The climate crisis is one of the most pressing issues in the modern world. People are demanding action from their governing bodies, who are then putting pressure on companies. While organizations are slowly integrating sustainability action plans into their operations and increasing their spending on alternative energy sources, it is still a drop in the ocean compared to what could be done.\
Unfortunately, the traditional financial system is not fit to satisfy the level of financing required to make broad changes. This is due to the fact that it rests on a narrow set of profit criteria for the benefit of shareholders; incentives are not aligned in a way where sponsoring holistic investments is attractive to stakeholders. That’s where Regenerative Finance (ReFi) comes in.
ReFi is a relatively new financial structure that determines investment opportunities based on Environmental, Social, and Governance (ESG) criteria while utilizing the power of blockchain and Web 3.
Regenerative Finance uncovered
Regenerative Finance is a rising market player in the climate finance sector, straddling the spheres of climate action, Web 3, and cryptocurrencies. It enables millions of crypto holders to take meaningful climate action and receive rewards in just a few clicks.
ReFi employs crypto as a means to solve the systemic problems of traditional finance by changing the concept of wealth — by using capital to create healthy and fair social and environmental systems, DeFi participants can contribute to the resolution of pressing social issues such as injustice, inequity and ecological crises. The primary goal of ReFi is to re-imagine and re-develop financial systems to help make the world a better place.
In sum, ReFi works on:
- Stabilizing climate by mitigating and sequestering greenhouse gases.
- Restoring natural ecosystems by cultivating biological diversity.
- Instituting social justice.
The fundamental distinction between ReFi and conventional finance is that Regenerative Finance focuses on the system’s long-term health over short-term financial gains. Such investments usually have lower return rates in the short term as they are designed with a complex issue in mind. Returns become greater over time as they assist in creating a more sustainable tomorrow.
So how would this work in practice? Well firstly, ReFi is linked to physical initiatives that incorporate Web 3 elements such as AI, 5G, IoT, and remote sensing data processing with distributed ledger power. A farmer, for example, could set up a regenerative land and water project to restore the harm done by a polluting manufacturer. Material assets and concrete outcomes could be funded through tokenization, which are then tracked. As their value is realized, profits can then be shared within the regenerative finance economy.
Why does decentralized finance need regeneration?
Considering the fact that crypto is gaining trust among institutional investors and big businesses, DeFi supporters are currently tasked with regenerating the crypto economy. Regenerators are looking to utilize crypto mechanisms in a way that can have a positive impact on the planet by investing and taking actions that are relevant to the real economy.
Once crypto enthusiasts have focused their ambitions beyond HOLDing and meme coins, blockchain protocols can better provide the required pillars for social institutions to take on some of the world’s most pressing challenges.
Decentralized finance and cryptocurrency have the potential to attract billions of dollars to the carbon market, without having to negotiate diplomatic terms for each country, which slows down decision-making on carbon pricing and cross-carbon trading.
The crypto community is rooted in the philosophy of liberalism, which is reflected in the decentralization and self-governance of the project by the community. Therefore, as the community accumulates more wealth, it is possible to develop blockchain-powered solutions to help local communities, take climate action and uphold sustainability. A regenerative future can only be accomplished by operating together to develop and facilitate new solutions that change people’s mindsets and navigate economic, environmental and social development.
Refi and carbon offsetting
Carbon offsetting is a primary ReFi instrument that is currently in use. Here is how an offset is created: the whole system works as a marketplace, with intermediates connecting credit buyers and credit producers. In the end, third-party organizations confirm regenerative actions by the credit producer.
Nowadays, global carbon markets remain fragmented and ineffective — that’s where blockchain-based solutions come in to resolve the following voluntary carbon market challenges: poor accounting, inefficiency, lack of liquidity, high compliance costs and barriers to entry, issues of Monitoring, Reporting, and Verification (MRV), ensuring financial additionality, and stakeholder inclusion and equity — no small task.
Regenerative finance has the prospects of becoming a trillion-dollar economy. Carbon offsets already account for a billion-dollar market, which will rise from 1.7 billion tonnes in cumulative demand for carbon offsets to up to 3.6 billion tonnes per year over the next 30 years.
Currently, ReFi impact is growing. For instance, in 2021, more carbon was transacted on-chain than off-chain. Another impressive fact is that 5% of all carbon credits created now exist on-chain.
ReFi projects to look out for
Natural asset-based currency: Celo
The Celo Protocol is open-source, proof-of-stake, and the world’s first carbon-negative blockchain supporting a commitment to green Web 3 sustainable development. Celo supports ReFi efforts and encourages climate-concsious contributors to help grow its ecosystem.
Its community-led initiative, the Climate Collective, fights climate change by aligning the demand for Celo stablecoins (cUSD, cEUR, cREAL) with an aim to help the planet — as the demand for these coins rises, more nature-backed assets get allocated. Moreover, the Celo protocol promises to back up 40% of their USD equivalent stablecoin with natural capital assets. This would encourage the protection of rainforests and other natural assets, while fungible currencies are created on top.
Market maker: KlimaDAO
KlimaDAO is at the center of the new ReFi economy. Their team has launched a decentralized and open market for carbon, and its token incentivizes users to govern this new green economy. The protocol’s mission is to ensure that pro-climate projects are profitable enough by improving access and demand for carbon offsets.
KlimaDAO repurposes the usual DeFi infrastructure and has built a treasury backed by carbon credit. This lowers the supply of carbon credits and thus grows the price, making it costly for polluters to delay changing their operations.
In a partnership with Toucan, Klima DAO has shown how traditional markets can be influenced:
- More than 5% of voluntary carbon market credits have been tokenized with Toucan since October 2021.
- The carbon price has grown 2 to 3 times due to KlimaDAO triggering the demand.
Vertically-integrated value creator: Open Forest Protocol
Open Forest Protocol can be described as a community-driven verification tool for forestry and conservation efforts. It is an innovative open-source blockchain-powered protocol that creates a transparent and secure means to store information.
The Open Forest application is easy-to-use for those forestation project operators who are not acquainted with blockchain or crypto. It has been developed to provide land users, NGOs, government administrations, and others with the ability to measure and verify the carbon on their land so they can recoup results-based payments. The major aim of the project is to attract carbon financing for small-scale reforestation initiatives.
At this point, we should mention that we have our own INC4 has a stake in Open Forest Protocol. One of our senior team members is guiding the project together with the core OFP team. We thought we’d give you a little more insight into the project thanks to our insider status.
Meet Alina Tustanovska, INC4 Builder and Proud Project Delivery Manager within the Open Forest Protocol team
Q1: As Chief Operating Officer at INC4 and the Product Delivery Manager for Open Forest Protocol, could you elaborate on your journey to becoming a friend of the NEAR protocol?
I adore working with the Open Forest Protocol and its mission reflects my desire to avert climate change and scale global forestation.
When the INC4 team was contacted to help guide the building and development of the Open Forest Protocol last year, we offered to build on the Ethereum blockchain, which is a tremendously successful network with an extensive dApp ecosystem; however, their team insisted on building on NEAR protocol.
We ran a little stress test to see if NEAR could indeed deliver what our clients wanted, and it turned out to pass with flying colors! NEAR has several benefits that were essential when deciding to go forward with building Open Forest Protocol:
- Wonderful end-user experience for people just getting started with crypto
- Affordable transactions costs and fast transaction processing speed
- Fast user onboarding
- NEAR is a carbon-neutral blockchain that perfectly fits the purpose of the Open Forest Protocol
Q2: Can you explain what the mission of the Open Forest Protocol is and how they use blockchain technology to achieve it?
So, OFP runs on NEAR and is on a mission to fast-forward a fully on-chain carbon economy. The team is starting with a data auditing platform to make forestation transparent, accountable, and scalable.
The forestation strategy works when it comes to combating global warming, the issue is with the traditional forestation industry which is lacking a unified, transparent, and affordable MRV system. OFP wants to offer such technology. Their team is building an easy-to-use blockchain platform to measure, report, and verify environmental data in a transparent and affordable way. They are currently developing an explorer, a project operator and validator dashboards, along with the field app.
Q3: So what exactly is the technology behind the operation of the Open Forest Protocol?
The OFP brings together blockchain, NFT and MRV technologies. It is built on the decentralized NEAR blockchain, which allows the project to be open-source, transparent, without barriers to the caring community that our climate crisis needs.
OFP uses NFTs for land plot registration. Once onboarded, all project information is permanently stored and updated in the token’s metadata. This way, all details are accessible, transparent, and easily traceable while the project exists.
Combined with satellite, AI, and IoT technologies, the MRV tools, which are available through OFP’s application, enable forestation projects and validators to act quickly and transparently.
Q4: Who are the main participants and how does the Open Forest Protocol work?
The main components needed for the project to work successfully are the following:
- Projects that upload data. Projects upload data to prove that the forest exists to help with our internal verification.
- Validators that stake on data outcomes to ensure the smooth running and regulation of the project.
- Carbon financing and Investors that support projects. The more people that support the forestation project financially, the more hectares of forests can be preserved.
- The community. The OFP community will govern the protocol and helps build the foundation for the future of decentralized forest management.
Now, let me guide you through the onboarding process and the way it works for the project operators. First of all, to register the project on Open Forest Protocol, the project operator should provide all data which is stored on-chain as NFTs. For that, the forest agents use the application to upload data to their dashboards. Then, the OFP validators verify the information uploaded. Once that’s done, this process sets the foundation for blockchain-native carbon credit tokens.
Build with INC4 to make the world a better place
As we can see, although just becoming more well-known, ReFi is already shaping up to be one of the major pillars of DeFi and Web 3. Just like traditional finance has evolved to an extent where people seek out ethical shopping choices, ReFi has the potential to take DeFi from a place of self interest and make it a force for widespread societal change. Reach out to the INC4 COO Alina Tustanovska if you want to join the regenerative finance movement and utilize the blockchain to address climate change, and support conservation and biodiversity by creating a more equitable and sustainable financial system.