Challenges with Traditional Finance for Climate Projects
- Limited Access to Capital: Navigating financial regulations and securing funding through traditional methods can be complex and prohibitively expensive, especially for small and medium-sized projects.
- High Transaction Costs: Fees for legal, administrative, and banking services can eat into project funds, making it harder for small initiatives to access capital.
- Slow Processing Times: The lengthy processes associated with traditional finance can delay the start of critical carbon reduction projects.
- Centralized Control: Traditional finance often relies on a few large institutions to approve funding, limiting the availability and flexibility of capital for innovative projects.
ReFi Solutions to Climate Financing Challenges
- Direct Access to Funding: DeFi platforms connect project initiators directly with investors, eliminating the need for intermediaries.
- Lower Transaction Costs: Smart contracts reduce the need for traditional financial intermediaries, lowering overall costs.
- Faster Transactions: Blockchain technology enables instant processing of transactions, allowing quicker deployment of funds.
- Increased Transparency: Blockchain ensures transparency by recording all transactions on a public ledger, fostering trust between investors and project initiators.
- Global Reach: DeFi platforms are accessible worldwide, expanding the pool of potential investors for climate projects.
- Innovative Funding Models: Tokenization of carbon credits, for instance, allows projects to issue tokens representing future carbon credits, enabling investors to buy, sell, and trade these tokens.
The use cases of ReFi for climate
Carbon tokens
Carbon credits from voluntary standards can be tokenized, with their information and functionality transferred to a blockchain. Alternatively, carbon credits can be issued directly on the blockchain, where all their attributes are publicly viewable. In both cases, one carbon credit is equivalent to one carbon token.
Examples:
| Blockchain carbon credit | One-way bridge | Two-way bridge |
|---|---|---|
| Coorest | MCO2 Token | Goddess Nature Token |
| Regen Registry | Nature Carbon Tonne | CORC token |
| Tero Carbon | Base Carbon Tonne |
Climate Investment DAO
A DAO (decentralized autonomous organization) is a self-governing entity built on the blockchain, designed to operate without central authority. Through smart contracts, the DAO manages and allocates pooled funds, which are contributed by its members or stakeholders. These funds are then invested in various climate initiatives, such as renewable energy projects, carbon offset programs, or sustainable agriculture. The decentralized nature of the DAO ensures transparency and democratized decision-making, as participants can vote on which initiatives to support, fostering a more inclusive approach to climate action.
Examples: KlimaDAO
Liquidity for Climate Projects
Investors can deposit funds into these pools, providing liquidity for financing climate projects and issuing carbon credits. In return, investors earn yields based on the performance and repayment of the underlying assets. Pools typically contain assets with varying risk levels, and returns depend on the pool’s risk profile and the success of the financed assets.
Example:
Liquidity Pools for DEXs
Providing liquidity to a decentralized exchange (DEX) involves contributing assets to a liquidity pool. By doing so, you enable trading on DEXs by ensuring that there are sufficient assets for traders to swap. In return, when traders use the pool to exchange assets, you earn a share of the trading fees.
Examples:
Future Carbon Units Purchase
The buyer receives the opportunity to acquire carbon units planned for future issuance at a pre-agreed price. The further the delivery date, the lower the purchase price.
Example: Solid World
Purchase NFT as Part of Climate Projects
In some cases, the climate project generating carbon units is divided into parts and it is possible to purchase them in the form of an NFT token.
Example: