Many startups have tried, and are trying, to use blockchain and – lately – decentralized finance (DeFi) for good. One of the most promising areas is the carbon credits market, where blockchain, transparent distributed ledgers, and smart contracts appear to be a natural fit. But things haven’t progressed as planned.
What are carbon credits?
Carbon credits are a financial instrument used in carbon trading. The carbon credits market, born in Kyoto in 1997, allows businesses and countries to buy and sell permits that limit them to producing a specific amount of carbon dioxide. So those permits help the environment, but how can they help the bottom line, the drive of so many business decisions?
The general idea behind carbon trading is that those companies or countries that can reduce emissions below their permit allowance will be able to sell those reductions as credit. Those entities then are incentivized to invest in technology and other methods of reducing their emissions to make more money.
In theory, it’s a great way for everyone involved to save money by reducing their emissions while simultaneously creating new markets for innovation. As you might imagine, it’s not always easy to get these markets off the ground – and that’s where DeFi has promised (and so far largely failed) to step in.
Why has DeFi not revolutionized the carbon credit market yet?
Some startups felt they could turbocharge the climate fight with crypto-economics by pushing carbon markets onto the blockchain. They would provide a global infrastructure data layer and force polluting companies to pay higher prices for carbon credits or seek more environmentally friendly approaches to their businesses.
Ultimately, these DeFi startups attempted, in many cases, to upend the system by creating infrastructure to make it easy for people to buy carbon credits, which would then be retired and replaced with new tokens on the blockchain. As a result, the tokens will be stored publicly and safely, able to be bought and traded like any other crypto asset, thereby attracting prospective buyers who didn’t have any interest in carbon credits before.
Campaigns by crypto environmental groups led to millions of carbon credits arriving on chain. According to some scientists and watchdogs, many of the credits were tied to low-quality, long-dormant projects that didn’t improve the environment. The result? Market prices fluctuated wildly, causing mild panic among traditional carbon-credit buyers and issuers.
Even though these projects are still ongoing, it’s clear that crypto markets are unprepared to handle such a challenge. It’s not about DeFi or blockchain technology but how we think about using blockchain for social good. That’s the real issue here.
The first rule of blockchain club? Don’t talk about blockchain club
Why is DeFi the most appropriate technology for carbon credits?
In reality, blockchains are a fundamental innovation that could support untold numbers of use cases – not all of which revolve around cryptocurrencies. So when we think about blockchains for social good, let’s do it in terms of applications that achieve specific goals and are tied directly to real-world problems. In other words, instead of blockchain initiatives just being lists of features and use cases, we should think about them in terms of outcomes achieved and how they can improve people’s lives and help solve critical issues.
That’s a critical distinction, especially when we look at climate change. Climate change is perhaps one of humanity’s most significant challenges. It’s not just a problem. It’s an existential threat that requires drastic action and innovation to address it in any meaningful way. DeFi could be part of that solution; as one Harvard economist said, there is a lot of value here if they can do it right. But they will have a hard time stopping overzealous buyers looking to make a quick buck by grabbing up low-value credits for cheap. A solution that can mitigate that opportunity might be the way to go.
In other words, it’s not about if we can develop blockchain solutions for climate change – it’s about when and how you incentivize good behavior and limit the abuse of the solution.
It’s easy to see why multi-party computing (MPC) is so promising in this field. The protocol enables frictionless lending of digital assets, and it’s fast, offering the highest security for individuals concerned about safety and for companies, banks, organizations, and governments.
DeFi and the carbon credit market – along with a focus on incentivizing the correct user behavior and the security that comes with MPC – could be the combination of technologies to realize the potential.
Do you have the answer?
Between October 25 and November 14, Partisia Blockchain is running a hackathon focusing on finding solutions to problems like this. With two tracks – DeFi Beyond Crypto and Data Economy – hackathon participants will benefit from mentorship and workshops, meet fellow hackers and bring their web3 ideas to life on the MPC privacy-preserving blockchain.
Register now, and you could not only find the solution to the issue of DeFi and carbon credits, but you might be in the top 30 teams invited to the on-site event in Paris. You may even walk away with a share of an incredible grant pool, including a whopping $125k and $100k for the two best projects, respectively.
Critically, you might be instrumental in applying blockchain to real-world problems, finding the correct answers, and making life better for all.