To Understand Regenerative Finance, We need to Understand Crypto & BlockChains
Regenerative finance brings with it a seductive promise in its name: there might be piles of money accompanying a wave of technology that, together, propose to bring the planet back from the brink of collapse. If you are a climate realist, how could you not be intrigued by the potential of regenerative finance?
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Unfortunately, if you understand finance, and you understand environmental science, you only understand 2/3rds of the solution. The more I study regenerative finance, the more convinced I am that the field is only possible thanks to crypto, as I write about here. In what follows, I’ll attempt to explain the connection between the three.
The field of crypto is confusing. Enthusiasts refer to going down the crypto “rabbit hole” as that initial period in which our curiosity takes us deeper and deeper into the technology. Few people ever refer to coming out of the rabbit hole, because once you’re in it every answer tends to lead you to more interesting questions.
The confusion around crypto is, on one hand, born of the fact that we’re attempting to describe complex computer science as it intersects with finance and economics.
It doesn’t help that crypto technology is so new that there aren’t yet experts, only some people who are less confused than others.
The public discussion around crypto is influenced by happenings that obscure our understanding of the technology as we confuse the technologies’ early use cases with the technologies’ intent.
We must then process information through our ideological filters, some say blinders, that attempt to simplify the world by separating ideas into good and bad based on how familiar or unfamiliar they seem or based on who is promoting them and our relationship to that person.
Before going any further, what’s important to remember is that when we debate whether or not new technologies should exist, the debate is futile. If a technology can exist, it will exist.
We now accept, for example, that arguing that the internet should be banned because it facilitates fraud is no longer a convincing argument except in the most authoritarian of states.
We all understand that the internet comes with benefits and drawbacks, but we either largely agree the benefits outweigh the drawbacks, or we accept the inevitability of technological advancement as a byproduct of living in a free society.
Just as there were people who argued against the internet when it was relatively new, today when we discuss crypto, we’re often comparing early use cases rather than the technology’s full potential.
The arguments born of fear and doomsaying that call for a banning of cryptocurrencies, for example, are based on limited knowledge of the societal benefit of a new technology whose promise we’re only beginning to conceive.
Those governments who promise to ban or regulate early technologies are only guaranteeing that their countries will miss the lucrative boat.
What makes matters more complicated is that our propensity to misname things can create long-term problems, as, for example, the indigenous peoples of the Americas can attest. In the case of crypto, we often use the term “cryptocurrencies” to describe what are really “crypto-technologies”.
The ability to derive currencies from crypto technologies is a novel and important application, but it is one of many applications. The naming conundrum is not dissimilar to how we refer to our pocket-sized super-computers as phones when the phone app is the most primitive and least-used application on the device.
If it were up to me, instead of using the term cryptocurrencies, we’d refer to the field as “crypto-technologies” or even “blockchain technologies,” but unfortunately that battle has seemingly already been won, though the term “web3” is an increasingly common way to refer to how blockchain-based technologies can re-configure the internet. The brilliance of the Web3 term lies in how it suggests a certain positive inevitability.
My point is that if we want to understand crypto and its larger societal implications, it helps if we de-emphasize the role of currencies and think more about the wider possibilities brought about by the use of blockchains, especially as we consider environmental use-cases and regenerative finance.
So what is a blockchain?
Blockchains perform a very simple function through a very complicated means.
In essence, Blockchains are hyper-secure databases where people register information (I’ll use the term database and ledger interchangeably). The reason Blockchains are hyper-secure is that they distribute their database across a network of computers and then use sophisticated cryptographic-based security systems to ensure that the information can’t be changed.
Think of it this way: if you have data that exists only on your computer, someone can hack your computer and change that information.
Now let’s consider your bank: maybe your bank uses a service like Amazon Web Services which creates multiple (dozens? hundreds?) copies of your information. In an Amazon data center, for example, one hard drive can fail without you noticing because your data is available on multiple hard drives simultaneously, but not on every hard drive Amazon owns.
With the Blockchain, information is stored on every computer on the network, and every time information is added to the database, every computer has to accept the change. As such, a basic hacker might easily corrupt your home computer. A sophisticated hacker might attack a bank and create fake transactions. With blockchains, the ability to create false transactions is extremely difficult.
Bitcoin is one application of a blockchain and it has never been hacked.
In order to hack Bitcoin, you would need to harness about 7 gigawatts of energy, which is about 75% of all the energy the United States uses in a day, due to the network’s security system, which requires each valid transaction to use a massive amount of energy as proof of its validity in order to be accepted by the network (more on that in an upcoming post).
As proof of its reliability, Bitcoin has been around since 2009 and it has never been hacked. What’s more, Bitcoin’s code is entirely public and can be audited by anyone, meaning if Bitcoin were hacked, we would have noticed.
Now you might say, “but I hear about crypto hacks all the time!”.
Yes, not all blockchains are the same, and some are more secure than others. Very few blockchains, for example, use Bitcoin’s energy-burning security protocol. Some blockchains trade off security for efficiency and then live to regret their decision.
Also, programmers can build applications on top of blockchains, in the same way that one can build an app for the Android or iOS app store, and those applications can also be hacked. Well-built blockchains, however, are designed to be the most secure base-layer technologies we’ve created so far.
Now here is the kicker: when you can create a blockchain that is resistant to corruption (fake transactions) or censorship (governments or others preventing data from being registered) you can have a single source of truth.
As an example of the opposite, when I worked at Twitter I saw two types of manipulation: governments would force Twitter to take down tweets they didn’t like. Twitter would make the tweet unavailable to individuals within the country of the offended government, but the tweets would continue to exist elsewhere. While this was happening, other governments created armies of fake accounts to attempt to silence adversaries and flood the network with dis-information. Twitter is susceptible to government censorship and corrupt use cases. A Blockchain is designed to resist both.
When we understand that we can create databases that act as a single source of truth, we realize that we have a very powerful tool to help us navigate an age of misinformation and disinformation.
So why are they called blockchains? Blockchains store information in blocks which are then organized chronologically on a chain. Anyone can audit the chain to ensure each instance or copy is an exact replica of the chain on every other computer on the network.
So why are the terms “blockchain” and “cryptocurrency” often used interchangeably?
Not many people are going to dedicate their computing power to hosting a blockchain database for free.
As a result, when someone wants to register information on the blockchain, they pay a small fee, and that fee is distributed to those who participate in the blockchain network by hosting the ledger on their computers. That fee is paid in the form of the blockchain’s native currency. In other words, blockchains operate like businesses where the profits are distributed to the workers, much like a cooperative.
Second, in the case of Bitcoin, those who host the Blockchain can not only earn fees but can also participate in a lottery to be awarded new Bitcoins when they are minted. The ability to earn fresh Bitcoin represents a potentially even greater economic incentive than being paid to validate transactions.
Another way to think of it is this: imagine your neighbors formed a collective to provide security to the neighborhood, and every night some random participant was awarded a bar of gold. That’s how Bitcoin works: the more people participate in hosting the ledger on their computer, the safer the network is because we have more copies of the ledger.
When China banned Bitcoin mining, for example, the Bitcoin ledger was safe, because thousands if not millions of copies existed elsewhere. If the US government were to shut down Amazon Web Services, for example, it’s not clear if the information stored on Amazon’s services would continue to be available. Your bank and anyone else using Amazon Web Services would cease to operate. Even without the backing of a company or a government, Bitcoin is far safer than any massive technology conglomerate, because companies represent single points of failure.
When we know that Blockchains can be unhackable, we begin to understand that with a technology that allows us to have an immutable (can’t be changed) single source of truth, we can create trustless decentralized systems that can compete with existing organizations.
If the President of the United States demanded to speak to the President of Bitcoin, his secretary wouldn’t know who to call. Bitcoin is worth over a trillion dollars, but there is no central management, nor is it constituted in the state of Delaware or any other jurisdiction. Governments have no control over Bitcoin; they can only try to control their citizens' ability to interact with Bitcoin.
Another multi-billion dollar crypto industry is Defi, or decentralized finance.
The central tenant of Defi is that blockchains can replace financial institutions like banks. Instead of opening a bank account in a branch near your house, you can open a crypto bank account in an automated organization and do everything you can do in a normal bank, but better.
Instead of a thick bureaucracy creating a difference between the interest paid to a saver and the interest charged to the loanee, the difference would be minuscule. Instead of capital accumulating in the C-Suite, value is accrued to the coin holders, who can be anyone. When you start to think about these things too hard, your head can explode.
My favorite analogy is the David Foster Wallace story of the fish. Two young fish are swimming along and an older fish comes by swimming in the other direction. The older fish says to the younger fish, “hey fellas, how’s the water?”. The younger fish keep swimming until one says to the other, “what the hell is water?”. For us, water is distrust.
We don’t think about it, but we don’t trust the institutions that surround us.
We don’t trust the CEOs of major banks. A lot of us don’t trust our governments regardless of who is in charge. We don’t trust the United Nations to solve wars or poverty. We don’t trust the Church for moral guidance. The killer app of Blockchains is the ability to create trustless organizations.
To work, regenerative finance needs to create economic systems that make not destroying the forest more profitable than destroying it.
In new environmental marketplaces, the demand will often come from large organizations like airlines, while the supply will come from hand-to-mouth farmers in the global south, often existing outside the formal banking system.
If we are to reach our goals, we need these relationships to work in a fast, frictionless, and automated way. We, therefore, need tools that bridge trust between supply and demand, and that’s what blockchains can do.
What’s more, for regenerative finance to work, we need value to accrue primarily to the individuals creating environmental conservation and regeneration. If we don’t, markets will naturally take the form of existing supply chains like agriculture in which much of the monetary value created is consumed by distributors or middlemen. If the value doesn’t reach suppliers, their economic incentives will be to continue to destroy rather than regenerate.
Having provided a non-technical explanation of what Blockchains do, I recognize that I am asking you to trust that my description of what Blockchains can do is what they will do. No doubt the terminology will be abused, and posers, fakers, and scammers will surf the wave of regenerative finance in order to turn a quick buck.
Those use cases, as I stated before, should not be given the symbolic role of representing what Blockchain technology can do.
Blockchain technology is likely the single tool that can help solve many of the problems that have prevented regenerative finance from flourishing up until now. It behooves us all to move from the “is crypto a Ponzi scheme?” debate into, “what do we need to understand about crypto in order to make it work for the planet.”
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