Crypto, climate, and the foundations of a regenerative economy
Climate change and the ever-growing environmental crisis are a collective action problem. To achieve the mass-mobilization and innovation necessary to make progress on it, we first must solve the failure of incentives and coordination that are at its core.
Web3 introduces a number of structural innovations that have the potential to play a role in solving this problem. In particular, the concept of decentralized ownership, the tokenization of natural resources, and the economic activity that is unlocked as a result of those mechanisms, together provide a toolkit to build a radically new kind of economic system - one that incentivizes the regeneration of our natural resources instead of their degradation.
This represents a level of fundamental innovation that we frankly haven’t see anywhere else. For those that have yet to explore the crypto x climate overlap, we thought it would be worthwhile to share our thoughts as to why these innovations are important, and why, as environmentalists, we are optimistic on the potential of web3.
Three Core Concepts
1) Decentralized Ownership Creates Aligned Incentive Structures
Today, most economic systems are inherently extractive - I am required to extract from an ecosystem to derive value from it, which usually negatively impacts other participants in that ecosystem. Web3 promises the ability to create ecosystems that are owned by their participants, resulting in incentive alignment between each individual stakeholder and the broader ecosystem, i.e. members of FWB or holders of Solana are incentivized to contribute to their respective ecosystems because as owners, they stand to benefit from its advancement.
At its core however, abstracted away from current crypto-native applications, this mechanism of decentralized ownership is really just a way to ensure that the value of a communal asset is effectively apportioned and internalized by the community that uses and contributes to it. In theory that communal asset could be anything - a company, an ecosystem, or a piece of land.
For anyone with an environmental science background, this kind of language is probably beginning to trigger painful memories of some ES101 professor hammering away on the Tragedy of the Commons until you never wanted to see a sheep in a meadow ever again.
The inability to properly manage communal natural resources is the foundation of the environmental crisis. Emitting carbon into the atmosphere has real negative impacts to our economies, just like the protection of forests has real positive impacts. The problem is that there’s no easy way to value these impacts to our shared resources in a way that would allow them to be factored into our economic decision making. And because we can’t do that, there’s no financial incentive to be good stewards of our communal natural resources.
Proposed answers to this problem have largely revolved around policy-based solutions or regulation. Policy has had a meaningful impact to date and will certainly play a key role in our success going forward. But even the best of these solutions is ultimately just a bandaid - an attempt to compensate for an economic system that was fundamentally structured to incentivize extraction.
The mechanism of decentralized ownership represents a level of structural economic innovation that few in the environmental space likely ever imagined. With blockchain technology, we can decentralize the ownership of communal resources such that they are owned by the community that uses or benefits from them. With ownership established, we can then design an incentive system that encourages the community to contribute to those communal resources. If done correctly, this architecture unlocks the potential for economies that are mutualistic (we are incentivized to contribute to each others’ advantage) and regenerative (the resulting financial system incentivizes actions that regenerate the common pool resources instead of extracting them).
We’re already seeing projects experimenting with these concepts. One of the earliest was KlimaDAO, whose currency KLIMA is bonded to existing carbon offsets. Holders of KLIMA benefit when its value goes up, and so are incentivized to increase the value of the ecosystem. And because that currency is backed by a physical asset (existing carbon offsets), those actions are real-world regenerative as well, because as currency demand increases, they increase the price of carbon offsets, in theory incentivizing more sequestration.
We say in theory because in practice, KlimaDAO has hit a number of stumbling blocks (which we’ll discuss later on) driven by both real world constraints (low quality and limited supply of carbon offsets) and tokenomics (i.e. their ability to incentivize long-term engagement with the project).
It is a good reminder that we are still in the earliest days of this space - real-world constraints must be ironed out, and best practices identified. But in these early projects we see the first exploratory use cases of decentralized ownership as a building block for new regenerative, economic systems.
2) The Tokenization of Natural Resources Facilitates their Financialization
If decentralized ownership is the conceptual architecture for a new economic system, the tokenization of real world natural assets is the technical toolkit for actually applying that concept.
When information from real world systems and assets are tokenized they become a fungible product with an immutable record that can be easily tracked and verified. This reduces the need for trust and eliminates the bureaucratic friction of information collection and verification at each transaction, allowing for automation and thereby increasing the liquidity of that asset. When this happens, those assets become programmable and transactable at scale.
Let’s go back to the Klima example. Imagine the enormous bureaucratic burden of creating a currency backed by carbon offsets if the exchange of each offset had to be tracked and verified manually. It would be impossible. Instead Klima uses Toucan Protocol - which takes carbon offsets from off-chain registries (e.g. Verra) and on-ramps them via their Carbon Bridge, turning them into a token called TCO2. The result is a fungible, programmable asset, whose increased trackability actually reduces concerns around double counting and fraud that exist in off-chain offsets.
In theory anything that can be verified can be tokenized in this way, and turned into an on-chain programmable asset. OpenForest Protocol and Moss are tokenizing forestry-based projects, Nori is turning the regenerative agriculture practices implemented by farmers into a tradable, digital asset, and CityDAO is experimenting with tokenizing land.
This increased transactability allows us to then use these real-world assets as underpinnings and inputs for financial mechanisms. Once tokenized, the value of those assets can be securitized, collateralized for use in lending and insurance, or bonded to a currency and used as natural-asset backed reserves.
And this concept isn’t limited to physical assets, it also works for data and other real-world inputs. For example, oracles like Chainlink pull weather data on-chain, allowing DeFi products to bake changes in real-time weather data and eventually climate risk into financial instruments. In another example, Topl allows companies to bring their supply chain information on-chain, turning their sustainability practices into immutable records that can be tracked and monetized at scale.
Whether it’s natural resources, data, or an intangible asset, the concept is the same. The tokenization process allows for the “financialization” of real world assets - it provides us a way to internalize the value of those resources into our economic systems and financial instruments efficiently at scale.
3) These mechanisms unlock capital and increase the speed of innovation
The technical architecture and innovations inherent in blockchain remove a variety of friction points that exist in a web2 world, ultimately unlocking new sources of capital and making it easier for new projects to develop.
As we’ve explored above, in a web3 project, ownership of an asset can easily be broken down into small affordable shares (tokens) and the flow of returns from those shares can be automated in real-time. Tokenizing (or digitizing) any real world asset brings price visibility, legitimizes the asset class, and creates more trust from market participants, all of which in turn drives greater adoption and increases volumes. Meanwhile programmable ownership and returns eliminates the coordination issues of pooling capital and investing as a group, and incentivizes higher participation of capital. Together, these mechanisms unlock new capital altogether, by allowing individuals or enterprises to invest in projects that would otherwise be too expensive or too logistically difficult for them to participate in.
For example, Eden DAO pools money to invest in CDR projects as a carbon offtaker, with the future carbon credits being tokenized and sold. In a web2 paradigm, these CDR projects require one or two large investors or an upfront purchase agreement - the logistics of coordinating too many small investors would prohibit the projects from engaging with smaller check sizes. But Eden DAO solves this problem by decentralizing ownership of pooled capital on-chain, allowing anyone to participate. And because their ownership and associated returns are automated, verifiable and liquid, people are more incentivized to participate than if the project were off-chain (on a crowdfunding site for example). These mechanisms essentially unlock a new demographic of investors, and as a result, the amount of capital available to invest in these projects goes up.
But web3 not only unlocks additional capital, it also allows projects to do more with less capital. Automated coordination reduces bureaucratic and logistical overhead and also often removes the need for financial middle-men that drive up costs, allowing invested capital to stretch farther. At the same time, the open-sourced and composable nature of web3 also reduces the total amount of capital necessary to build, test and scale new concepts; new projects can use existing open-source tools and are building on top of massive protocols that are themselves growing and maturing every day.
These forces combine to create a space where the barriers to invest and the barriers to build are much lower. As a result we’re likely to see not just more investment in traditional climate projects, but also higher outputs of rapid experimentation and innovation around new concepts.
Putting It All Together
Together, these three features (decentralized ownership, the tokenization of natural resources, and the unlocking of capital) present a web3-enabled toolkit for building new regenerative economic systems. Many of the existing and potential applications of this toolkit draw on concepts that are not wholly new to the environmental movement (e.g. carbon markets, REDD+, climate-focused crowdfunding). But with blockchain, we’re able to eliminate the friction points of coordination and incentivization that to date have largely limited those projects from scaling.
Decentralized ownership, automated coordination and programmable assets allow us to create market-based ecosystem in all kinds of networks where it would not have previously been possible. And the composability and open-source nature of web3, combined with the unlocking of capital, means the ability to build and iterate on these kinds of projects has become radically accessible, meaningfully accelerating the learning curve. Together this represents the opportunity for a level of structural innovation that we’ve yet to see anywhere else.
A Winding Road Ahead
Of course, it’s important to pair optimism with a healthy dose of pragmatism. Web3 is merely a mechanism for coordinating digital flows of information - its ability to create sustainable impact is dependent on the effectiveness of its design and application, the quality of its inputs, and attitudes towards its adoption.
Just like any investment, a new project only works if the owners believe in the long-term value of their shared asset. While decentralized ownership makes sense on a conceptual level, in practice, numerous crypto-native projects fail because the incentives are not architectured effectively for long-term engagement and value creation.
A project is also only as good as the underlying data or asset, and this means that on-chain projects can be bottlenecked by off-chain problems. This is especially true when it comes to climate-tech, where new technologies and standards of data collection and verification are still emerging. For example on-chain carbon offsets are only as valuable as our ability to properly monitor and verify that offset in the real world. The standard verification agencies that projects like Toucan and Klima use are riddled with quality concerns to the extent that many environmentalists would call the offsets they issue worthless. A currency backed by carbon-offsets also only works if there is a liquid supply of those offsets in the real world - something that is likely soon to not be true as we stare down an impending capacity shortage of carbon sequestering projects. And these problems of supply and verification only escalate when you move to less standardized and newer nature-based solutions like forestry and regenerative agriculture.
There are also existential threats that are still to be reckoned with. Nearly every major country has or will soon have policy on both climate and blockchain. How those political attitudes evolve will be a serious gatekeeper for the potential development of blockchain-based climate solutions. And perhaps the most obvious concern is that today blockchain requires a ton of energy (one study estimated that a single BTC transaction consumes as much energy as it takes to power the average American household for 6 weeks) and cannot power our new regenerative economies until we find a way to decarbonize it.
To scale, projects need to be trustworthy in their standards and longevity. They need to be science-backed, with effective tokenomics, a climate-committed community, and a product that is sustainable because it solves a real need in the market. And the threshold only goes up when you begin working with governments and enterprises - something that will be necessary to drive global impact. In a world characterized by “pump-and-dumps”, where there’s new projects springing up every day with often very little oversight or transparency, interdisciplinary dialogue and collaboration will be necessary to build and elevate projects that can truly scale and become permanent. Not only between crypto and climate communities, but also between investors, scientists, product designers, economists, policy-makers and any other potential stakeholders.
Web3 is by no means a panacea for all of our ecological woes and we will likely see a lot of trial, error and evolution before any kind of true scalable environmental impact comes out of it. This is true of any new technology. And while the projects that exist today may not themselves provide a lasting solution, they still contain exciting kernels of innovation that are worth nurturing and exploring, because they could go on to be the founding mechanisms of a true regenerative economy.
To what extent any of this actually manifests - only time will tell. But if web3 is able to deliver on even a fraction of its promise, it may very well represent a once in a lifetime opportunity to shift the foundational structures of our economy, which is an opportunity we can’t afford to miss.
Index
A non-exhaustive list of crypto x climate projects can be found here.
Some additional materials:
On web3 more broadly:
Thanks to Mars Garza, Sean Thielen-Esparza, Craig Wilson, and Henry Chan for their thoughtful edits and contributions.
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