Web3 and blockchain technology have opened up numerous finance opportunities, initiatives and instruments over the past decade. Cryptocurrency is now a mainstream topic and adoption continues to grow across the globe – enabling people to operate outside of the traditional financial system.
As finance use cases in Web3 continue to evolve, there is one relatively new concept called Regenerative Finance (ReFi) that is gaining significant traction. This combines Decentralised Finance (DeFi) with positive social-economic and environmental goals – such as removing carbon dioxide from the atmosphere.
Web3 technologies offer multiple opportunities for exacting change across the world from a financial perspective. These include decentralisation and the democratisation of financial services, removing geographic barriers, improving accessibility, and enabling community management of financial systems.
ReFi effectively seeks to align and augment the positive aspects of DeFi in service of regenerating the planet after a century of industrialisation and unbalanced wealth distribution.
Financial Markets & Cryptocurrency
In late 2022, the cryptocurrency market seemed to be in turmoil. One of the largest exchanges in the world, FTX, went bust and its owner was brought up on fraud charges. The media coverage of this was extensive, and doubts were raised over the volatile, turbulent nature of the cryptocurrency market.
By extension, some have been prompted to ask – “what are the actual real-world use cases for Web3 technologies?”
Blockchain, the underlying technology that cryptocurrencies are built on, is recognised as having a plethora of use cases, from automotive manufacturing to supply chain, luxury goods to gaming and beyond. This is in part because, across all industries, it excels at aligning incentives to clear and measurable goals.
The traditional financial markets have long been modelled on the extraction of value and exploitation of people – empowerment for the few whilst relying on the labour of many. Resources and wealth are funnelled towards a tiny number of places and individuals.
This system was shaped by free market forces without sustainability in mind, and many issues the world faces now are consequences of this unbalanced, self-perpetuating paradigm. While cryptocurrency gives the underlying capacity to restructure this system and rebalance wealth distribution more fairly, it still has its drawbacks when it comes to certain issues.
For example, Bitcoin operates using a Proof-of-Work mechanism to gain consensus across its network and make transactions. This requires participants to ‘mine’ (generating Bitcoin rewards for themselves), solving ever-increasingly difficult cryptographic puzzles. The amount of energy required for this is massive – the total annual estimated consumption for Bitcoin production is higher than that of the entire country of Argentina.
Action was undertaken to remedy this specific problem. Ethereum, for example, switched to a Proof-of-Stake mechanism, reducing the energy required for creating ETH by 99.95%. Despite this undoubtedly positive shift, it’s still clear that if Web3 financial systems are going to be sustainable, they’re going to have to be deliberately designed with self-renewing processes in mind and work to help mend the planet.
Recognising this, financial actors and activists in the Web3 space have started to innovate, giving rise to the concept of ReFi.
To understand ReFi, we first need a general overview of Regenerative Economics, or Regenerative Capitalism.
The phrase ‘Regenerative Economy’ was first coined in 2015 by John Fullerton. In his 2015 paper, Fullerton muses that “a Regenerative Economy maintains reliable inputs and healthy outputs by not exhausting critical inputs or harming other parts of the broader societal and environmental systems upon which it depends.”
Regenerative Economics theory recognises that rather than trying to completely overthrow the entrenched capitalist system, it is better to try and evolve it to the next stage before it’s too late. The aim is to reconfigure the current system so that rather than remaining extractive, it becomes regenerative with everyone working together to restore and conserve what we have left of the world around us.
The goals go beyond reducing net carbon emissions to zero, but to actually removing carbon from the atmosphere (hence the term ‘regenerative’) amongst other ecologically positive aims.
At the heart of the global economy is the world financial system. If there’s to be a significant reverse of climate change and the addressing of other socio-economic problems such as poverty, it should start with rethinking the current system of global economics.
This is to shift thinking from the ‘take-make-destroy’ model towards a more holistic worldview and examine the current financial incentives for businesses to engage in ethical commerce. Many organisations, large and small, have started to review and realign their business models towards more sustainable practices.
However, oftentimes the incentives for doing so are less than altruistic – ‘greenwashing’ has become prevalent. That is the act of emphasising the sustainability of a business’s products and services (even if they aren’t sustainable at all) to capitalise on consumer trends around environmentalism and gain a competitive advantage.
This can dilute or even hijack the overall message and does nothing to prevent the environment’s further decline.
So then, what is Regenerative Finance?
ReFi can be considered the real-world, Web3 application of Regenerative Economics theory. The ReFi movement aims to deliver on two core principles – the long-term generation of value for all, and the conservation/restoration of natural resources.
Ultimately, it is an attempt to redefine how firms and individuals relate to finance and develop a self-regenerating, sustainable system that doesn’t rely on scarcity or exploitation to create value.
Web3 technologies and concepts such as blockchain, tokens, NFTs and DeFi can be leveraged to help tackle ecological and social issues – from deforestation to food scarcity – by increasing the equitable distribution of wealth and encouraging investment in regenerative projects.
Impact Investing is not a new phenomenon – the term refers to a type of investment that aims both to generate financial returns in the traditional sense, but also to ensure those investments are in projects that will have a positive environmental (or social) impact. The current estimated market size for Impact Investing sits at $1.164Tn globally.
In the past, this has largely been the domain of philanthropists and investment firms. However, ReFi opens the door to investment to a much broader range of people through decentralised finance initiatives. Blockchain technology allows each transaction to be recorded transparently, visualising the way that each contribution is being spent, tracking the environmental impact clearly and measurably.
It also ensures accountability, both for firms to prove they’re participating honestly in ‘green’ initiatives and for individuals to check the firm’s claims, which helps to drive genuine behavioural change and eliminate ‘greenwashing’.
Equally, DeFi puts monetary control back into the hands of communities that have been historically disenfranchised – in other words, “banking the unbanked”. Less developed areas of the world have seen the adoption of cryptocurrencies skyrocket in recent years, with the profitability of cryptocurrencies often offering a healthy alternative to that of their own fiat currency.
Allowing people access to financial services and markets that they’ve been traditionally shut out of, which could improve their daily lives, represents one of the core tenets of ReFi. Communities across the globe could make use of DAOs (decentralised autonomous organisations) for community activism, finance and social projects.
DAOs tokenise membership and voting rights, truly democratising the management of the DAO’s treasury and ensuring that participants get a say in how the money they’ve invested is spent.
Impact DAOs are decentralised autonomous organisations that are specifically focused on ReFi initiatives. They differentiate themselves from other DAOs by their mission-driven focus on positive socio-economic and environmental causes – for example, facilitating the removal of carbon from the atmosphere is one of the main Impact DAO business models.
The open nature of DAOs and the position of members as key stakeholders based on their token holdings means that investment opportunities are not a closed shop, and everyone can feel like they’re doing their bit for causes that they care deeply about.
KlimaDAO is often touted as one of the leaders in the Impact DAO space. Describing their activity as ‘DeFi that defies climate change’, KlimaDAO have set up their own cryptocurrency token called KLIMA which is backed by real-world carbon assets. This means that when someone purchases this token via a cryptocurrency exchange, they’re funding the removal of a defined amount of CO2 from the atmosphere.
KLIMA token holders benefit from rewards from the KlimaDAO just by virtue of their token holdings when others buy into the organisation. There is then an incentive to invest and hold tokens, which in turn helps to reduce carbon dioxide in the atmosphere – a pure manifestation of ReFi in action. The DAO claims to have absorbed over 17 million tonnes of carbon to date.
Other notable names in the space include Seed Club and BanklessDAO. Seed Club is a Vancouver-based incubator & accelerator DAO focussed on helping eco-conscious groups set up DAO structures to carry out their good work.
BanklessDAO enables people to take ownership of their finances through cryptocurrency, as well as aiming to accelerate decentralised media, art and other areas that have traditionally been stifled by ‘gatekeeping’.
Blockchain in the Carbon Offsetting Market
There are two carbon offsetting markets: compliance and voluntary. Compliance refers to government-mandated carbon offsetting initiatives strictly imposed on organisations to reduce their emissions to support the Paris Accords’ targets.
The Voluntary Carbon Market (VCM) is where organisations purchase carbon offset credits voluntarily to help reduce their environmental impact.
Being able to purchase carbon offset credits allows organisations that have traditionally high emissions to act immediately to reduce them via offsetting, rather than waiting for a gradual change in their operations which could take years. The total value of the VCM exceeded $21Bn in 2021.
However, the VCM is opaque at best. Using Web2 infrastructure, it’s difficult to accurately measure how the carbon is offset for the money being paid. There have been accusations of ‘phantom’ tokens that don’t actually affect any change.
Without being able to accurately measure the impact, it can be difficult to convince brands to engage with the VCM beyond their mandatory commitments imposed by the compliance market. Web3 and ReFi initiatives present a direct solution to this issue. Blockchain-based carbon offset tokens can be tracked directly to their corresponding environmental action down the line.
Blockchain’s inherent transparency and immutability mean that digital certificates of ownership (for carbon credits) and proof of action are available to all participants on the network, giving organisations the ability to point to their ecological contribution, whether it be replanting trees to combat deforestation or through the removal of carbon from the atmosphere via direct air capture.
Utilising NFTs in Cultural Heritage Preservation
A potentially under-reported aspect of ReFi is the possibilities that Web3 unlocks for the enfranchisement of indigenous communities around the world.
NFTs are often utilised in the digital artwork space to represent the uncompromised ownership of a piece of art. They can be traded, exchanged, bought and sold on NFT marketplaces that are accessible to anyone with an internet connection.
This opens up opportunities for pieces of cultural artwork to be offered in a digital format to a wider marketplace, rather than relying on tourism to the area. Increases in tourism have led to demand for markets where tourists can buy mass-produced ‘cultural’ trinkets, which often incentivises the local population to cheaply commodify their cultural heritage and can ultimately lead to the culture’s dilution.
Indigenous artists could use NFTs to sell their artwork, set their own appropriate pricing, not rely on the fleeting whims of tourists, and get paid in cryptocurrency secured on the blockchain. Smart contracts could be built into these NFTs so that the original creator stands to make continuous income upon each resale.
On a macro scale, cultural heritage is being destroyed by war, inequality and environmental degradation. NFTs offer an opportunity to effectively ‘back up’ cultural artefacts onto the blockchain. These cherished cultural icons can be digitised and tracked with ease on the blockchain and verified by members of the community.
Ukraine is already embracing web3 technology in the face of the Russian invasion to maintain its cultural integrity. All artefacts of cultural significance, from museum exhibits to religious items housed in churches, are being digitised and logged on the blockchain.
In the event that cultural treasures are destroyed, there will always be a record of their existence. Additionally, 3D printing digital files that could be used to create a replica of the original artefact could be backed by NFTs and stored on the blockchain.
Regenerative Finance is a comparatively new concept when compared with cryptocurrency, Web3 and blockchain as a whole. However, it has the potential to significantly improve sustainability and environmental initiatives around the world.
Alongside this, specific ReFi initiatives are working to ‘bank the unbanked’, offering financial independence that has been traditionally unavailable to many. Cultural artists can display and sell their work beyond their borders, unhindered by geography or politics.
Governments and supranational organisations can adopt Web3 technologies to digitise the treasures of world heritage to preserve them when under threat from warfare or environmental decay.
The evolution of Impact DAOs is allowing individuals to directly impact social and environmental causes close to their hearts without needing to be part of a large investment fund or organisation. This directly reflects the incredible innovation within the space, which itself is growing drastically.
What we’re seeing is the natural evolution of Regenerative Economics, and Web3 is leading the way.