ImpactAlpha, Jan. 27 – If blockchain was a solution in search of a problem, it may have found it in climate change.
The gnarly challenges of keeping track of carbon emissions, credits, allowances and payments across markets and supply chains and geographies would seem to require something like a distributed ledger, the technology behind Bitcoin and other cryptocurrencies.
Already, crypto trading has drawn billions of dollars into carbon markets and leapfrogged slow-moving diplomatic negotiations to drive carbon price discovery and cross-exchange carbon trading.
KlimaDAO, backed by billionaire Mark Cuban, has accumulated nearly 15 million “base credit tokens,” each one representing a metric ton of stored carbon. KlimaDAO’s aim is to drive up the price of carbon to incentivize emissions reductions, but at $57 per token, the price is down 98% from its peak. The broader crypto market has shed almost $1 trillion since November.
The hackers and visionaries behind the proliferation of climate-related crypto coins, tokens, registries and warehouses have something more ambitious in mind even than decentralized finance, or DeFi. Crypto-enabled regenerative finance, or ReFi, is emerging as a distributed, democratized system of value-creation around decarbonization, sustainable agriculture, biodiversity, ecosystem restoration and social justice, all tracked, measured, verified, enforced and settled on blockchain.
The Swiss foundation Ixo, bills its system as “a global digital immune system for Earth and humanity” or the “Internet for impact.” Its impact tokens represent tradeable units of positive outcomes, such as emissions reductions or biodiversity.
Regen Network, in Great Barrington, Mass., is creating an “ecological fintech infrastructure” for ecosystem services.
“The bigger idea is regenerative finance,” says Thomas Morgan, the founder of basinDAO, which is aiming to reduce carbon and restore nature with a blockchain-based network. “We’re moving from traditional finance to decentralized finance to regenerative finance.”
Ministry for the Future
The crypto, ReFi future has been foretold – in science fiction.
Kim Stanley Robinson’s 2020 climate-themed thriller, The Ministry for the Future, has become a must-read for climate-techies. The book opens in 2025 with a heat emergency that kills 20 million people in India. Government leaders desperate to stave off climate catastrophe issue a global “carbon coin” to pay for a massive decarbonization effort, including by paying off oil companies to keep fossil fuels in the ground.
The fictitious scenario is based on a real-world paper by Delton Chen, an Australian civil engineer who launched the Global Carbon Rewards initiative to advocate for a carbon currency to incentivize clean energy production, sustainable business practices and carbon removal (but not pay off oil companies). Central banks would issue the currency via a kind of carbon-focused quantitative easing and set its long-term price. Chen is looking to sign up governments for a demonstration project.
ClimateTrade, a Spanish startup launched in 2018, claims to be the first blockchain-based carbon market. Corporate customers like Santander and Cabify as well as governments of Spain and Columbia have listed their digital carbon registries on its marketplace. ClimateTrade this week raised €7 million to expand to the U.S. and other markets.
The World Bank recently blessed the creation of a “climate warehouse,” a collective data layer built on a blockchain intended to foster interoperability between carbon buyers and sellers around the world. The warehouse is being developed by San Francisco-based Chia Networks, one of the blockchain startups racing to build the rails for a new financial order.
Chia is also working with the government of Costa Rica to put that country’s extensive carbon assets on the blockchain. The open source system, which Costa Rica will make available to other countries, will cover climate metrics, data collection, inventory, mitigation and activities registry, reporting, and will link to global systems like the climate warehouse.
The next step for Chia: issuing and retiring credits “on the chain.”
“The hope is that by creating a cross-market, cross-nation, global, centralized, decentralized database, trusted but trustless database – these are the weird, weird words of blockchain – that all of a sudden you unleash all the private capital” for regenerative purposes, says Chia’s Gene Hoffman.
Before it can green the planet, crypto has to green itself. Or to put it another way, if crypto doesn’t save the earth, it may destroy it.
The ever-increasing amount of energy needed to mine coins has itself become a climate hazard, the subject of a Congressional grilling last week. By some estimates, crypto mining consumes 20% of the world’s baseload energy, much of that from cheap coal and other fossil fuels.
Such energy consumption is something of an original sin for Bitcoin, which relies on “proof of work” to verify transactions, deter hackers and build trust without a central authority. That means digital miners compete to solve increasingly complex cryptographic puzzles. The winner updates the blockchain and is rewarded with Bitcoin. The result: an arms race between huge mining farms with massive computing power, all running 24/7.
Bitcoin’s main alternative, Ethereum, is shifting to “proof of stake,” a more eco-friendly approach in which members of a blockchain put up their own crypto in exchange for a chance to validate new transactions. (The downside: the system rewards those with the biggest stakes, and therefore the most wealth).
Bram Cohen, who created the pioneering peer-to-peer file-sharing system BitTorrent two decades ago, set out to improve on those two systems. His Chia Network uses a consensus algorithm based on hard-drive storage called “proof of space and time.” Less power-intensive, Chia was blamed last year for a run on storage capacity that drove up prices. In November, Chia helped launch a Circular Drive Initiative to repurpose data center storage drives that would otherwise be shredded and replaced every three years.
Instead of mining or staking, Chia calls its process “farming” and lets users “seed” their hard drives with data. Unlike some climate coin startups, it has been careful not to sell tokens, which could fuel speculation and be seen by regulators as the issuing of securities.
The company, which raised a $61 million Series D funding round last year led by Andreesen Horowitz and Richmond Global Ventures, plans to go public.
Cohen says Chia’s programming environment enables “smart contracts” that can automatically retire a credit or pay off a project developer once carbon reduction results are verified.
“We’re creating a system that will truly decentralize climate finance,” Cohen told ImpactAlpha. “I think compared to BitTorrent, we’re right now at, like, the very beginning of 2002. For BitTorrent, that was the point where it was working, but it wasn’t being used yet. And then it took off very rapidly from there. And I think we’re at that point right now.”