How Regenerative Finance Is Bringing Sustainability to Crypto

As 2022 draws to a close, few would look back on our nascent industry and say it has lived up to its potential. Crypto began as a revolution in every sense of the word: a way to democratize access to finance and a revolution against the current financial system and its attendant exploitations and issues.  Fast forward to today, though, and what we’re seeing is an ecosystem that failed to focus on its core promises and instead remains largely separate from the real world and is relearning many of the lessons traditional finance learned years ago.

We’ve lost sight in recent years of the true innovation of blockchain and smart contracts and have gotten caught up in Ponzi-economics and celebrity hype trains. Businesses and individuals in the space have fallen prey to the “number go up” mindset, in which that is the only goal. Nothing demonstrates this more than the catastrophic collapse of FTX.

It is evident now more than ever that the businesses built on top of decentralized finance (DeFi) primitives need to focus on adding tangible and sustainable value. As we reset and reorient our focus, Web3 will embrace the challenge of tackling the toughest real world issues by creating incentives that make it economically advantageous to do so. And that’s where ReFi comes in.

Phil Fogel is the chief blockchain officer at Flowcarbon, an ecosystem focused on making carbon markets accessible and transparent, as well as mobilizing new technology and communities to fight climate change. This piece is part of CoinDesk's Crypto 2023 outlook.

Any DeFi product that is to succeed in this new world must solve for two fundamental principles: the creation of new value and new institutional use cases. Regenerative finance is uniquely positioned to address both of these concerns. Through understanding where ReFi comes from it’s easier to grasp how. ReFi is the combination of two distinct disciplines: regenerative economics, in which the focus is on balanced, circulatory flows of capital that integrate both positive and negative externalities while taking care of people and the commons; and decentralized finance, which aims to remove opaque, centralized intermediaries to democratize both the access to financial services and the management of the financial system itself.

The existing mechanics that attempt to create a regenerative economy are not working. Environmental, social and governance (ESG) measures are broken and do not align with financial incentives. ESG investments have both statistically underperformed the market and lack transparency, as shown in an HBS study and an investigation into Goldman Sachs ESG funds. In order to harness the rising demand for a new regenerative economy, we need to turn toward emergent technologies such as DeFi. Vinay Gupta said it best when he said that “crypto wins by solving problems that nobody else can solve, profitably.” This leads to the core thesis of ReFi: We can create mechanisms for both ordinary people and corporations that incentivize the regeneration of environments and communities in a way that is palatable to governments and superior to existing non-crypto solutions.

The ReFi space is poised to explode in 2023.

Read more: ReFi Is Going Mainstream

And no place is better suited and more ready for its effects than the voluntary carbon market. The VCM has long been plagued by issues of accessibility and quality. It is nearly impossible for an individual to get an account at one of the major carbon registry bodies, preventing them from even participating in the market. The market is also illiquid and opaque. Spot prices are not readily available and carbon offset units (COU) transactions typically happen over the counter through a web of brokers and middlemen.

All in all, the quality of carbon projects is a hotly contested issue. There are many instances of projects overestimating emissions reductions; additionally, permanence and leakage are notoriously difficult to measure.

To date, various ReFi projects have emerged to address these issues, from the angle of infrastructure for tokenized credits, protocols for verifying carbon project data and so many others. By operating in Web3, different actors can address different parts of all sorts of problems in an interoperable and permissionless way, without contending with the many gatekeepers and roadblocks historically involved.

All existing ReFi projects are beginning to interact with each other, and this ecosystem is poised to explode in a way that will happen much faster thanks to Web3. With more of an emphasis than ever on sustainable practices in virtually every sector in the world, ReFi-centered growth will be exponential, and 2023 will be the year we look back on as the time when it all took off.