Published Thu Jun 23 2022
Regenerative Finance, or ReFi, speaks to a preference for the funding of community and public goods over — or in parallel to — projects that are expected to produce a return for the funder. In the context of KlimaDAO, ReFi refers to the environment and our climate, and how DeFi can enable value creation for carbon projects across the globe via the Voluntary Carbon Market.
In this article we introduce some key terms for both DeFi and the VCM to aid understanding of ReFi.
Blockchain - A chronological collection of digital records (aka a distributed ledger), with each block referring to the block before it. Blocks can not be rewritten, instead, a new block is added to the chain that details the changes.
Blockchain bridge - Facilitates cross-network transactions by allowing assets to move between separate blockchains and/or layer 2 networks
Burning - Function that permanently and irreversibly reduces supply of an ERC20 Token. In the context of the ReFi space, burning mechanisms are utilised to achieve on-chain ‘retirements’ of tokenized carbon assets, as the process prevents double-use when making environmental claims.
Carbon bridge - Connects the voluntary carbon market to Web3; creates tokens that represent carbon credits.
Carbon offset - A carbon offset unit represents the removal of one tonne of carbon dioxide equivalent (t CO2-e) from the atmosphere, or the avoidance of one tonne of emissions.The term *carbon dioxide equivalent* refers to the summation of multiple greenhouse gases based on each gases global warming potential (GWP). The Global Warming Potential (GWP) was developed to allow comparisons of the global warming impacts of different gases. Specifically, it is a measure of how much energy the emissions of 1 tonne of a gas will absorb over a given period of time, relative to the emissions of 1 tonne of carbon dioxide (CO2). For instance, methane has a GWP about 28 times that of CO2.
Carbon Pool - Allows for some level of commoditization by pooling similar carbon tokens based on specific criteria, such as vintage or methodology. This is necessary to produce a transparent price signal to the market for different categories of carbon credits.
DAO (decentralised autonomous organisations) - A DAO is a transparent and member-driven organisation which has its rules written in code. It often has a governance token to vote on proposals but sometimes uses other governance mechanisms to make decisions.
Decentralisation - Allowing people to interact one on one with assets, without the need for an intermediary.
Decentralised Exchange (DEX) - Peer-to-peer marketplaces where traders make transactions directly without handing over management of their funds to an intermediary or custodian. These transactions are facilitated through the use of self-executing agreements written in code called smart contracts. Carbon pool tokens typically trade on a DEX.
Decentralised Exchange: Automated Market Maker (AMM) - AMMs rely on blockchain-based services that provide information from exchanges and other platforms to set the price of traded assets called blockchain oracles. Instead of matching buy orders and sell orders, the smart contracts of decentralised exchanges use pre-funded pools of assets known as liquidity pools.
The pools are funded by other users who are then entitled to the transaction fees that the protocol charges for executing trades on that pair. These liquidity providers need to deposit an equivalent value of each asset in the trading pair to earn interest on their cryptocurrency holdings, a process known as liquidity mining. If they attempt to deposit more of one asset than the other, the smart contract behind the pool invalidates the transaction. Liquidity provision is ‘permissionless’.
The use of liquidity pools allows traders to execute orders or to earn interest in a permissionless and trustless way (read more). AMMs are the primary DEX infrastructure utilised by the on-chain carbon market, particularly on the Polygon blockchain.
Decentralised Exchange: Order Book DEX - Order books compile records of all open orders to buy and sell assets for specific asset pairs. Buy orders signify that a trader is willing to buy or bid for an asset at a specific price, while sell orders indicate that a trader is ready to sell or ask a particular price for the asset under consideration. The spread between these prices determines the depth of the order book and the market price on the exchange. In DeFi, order book DEXs come in two flavours, on-chain and off-chain, depending one here order book information is held.
Decentralised Exchange: DEX Aggregator - DEX aggregators use several different protocols and mechanisms to solve problems associated with liquidity. These platforms aggregate liquidity from several DEXs to minimise slippage on large orders, optimise swap fees and token prices and offer traders the best price possible in the shortest possible time.
Double claiming - A situation in which the same emission reduction or removal is claimed by two different entities towards achieving climate change mitigation, e.g. once by the country in which the emission reduction or removal occurs, and once by the entity using an emissions unit or credit.
Double counting - A situation in which a single greenhouse gas emission reduction or removal is counted more than once towards achieving climate change mitigation. Double counting can occur through double issuance, double use, and/or double claiming. Double counting has been avoided in the ReFi space by ‘burning’ utilised tokenized carbon assets so that they can not be used more than once by organisations or individuals looking to claim their environmental benefit.
Double issuance - A situation in which more than one emissions unit or credit is issued for the same emissions or emission reductions. This leads to double counting if more than one of these emissions units or credits is counted towards achieving climate change mitigation. This can occur, for instance, when the same project is registered under two different carbon programs or twice under the same carbon program. This situation can lead to double issuance if carbon programs do not implement proper controls to ensure that, if a project is registered with more than one program, offset credits are cancelled by one program before offset credits are issued by another program for the same emission reductions or removals. Double issuance has been avoided thus far in current carbon offset tokenization schemes by ‘retiring’ credits on their host registry with unique hash information embedded in the retirement so that they can be reissued on the blockchain.
Double use - A situation in which the same emissions unit or carbon credit is counted twice towards achieving climate change mitigation. This could, for example, occur if an entity would use a single emissions unit or carbon credit to fulfil two different purposes.
Distributed Ledger Technology (DLT) - All transactions are synchronised across a network of independent computers with no central entity; blockchain and hashgraph are two types of DLTs
Ethereum - Added smart contracts to the blockchain making it possible to run programs. Ethereum is proof-of-work but is transitioning over to proof-of-stake (was referred to as Ethereum 2.0 but has been rebranded as the Consensus Layer to help avoid scams).
NFT (non-fungible token) - Tokens that represent ownership of digital items. The asset itself is not stored in the token, only ownership information and any unique properties associated with the asset. Creators retain copyright and reproduction rights.
Oracles - Tools that send real-world data (like weather measurements or asset prices) to smart contracts.
Permissionless - refers to public blockchains that allow anyone to participate in validating and mining transactions, as well as using the system to buy, sell, trade and utilise assets.
Polygon - A Proof of Stake sidechain that was created to scale Ethereum and provide lower transaction fees. Users can build Ethereum applications on Polygon and not take up network space on Ethereum. Polygon is a carbon neutral blockchain via offsetting emissions associated with network activity.
ReFi (regenerative finance) - leveraging pooled capital from DeFi as a tool to solve systemic problems (racism, environmental degradation, climate change) at scale.
Retiring (offsets) - Retirement refers to claiming the environmental benefit of an offset and permanently removing it from the market to avoid double claiming.
Sidechain - Secondary blockchains that run in parallel to the parent blockchain to help process some of the data; trading off security for speed; e.g: Polygon. Ethereum side chains can be referred to as ‘Layer 2s’ or ‘L2s’.
Smart contracts - Computer programs stored inside a blockchain that deploy when a condition is met ("if this, then that").
Stablecoins - A token linked (pegged) 1:1 to something external of value, such as a currency. Oracles are often used to maintain price information for such assets on-chain.
Token - Digital assets that use an existing blockchain (and pay a fee to that blockchain) to operate and verify transactions; tokens enable interaction with decentralized applications. Also allows one coin to be represented on another coin’s blockchain network.
Governance Token - a governance mechanism for making decisions in a more trustless and collaborative way. Voting rights are often bound to a governance token.
Tokenized Carbon - Refers to a carbon asset brought onto the blockchain; usually represented as an NFT. Tokenized carbon can refer to a single unit (e.g. one carbon offset) or a batch of assets (e.g. carbon offsets from a specific project and vintage period). These NFTs can be deposited into Carbon Pools to create fungible ERC-20 tokens representative of that pool. Examples are provided below under ‘Protocol Specific Terms’.
Wallet - According to Cody Simms: "The wallet is the core concept of Web3. You use it to sign into web3 applications (websites) & to transact. It's your identity + your footprint + debit card." Wallets hold private keys which are the passwords that grant access to cryptocurrencies in a safe and accessible manner. Examples include Metamask (web browser based wallet) and Trezor (a hardware wallet).
Web3 - The concept that individual users will own and control their own digital content rather than monopolistic tech companies.
C3 (C3) - a utility token for the C3 carbon-bridge. It is distributed as a reward to users of the protocol that stake, bridge or provide liquidity. C3 can be used to vote on protocol decisions.
BCT (Toucan) - BCT is the carbon reference token for the base carbon pool, which accepts any TCO2, independent of project type (e.g. forestry carbon offsets, renewable energy carbon offsets or methane capture offsets, ...). At this time, the only requirements for TCO2s to be eligible for deposit into the BCT pool are: the TCO2 is verified by Verra, and has vintage later than 2008. BCT’s pool exists on the Toucan platform. In 2022 the BCT vintage criteria was raised to 2014+.
NBO (C3) - Derived from a Carbon Pool accepting most VCS and GS methodologies for credits issued from 2014 onwards. There are a number of blacklisted methodologies, including VM0002 due a perceived lack of additionality after 2014. More information is available here.
NCT (Toucan) - Nature-based carbon credits, excluding projects associated with the VM022 methodology.
MCO2 (Moss) - a tokenized Verra VCS protocol carbon credit. Moss created MCO2 in August 2020 by curating REDD+ projects in the Amazon Forest (one in Peru, five in Brazil). The MCO2 token was the first carbon credit to be listed on major centralised exchanges like Gemini and Coinbase, and the reconciliation of its ledger pool is done in real time by crypto auditor Armanino.
MOSS (Moss) - MOSS is the governance token of the Moss DAO, which grants holders the right to vote on proposals affecting their protocol and token.
UBO (C3) - Derived from a Carbon Pool accepting most VCS and GS methodologies for credits issued from 2014 onwards. There are a number of blacklisted methodologies, including VM0002 due a perceived lack of additionality after 2014. More information is available here.
KLIMA (KlimaDAO) - KLIMA is the native currency of the KlimaDAO protocol, backed by at least one Tokenized Carbon Tonne held in the KlimaDAO treasury. KLIMA can be staked with the protocol and be used to vote on protocol governance decisions. New KLIMA is minted when the protocol acquires more tokenized carbon tonnes via bonding.
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