The Cosmos vision is one of many application-specific blockchains interoperating with each other. It is the belief that creating domain-specific, sovereign ecosystems will often prove more suitable than building on a shared, general purpose blockchain substrate like Ethereum. But how does value accrual work in such a system? What domains could provide enough value to justify the cost of needing to operate their own blockchain?
Regen Network is building a network focused on ecological regeneration. The goal is to provide tools to actors in the climate finance industry and turn them into stakeholders of the Regen ecosystem.
Regen is a Proof-of-Stake blockchain built on the Cosmos SDK with a staking token $REGEN that recently (on April 15, 2021) launched its mainnet supported by 50 independent validators. This token could accrue value from levying fees on ecological assets originated and secured on-chain, and from transaction fees paid by users paying for services on the network. Data from the recent explosion of decentralized finance protocols and associated governance tokens allow us to get insight into how the market is valuing such tokens.
But first, one might wonder what kind of assets would be secured on the Regen Network and what kind of transactions may take place. This post will take a look at the initial use case of a registry for carbon credits and then discuss two hypothetical valuation methods: one based on discounted cash flows from transaction fees and one based on comparable DeFi protocols, and their respective market capitalization in relation to the assets locked in their smart contracts (TVL).
The First Use Case: A Public Registry for Carbon Credits
The Regen Ledger ultimately is designed to become a platform focused on use cases around the topic of ecological finance, but for this analysis we will focus on the first application built by the Regen team, which is a registry for carbon credits.
Carbon credit markets are opaque and private; there are lots of problems that a shared, public market could solve. If you are interested in learning about the how and why, the Regen whitepaper goes into these problems in-depth in section 4.2.1.
Even though there is a lack of transparency and many scattered markets, it is clear that carbon markets, in their totality, are huge. Corporations, governments, NGOs, and public blockchains are all adapting to a new standard of carbon sensitivity. Analysts looking into the topic provide wide ranges of estimates, which can be used as a basis for valuation attempts. In particular, one can assume global trading of carbon credits to amount to $278bn in 2021, an amount that is based on data and growth rates observed in recent Refinitiv studies that also aligns with earlier research conducted by the Regen team. The carbon market has experienced high growth in recent years due to a heightened awareness of climate change and the increasing importance of needing to find a solution.
Valuing REGEN based on Carbon Credit Transaction Fee Cash Flows
To understand how capturing this market might translate to value appreciation in REGEN tokens, one needs to first understand the dynamics in a Proof-of-Stake network. While initially, most Proof-of-Stake networks bootstrap their security through token issuance (mostly referred to as inflation), the long-term assumption is often that transaction fees levied within the network should compensate stakers for putting their capital to work. Following this, the price of a staking token could be derived using discounted cash flow valuation. Many analysts in the crypto space have attempted these kinds of valuations, an example from 2018 by John Torado on the REN token can be found here. Using this approach, the Regen Network could accrue significant value depending on the market share of the $278bn carbon credit market that it can capture and its ability to levy a fee on originations and trading of those credits.
Valuing REGEN based on TVL Comparables
As mentioned in the introduction, a plethora of DeFi protocols and associated tokens allow us to get a sense of how the market values governance tokens based on the total value locked within the associated protocol. CoinGecko e.g. is tracking the Market Cap to TVL Ratio for different protocol tokens. Using this comparable approach, one might also consider valuing the REGEN token based on the total value locked in tokenized carbon credits and other natural capital assets that are originated and locked in smart contracts on the Regen Network.
Thoughts on the Future of Climate Finance and DeFi
So far, we’ve only talked about the single use case of a public registry for carbon credits. We assumed that the Regen Network will become a place in which ecosystem players originate, buy, and sell such credits. Once such agreements are digitized and exist on Regen Network as NFTs, which is how this will technically work, there are many ways in which these tokenized agreements could become used in the digital economy. As an example, tokenized agreements could serve as collateral in decentralized financial applications giving them additional utility, and increasing the potential market and value capture for Regen as the originating chain. An example would be using natural capital assets as lower volatility collateral to borrow stablecoins against. The DeFi ecosystem will benefit in using real-world collateral since they may bring stability to a space that is currently dominated by highly correlated crypto-assets — a topic that another one of our supported networks, Centrifuge, is also working on by bridging trade and decentralized finance.
The Regen Network and its ecosystem is equipped to have a huge impact on climate finance and defi — bridging worlds. We believe a public carbon credit registry that can ensure credits are actually serving their desired cause is a great start to foster permissionless innovation and will lay the foundation for many more use cases in the future. Regen Network mainnet is fast approaching. Make sure to follow the channels linked below to stay in the loop.
The time to coordinate to solve climate change, come join us and the Regen community in this endeavor!
About Regen Network
Regen Network aligns economics with ecology to drive regenerative land management.
About Chorus One
Chorus One is offering staking services and building tools and protocols to advance the Proof-of-Stake ecosystem.