Does the Natural Asset Exchange Need a Blockchain?
The term ‘Blockchain’ has become quite the buzzword of late and all sorts of miracle correlations are made in its name. In essence, it is a technology that offers an alternative to the traditional database approach to the storing of financial transactional records and ledgers. That said, it is not preferable to every situation where traditional databases are being used. So asking if a project “really needs a blockchain?” and why it doesn’t “simply use a database instead?” are valid questions. In this post, we take a closer look at the specific properties of blockchain that stand out as natural choices for the EARTH Token and the Natural Asset Exchange.
The Double Spend Problem
The electronic transfer of money and assets was one of the early promises of the internet itself, but one that didn’t materialize because of multiple failed attempts to solve the ‘double-spend’ problem in a way that did not involve a trusted third party to authorize transactions. Any money or asset sent online could be duplicated or forged and sent again to multiple recipients. That was the case until 2009 with the invention of Bitcoin by Satoshi Nakamoto — the world’s first functioning peer-to-peer trustless payment system. Instead of having trusted third parties to attest for entries added to the ledger, Proof-of-Work could be shared by participants on the network, each independently verifying that a transaction is valid, and any double-spend attempts would be discarded network-wide. This breakthrough meant that for the first time ever, the transfer of a digital record could be verified in an open and trustless way without the need for a trusted central authority or issuer.
The double spend problem is particularly pertinent to the carbon-mitigation industry because, to date, it has relied on trusted authorities to attest to the validation of a natural asset certificate. In practice, a natural asset provider needs to obtain a certificate from an issuing authority that can attest to the creation of the natural asset. Once a natural asset certificate is issued, it then gets passed along to third-party middlemen, that operate in multiple jurisdictions, who look to pass on these certificates to buyers, namely corporations that are looking to mitigate their environmental impact.
The problem with digital certificates that reside on siloed databases is that they can be counterfeited and double-sold in different parts of the world — meaning the same asset could potentially be sold twice, or someone could be sold a counterfeit certificate. This in and of itself is one of the most compelling reasons for natural assets to be loaded onto an open, transparent blockchain where anyone querying the chain can easily see the asset and verify its validity.
This realisation alone was a penny drop moment at impactChoice where we were already offering this solution to our clients on a private permissioned blockchain internally, and was a key inspiration for the Natural Asset Exchange to be built on a public permissioned blockchain as it could eliminate the need for trust in third parties and virtually eliminate fraudulent trades, something that had been hampering growth in the industry.
With public permissioned blockchains, the ‘public’ refers to everyone having access to view ledger entries. The ‘permissioned’ means that only certain parties have access to amend the state of the blockchain, such as natural asset verifiers, and EARTH Token holders being able to adjust ledger entries by virtue of their trades on the NAE.
Public Verifiability and Transparency
With distributed ledgers, verified participants can interact with the ledger and add new entries. The whole network then agrees on the new state of the ledger of assets. Any interested party can verify the state of the ledger for accuracy and can identify the ownership of the assets to the finest granularity.
A buyer of a natural asset on the NAE would be able to check the ledger and make sure that their transaction went through. They would then be able to point to this entry in the ledger publicly to prove to any third party that they own the asset.
Natural asset providers, known as sellers, will be able to collect real-time global pricing data, as opposed to whatever price they are offered by a local dealer or agent. By removing legacy market pricing opacity, and replacing it with the transparency of a public blockchain, open and real-time pricing can attract new natural asset investors to the market, further compounding the positive environmental impact by extending trade to new participants. As there are no minimum spends or buy-ins, natural asset providers of any size and scale can participate.
Blockchains Remove Traditional Barriers to Participation
Blockchains have proven extremely useful in overcoming barriers that are typical to traditional transnational trades. Having a native blockchain token can eliminate the issues with buyers and sellers having to deal with foreign currency exchange as assets are usually denominated in a small handful of national currencies that could only be accessed through expensive brokers, and sometimes for some buyers, not at all.
The divisibility and multiplicity of a native blockchain token lends itself to being able to eliminate the concept of minimum buy-ins. A natural asset could be denominated in an amount of tokens, and an asset does not even need to be purchased in whole as a share of a token can be purchased according to the needs and affordability of the buyer.
Another traditional barrier to markets is where the exchanges are geographically and jurisdictionally located, and not all traders have access to overseas exchanges, usually the domain of large accredited investors. Blockchains have been accompanied with truly international exchanges with the ability to democratize trade across borders. Near anyone with access to the internet and cryptocurrencies will be able to have access to the exchange.
Beyond the general barriers to transnational trade, there are also industry-specific barriers. The environmental sustainability and carbon mitigation industry has its own set of specific barriers that are ripe for positive disruption. By virtue of the NAE being blockchain based, buyers won’t need to pay registration fees for participation, won’t need to fund escrow accounts with an exchange and will not be subject to transaction volumes and arbitrary trade limits, all of which are current market practices in the industry. Buyers will no longer need to be registered on third-party registries in multiple jurisdictions.
Seamlessly Integrate with Future Systems like IoT
The openness of blockchains lends itself to future tech innovations being built on top of them in an open source way (as opposed to private siloed databases where each database owner has their own rule sets for system integration). Tech like the Internet of Things (IoT) which is currently in the pipeline, includes small devices equipped with sophisticated sensors that can measure carbon inputs and outputs. IoT software can be designed with the ability to interact with blockchains via smart contracts- and even trade on them autonomously — in real time. On the supply side, as a natural asset is being measurably produced or captured, it can be loaded into the exchange on a real-time basis. Tech like renewable energy smart electricity grids require only minor adaptations to be plugged in and sync with the blockchain. And on the demand side, as an IoT object measures an activity that needs carbon mitigation, it can buy a mitigation product from the exchange in a real-time, just-in-time fashion.
The Future Will Be Distributed
Beyond databases, our modern societies are characterized by mega-corporations and states having centralized control and influence over our daily lives. By virtue of their scale and ability to leverage power, these very same corporations and authorities have been tasked to act in the best interests of our environment. I leave it to the reader to decide on exactly how good a job they have managed to perform to date. Blockchains are showing immense potential for distributing power out on the edges of the network — and this is something that can be replicated by our societies.
As we build a globally connected community, as our business and personal networks cross over artificial borders and boundaries, we can use distributed technologies to claim our power at the edges and into our hands. We need to utilize the tools that are becoming available if we want to tackle the enormous task of making our environment sustainable for the Earth’s future generations.
We firmly believe that the EARTH Token and the Natural Asset Exchange are a necessary first step in democratizing global efforts aimed at addressing environmental sustainability throughout all sectors of our societies, from corporations to the local communities down to small businesses and even individuals. Unprecedented levels of market access and transparency can underpin a vast mobilization of natural resources on the scale that is needed to make a real environmental impact.