How Tokenized Carbon Credits Could Help Advance Climate Solutions | Earth.Org – Past | Present

Environmental concerns about blockchain and cryptocurrencies are well known and not surprising given that Bitcoin mining would have uses more electricity every year than all of Finland. People who may not know much about blockchain seem to have at least a vague idea that the technology is power-hungry. As such, reducing the energy consumption of blockchain is high on the priority list of those looking to truly understand the technology. This article seeks to demystify the capabilities of the technology and explore the role tokenized carbon credits could play in tackling the climate crisis.

Proof of work is a cryptographic process that Bitcoin and Ethereum use to securely validate transactions. This not only puts “crypto” in cryptocurrency, but its inherent complexity also has the added benefit of making it very expensive to attack a cryptocurrency’s network. Yet this Proof of Work (PoW) approach comes at a significant environmental cost due to the energy required by dedicated and expensive hardware “mining rigs” as they perform the complex calculations needed behind PoW. In contrast, Proof of Stake (PoS) is an alternative approach that maintains network security, but requires much less computation and can be performed on a desktop computer. This process – employed by networks like Polygon – can avoid the massive and large power consumption of proof-of-work and has already successful in reducing associated greenhouse gas (GHG) emissions over 99% in comparison.

However, beyond energy consumption, some climate tech entrepreneurs wonder if there are even more opportunities that blockchain technology can be used to support and solve the climate crisis.

One of the most promising approaches is to explore how blockchain technology can reinvigorate voluntary carbon markets (VCMs). Although this market has been touted as a game-changer in the fight against global warming by incentivizing GHG reductions, it has only recently begun to gain widespread adoption as governments, individuals and businesses respond to growing evidence and urgency that our climate change is an existential threat.

the first iteration VCMs originated in the 1990s when over-the-counter trading allowed organizations and individuals to purchase carbon credits outside of any formal national or international regulatory requirements. VCM’s trading volumes have steadily increased since then and are expected to continue to grow in popularity thanks to investor interest in environmental, social and governance (ESG) factors and increased pressure on investors. nations to start taking action on their commitments under the Paris Agreement.

One of the main factors attributed to the growth in the use of carbon credits has been the increased robustness and quality of carbon credits issued in the markets; with a variety of quality standards, such as the Verified Carbon Standard (VCS) and the Gold Standard.

That said, on the demand side of the market, little progress has been made over the past 20 years. The VCM is believed to have a number of loopholes, particularly within the market supply chain where credits are traded between brokers, organizations and consumers, inhibiting the market’s ability to scale. According to a 2021 McKinsey report, VCMs in their current form are “fragmented and complex with questionable credit-selling practices and limited pricing data that” make it difficult for buyers to know if they are paying a fair price, and for suppliers to manage the risk they take…. ” OTC exchanges have been criticized by the United States Securities and Exchange Commission (SEC) for their lack of transparency. For the market to evolve, it is clear that advances made on the supply side must be integrated into a more efficient and transparent market that can further increase trust and enable scalability.

This is where blockchain technology (and more specifically Ethereum, and Ethereum-enabled blockchains) can help address market failures. With public and transparent distributed ledger systems and smart contract-enabled market innovations introduced by decentralized finance (DeFi) protocols such as UniSwap and SushiSwap, new ways of transacting assets have emerged using Automated Market Makers (MA). These solutions have already played a transformative role within the cryptocurrency ecosystem, as new products require liquid and efficient markets to support their growth; without them, scale and adoption cannot be achieved.

In traditional finance, large hedge funds and banks can serve as “market makers”, essentially providing billions of dollars of capital to serve as liquidity to create a market and help it operate efficiently, reflecting the orders of buyers. and sellers. AMM’s blockchain solution allows anyone to provide liquidity or interact with the market. MAs incentivize liquidity providers when they offer a pair of frequently traded tokens to a “pool,” which can then be used by traders to fill their orders at any time at market equilibrium. As these pools of liquid assets are hosted on the blockchain, all past and present market activity is transparent and traceable.

Given VCM’s oft-cited problems with low transparency, fragmentation, and illiquidity on the demand side, DeFi-enabled liquidity pools can bring much-needed clarity and accessibility to carbon credits by integrating carbon credits.

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The launch of KlimaDAO – which seeks to realign economic incentives to participate in the Voluntary Carbon Market (VCM) by accelerating the transition to net-zero global carbon emissions – and the Toucan Protocol, which brings carbon markets to DeFi markets, effectively enable individuals and organizations to contribute to a cleaner planet. This somewhat symbolizes a watershed moment for VCM, as together these entities have created the infrastructure and incentives to integrate the provision of carbon credits into DeFi and expose the carbon credits for the benefit of the blockchain.

Since launch, the market has seen nearly 25 million carbon credits linked to the blockchain via the infrastructure developed by the Toucan protocol. More than 17.5 million of them being subsequently locked away in KlimaDAO’s treasury. This is made possible by the incentive mechanisms built into the KlimaDAO protocol, which rewards those who offer their tokenized credits to KlimaDAO.

However, what is perhaps of most interest to VCM at large is that KlimaDAO uses its Klima tokens to facilitate deep and stable liquidity pools for tokenized carbon credits, such as the protocol base carbon ton. Toucan or Moss’ MCO2. Through these pools, a marketplace is created that allows any individual or institution to directly access and acquire tokenized carbon credits with low slippage. This could be for those who wish to acquire credits in retirement to offset carbon emissions or those who wish to use them for other incentives in DeFi. Creating this market from scratch, to have liquidity consistently exceeding $10,000,000 in volume on a daily basis is no small feat in itself, and it could be revolutionary.

Previously, the only way to access carbon credits was through a carbon credit broker. When purchasing credits from a broker, a buyer has no control over the additional fees that have been charged on a credit, and they rely on the broker themselves to offer any credits they have already or can acquire, and withdraw the carbon credit on their behalf. If a buyer wishes to receive more information on the market price of carbon credits, he must contact a number of brokers by telephone and e-mail in order to understand which carbon credits he can obtain, how much and how much – a process cumbersome for an organization that simply wants to invest in the planet.

With a growing supply of carbon credits finding their way onto the blockchain and accessible and efficient markets to trade them, we are now seeing a new paradigm emerge for the voluntary carbon market. MAs themselves and “symbolic carbon credits” are new concepts. With KlimaDAO providing liquidity within a transparent marketplace, it frees up growth and investment in the planet for anyone to participate.

Although a lot of work has been done and some demonstrably positive results have already been achieved, great attention will be given to how these new markets can increase their impact and remain relevant in the long term. For example, currently a significant amount of the token carbon credits available are focused on carbon mitigation projects – many of which are still available in the system. There is, however, growing interest in carbon removal technologies, but with very limited liquidity available even within the old VCM, it will be interesting to see if and how this new blockchain-powered market, which ultimately relies on “deep liquidity and scale, can provide these increasingly sought-after disposal carbon credits to its users. Only time will tell.

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