How ReFi helps the environment: Case Study with Klima DAO

Last week, we explored, "What the Hell is ReFi?" Today, let's dive into the impact of ReFi on the environment.

Over the last year, critics' disapproval of Bitcoin's Proof of Work footprint grew a general frown upon cryptocurrencies. In response, Web3 companies stepped up to implement green initiatives beyond offsetting their contribution to carbon emissions. They aim to yield not just a carbon neutral effect, but a carbon negative one. For example, the leading pro-green blockchain, Polygon, is going carbon negative after accomplishing carbon neutrality in 2022.

Source: Polygon

What is ReFi?

Regenerative Finance (ReFi) is a green movement, generally led by Web3 companies that wield DeFi tools to fight against climate change issues. Many ReFi projects currently focus on sequestering carbon, but the ReFi community expects more projects to expand into restoring biodiversity and cultivating social equity.

Learn more about top ReFi projects.

What is being done - really?

With climate change in the forefront of public attention for the past two decades, several projects have already initiated scalable solutions. Following that, why should Web3 initiatives get a featured column on fighting against climate change?

Tackling climate change using blockchain technology is unprecedented. Web3 builders believe in the power of blockchain technology to provide more innovative solutions to economic, political, and social issues -  climate change included. In fact, John Ellison, who has contributed to some of the biggest ReFi projects, believes that the ReFi movement is the most promising application of blockchain technology. Ellison highlights that ReFi provides the following unique benefits:

• Solves challenges facing carbon markets.

• Establishes transparency and accountability, preventing double counting and potential greenwashing.

• Raises the ‘floor price’ of carbon.

• Scales carbon dioxide removal technologies and develops scalable MRV (measurement, reporting and verification) systems.

One of the best ReFi projects, Klima DAO, is a prime example of blockchain technology generating the benefits above.

Klima DAO

Klima DAO has made a mark on carbon markets by incentivizing market players to reduce their emissions. Klima DAO offers the KLIMA token - every KLIMA is backed by 1 carbon credit, which represents 1 tonne of carbon removed from the atmosphere. Essentially, the higher the price of KLIMA, the higher the return on removing carbon from the atmosphere. This is already attractive for entities that are keen on reducing their carbon footprint. But more importantly, even for entities that are not as dedicated to reducing their carbon emissions, the Klima DAO provides strong financial incentives for them to cut down their emission rates.

Source: KlimaDAO

The Carbon Market

Klima DAO is built to influence the carbon market. So what is the carbon market? The concept of carbon markets arose when governmental organizations introduced the cap-and-trade system to regulate carbon emissions. Under this system, the government issues a limited number of permits for carbon dioxide emissions per year. You can think of carbon credits as a “permission slip” for a company to emit up to a certain set amount of carbon dioxide that year.

Further Resource: All about carbon credits

If the company wants to emit more, then they can buy these permits from other companies who have yet to spend up all of their credits.

Source: Vox

This market later splintered into a Voluntary Carbon Market, which is an unregulated carbon market that facilitates trades between any group of participants who have voluntarily pledged to reduce their carbon emissions (but, there are still third-party standards that participants have to adhere to). These participants are often companies who pledge to become more environmentally friendly due to consumer pressures or to compensate for their historic carbon footprint.

Similar to the cap-and-trade system, when an entity within a VCM reaches its pledged cap of carbon emissions, it can buy the credits of other entities that have emitted carbon lower than their pledged amount. Since Klima DAO hoards a lot of the carbon credit supply in carbon markets, it increases the price of these carbon credits. As a result, entities are incentivized to find ways to reduce their carbon emissions instead of buying carbon credits to compensate for creating more pollution.

Klima DAO - Supply Chain & Tokenomics

Klima DAO attempts to buy as many carbon credits as it can and brings the credits on-chain in BCT. These tokens can be claimed against emissions by being burned. While at least 1 BCT backs 1 KLIMA, the price of KLIMA itself is determined by market forces - the price of KLIMA cannot go below the price of BCT, but it can go above it based on speculators’ belief in the project.

The Klima DAO is forked from Olympus DAO. Similar to how Olympus’ OHM token is backed by DAI, KLIMA is backed by carbon credits, which are represented by Base Carbon Tonnes (BCT) tokens. Inspired by Olympus Dao’s mechanisms for creating protocol-owned liquidity, the Klima DAO owns most of the KLIMA liquidity.

On top of Olympus DAO, the underlying structure of Klima’s operations rely on multiple Web3 and non-Web3 players to function as a whole.

Source: KlimaDAO

The carbon credits are first brought into Klima’s operational radar through organizations that verify carbon standards of carbon projects.

Any company that wants to be rewarded with carbon credits after conducting an action that mitigates or removes their carbon footprint (e.g. planted trees, installed solar or wind energy etc.) must be verified by a third party to ensure that the company has indeed conducted the carbon-reducing actions.

Source: KlimaDAO

After passing verification and receiving the earned carbon credits, the credits are tokenized bring them on chain. For instance, the Toucan bridge allows anyone to bring their carbon credits from legacy registries onto the Toucan Registry, which then translates them into TCO2 tokens on Polygon. Each TCO2 token represents one ton of carbon offset. For data management and monitoring, these tokens are labeled with the: • Origin of the offset • Offset type (renewable energy project, direct carbon air capture, etc)

Source: KlimaDAO

The TCO2 tokens are then pooled to issue a standard BCT token. Any user can trade TCO2 and BCT in the pool on chain to help create an open and transparent market for carbon. Additionally, the KlimaDAO buys BCT tokens and issues KLIMA in exchange.

Source: KlimaDAO

The Klima DAO also enables staking of KLIMA with long-term APYs to incentivize holders to participate in pulling liquidity off the market and into the staking pool, which further increases demand and restricts supply for KLIMA. Once you have that (e.g. 85% are actually staking on Olympus).

Further Reading: Tokenomics of Klima DAO

The impact of Klima DAO on the environment

To date, the Klima DAO has facilitated more than 150,000 tonnes of carbon offsets and absorbed 18.1 million tons of carbon.

In the beginning of this article, we questioned whether blockchain technology provide any unique solutions to climate change issues. Although carbon markets have existed for a long time, their performance is clogged due to issues like:

• Poor accounting, leading to issues like double counting, which can happen intentionally or as a lack of market alignment and standardization.

• Inefficiency — Brokers and traders taking up to 50% of the total value received by project owners; also, a lack of market mechanisms to enable effective price discovery to accurately value carbon of different times.

• Lack of liquidity — Brokers provide the facilities required to match supply and demand and there is no central market from which to source quality offsets.

• High compliance costs and barriers to entry, which exclude smaller or more remote projects from entering credits into the market.

• Issues of Monitoring, Reporting, and Verification - expensive implementation can lead to projects not offsetting the carbon they claim or permanently.

By bringing carbon credits on chain to scale transparency and accountability, Klima DAO and many other ReFi organizations are helping to make the environment healthier.

Top ReFi projects

Last week, Omni featured the top ReFi projects that you can direct to and interact with easily by clicking on the curated list of projects on the Omni Explore Screen. Head to the explore page on the Omni website or Omni app and get access to more gem finds in the Web 3 world!