I posted this note as part of the discussion around CGP30 (adding voluntary carbon credits to the reserve), and @Slobodan suggested that I elevate it to a new topic, so as to frame a broader discussion on the potentiality for Celo to foster an ecologically regenerative financial system. This post defines the idea of natural capital backed currencies, and why I see natural capital backed currencies as so important for our shared future.
The narrow problem
Much of the current discourse around the environmental impact of cryptocurrencies centers around the carbon footprint of bitcoin. From this narrow perspective, Celo addresses the carbon issue in three ways:
First, the Celo consensus protocol uses an energy efficient proof-of-stake mechanism.
Second, the protocol offsets the carbon emissions associated with consensus at the protocol level.
Third, there exist tokenized carbon credits on Celo, that then enable composable ecological assets (for example, eBTC, that wraps cBTC with cMCO2 to create carbon-neutral BTC).
These three mechanisms address the carbon footprint considerations. But this narrow analysis misses the larger, more important point.
The bigger problem
The broader point is that the traditional financial-economic solution is responsible, in large part, for our current ecological crisis. In our economic system, economic health is defined in terms of production and consumption, dismissing the costs of pollution and natural resource consumption as externalities, depleting our finite natural resources as a consequence, with disastrous effect.
In this context, the real questions to ask are not the narrow ones around the carbon footprint of Bitcoin. Our current economic system running on a carbon-neutral bitcoin would still ravage the environment.
The real questions to ask are the deeper ones: how can we devise a money system that internalizes the costs of natural capital destruction (and internalizes the benefits of natural capital preservation and restoration)? How can we devise a money system wherein economic growth leads naturally to ecological regeneration? How can we devise cryptocurrencies such that their widespread adoption would reverse our current ecological crisis?
Natural Capital Backed Currencies
The original idea for natural capital backed currencies comes from Charles Eisenstein in his beautiful book Sacred Economics . Here, he observes that whatever backs money, people tend to make more of. When gold backed money, there was an intense incentive to mine gold, because it was, effectively, printing money. In older cultures where cattle backed money, there was a similar overproduction of cattle.
So why not, he proposed, back money with things that we want to see more of – pristine forests, clean rivers, etc.
This is a powerful idea. If, as a society, we were to denominate our economic activity in natural capital backed currencies, any economic growth – any increase in money in circulation, would lead to a growth in preserved natural resources.
While the idea is a powerful one, its implementation in the context of fiat currencies (Charles wrote Sacred Economics before crypto) would be extremely difficult, involving interlocking agreements between local governments, regional governments, national governments, and international treaties.
But Celo Dollars can enable natural capital backed currencies in a different way.
The Celo Reserve
The stability protocol for Celo Dollars (cUSD) could be understood roughly as follows. If the price of cUSD on the open market is greater than $1, it suggests that the demand is greater than the supply, and the protocol increases supply to meet demand by printing cUSD, selling it on the open market for $1 in CELO, and depositing that CELO in a decentralized reserve. If, on the other hand, the price of cUSD is less than $1, then it suggests that the supply is greater than the demand, and so the protocol reduces supply to meet demand by buying cUSD on the open market for $1 in CELO, and retiring the cUSD. The reserve assets (and their target allocations) are decided through governance, and the reserve is periodically rebalanced so that the reserve assets meet their target allocations.
Natural Capital in the Reserve
With NFTs, it’s possible to tokenize real assets, including forests, farmland, and watersheds. Moreover, sensors and satellite imagery can be used in conjunction with smart contracts to ascertain (and create incentives for) preservation and reforestation of forests, increasing the carbon sequestration properties of farmland through regenerative agriculture, and remediation of pollutants in watersheds.
As natural capital tokens come into existence, a community is empowered, through governance, to choose to allocate a certain target allocation of natural capital tokens to the reserve – for example, the community may choose to allocate 40% of the reserve to forest tokens.
This would have a massive impact. The more Celo Dollars go into circulation, the larger the reserve gets. The larger the reserve gets, the larger that 40% allocation gets. The larger the allocation gets, the more the protocol programmatically preserves forests. There are currently ~$50mm cUSD in circulation. At a 40% forest allocation, the reserve could hold and preserve tens of thousands of acres of forest.
Carbon: the first natural capital tokens
Tokenized carbon credits are the only natural capital tokens that exist today, and it’s an important primitive in the ecosystem of natural capital tokens, for a number of reasons.
First, there is an existing use case (carbon offsets) and a liquid off-chain market for carbon credits.
Second, it lends itself to composable ecological assets – for example, carbon-neutral bitcoin (like eBTC).
Third, it is natural to denominate yields for natural capital tokens in carbon credits (for example, a tokenized forest NFT can be staked to yield carbon tokens commensurate with the carbon credits earned through its preservation).
Forest tokens and regenerative agriculture tokens
Allocating a portion of the reserve to carbon has the effect of the reserve acting as a carbon sink – as the cUSD-denominated economy grows, the reserve buys and holds more carbon credits, effectively sequestering carbon out of the atmosphere in proportion to economic growth.
While this is powerful, I don’t see carbon credits in the reserve as the long-term solution, because there are two asset classes (that don’t exist yet) that are even more powerful – forest tokens and regenerative agriculture tokens. From a mission perspective, holding these tokens in the reserve has beneficial effects beyond just carbon sequestration – for biodiversity and soil health, as examples. From a practical perspective, these tokens can generate a stream of carbon credits over the lifetime of the token, bolstering the reserve and increasing the stability properties of cUSD.
Design considerations for forest tokens and regenerative agriculture tokens
There are several important considerations in the design of a natural capital token ecosystem, and I would love to see these develop on Celo.
Tokens. These tokens will naturally be NFTs – they represent a specific parcel of a specific forest or farm. From a regulatory point of view, they would likely be seen as commodity tokens.
Staking Services. They should be able to be “staked.” Staking a natural capital token with a project administrator would allow the project administrator to add value to the land (protecting the forest, switching the farming technique to regenerative ag, etc) to generate ecological service credits (like carbon credits) that can be split between the staker and the project manager. In this context, staking would effectively be the equivalent of renting land to somebody who could use it to enhance the biodiversity, soil health, or carbon sequestration properties of the land.
Exchanges. There would need to eventually be an exchange for such assets. Because they are NFTs, they are less natural fits for DEXes like Ubeswap. But because of the specific nature of these assets, they are less natural fits for traditional NFT galleries, that are more focused on art and music.
Reserve. The reserve would likely need to start thinking of itself as a capital stack. NFTs are less liquid than fungible tokens, and it would not make sense for the reserve to sell them at every dip in cUSD circulation. Rather, the liquid tokens in the reserve should be the first out in dips in cUSD circulation, and natural capital tokens should be at the bottom of the capital stack.
Oracles. Over time, protocols that measure and report the ecological value of tokenized natural capital (such as number of trees, water retention properties of the soil, biodiversity, etc) using sensors and satellite imagery, will be useful for smart contracts that trigger on enhancing the ecological value of the land.
Assuming we are able to get to a meaningful portion of the reserve to forest tokens (say, 40%) in the few year time frame, the reserve would, at current cUSD in circulation, preserve tens of thousands of acres of forest. Assuming cUSD adoption grows to the level of USDC’s current adoption, the reserve would preserve (or reforest) tens of millions of acres of forest. In the long term, this has the potential to have a much larger and systemic impact, aligning economic growth with ecological regeneration. This is extremely powerful, and if we are to truly live into our value of connectedness, every bit as important as financial inclusion.