Regenerative finance (ReFi)
Regenerative finance is based on the Concept of a Regenerative Economics, presented by John Fullerton in his work “Regenerative Capitalism”. Unlike sustainable development, which focuses on preserving current systems, regenerative economics emphasizes the restoration and renewal of natural systems, pushing beyond mere maintenance.
Building on this, Regenerative Finance (ReFi) merges the principles of regeneration with decentralized finance (DeFi), where blockchain technology is used to create financial systems aimed not just at profit but at positive environmental and social impact.
This idea is further explored in Kevin Owocki‘s book “Green Pill”, where he discusses the transformative power of ReFi to regenerate ecosystems and support community well-being, aligning finance with long-term ecological restoration. The integration of blockchain ensures transparency and efficiency, allowing projects to fund climate and social initiatives more effectively.
ReFi is emerging as a financial model for those who seek to invest in projects that prioritize the regeneration of the planet while leveraging the power of decentralized systems.
ReFi for climate
Finding liquidity to initiate carbon projects can be a complex and challenging process in which regenerative finance can be helpful. Traditional financial markets and systems often pose significant barriers to entry, particularly for small and medium-sized projects. Here are some of the main challenges:
- Limited Access to Capital: Obtaining funding for carbon credit projects typically requires navigating a labyrinth of financial regulations, engaging with multiple intermediaries, and meeting stringent criteria set by financial institutions.
- High Transaction Costs: The costs associated with securing funding through traditional means can be prohibitive. These include fees for legal, administrative, and banking services.
- Slow Processing Times: Traditional funding processes can be slow, often taking months or even years to secure the necessary capital. This delay can hinder the timely implementation of carbon credit projects.
- Centralized Control: The centralized nature of traditional financial systems means that a few institutions hold the power to approve or deny funding. This centralization can lead to inefficiencies and a lack of flexibility in funding options.
ReFi offers innovative solutions to these challenges, making it easier to find liquidity for initiating climate projects:
- Direct Access to Funding: DeFi platforms eliminate the need for intermediaries by connecting project initiators directly with investors. This direct access can significantly lower barriers to entry and make it easier to obtain funding.
- Lower Transaction Costs: DeFi reduces transaction costs by automating processes through smart contracts. This automation eliminates the need for many traditional financial intermediaries and their associated fees.
- Faster Transactions: Transactions on DeFi platforms can be completed in a matter of minutes, compared to the lengthy processing times of traditional finance. This speed enables quicker deployment of funds to carbon credit projects.
- Increased Transparency and Security: DeFi platforms operate on blockchain technology, which provides a transparent and immutable record of all transactions. This transparency can enhance trust between project initiators and investors.
- Global Reach: DeFi platforms are accessible to anyone with an internet connection, enabling a global pool of investors to support carbon credit projects. This global reach can increase the availability of funds and diversify the sources of liquidity.
- Flexible Funding Models: DeFi allows for innovative funding models such as tokenization of carbon credits. Project initiators can issue tokens representing future carbon credits, which investors can buy, sell, or trade. This tokenization can provide immediate liquidity and create a dynamic market for carbon credits.
The use cases of ReFi for climate
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: NFTrees