Hi folks, @Slobodan kindly shared some time with me today to discuss ReFi.
This touches also on questions from @markbarendt on the Reserve Decentralisation thread and also @John.Fletcher on the thread about adding more stables to the reserve.
Summary
I know there is a lot more in the proposal above, and I am both omitting a lot of good ideas and a lot is over my head until I learn more. Still, these few points above helped to ground me a bit on what makes big picture sense for what we’re doing.
These notes aren’t comprehensive but hopefully add some colour from a ReFi-outsider perspective.
What kinds of natural capital are we looking at?
Short term, voluntary carbon credits like Flow GNT and Toucan NCT are being considered.
- Both would be native tokens on Celo (avoiding bridging risks). I’m actually not sure now if cMCO2 is native or bridged, but it’s what we have in the reserve today and it’s also a voluntary credit token.
- Voluntary credits are much less liquid than mandatory credits (like in the EU and California) and trade at a much lower price (see some charts here: Live Carbon Prices Today, Carbon Price Charts • Carbon Credits). However, they are much more easily tokenizable as there are no regulations (by definition) or KYC.
- It’s hard to know where price goes for these voluntary tokens (probably true as well for mandatory credits, although there is a regulatory driven demand for those). Of course it’s hard to know where Bitcoin and Eth prices will go as well. All in all, carbon credits, and specifically voluntary credits would be a (perhaps ideally small) portion of total natural capital reserves.
- On a rather specific note, it’s important that Celo buy tokens in a revolving fund of credits, one in which market participants are regularly burning tokens (which allows the oldest tokens in the pool to be minted). The specific risk here is that the reserve gets stuck holding very old credits (which will tend to trade at increasing discounts to newly issued credits).
Longer term, there is one option that is clear to me so far, which I (my description only) view as ReFi impact bonds - basically tokenized loans that go to ReFi projects.
- A company called Real World Assets (working with Maker) had analysed in detail how to structure these products for a DAO. It seems piggy backing on this, and having companies like RWA tokenize (tradable) bonds for the Celo reserve is a good option.
- These loans/bonds would be fiat denominated and also yield bearing. From a reserve stability standpoint, this is good because that would provide correlation with cStables.
- One of @sep 's five principles of money for Celo is to avoid debt. However, Sep has also mentioned that features of Celo don’t have to meet all five principles, they can meet one or some. Here, it’s the natural capital backing that would be met.
- In principle, I would imagine a company like RWA could also tokenize the equity of ReFi initiatives, if we really wanted to avoid debt. My view is that some debt makes sense for stability reasons.
- To be clear, this approach involves trusting RWA. There are a few approaches, but one is that RWA (or others) would propose certain groups of projects/initiatives to Celo governance. Over time, it would make sense for Celo to work with many companies like RWA for diversification.
- A little bit as with voluntary carbon credits, there are strong aspects of impact type investing that are subjective and this can lead to gaming and adverse selection for buyers of debt/equity in these projects. This is obviously a significant risk.
Wildcard idea
I see a way to use perpetual futures (as FTX do for stocks and crypto tokens) to create synthetic versions of carbon credits (and perhaps other commodities, equities or bonds). For example, a perp could be created natively on Celo that tracks European trading credit (ETS credits). It might seem that not owning the underlying credit is out of line with the reserve’s mission, but - on further thought - I believe this is not the case. If there were an ETS perp trading on Celo, as the reserve buys it, the price would go up. This creates an arbitrage with real ETS credits and puts upwards pressure on the real ETS credits. So I believe there would be a real market impact. These products are not permitted in the US but there are lots of perps on FTX for non-US investors. I’ve done some outreach. Could be a bad idea, but could be worth a small pilot.