Celo and Regenerative Finance

[nirvaan]

Hello all, glad to be here!

@sep

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?

Just want to restate the wonderfully phrased goal here before diving into the details. In an ideal world, all financial systems could support Dr. Raworth’s proposed “Doughnut Economics”, where we strive towards supporting the inner circle and mitigating the outer. Celo as an organization is doing excellent work on both fronts.

We must remember that it’s not just about CO2 sequestration: there is so much room for earth-improving initiatives. In fact, most carbon offsets are measured in tCO2e (ec.europa .eu/eurostat/statistics-explained/index.php?title=Glossary:Carbon_dioxide_equivalent), or “tonne of CO2 equivalent”, which could also be nitrogen, methane, energy watts, chemical volumes, water body purification, etc. This equivalence is calculated based on associated metric Global Warming Potential (GWP), which will be important later for exchanges. All things considered, CO2 is arguably the most crucial and impactful to sequester, and this base unit (1 tonne of carbon) is the backbone of our regenerative economy.

I think the first rule of NatCap in the Reserve should be “No Vintages”: in order to create future-friendly yield-bearing carbon assets, we cannot onboard credits for historically sequestered CO2. I recently tried purchasing Carbon Removal Tons on Nori (P2P marketplace with blockchain integration, easily accessible to retail investors) and ended up with 5 “NRTs” of Iowan carbon sequestered in 2015. This credit has no future appreciation in value, and would trade at a discount on any secondary market. “Vintage Futures”, on the other hand, are valuable institutional products that hedge our overall exposure - there is little doubt companies will need to offset carbon produced this year.

Now onto the topic at hand: a regenerative financial architecture for the Celo reserve.

@sep

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.

In a nascent, fragmented carbon offset market dominated by corporate giants bulk-buying allowances with dubious impact (as I outline in this article), I totally agree that generic carbon credits are not the solution, and how could they be? Each offset represents bootstrapped funding for a unique operation such as forest conservation, sustainable agriculture, or carbon capture. @sep listed forest and agriculture tokens, and I think we should add all the primitives that can be mapped to CO2 equivalence through Greenhouse Warming Potential (GWP) or otherwise.

Carbon offsets are priced by estimating the logistical cost of sequestering 1 ton of carbon for several years based on operational requirements, location, environmental risk factors, and there are many other factors to price in.

[Page 15 of report: Standard, Methodology, Attribute framework]

The “Taskforce on Scaling Voluntary Carbon Markets” (TSVCM) published a superb report in July that I highly recommend to anyone here, and will be referring to throughout this post. They want to ensure quality and clarity in the carbon market so that defunct 2011 wind farms and already-protected forests don’t slip through; and have produced a useful framework for judging “Core Carbon Principle credit” (CCP) thresholds. They are implementing what amounts to predefined project templates with endorsed verification Standards, accounting Methodologies, and legal Terms of Use. This is particularly important for onboarding indemnified assets and scaling the Celo NatCap reserve.

[Page 11 of report: Standards packaged with Limitation of Liability, Dispute Resolution, etc.]

“Harmonized Terms of Use across Standards enhance clarity for buyers over what conditions they are bound by when trading CCPs with different origins, making credits more fungible”. I would replace fungible with “poolable” on Toucan, a partner of the Climate Collective. As @Slobodan pointed out in about Liquidity, we need a frictionless market in which to trade such assets. A common denominator of CCP certification would help baseline credibility and market price discovery. One could also pool assets into a liquid carbon index, or more exclusive “curated carbon pools” that will help us identify which attributes are seen as key differentiators by the market.

The Taskforce’s predefined Attributes are where CCP credits get a major value boost. Anything tagged with ESG, CCB, SDG, W+ is worth substantially more to corporates, and of course removal is more valuable than avoidance or reduction. Association with Chartered Accountants may inspire more confidence for some, while tech-based solutions may be a publicity priority for other firm.

[Page 17 of report: Attributes including Type, Removal/Reduction Method, Storage method, Co-benefits, Corresponding Adjustments, etc.]

And this is where we get back to NFTs:

@sep

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.

More than a parcel of farm, this NFT should represent all relevant attributes such as type (removal/avoidance), vintage (>2020 or later), region, those mentioned above from TSVCM, and many more. I think this lends itself to restricted generative NFTs like Loot or NFT World::

[See this collection opensea .io/collection/nft-worlds]

I feel this fictional NFT is a decent mock-up for a real-world carbon-and-equivalents sequestration parcel. As @papa_raw pointed out we need some sort of biomimetic market that follows real world state, and perhaps Chainlink Keepers can maintain Dynamic NFTs (blog.chain.link/create-dynamic-nfts-using-chainlink-oracles/) that update with real world data.

@sep

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.

Now as you all rightly pointed out, real world data is somewhat tricky. dClimate has a lot of data that is used by their partner company Arbol, a parametric insurance provider (which we should definitely look into for the reserve assets). This data is already on-chain and we should be able to integrate between Celo and Chainlink’s overlapping fall hackathons. I also want to highlight a few cutting edge solutions that will eventually help enable a more data-driven and trusteless marketplace:

• Pachama: Lidar, Satellite, AI, machine vision, to measure and model carbon capture in forests
• Yardstick: Scalable soil carbon IoT measurement tool

But for now, these live-carbon updates would presumably be projections or periodic measurements. I like @papa_raw idea of using Spectre or Dodo to fractionalize a NFT, establish a liquidity pool, and engage in “price discovery”. Until a point:

@papa_raw

One example would be: some sort of price ceiling is hit, and growth of the original NFTs market is curtailed in favor of building up a new capital reserve to purchase more land – which is either added to the original NFT or designated as a new NFT and placed in a composable financial artifact with the first (e.g. ERC-998 or an N-dimensional LP token).

I am not sure of the mechanics here, but I feel this could be accomplished with ERC721 (or perhaps ERC1155) like Uniswap v3 NonFungiblePositionManager(docs.uniswap. org/protocol/reference/periphery/NonfungiblePositionManager#positions). I am putting together a better architecture diagram but I think this ties into crowd-funding and “liquidity bootstrapping”.

Though I agree with the concept, I think “staking” is potentially misleading because the DeFi community is accustomed to redeeming their not-so-locked tokens or liquidity at a moments notice. OlympusDAO pioneered the crypto Bonding (olympusdao.medium. com/a-primer-on-oly-bonds-9763f125c124) model which ensures enduring liquidity and reserve assets, we should learn from their journey.

@sep

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.

I wonder if we can extend this to something like PoolTogether pools. What if a Pod staked tokens (for say 6 months, long enough to call it a “Bond” in DeFi), and periodically donated its collective interest to a project via its NFT? This may not be enough to bootstrap a project, but could provide a steady source of additional income.

That’s all for now, will come back with some cool diagrams and further thoughts! Hopefully, next time I can post more images and links…