IOBC Capital: The Sustainable Path of Merging Environment and Finance: Can ReFi Reshape Web3?

*Author: Xinyue, * IOBC Capital

From DeFi to ReFi

The mainstream narrative of Web3 seems to have never involved the planet we live on. Compared to the shrinking Amazon rainforest, crypto natives are more concerned with the bloated and expensive Ethereum network. What is the latest crypto theme? "Pepe achieved a market cap of 1 billion dollars in 23 days," various myths of benefit are being spread, and investors rush into meme projects with an average lifespan of less than a week.

However, behind this clamor, the development of the Web3 industry faces a crisis of narrative degradation. To achieve recognition and migration of billions of mainstream populations to Web3, it is clear that we need to create narratives that embody a more blockchain-native spirit, combining the characteristics of crypto technology: "low-cost trust and the free flow of cryptographic verification," to address the most urgent challenges humanity faces in this era. The most valuable exploration in this direction is the attempt to combine web3 with environmental issues: Regenerative Finance - ReFi.

Unlike the many controversies faced by the development of the crypto industry, using financial means to improve the environmental issues faced by humanity has always been a prominent topic in mainstream society. Concepts such as impact investing and green finance have also received support from mainstream institutions, which have established their own ESG investment departments. The carbon trading market size recorded in 2021 was $909 billion, reflecting a 12% growth compared to 2021. In contrast, the current market cap of Bitcoin is $521 billion. Similar to RWA, the potential market for ReFi has a larger imaginative space than crypto-native assets.

Although the vision of ReFi is to create a sustainable future for humanity, including grand visions like regenerative agriculture, environmental protection, and eliminating inequality, the current mainstream ReFi protocols mostly focus on the rapidly growing voluntary carbon trading market (as opposed to regulatory mandatory carbon trading). This is because, in the traditional voluntary carbon trading market, the unique attributes of carbon projects mean that carbon offsets can only be traded in the form of differentiated products (carbon contracts), heavily relying on verification services from third-party central institutions (such as VCS provided by Verra) and do not possess the attributes of commodities (like corn or rice).

As a result, most carbon trading occurs in over-the-counter markets, lacking transparency for the entire market. This makes it difficult for end customers to know whether they are paying a fair price and how much funding flows to the original project developers.

Ideally: ReFi hopes to use blockchain technology to authentically and immutably transfer ecological assets on-chain, and after going on-chain, tokenize ecological assets through smart contracts, enabling global individual investors to freely trade and lend using decentralized finance methods, thereby enhancing the value of the ecological assets behind the tokens.

Current Mainstream ReFi Practices

The main attempts to achieve ReFi goals by combining blockchain technology include: ReFi platforms, ReFi protocols, ReFi DAOs, and ReFi Games.

Green Public Chain - Celo

Celo is one of the main drivers of ReFi development. Since its inception, Celo has been committed to providing decentralized financial services to billions of unbanked populations globally through mobile devices. As a platform, Celo itself does not provide ReFi services, but it supports major carbon credit tokenization projects such as Toucan, Moss, and Flowcarbon. Celo is also the first carbon-negative public chain, automatically purchasing carbon offset credits from Project Wren through block rewards to overcompensate for its carbon emissions. They also plan to transition 40% of the reserve assets of Celo's stablecoin (cUSD) to tokenized rainforest and carbon sequestration assets within four years.

ReFi Protocols - Toucan Protocol, Regen Network

Toucan Protocol is an open-source carbon trading protocol developed on Polygon, which has now expanded to the Celo network. Its product architecture consists of two parts: Carbon Bridge and Carbon Token Pool, allowing users to bring their real-world carbon assets on-chain through the Carbon Bridge and subsequently trade in the Carbon Pool. As a pioneer in ReFi, Toucan currently holds a major share in this sector (with a trading volume of $4 billion) and has facilitated a reduction of 50,000 tons of carbon emissions.

Carbon Bridge:

The Toucan Carbon Bridge is based on a streamlined process verified by VCS: users first generate a blank BatchNFT and receive a corresponding reference number (including transaction hash, on-chain ID, and Toucan protocol number), then destroy their carbon credit assets in Verra and fill in their NFT reference number. They then add their Verra destruction number to their BatchNFT and wait for verification. Upon approval by Toucan, the blank BatchNFT will automatically be filled with all information about the project (type of carbon reduction, quantity, time, etc.). The NFT can then be extracted into the corresponding Toucan carbon token (TCO2).

Carbon Pool:

• The product logic of the Carbon Pool is to bundle the carbon emission tons (TCO2 tokens) from multiple specific projects together, forming a more liquid carbon index token for price discovery of different categories of carbon assets.
• Not every TCO2 has the same value.
• Carbon projects are classified into carbon removal, reduction, and avoidance, each category having different values.
• The pricing of carbon projects is influenced by multiple differentiated criteria, such as project type, country, standard rigor, and additional benefits (like biodiversity increase or sustainable development goals).
• The Toucan Carbon Pool achieves a certain degree of commodification by aggregating similar carbon tokens. This is necessary to provide transparent price signals for different categories of carbon offsets. These standardized carbon tokens can be traded on decentralized exchanges, offering deeper liquidity than individual project offset tokens.
• TCO2 tokens are locked in carbon pools with the same attributes through logical filters, creating a carbon pool token (e.g., BCT token) sent to the depositor's wallet. Carbon pool tokens are interchangeable ERC20 tokens.
• Currently, Toucan has two carbon pools, namely BCT (Base Carbon Ton) and NCT (Nature Carbon Ton).

Although the Toucan protocol is currently in a leading position, its process of bringing natural assets on-chain heavily relies on third-party professional institutions (Verra). On May 25, 2022, Verra suspended its registration services due to concerns about ReFi projects, which also shook market confidence in related ReFi protocols.

Regen Network, in contrast to Toucan, Moss, and other ReFi protocols that adopt the Verra Carbon Bridge solution, leans more towards building an open platform they define as a global ecological accounting system (Regen Ledger), using the Tendermint consensus engine and built on the Cosmos SDK, to support a wide range of third-party ecological projects to verify and deploy the ecological value and state changes they create on-chain, providing a complete incentive framework for tracking ecological changes.

The products of Regen Network mainly consist of three parts: Regen Registry digitizes real-world ecological asset data, Regen Ledger manages and captures the value of ecological assets, and Regen Marketplace provides a trading market and liquidity for tokenized ecological value.

Compared to Toucan's reliance on centralized verification services, the implementation logic of Regen Registry is more blockchain-native and easier to gain industry recognition. Regen will directly sign agreements with the creators of ecological value and collect ecological data through four channels:

• Raw remote sensing data (optical, infrared, LiDAR)
• Geographic information system datasets (topography, soil types, water distribution)
• Sensor networks (climate, moisture, vegetation)
• User collection

After bringing ecological data on-chain, Regen will generate credit analogs and credit batches for the ecological assets based on metadata and Regen verification logic.

Regen Ledger provides three core ecological protocol frameworks: Ecological State Protocols (ESPs), Ecological Contracts (ECs), and Supply Protocols (SPs).

ESPs are the core components for realizing the unique value of Regen Network and are the main reason it achieves web3 native value distinct from Toucan. ESPs are algorithms and standards used to verify specific ecological states, with each ESP being individually labeled and managed by the Regen Foundation, such as the number of tons that will be sequestered on corresponding land at a specific time, or the boolean value of groundwater reserves on that land. Similar to traditional web3 open-source code repositories, different ESPs can reference each other and derive versions based on specific versions.

SPs are supplementary protocols built on top of ESPs, used to measure the output of corresponding ecological value and assist in verifying the entire supply chain circulation process of that output on-chain based on algorithms.

ECs are the core value proposition protocols and smart contract framework of the system. Different ecological projects can raise their funding requests or initiate crowdfunding based on ECs to achieve specific ecological goals, such as carbon sequestration. By setting phased tasks and conditions, the collected funds can be ensured to be used transparently upon achieving the corresponding goals through smart contracts.

The main trading pair of Regen Marketplace is REGEN/EcoCredit. To address the non-homogeneous attributes of ecological assets, the ecological asset value captured on-chain through the aforementioned ESPs process will be abstracted into a separate logical container called Credit Class, which will then be assigned Credit Type attributes (such as carbon credits, ecological protection credits, etc.) and aggregated into different Credit Batches. Each Credit Batch is non-homogeneous, but within a Credit Batch, there is a set of fixed interchangeable Credits that can be freely exchanged and canceled. Through this logic, Regen Network can accommodate the value differences of different ecological credits while maximizing EcoCredit liquidity.

Summarizing the product components and logic of Regen Network, we can say that although Toucan Protocol is a pioneer in ReFi protocols and has a significant lead in TCL and trading volume, Regen Network has taken a more open-source and blockchain-spirited path. It is worth mentioning that Regen Network and Toucan Protocol announced last month the launch of a bi-directional bridge between the two networks, with NCT as the standardized carbon coin for mutual recognition.

ReFi Game

The current mainstream web3 game models are primarily X to Earn, providing different game forms and focusing on developing corresponding economic incentive mechanisms and token economic models. ReFi Game is no exception, generally referred to as Impact to Earn, which incentivizes players to create ecological value and positive externalities through economic returns. However, on this basis, ReFi has also expanded into another quadrant, namely Play to Impact, which contrasts with the former by incentivizing players to play through the production of positive externalities, similar to Alipay's Ant Forest.

Play to Impact Game:

Guardians of Earth: The game achieves a twin mapping to the real world through oracles, allowing players to pay to create their own "Nature Realm" on-chain and monitor the ecology of that area. Other gameplay elements are still under development.

Climate Guardians: The gameplay is designed for players to generate their own villages and form their own tribes to combat the threat of rainforest disappearance, with the project team donating the income to the Amazon rainforest protection fund.

Impact to Earn Game:

Wheel Coin: Rewards players for low-carbon travel with WheelCoin, which can be redeemed for train mileage.

Litter Coin: Encourages users to clean up litter to earn LitterCoin, which can be exchanged for the crypto token ADA.

The Future of ReFi

In the definition of the ReFi Foundation, ReFi is described as "a redesigned monetary system to better coordinate with the Earth." Traditional finance has a problem of one-way value flow: natural resources and ecological value flow unidirectionally into the human monetary system, which does not reward actions that replenish and restore this ecosystem. It is evident that such a system needs to be completely transformed.

Although current mainstream ReFi practices are still primarily focused on carbon credit trading, we can optimistically anticipate that the development of ReFi will supplement our economic system with more diverse Nature Capital-Backed Currencies and transmit transactions verifiably through blockchain, whether based on green agriculture, water purification, or even the species richness of a protected area. As writer Charles Eisenstein said: "if you back the money with more things you want to see in the world, you will get more of those things."