collateralized by the GNT that was deposited.
- Moola Market will enable GNT holders to offer stablecoin loans to others and take out loans themselves against their GNT collateral.
To predict how the GNT token price may perform, we can look at Toucan Protocol’s asset-based BCT (Base Carbon Tonne) token.
BCT, each of which is backed 1:1 by real-world carbon credits, launched on October 21, 2021 at the real-world carbon credit market price of $5.17. It is now valued at $2.12 while the real-world voluntary markets for carbon credits range from $2.76 to $10.42 based on the quality of the credit (carboncredits.com). The protocol’s issuance of tokens based on credits from questionable sources has contributed to it being traded at below market rates (Toucan). By this logic, GNT should trade at or near the top of the market value range.
Closing thoughts
Sylvera, a carbon credit-issuing startup, contends that it is extremely difficult to establish a simple set of criteria for evaluating carbon-offset projects because of all of the different factors in play. Whether you try and do it by registry, age, or project type, you will let some projects in of low quality, and you will cut out high quality projects (Time).
Toucan Protocol attempted to bypass this challenge by bringing on-chain any carbon credits that had been created by issuers such as Verra and Sylvera. Toucan was able to supply huge numbers of credits to the blockchain, but has struggled to maintain demand for its BCT tokens.
In response to the Toucan controversy, Verra has shifted towards favoring a centralized digital market for trading carbon credits like Carbonplace, which would be managed by banks including UBS (Time).
Flowcarbon is committed to bridging only the most climate-friendly carbon credits to Celo to mint its GNT tokens. We shall see if their proof of quality leads to the GNT token capturing a value premium over real-world carbon credits.
If it does, then the virtuous cycle of leveraging the blockchain to invest in more carbon credit-producing projects could begin.
Chuck Cummings is a an advisor, consultant, and educator to businesses that want to leverage web3 technology to gain an edge. He is a cofounder of Bankless Consulting.
This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.
