August 4, 2023
The Voluntary Carbon Market (VCM) is a relatively nascent system, having only come into being in the twenty-first century, and as such has certain constraints that are typical of early-stage markets. Some of the issues that industry bodies such as the Taskforce for Scaling Voluntary Carbon Markets have identified include:
By encouraging greater access to the VCM, as well as improved transparency, we can address these problems and better harness the power of collective action. The technology is now available to achieve this.
Since 2021, KlimaDAO has developed a suite of modularized public infrastructure that enables individuals and organizations to participate in the VCM via the Web3 tech stack. This new, open, and public blockchain-enabled version of the VCM is referred to as the Digital Carbon Market (DCM). For the DCM to succeed in radically scaling the wider carbon market, antifragile public goods—i.e. openly accessible infrastructure that becomes ever stronger through increased contact with complex systems and the stressors, shocks, and volatility they entail—that form the base layer of the DCM are essential.
Public goods come in many different forms. Examples include:
These are very disparate concepts, but economists agree that what unifies them as public goods is the fact that—to some degree at least—they are both non-excludable and non-rivalrous. But what do these terms mean in practice?
Non-excludable: Non-excludable means that once a public good is provided, it is available for everyone to use and enjoy, regardless of whether they contributed to its provision or not. This means that it is difficult or impossible to prevent anyone from benefiting from the good.
Non-rivalrous: Non-rivalrous means that the consumption of a public good by one individual does not reduce the amount available for others to consume. In other words, one person's use of the good does not diminish its availability or quality for others.
To revisit the list above, we can see that clean air is a public good because it is available for everyone to breathe, and one person’s consumption of clean air does not reduce the amount available to others. Similarly, flood defense systems can be considered public goods because they provide protection against flooding for everyone in a community, regardless of whether or not they directly contributed to the construction or maintenance of the systems. On another note, the idea of Ethereum as a public good platform holds a great deal of sway in the Web3 world, and is illuminatingly explored in this article by Bankless.
Public goods often present challenges for market economies because they tend to be underprovided by private entities. Since it is difficult to exclude people from using public goods and charge them directly, private companies may not have enough incentive to produce and maintain these goods. As a result, governments typically provide public goods, but this does not have to be the case. Public goods can be privately funded, and many are in fact not human made at all but are rather natural resources (sometimes called global public goods).
However, it is important to recognize that, when theory meets reality, the complexity of the real world has to be confronted: non-excludability and non-rivalry exist on a continuum and, in practice, as this article by Vitalik Buterin discusses, many public goods are hybrid in nature.
A common-pool resource is a type of good that is characterized by excludability but is rivalrous in consumption. In other words, common-pool resources are natural or human-made resources that are available to a group of individuals but which can be depleted or degraded if individuals overuse or exploit them. Most of the prominent examples of common-pool resources are found in the natural world, and include:
Elinor Ostrom defined common-pool resources and extensively discussed their governance. She found that many communities worldwide had developed successful systems for managing them without resorting to privatization or government intervention.
Based on her analysis, Ostrom identified eight design principles that can be used for the effective governance of common-pool resources:
These design principles aim to ensure that common-pool resources are managed sustainably and that individuals who rely on these resources have a say in their governance. By implementing these principles, communities can prevent overuse and degradation of common-pool resources, benefiting both present and future generations.
In the DCM, Ostrom is an influential figure and governance according to these design principles is a central concern. In their 2022 paper, Carlos Andres Diaz Valdivia and Marta Poblet assess how ‘Ostrom-compliant’ various DCM actors are, concluding that there is a spectrum of adherence among actors and in regard to individual principles but that KlimaDAO, Regen Network, and others continue to actively seek a decentralized governance structure that improves the market.
KlimaDAO develops public goods and provides stewardship over a common-pool resource for the DCM, stimulating economic activity that is good for the planet. We see the following modules of our current tech stack as public goods for the carbon market:
All of these public goods allow people to access and benefit from the DCM. They are openly available for Web3 developers and VCM actors to build with and integrate into other systems. Further, the more they are used the more antifragile they become: like nature’s systems, they feed back into each other—and from there they feed into the wider VCM, into the global economy, and ultimately into the planet itself, creating a virtuous circle in which economic transactions are no longer extractive in relation to the wider ecosystem but are instead regenerative. In the future, we envision the creation of further public goods for the DCM. These include the forward carbon projects we are developing alongside SCB Group and Aither.
On the other hand, the liquidity pools consisting of digital carbon credits and a stablecoin that KlimaDAO has stewardship over are not public goods but rather common-pool resources.
Although different from traditional common-pool resources such as the natural resources explored above, both carbon credits and traditional common-pool resources represent shared resources that can be managed and utilized by various users. In the context of decentralized finance, carbon credits and stablecoins provide value to users within the ecosystem, and their proper management—which we envisage as following Ostrom’s eight principles above—is crucial for maintaining the system’s sustainability and overall market health.
These pools can, of course, be depleted so use does not fundamentally strengthen them and they cannot therefore be conceived of as public goods. However, there are multiple benefits that accrue to the market as a whole when these pools are treated as common-pool resources. These include:
Thus, while the liquidity pools may be depletable themselves, their presence in the ecosystem strongly increases the antifragility of the DCM and, by extension, can play a key role in enhancing planetary wellbeing.
While wind extinguishes a candle, a gale energizes a fire: the key to longevity and success in the face of adversity is to become beyond resilient. Taleb writes (Antifragility, Prologue IV) of how fragile systems fail in the face of volatility—and that “everything that does not like volatility does not like stressors, harm, chaos, events, disorder, ‘unforeseen’ consequences, uncertainty, and, critically, time.” By contrast, antifragility requires volatility—and time—otherwise the property cannot be birthed.
KlimaDAO has been forged in fire and we are fully aware that the road ahead will not be smooth. As a pioneer in this space, and undoubtedly one of the first decentralized autonomous organizations to achieve real-world, pro-planet effects, we take our collective responsibility seriously. We remain committed to our mission of developing public goods for the carbon markets and supporting the sustainable management of common-pool resources for the benefit of the planet and of future generations. Through our modular tech stack, we aim to create a virtuous cycle whereby economic activity aligns with ecosystem health. By following Ostrom's design principles for the effective governance of common-pool resources, we can prevent degradation and overuse. Additionally, we are continuously working on expanding public goods for the DCM, including forward carbon projects and other innovations to come. We welcome partnerships with other actors in the DCM, including those seeking to innovate in terms of new standards.
Humanity’s failure to scale up climate finance and get on track with 2030 and 2050 emissions targets has thus far been the result of coordination failure. As a decentralized autonomous organization, KlimaDAO seeks to solve for that—we exist because we believe we can solve this coordination failure, leveraging our unique protocol mechanics, governance structure, and technology, all of which enable us to provide public goods and common-pool resources in a way that other organizations cannot. Everything we have built, we have built for the public good. Further, the public goods we have given the DCM are beyond resilient; they are antifragile at their core and they are here to stay.
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