Shortly before the nadir of the downturn a few months back, I wrote a sharp-tongued post on what I now call “Act I” of the Web3 for Climate movement: CryptoCarbon. My objective was to illuminate what I identified as spurious practices, in an effort to protect both the integrity of genuine environmental markets, and the unwittingly hoodwinked users who were bound to enrapture, as victims of ESG-wrapped shiny object syndrome. Not a mere days later, CryptoCarbon descended into the predictable death spiral common in over-leveraged markets amid a bear turn.
I called the crash, but admittedly, I misunderstood the motive.
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Having dedicated my career to the cause of behavioural economics (game theory) and having experienced first-hand the flawed design of carbon markets, I benefited from the industry insights that allowed for market prescience. The foresight into the inevitable obstacles eventually faced within CryptoCarbon allowed me the privilege of predicting the crash that others misjudged or were entirely naïve to.
But what I did not predict, was what I call “Act II” of Web3 for Climate: ReFi. An acronym for “Regenerative Finance”, this movement began in earnest long before the catastrophic culmination of CryptoCarbon, but its voice really strengthened in the wake of the crash. Operating as an umbrella term for all things environmental on the blockchain, it is primarily focused on the application of native Web3 technologies, token economy design, and embracing decentralized systems in support of collective uplift to reimagine and redesign the tools to accelerate environmental solutions. Fundamentally, ReFi is the amalgamation of the principles of long-contended regenerative economics and decentralized finance, leveraging Web3 technologies to organize and distribute capital more efficiently. ReFi aims at establishing a new set of values-based systems for an integrative and sustainable future.
The most interesting distinction I observe between Act I and Act II, is the depth of conversations being had, and the density of intellectual and philosophical rigor. Mind-bendingly complex topics being dissected, centering around things like reimagining economics to account for the true value of ecological systems, and establishing robust standards for a measuring and quantifying a world of dynamic natural systems traditionally exploited and extracted as by-products of capitalistic imperatives. Really. Hard. Problems.
Act II is serving as a long overdue centripetal force; mobilizing an unprecedented variety of thinkers and doers from diverse fields to brain mash on the wicked problem that is climate. Act II feels like the responsible reaction to Act I; a reflection on what went wrong, what went right, and what needs to happen next.
So what really happened in Act I?
Early CryptoCarbon projects identified the primary points of failure in the carbon (all environmental products) markets being lack of access and scaling bottlenecks. They asserted that more liquid markets would facilitate greater participation and more dramatic environmental results. The model was to arbitrarily layer blockchain-based applications on top of presumably robust off-chain assets, and roll them up into fungible instruments to be designed to catapult around the Ether.
What they failed to understand (or more cynically, cared not to), was 1) the fundamental asset being traded was already broken (much like the derivatization of mortgages in 2008 – carbon offsets were not the quality assets they bet on); and 2) that the issuers of these instruments would be enthusiastic about their digitization. The reality of both of these challenges is that early projects conducted insufficient diligence into the market they were intending to disrupt, leading to a failure in understanding of the true scope of problems.
Whether this was a result of opportunistic Degens seeking profit at any cost, lazy product design, or benign optimism, is somewhat irrelevant at this point. The problem is in the process; without conducting extensive incentive design workshops and sensitivity analyses in advance of launching a token product, these types of “externalities” are almost inevitable. Every market has its idiosyncratic system-level problems, and without multimodal audits and causal analysis, neophytes are bound to wind up deepening the cracks.
But for all its missteps, judging within the goalposts of access and liquidity, CryptoCarbon Act I was in fact, a screaming success. The market boomed, and a whole new asset class was created with the whole of Web3 taking note.
What I got wrong in my own assumptions
Operating within the myopic belief of omnipresent exploitation in the land of DeFi, my initial assessment of CryptoCarbon was one of vilification. I couldn’t compute that the key players building these carbon rocket launchers would not have predicted the Achilles heel of the offset market, and I branded them maleficent.
Having now spent hundreds of hours digging through the ReFi forums, attending conferences, and excavating the plethora of digital content on the post-mortems of Act I, I realize now that I got the motive wrong. I have now taken the time to interview and drop-in and geek-out with many of the leaders in the space, and concluded that I was dead wrong on my value analysis.
Instead, I am now observing that there was a gross misunderstanding of the carbon market at large, and it was mostly a case of well-intending technologists suffering from a classic case of Chesteron’s Fence; reforms should not be made until the reasoning behind the existing state of affairs is understood. They did not do their market homework deeply enough to understand its cracks and instead of catalyzing a game-changing solution, they catalyzed deeper destruction. This actually happens a lot in tech.
Act I was CryptoCarbon; Act II is ReFi
Act I acted as a dramatic exposé of the weaknesses in carbon monitoring, carbon quantification, environmental accounting, single-points-of-failure problems, off-chain to on-chain complexities, and perverse incentives (aka, build a mechanism to get rich and bad actors are bound to game the system).
The problem being attempted by Act I focused predominantly on demand & supply matching. Unlocking carbon markets on chain to scale a globally buoyant market, and financial structures that support true price discovery. Both of these are legitimate challenges that blockchain is uniquely positioned to address, so what we have learned from Act I, is that DeFi actually works here.
ReFi is proving itself as the best-in-class court to analyze and identify the more systemic challenges around the quality, environmental credibility, accountability, monitoring and measurement that has plagued the carbon markets for three decades. The pervasive garbage in-garbage out problem is no truer than in tokenizing offsets, but to address this problem, we need a return to first principles and deep systems analysis to understand how we ended up with a broken market and how we build a digitally healed one. Centering around the guardrails of rigorous and evidence-based standard setting for credits (quality of supply), we can then build out the infrastructure to support its exponential explosion.
The Future of ReFi
The irrefutable tone shift in how the ReFi community defines its ambitions and approaches new partners reveals its emphasis on a need for deep subject matter expertise — from policymakers, institutional investors, embedded operators, and scientists. With this step towards deepening thinking, and inclusive community-building, I observe a uniting effect, despite the last year’s challenges.
The ReFi movement still has room to include legacy market incumbents, institutions, and standard setting bodies present opportunities for collaboration. More to come on my thoughts on the ReFi movement, token engineering, and collective commons problems like climate, but for now, I just wanted to put it out there that I am deeply encouraged to witness this movement, and fully endorse what I perceive as a whole new Web3 world.