What is ReFi? Breaking Down Regenerative Finance
Blockchain energy consumption, tokenized carbon credits, and social impact
The energy consumption for maintaining proof-of-work blockchains, such as Bitcoin or proof-of-work era Ethereum, has received much criticism from the mainstream media. As Ethereum enters Proof-of-Stake era and many second or third generation blockchains already achieve carbon-neutral or even carbon-negative, it’s time to recognize and celebrate the Regenerative Finance (ReFi) movement.
What is ReFi? 3 main categories of ReFi
Regenerative Finance, or ReFi, is a cryptoeconomic model to incentivize positive environmental and social outcomes. Think of ReFi as a new generation of DeFi—DeFi plus positive externalities equals solving coordination failures like climate change.
Three main categories of ReFi to look at:
Layer 1 Blockchain Energy Consumption
Tokenized Carbon Credit projects
Social impact projects
Layer 1 Blockchain Energy Consumption
Before talking about how ReFi applications will solve the urgent and ambitious problem of climate change, we have to address the elephant in the room—blockchain energy consumption.
As the first blockchain, Bitcoin uses proof-of-work consensus, which demands a lot of energy as miners compete to solve a mathematical puzzle for verifying transactions. Many other first-generation blockchains that use proof-of-work consensus, such Litecoin and Dogecoin, share the similar issues with energy consumption. Second generation blockchains use proof-of-stake consensus which requires way less energy because they use validators for proving transaction.
Ethereum successfully transitioned to proof-of-stake from proof-of-work on September 15, 2022, known as The Merge. Ethereum energy consumption fell by ~99.95%. According to Digiconomist, at the time of writing, the total energy expenditure for securing Ethereum is closer to 0.01 TWh/yr. The carbon footprints of a single Ethereum transaction is 0.01 Mt CO2 which is equivalent to the carbon footprint of 22 VISA transactions.
There are many alternative layer1 blockchains are carbon-neutral or even carbon-negative, such as Celo, Algorand, Palm, and Flow. Side chain like Polygon is also highly energy efficient.
Tokenized Carbon Projects
Tokenized carbon credits are the main application for ReFi.
One reason to pay close attention to this use case is because the carbon credit market could grow to $50 billion by 2030, according to a 2021 report from McKinsey. All the big oil companies, major airline companies and corporations are snatching up carbon credits on the market to achieve their net-zero targets.
So what’s a carbon credit? Each carbon credit represents one tonne of CO2 or CO2 equivalent greenhouse gases emissions that contribute to global warming. There are two carbon markets. One is the compliance market which is the mandatory reductions for governments. The other one is the voluntary market allows corporations or individual to purchase carbon credits. This market provides the supply of tokenized carbon credits.
The current state of voluntary carbon market is opaque and have problems with double counting and limited pricing data. Not many people know how the price is set for these offset projects. That’s where web3 comes in. Tokenized carbon projects like KlimaDAO, Flowcarbon, Toucan, Moss, Nori and others use the blockchain technology to bring transparence to the carbon credit market.
(The problem of) Verra
In order to bring carbon credits from the traditional market onto the blockchain, tokenized carbon credit projects first need to go through a registry, like Verra. Verra, the Verra Carbon Standard (VCS), is one of the largest carbon credit certifier and issuer for the voluntary market.
Many Web3 projects use Verra to bring carbon credits on-chain. For example, Toucan—the infrastructure for tokenized carbon credit projects like Klimadao. The Toucan Bridge is a one-way bridge to bring retired carbon credits onchain. To retire a carbon credit in the carbon registry means it’s been taken out of the circulation of a carbon market.
Toucan has successfully brought 21 million carbon credits from the Verra Registry on chain. However, due to the disagreement over crypto projects’ intent and action of retirement on its register, Verra, on May 25, announced to ban the practice of creating tokens based on retired credits and decide to pivot to the direction of favoring centralized institution partnerships who can perform KYC for “live” carbon credits. This pushes web3 tokenized carbon projects to diversify supply and explore new markets. The value of millions of existing carbon credits may grow as more ReFi projects build on top of this liquidity.
Social impact ReFi projects
Web3 is more than just technology. It’s social coordination.
ReFi is also more than financial or environmental capital benefits. Projects that create positive social impact, like universal basic income (UBI) or public goods, are a ReFi subsector should be recognized.
Gitcoin is the incentive layer on Ethereum for building and funding digital public goods like open source projects. Developers can create or contribute to open source project and get funding through the quarterly Grants Rounds.
Many Universal Basic Income (UBI) projects create positive social and cultural externalities on local communities. For example, Proof of Humanity is an anti-sybil registry, each member in the register receives 1 UBI token every hour.
One other UBI project worth mentioning is Impact Market. Impact Market is built on Celo and distributes what they call Unconditional Basic Income (UBI) in the form of cUSD, a stablecoin on Celo, to vulnerable communities. So far, the project has successfully raised more than 3 million cUSD and distributed 2.9 million cUSD to local communities.
Closing thoughts
The traditional economic model of extracting value from land and natural resources to generate profit is no longer feasible due to mounting environmental and societal pressure.
ReFi now offers a brand-new approach to value creation that benefits both the environment and people thanks to blockchain technology. Keep an eye out for more existing projects to join the ReFi movement!
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This newsletter is for informational and educational purposes only, not financial advice. Always DYOR (Do Your Own Research).
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