Hello, fellow sustainability and web 3.0 enthusiasts!
Today, I’d like to discuss the relevance of blockchain to the carbon credit space and how it can be applied in a way that actually delivers value to the creators and consumers of carbon credits as well as society as a whole.
This blog comes from my recent experience working with Muni Kumaramangalam to develop an approach for trading carbon credits on the blockchain that leverages more of the benefits of Web 3.0. I would like to share our experience and findings so that the community can continue to build on what we’ve learned to help transform how climate friendly projects can be financed and run.
Benefits of Web 3.0 for Carbon Credits
To start, there are several benefits to putting carbon credits on the blockchain. For these benefits to be realized, the system must be built out properly.
- Transparency: Through a simple click, the blockchain can allow any individual to check the validity of any credit that has been minted. It can show exactly how that credit was created, what the current state of the carbon credit-generating project is, and the information used to calculate the carbon storage.
- Traceability: The blockchain will allow any individual to view who owns a carbon credit, who previously owned a carbon credit, and if a carbon credit has been retired or not. It can trace back to the exact project that created the credit.
- Immutability: Once credits are created or retired, that information is forever locked on the blockchain. This makes it impossible to double mint or double retire credits.
- Democratized: A properly decentralized approach can allow the community of holders to decide which carbon credit projects should and should not qualify. This ensures that only the accepted standards can create recognized credits.
Read more about our approach: Building a Transparent and Sustainable Future with GHG Registry
Traditional Tokenization Approach
Now that you’ve seen these benefits, let’s look at the traditional approaches that have been taken and the issues with them. You’ve likely seen at least some blockchain protocols claiming to tokenize credits, but an important question to ask is, how does that protocol handle tokenization?
Currently, most known blockchain protocols lean on far too much traditional web 2.0 technology to fully realize the benefits mentioned above. The standard approach is to work with a traditional web 2.0 carbon credit registry that handles the creation of the carbon credit standards, validating projects, storing project information, and calculating the amount of credits produced. Web 3.0 is only layered on at the end. Tokens are minted to represent credits in specific projects and then those are transacted and burned to retire them.
Downsides of the Existing Approach to Tokenization
Transparency is limited because the actual calculations and project data storage are done within the web 2.0 registry. It is entirely up to that registry what information they want to publicly display. Only the actual transactions after the credit creation are transparent.
Traceability is often quite problematic because of the lack of transparency within web 2.0 registries. A minted carbon credit token may point at a project that produced it, but it’s difficult to know exactly where and when that exact credit was created within the project.
Immutability is one of the biggest issues here because a web 2.0 registry has no restrictions when it comes to changing data within a project. Credit values, collected data, and even locations can all be changed, meaning that the registry must be completely trusted by the purchasers.
Democratization is something existing web 2.0 registries lack. They have the exclusive say on what types of credits and projects they accept. This leads to repeated outcries when it’s discovered that standards weren’t strict enough. Allowing transparency and voting into this certification process will help to mitigate this issue.
We took the rather simple but innovative approach to fixing all the issues with the classic approach and that involves bringing the actual carbon credit registry onto web 3.0. The progress in blockchain technology has allowed us to do this and still run the system efficiently.
The system is composed of 3 main smart contracts. A developer smart contract, a registry smart contract, and a carbon credits smart contract.
The developer smart contract is accessed by a project developer who wants to create new credits. They perform an assessment and submit core information, such as the location, type of credits, and key variables needed to calculate the carbon storage. This information is then stored on the blockchain. Any reports that are too large to store on the chain are saved to decentralized storage, with links to them stored on the chain. Once this process is complete, the registry is alerted to verify the submission.
The registry smart contract is accessed by a registry authority. Currently, the registry authority takes the core project inputs and verifies all of them before submitting them to the registry smart contract. Minting of credits is only allowed if all inputs align with the developer smart contract. In the future, this authority can be eliminated by moving more of the assessment logic to the blockchain and using oracles to validate real-world data.
The carbon credits contract handles the minting and traceability of the tokens. If the developer smart contract and registry smart contract have aligned data inputs, then the minting is approved, and credits are created. Credits are minted in batches that are tied to a specific time and place in the project so that the continued storage of these credits can be validated in the future.
Improvements and New Solution Ideas
While we believe that our approach is a step forward in creating a more effective and transparent system for carbon credit trading, there is always room for improvement. Here are some areas where we believe further development could be beneficial:
- Automation: While our approach eliminates many of the issues with traditional web 2.0 registries, there is still some reliance on manual verification and input. Moving more of the assessment logic onto the blockchain and using oracles to validate real-world data could help to automate the verification process even further.
- Decentralization: Our approach allows for community voting on which carbon credit projects should qualify, but this could be taken further by making the process fully decentralized. This would involve creating a decentralized autonomous organization (DAO) that allows anyone to propose and vote on carbon credit projects.
- Integration with environmental, social, and governance (ESG) frameworks: Our approach focuses on the blockchain aspect of carbon credit trading, but it could be beneficial to integrate it with existing ESG frameworks to provide a more comprehensive approach to sustainable investing.
- Partnership with carbon offset platforms: Carbon offset platforms could benefit from our approach by integrating the blockchain aspect of carbon credit trading into their existing platform. This would provide increased transparency and traceability for their users.
I hope the ideas and strategies I’ve shared today have inspired you to think outside the box and find new ways to tackle the challenges we face. If you’re passionate about this cause and eager to join forces with like-minded individuals, I invite you to get in touch with me. Together, we can explore the exciting possibilities of blockchain, sustainability, and collaborate to make a real difference in the world.