How DeFi on NEAR is Helping Combat Climate Change
Before Proof-of-Stake platforms, blockchain technology and climate action seemed destined to operate in vastly different worlds. NEAR, the first carbon neutral PoS ecosystem, has become a hotspot for how these worlds might meet, and help combat climate change in the process.
Right now, DeFi is reimagining finance for millions of people. Its disruption of the borrowing and lending industries via innovative new products has given much needed momentum to one of Web3’s — and NEAR’s — foundational pillars: give people control of their money.
While NEAR’s DeFi sector has been thriving as of late, as a result of a super fast and secure blockchain, we’re always thinking about what industries DeFi could shape and influence next. Even at this early stage, we can already see the roles DeFi might play in financing initiatives that are helping to tackle climate change.
As part of an ongoing content series exploring crypto and the environment, we’re focusing on the projects and the ideas already taking shape in and around NEAR.
Climate Initiatives as Assets
Yessin Schiegg, Chief Financial Officer at NEAR Foundation, thinks DeFi climate investment will likely borrow some of the tools already found in the industry and adapt them to carbon credits and other climate-related assets.
“Smart contracts could automatically retire carbon credits to match the moment when C02 exhaust is created and DeFi mechanisms could directly plug in,” says Schiegg. “Investors can hedge carbon offsetting obligations, speculate on price movements, and earn yield on pre-financing carbon offsetting measures.”
Blockchain can also provide flexibility as to when carbon credits are retired — the process in which assets representing carbon emissions are removed from the marketplace so they can no longer be traded.
Currently, the carbon credit retirement process is highly manual and centrally controlled, which means it’s done in bulk. It also requires trust and is not fully accurate when matching exhausts to the credits designed to represent them.
“Smart contracts could automatically retire carbon credits to match exactly when they are created and DeFi mechanisms could directly plug in,” Schiegg explains. “Money is, in a fashion, created by burning energy (melting rocks to get the gold out or mining bitcoin). It would be great to see more innovation in relation to creating money — e.g., by offsetting CO2 or by other social action, like planting trees or fighting hunger and disease.”
Kendall Cole, Head of Product at NEAR Foundation, expects to see tokenized carbon credits used throughout DeFi as collateral for loans, in derivatives, and other products.
“The deepened liquidity and enhanced utility of these products should contribute meaningfully to the efficiency of the market,” he says. “It will also expose them to a new investor base.”
Other DeFi climate investments could be used in older, more established sectors. As an alternative to traditional agriculture, a major contributor to global greenhouse gases, Raiz is using NFTs to fund its vertical farms. A NEAR and Mintbase project, Raiz is setting up compact, vertical farms in under-used urban spaces to create optimal growing environments for crops meant for local communities and restaurants.
“We’ll create digital artworks of plants corresponding to impact metrics such as water saved or emissions avoided from traditional agriculture,” says Raiz’s Emiliano Gutierrez. “In the long run, the goal is to bridge the physical and digital world by transforming our hydroponic systems into investable assets so in that manner people worldwide have a wider access to tokenized impact.”
For Raiz, it would represent an alternative funding mechanism and a way to digitize its processes and yields. Through DeFi, digital assets could trace where food is produced but also where positive impact is being made.
“Impact tokenization (yet to be developed on our end) will provide the capability for investors or token holders worldwide to have a quantified impact related to the tokens they hold,” says Gutierrez. “This would represent a hydroponics system that is equal to approximately 100 plants a month.”
Another path forward in DeFi climate finance could be in directing a percentage of the carry (a share of the profit) over the fund’s lifetime toward climate-focused foundations and projects, or to a non-profit that mitigates climate risk. This is what MOVE Capital, a NEAR-based seed grant fund, is doing.
“South Pole could be one option, Open Forest Protocol another, but there are so many options,” says the fund’s manager Rune Bentien. “We could even set up a DAO where projects can apply for support. If we go this route we want a stellar panel who will decide where the [climate solution] funds will go.”
Bentien also points to projects like ESGen, a startup he is working with, that will assess and understand how their operations impact the environment. If reliable and meaningful data is available, Bentien thinks companies and projects can act on it.
“Assuming you believe in blockchain, you would also expect this to underpin the next generation internet that will supercharge us as users to put our money where our mouth is,” says Bentien. “And by doing so, we put pressure on the companies who don’t show responsibility.”
Making sure climate finance projects are legit
With off-chain climate investment projects, there are a number of key challenges: how to verify its effectiveness, and how to prevent fraud from creeping in. Blockchain can help resolve some of these issues.
Take the tracking of carbon credits, for instance. Blockchain allows the tracking of carbon credits from their creation via carbon offsetting projects through their full value chain, then on to their retirement.
“The data will be on chain from the start but the explorer tools and the data input oracles will have to be built over time,” says Schiegg. “This is what Open Forest Protocol is building in relation to collecting carbon offsetting data.”
Fred Fournier, CEO of Open Forest Protocol, sees his project as being at the forefront of climate impact investing. Right now, forestation projects cannot value their natural assets. OFP is working to change that with a standardized MRV (monitoring, reporting and verification) system, backed by a community of validators that will then allow the minting of carbon credits.
“Investors will benefit from a high yield and the invested money will truly benefit local communities, farmers, and people that have the most power to take action on restoring our nature and forests,” says Fournier. “Hence contributing in a very substantial manner in fighting climate change.”
Other DeFi climate initiatives
Not all DeFi climate initiatives will be about creating investment assets. On November 1st, NEAR Foundation awarded Hillridge, a software startup addressing low rates of insurance for extreme climate events, a US$200,000 grant to develop a blockchain-based parametric insurance platform for tropical storms. The platform is set to be piloted on typhoons in Vietnam, one of many tropical nations where millions of people are insured against catastrophic storms.
Hillridge would help emerging economies like Vietnam overcome inefficiencies in this emerging market by creating a tamper-proof ledger that helps automate reporting and stamping out fraud. Each of these issues take months to sort out, creating uncertainty and distrust while deterring insurance companies from offering coverage.
On NEAR, Hillridge uses parametric triggers (from independent and trusted weather data providers) based on storm location and wind strength to determine if any insurance payouts should be made, usually within 48 hours. Hillridge’s DeFi solution means insurance policies can be offered at scale and at a fraction of traditional insurance’s costs to homeowners, businesses, or employees working in agriculture, tourism, retail, aquaculture, and other industries and markets.
NFTs growing on trees
In April, Colombian-American art curator, social entrepreneur, and climate activist Angela del Sol Varela and her Evolution Seed team decided they wanted to launch a NFTree initiative — a type of carbon offset tree planting project that uses NFTs as credits. But she quickly started thinking beyond NFTrees. Enter: Sisu.
Inspired by the Finnish word for “inner strength,” Sisu, a partnership with NEAR, is a DAO that can help people network to help solve a variety of climate-related projects using NFTs and DeFi.
“How can we catalyze the power of communities, tie them to DeFi, and use all of those resources for earth restoration,” says del Sol Varela of Sisu’s mission. “It will help accelerate solutions and do so in a transparent and non-tamperable way.”
Sisu will mint NFTs for a variety of climate projects. The Sisu team is exploring the use of DeFi to track info that would ensure the project is working as it should.
“When we talk about carbon credits, for instance, it’s a market that’s very obscure,” she adds. “We might not know where trees are being planted, who is measuring their growth, and who is taking care of them. With blockchain, there is that component of transparency and being able to follow up.”
Hurdles ahead
While DeFi promises a barrier free entry into financing climate positive projects, obstacles still remain. Blockchain continues to be a hurdle many new investors struggle to get over. Schiegg calls this the “mental barrier” of blockchain onboarding.
Participants will still have to deal with the risk and rewards inherent to investment. Being that blockchains are new ecosystems, some participants will be more fearless than others.
“If you take the perspective that volatility is a measure of risk then DeFi participants indeed have to cope with more risk than most people dealing with traditional instruments,” Schiegg explains. “However, finding a paradigm change in this fact is remote in my opinion. It’s still the same game for participants: they have to balance risks and rewards.”
Other barriers might be more concrete, at least as far as regulation is concerned. While DeFi can usher in a new and exciting era of blockchain-based climate solutions, regulators need to align with its ambitions before it can be unleashed.
“The experimentation and fast iteration that is possible on-chain can accelerate climate finance themed innovation,” says Schiegg. “However, DeFi will first have to survive the reaction of the regulators.”
The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, recently issued anti-money laundering (AML) guidance that could trigger regulatory overreaction that might make onboarding to DeFi platforms a serious barrier. Compliance could be difficult and expensive to achieve for crypto companies, especially those working in startup mode. This would, in turn, limit the scope of creative investment and other climate solutions made possible by DeFi.
Another hurdle has to do with how blockchain apps play with off-chain data. Kendall Cole isn’t yet convinced that climate project verification is a good argument for why blockchains and DeFi are well suited for climate finance.
“One area blockchains are particularly weak in is the verification of off-chain data,” says Cole. “And given much of climate action is physical versus digital (including the creation and verification of carbon credits and offsets), on-chain data isn’t particularly useful for investors interested in verifying the real-world effectiveness of an initiative.”
That said, developers could create solutions to this weakness, especially as Web3 is more easily and seamlessly integrated into the physical world, as Web2 has been over the years. Oracles, networks that plug in real-world data into blockchains, are one solution that is evolving quickly.
But a healthy dose of realism isn’t a bad thing. Rune Bentien cautions against looking to DeFi or blockchain as the holy grail in solving the climate crisis. DeFi climate finance is just one of many tools at humanity’s disposal in crafting solutions to climate change.
“It will be a combination of technologies coming together that will enable society to save ourselves by saving the planet,” says Bentien. “But what this space has done is to form a movement that disrupts legacy financial infrastructure, money, and organisational structures, and I am hopeful we can mobilize such forces within the space to focus on climate as well.”
About NEAR
NEAR is a high-performance blockchain that is designed to be super-fast, incredibly secure, and infinitely scalable. NEAR’s vision is to create a network that enables people to re-imagine finance, creativity and community in new and inclusive ways.
NEAR is built by an award-winning team of engineers and entrepreneurs to be simple to use, inclusive and good for the environment. NEAR is backed by top VCs such as A16Z, Pantera Capital, Electric Capital, Dragonfly Capital, Coinbase Ventures, Blockchain.com, and Baidu Ventures.
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