How tokenized carbon credits could help drive climate solutions | Earth.Org – Past | gift

Environmental concerns surrounding blockchain and cryptocurrencies are well known and not surprising given that bitcoin mining reportedly uses more electricity than all of Finland each year. People who may not know much about blockchain seem to have at least a vague idea that the technology is energy hungry. Therefore, reducing the power consumption of the blockchain is high on the list of priorities for those who really want to understand the technology. This article attempts to demystify the capabilities of the technology and examine the role carbon credits in tokens could play in combating the climate crisis.

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Proof of Work is a cryptographic process used by Bitcoin and Ethereum to securely validate transactions. Not only does this bring “crypto” to cryptocurrency, but its inherent complexity also has the advantage that it is very expensive to attack a cryptocurrency’s network. However, this proof-of-work (PoW) approach comes at a significant cost to the environment, as dedicated and expensive hardware “mining rigs” require energy when performing the complex calculations required behind PoW. In contrast, Proof of Stake (PoS) is an alternative approach that maintains network security but requires drastically less computation and can be performed on a desktop computer. This process – used by networks like Polygon – can and does avoid the enormous significant energy consumption of Proof of Work already succeeded in reducing the associated greenhouse gas (GHG) emissions by over 99% in comparison.

Looking beyond energy use, however, some climate technology entrepreneurs are questioning whether there are even greater opportunities that blockchain technology can be used to help and address the climate crisis.

One of the most promising approaches is to explore how blockchain technology can revitalize Voluntary Carbon Markets (VCM). While this market has been touted as pioneering the fight against global warming through incentives to reduce greenhouse gases, only recently has it seen widespread acceptance as governments, individuals and companies respond to the mounting evidence and urgency that our changing climate represents an existential threat.

That earliest iteration VCMs emerged in the 1990s when over-the-counter exchanges enabled organizations and individuals to buy carbon credits outside of formal national or international regulatory requirements. VCM trading volume has steadily increased since then and is widely expected to increase thanks to investor interest in environmental, social and governance (ESG) factors and increasing pressure on nations to take action to meet their Paris commitments Taking deals will continue to gain popularity.

One of the key factors attributed to the growth in carbon credit usage has been the increased robustness and quality of carbon credits issued in the markets; with different quality standards such as the Verified Carbon Standard (VCS) and the Gold Standard.

However, hardly anything has changed on the demand side of the market in the last 20 years. The VCM is believed to have a number of shortcomings, particularly within the market’s supply chain where loans are traded between brokers, organizations and consumers, which inhibit the scalability of the market. According to a 2021 McKinsey According to the 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 are taking…. ” The over-the-counter exchange has been criticized by the US Securities and Exchange Commission (SEC) due to lack of transparency. Of course, for the market to scale, the advances made on the supply side must be integrated into a more efficient and transparent marketplace that can further boost trust and enable scalability.

This is where blockchain technology (and more specifically Ethereum and Ethereum-compatible blockchains) can help correct market failures. With public and transparent distributed ledger systems and smart-contract-enabled marketplace innovations introduced by Decentralized Finance (DeFi) protocols such as UniSwap and SushiSwap, new ways of transacting assets have emerged through exploitation Automated Market Makers (AMM). 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 act as “market makers,” essentially providing billions of dollars in capital to create liquidity in a market and help it run efficiently — taking orders from buyers and sellers reflect equally. AMMs blockchain solution instead allows anyone to provide liquidity or interact with the market. AMMs incentivize liquidity providers by offering a “pool” a pair of commonly traded tokens, which traders can then use to fill their orders at any time in market equilibrium. Because these liquid asset pools are hosted on the blockchain, all past and present market activity is transparent and traceable.

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

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The launch of KlimaDAO – which is working to realign the economic incentives for voluntary carbon market (VCM) participation by accelerating the transition to net-zero global carbon emissions – and the Toucan Protocol, bringing carbon markets to DeFi -Marketplaces effectively empower individuals and organizations to contribute to a cleaner planet. This symbolizes something of a watershed moment for the VCM, as these entities have collectively created the infrastructure and incentives to embed carbon credit deployment into DeFi and make the carbon credits available for the benefit of the blockchain.

Since launch, the market has had almost 25 million carbon credits bridged to the blockchain via the infrastructure developed by the Toucan protocol. Over 17.5 million of them were subsequently locked into the KlimaDAO treasury. This is made possible by the incentive mechanisms built into the KlimaDAO protocol, which reward those who offer their token credits to KlimaDAO.

However, what is perhaps most interesting to the broader VCM is that KlimaDAO uses its Klima tokens to enable deep and stable liquidity pools for tokenized carbon credits, such as B. the base carbon barrel of the Toucan protocol or the MCO2 from Moss. Through these pools, a market is created that allows any person or institution to directly access carbon credits in tokens and purchase them with low slippage. This could apply to those looking to purchase retirement credits to offset carbon emissions or those looking to use them for other incentives in DeFi. Creating this market from scratch to a level of liquidity exceeding $10,000,000 daily is no easy feat in and of itself and could be revolutionary.

Previously, access to carbon credits was only possible through a carbon credit broker. When buying credit from a broker, a buyer has no control over the additional fees charged for a loan and relies on the broker himself to offer credit that he already has or can purchase and the carbon credit on his Account withdraws names. If a buyer wants more information about the market price of carbon credits, they need to contact a number of brokers via phone and email to understand which carbon credits they can purchase, how many, and how much – an arduous process for an organization that simply wants to invest in the planet.

With an increasing supply of carbon credits finding their home on the blockchain and accessible and efficient markets enabling their trading, we are now seeing a new paradigm for the voluntary carbon market emerging. AMMs themselves and tokenized carbon credits are novel concepts. Because KlimaDAO provides liquidity within a transparent marketplace, it unlocks growth and investment into the planet for everyone to participate in.

While considerable work has been done and proven positive results have already been achieved, much attention will be focused on how these emerging markets can scale up their impact and remain relevant over the long term. For example, a significant portion of the available token certificates are currently focused on carbon mitigation projects – many of which are still available within the system. However, there is growing interest in carbon removal technologies, but with very limited liquidity available even within the legacy VCM, it will be interesting to see if and how this new blockchain-powered market, which is ultimately set to “deeper Liquidity” based and size, can make these increasingly coveted CO2 certificates available to its users. Only time can tell.

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