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It is widely recognized that liquidity in the Voluntary Carbon Market (VCM) is highly fragmented and that the current over-the-counter nature of these markets is constraining their growth and limiting their chances of success at the scale that the planet requires.
This limitation has serious consequences. The fundamental goal of the VCM is to channel meaningfully large amounts of capital into pro-planet projects, and this task is obviously urgent.
For the VCM to be successful and thrive, a diverse portfolio of offset types is required. There are four broad categories that most offsets fall into.
1. Avoided loss of nature.
2. Nature-Based Sequestration.
3. Emission avoidance and reduction.
4. Technology-Based Removal.
Related: Solving the #1 problem of our time using blockchain technology
However, this variety of offsets can bring its own set of complications and potential problems.
Understandably, buyers occasionally look for specific types of carbon credits that best suit their needs. For example, Microsoft’s offset purchases in 2021 were primarily focused on forest projects, followed by soil carbon sequestration projects, bioenergy, biochar, and direct air capture projects (which are technology-based removals).
Obtaining credit can involve researching a project’s background, careful budgeting in an environment where pricing is not widespread, and maintaining an ongoing relationship with a trusted intermediary.
Of course, sole traders and SMEs lack both the resources and the purchasing power of large corporations like Microsoft.
In relation to the qualities of different types of projects, nature-based offsets are relatively cheap and comparatively plentiful, but their gains can be easily reversed while carbon removal technology is in its infancy and prohibitively expensive for all but the largest multinationals .
In addition to the time companies must spend figuring out what best suits their needs, over-the-counter transactions with carbon brokers are also time-consuming. It can take weeks to purchase and cash out the correct credits. This is a trust-based process that takes place mostly behind closed doors.
See also: catch up on climate change? There’s still time to get it right.
The emerging crypto-carbon space is different. Although the burgeoning Regenerative Finance (ReFi) movement is still in its infancy, only gaining traction in the fall of 2021, it is beginning to empower organizations and individuals alike to take more control of their climate-positive investments. Integrative, transparent and sustainable solutions are emerging in the blockchain, which will improve both transparency and pricing.
Through technological innovation and a clear, decentralization-focused vision to take the internet beyond extractive capitalism, Web3 dispels the false narrative that blockchain can only ever be a destructive waste of computing power.
Recently, the World Economic Forum recognized that “the crypto industry and Web3 innovation can become key players in driving transparent, auditable, and actionable changes toward environmental sustainability in ways that traditional institutions have been unable to do.” Accordingly, big blockchain players like Polygon are going carbon positive and making big investments in green initiatives.
See also: How blockchain can help fight climate change
As mentioned in my previous Entrepreneur article, building a better VCM on-chain is an important part of the ReFi vision. As publicly accessible, immutable ledgers, blockchains make market transactions permissionless and accountable, opening all markets to greater levels of participation and control.
At this moment, several different types of carbon credits are available on-chain in tokenized form. These include:
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BCT: The most widely used on-chain carbon token from the Toucan protocol.
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NCT: A recent development by Toucan that focuses on nature-based credits.
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MCO2: From MOSS, a pioneer in the crypto-carbon space that has been around since early 2020.
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UBO: The Universal Base Offset is a token of C3 that includes most of the Verra and Gold Standard methods. It is used for loans issued since 2014.
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NBO: NatureBase offset from C3.
These different tokens reflect an innovation made possible by bringing these credits on-chain while providing interoperability and composability. Each token itself consists of a transparent pool of underlying tokenized carbon assets that can be easily exchanged, even in fractions that are not practical or feasible with off-chain markets.
These tokens can then be used to form the building blocks of an entire on-chain ecosystem where tracking, selecting, holding and withdrawing specific tokens can be encouraged using decentralized finance (DeFi) mechanisms.
Key to this growing ecosystem are Automated Market Makers (AMMs). These AMMs use highly liquid pools of tokenized carbon to enable the transparent and efficient exchange of tokens on well-established and secure decentralized exchanges (aka DEXs) such as Uniswap and SushiSwap. This overcomes a key barrier within the VCM associated with over-the-counter trading and illiquid markets.
Unlike traditional markets that match buyers and sellers, AMMs are based on always-on algorithms that allow trades to be executed without permission and they automatically use pools of liquidity. Individual users simply exchange one asset for another using the AMM instead of having to place a traditional buy or sell order, which results in having to wait for that order to be executed.
Just like humanity and the earth itself, the blockchain has no central authority. Solving the climate crisis requires cooperation and coordination at a global level. Therefore, we need the interoperability of complex forces working together with minimal friction for the mutual benefit of all.
While improving the VCM is just one piece of the puzzle we need to solve, carbon asset stratification through tokenization enables a fairer and more equitable marketplace, where the flow of finance to pro-climate projects around the world takes precedence over intermediaries and market participants .
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