Earth Day 2023: The Rapidly Growing ReFi Ecosystem on Hedera

Co-authored by Wes Gesienberger, Jonathan Rackoff, and Rufus Daniel .

Today, on this 54th Earth Day, The HBAR Foundation Sustainable Impact Fund (SIF) looks back on what has already been an incredibly productive year for the Regenerative Finance (ReFi) ecosystem on Hedera. 

Since the inception of the fund, we have strived alongside sustainability-focused policymakers, retail applications, and institutions large and small, to realize a shared goal: bringing the balance sheet of the planet to the public ledger. 

Below, we dive into our mission at the SIF, Hedera’s unique advantages in tackling climate and ESG challenges, and how our team of dedicated sustainability and web3 experts, together with our innovative grantee and ecosystem partners, are building the open source web3 infrastructure to solve them.

What is ReFi? 

The overarching thesis of ReFi is that web3 innovation has the capacity to transform our all-too-often extractive, profit-focused economic system into one that takes seriously – and takes responsibility for – protecting and preserving the environment we share; more than that, for regenerating the ecosystems, the biodiversity, and all the natural capital held in common as public goods; and in the process, centering social inclusion, equitable access, and environmental justice.

As with Decentralized Finance (DeFi) broadly, distributed ledger technology (DLT) and related tools such as smart contracts and decentralized identity in ReFi serve to disintermediate the cumbersome legacy mechanisms of Traditional Finance that have slowed, added risk to, and increased the costs of transactions. By enabling borderless, immutably recorded peer-to-peer transactions, it suddenly becomes possible to reduce previously intractable frictions in the voluntary carbon markets, in the development of climate projects around the world, in ESG disclosure, and many more.

ReFi also prioritizes sustainable outcomes that benefit the communities and people actually doing the work on the ground, and so often in the Global South – not just improving environmental outcomes at large for the benefit of rich, developed nations in the Global North. 

This is what it means to advocate for a “Just Transition” to usher forward the low/no-carbon future we desperately need, yes, but in the process to reimagine and reinvent the systems and structures that historically have entrenched social power and agency over natural capital in the hands of the few.  In seeking to accelerate the ReFi movement, the SIF acknowledges up front that in many cases synthetic environmental assets such as carbon credits as well as ESG disclosure of greenhouse gas emissions serve corporate interests. But it isn’t all or nothing. Like it or not, private capital has a critical role to play in our climate transition. Building tools for major corporates to share their carbon impacts openly and transparently can only serve to increase stakeholder pressure to reduce them. Enabling the tokenization and on-chain buying and selling of high-quality environmental assets with robust auditability and reliable price discovery will only ensure that corporate resources are redirected to climate action, where their efforts to abate have failed or remain infeasible. And the technology infrastructure the ReFi ecosystem is building on Hedera will have the essential, collateral benefit of ensuring a more efficient and ethical allocation of capital to local and indigenous communities, while still holding all participants accountable and reducing barriers to entry to climate and sustainable financial markets for businesses of every size and scale.

The Hedera Guardian

Though the audit trail and system of trade or attestation facilitated by blockchain networks is important, truly updating the sustainable finance markets requires richer tooling that interacts with and enhances the network capabilities. Cue the Guardian.

At the heart of the Hedera ReFi ecosystem is the open-source Guardian, a powerful Hedera-native Policy Workflow Engine (PWE) for creating and tracking digital environmental assets that embody rich data about their underlying attributes – and, importantly, the methodologies used to determine the environmental benefits on which their value depends. Until now, however, the process of submitting and approving project methodologies has been a major obstacle. Simply put, it has been too expensive and taken too long, preventing access to the diversity of methodologies we need. The Guardian removes this obstacle, dramatically streamlining the onboarding of a new methodology in a digital format; instead of months or years, the Guardian takes weeks; instead of millions or hundreds of thousands of dollars, the Guardian requires less than $20,000 on average to develop a digitized version of a methodology (note registry fees and traditional market fees still exist). 

The Guardian is also transformative in the MRV – Monitoring, Reporting, and Verification – space. The Hedera network represents not just a digital system for trade or attestation, but a full-fledged decentralized-identity-based workflow that enables data-rich and credible digital MRV (dMRV). Utilizing the Guardian, we can now integrate automated remote sensor data and incorporate machine-learning-based error correction and fraud detection.

And companies do not require sophisticated in-house development resources to access these powerful tools. By using Envision Blockchain’s PaaS Managed Guardian Service (MGS),  sustainability-focused teams can focus on what they do best: building applications and policies, rather than configuring and managing a bespoke instance of the Guardian. For users who prefer SaaS, companies like Dovu, KrypC, and Tymlez provide out-of-the-box applications specializing in bringing environmental assets to market. Other providers, atma.io for example, have concentrated on enabling on-ledger carbon accounting and tokenization for brands on the DLT to understand their carbon impact across the supply chain while offering additional carbon reduction measures to achieve net neutrality and move towards carbon net positivity

Through the development of these applications and open source contributions by Hedera’s ReFi ecosystem following Inter Work Alliance (IWA) voluntary ecological markets and carbon emissions token standards, the barrier of entry for developers is greatly reduced, and projects are enabled to incorporate richer and more complex data than previously possible. As a result, the Guardian is now the largest repository of open-source digitized methodologies in the world.

This tooling enables new possibilities including the discoverability of assets across the public ledger, and the comparison of assets without compromising the privacy or confidentiality of projects or proprietary supply chains through Selective Disclosure. This will be followed by new features including Independent Tagging where independent ratings can be applied to any aspect of a guardian asset to provide thorough feedback on the asset's value by experienced market participants.

Together with our ecosystem, these platforms that have become protocols are providing the sustainable building blocks needed to scale for enterprises in our decentralized world.

Bringing the Balance Sheet of the Planet to the Public Ledger 

Enabled by the Guardian, our ultimate goal at the SIF is to​ fight climate change and regenerate nature by bringing the balance sheet of the planet to the public ledger - Hedera. To achieve this end, we have five investment focuses:

PI: Distributed Ledger Technology (DLT) like Hedera is essential to enable trust and transparency, enforced by on-chain audit trails, which will allow the climate markets to scale by combatting core concerns like double-spending.

By creating a precise, accountable, and equitable linking of capital flows between rich nations, major corporates, multilateral climate NGOs, and local communities - a transparent link between these crucial and diversified market participants is formed.

PII: Building, investing in, and maintaining open-source infrastructure like the Guardian and Automated Regression Market Makers (ARMMs) is essential to enabling all of our goals. These tools offer unprecedented benefits to market participants in the green finance markets. 

PIII: Illuminating how our modern system of validating and verifying carbon credits results in systemic bottlenecks and how the Guardian resolves these, enabling scalability via fully auditable project value chains.

‍PIV: One of our most ambitious goals is to establish a global carbon price. Inefficient pricing currently plagues the markets, with organic price discovery being extremely complex. 

Through the ARMMs in partnership with Object Computing and Block Science, we have developed a price discovery mechanism for highly complex semi-fungible assets such as carbon credits. 

The first implementation of this mechanism is through Tolam Earth, the carbon marketplace on Hedera. Here, the ARMM enables corporations to make fully auditable, large, and secure purchase decisions in order to meet carbon reduction, neutrality, or net zero goals. 

PV: Finally, we aim to make ESG reporting, a vital metric of all modern organizations, credible. Each investment focus contributes to this end goal through the creation of transparent and trustworthy reporting within the field of sustainability. 

The Hedera ReFi Ecosystem 

With these goals in place, it is our broad ecosystem of sustainability partners building on Hedera that is actively enabling us to bring the balance sheet of the planet to the public ledger. So let’s take a look at what they’re building. 

• Climate Markets: One of the greatest value propositions of Web3 technology rests within the energy markets, specifically carbon. By incorporating blockchain technology, we can deliver unprecedented trust and transparency to a market plagued with issues such as double-spending. 

• DOVU: A decentralized carbon marketplace enabling high-quality carbon credits to be traded globally with a complete audit trail from carbon source to retirement. As a DAO, DOVU is governed by its native token - $DOV. 

• Flow Carbon: Flowcarbon adds liquidity and transparency to the voluntary carbon market, allowing more capital to flow directly to major conservation, reforestation, and ecosystem restoration projects. Flowcarbon also supports new innovative projects like EV charging, biochar production, and the distribution of cleaner and healthier cooking mechanisms in the developing world.

• Evercity: Berlin-based green debt and carbon origination platform and developer of an open-source sustainable finance protocol, utilizing Hedera to create new instruments for green debt and carbon forwards.

• Tolam: The trusted marketplace leveraging ARMMs for high-quality, high-impact carbon offsets to help organizations reach sustainability goals.

• KrypC: CarbonCore stores, tracks, and distributes carbon credits, acting as an end-to-end carbon offset marketplace where industrial supply and demand meet. High-profile clients include Amana Solar.

• Water Ledger: Water management platform that provides an independent, shared point of truth of who traded what water, when, where, and at what price.

• Solid World: Solid World is a pioneering climate finance platform that leverages Guardian dMRV technology to tokenize real-world assets, providing a transparent, liquid market for climate projects, and unlocking new investment opportunities for investors in the rapidly growing climate market.

• Supply Chain:

• Avery Dennison: Tracking the carbon emissions of billions of unique items in their supply chain through atma.io so that businesses and organizations can monitor their carbon footprint

• TYMLEZ - Supply chain tracking for Green Pig Iron comprising biomass harvesting, biochar production, and transport, iron or mining and beneficiation, and high-purity pig iron production. This enables the creation of Guarantee of Origin certificates for carbon tax accounting. 

• Conservation:

• Porini: Through their Nature Collectibles, Porini migrated from Ethereum to the carbon-negative Hedera network to fund areas on the IUCN green list through NFT financing. 

• Aniseed: The nature-based rewards program finances a range of conservation projects from forest preservation/regeneration, government licenses, animal sanctuaries, game reserves, rangers, and their families, to local communities.

• ESG: 

• TYMLEZ: Secure, trusted, and scalable carbon reporting solutions for ESG compliance and voluntary disclosure, from Guarantee of Origin (GO) to trading in the Voluntary Carbon Market (VCM) - leveraging TYMLEZ’s ability to ingest encrypted and verified data directly from IoT devices.

• Corp Stage: A verifiable and auditable ESG reporting platform, providing companies with a trusted and reliable way to track & report on sustainability and social responsibility efforts. 

• Energy:

• VPE: The first digital energy exchange platform for real-time matching and settlement of generation and consumption transactions between retail users.

• Verde Blocks: A wholesale energy procurement platform that buyers can use to request power bundled with Renewable Energy Credits (RECs), and wholesale electric sellers can use to respond to bids where payment is assured upon delivery.

Policy Initiatives

Alongside the innovative work of our ecosystem participants, the SIF has undertaken extensive policy advocacy, thought leadership, regulatory strategy, and educational work  – efforts we believe will be indispensable to ensuring that well-intentioned regulatory and quasi-regulatory actions will not inadvertently disrupt our goal of bringing the balance sheet of the planet to the public ledger. 

That is why this year, with the leadership of Jonathan Rackoff (VP, Head of Global Policy), the SIF has staked out clear positions on a wide array of issues at the heart of climate and environmental sustainability policy, and made clear commitments to advise further where needed. Governments have largely avoided regulatory oversight of the VCM and other domains central to ReFi, and in that vacuum, as web3 innovators and NGOs step up to fill the gap, we believe that proactive participation in open, transparent standard-setting and rulemaking processes is our responsibility. It is how we shape the regulatory landscape that is coming (and it eventually is) and promote innovation in and adoption of sustainable finance tools and principles along the way.

Here is a short, non-exhaustive history of our policy actions to date:

• Biden White House: As part of the White House request for public comment surrounding DLT/blockchain, its sustainability credentials, and use cases within green technology, we presented an educational piece into Proof of Stake alongside use cases such as ESG disclosure and carbon trading, using practical, data-rich use cases and reports. 

• Gold Standard: Addressing issues of retirement timing, safeguards for pooling and fractionalization, permissible de-tokenization, forward contracts, and ex-ante crediting scenarios, KYC/AML compliance assurance requirements, as well as minimum sustainability credentials of DLT networks authorized to engage carbon-credit tokenization and trading.

• Verra: We created a broad industry coalition of 24 other climate-forward ReFi platforms – we made a strong case for enabling tokenization of carbon credits issued by and stored on the Verra (VCUs) and Gold Standard (VERs) registries.

• UNFCC: Together with Open Earth, we explained how the audibility of immutable, open-source, public DLT networks like Hedera, combined with the automated data flows possible with dMRV will extend the temporal scope of effective project-level monitoring, reducing double counting risk over longer time horizons, and protecting the rights of indigenous peoples and local communities as climate impacts worsen.

• Gold Standard Public Consultations: In two public consultations, we drafted (1) general guidance for digitizing traditional Measurement, Reporting, and Verification (dMRV) using the Hedera Guardian and (2) suggestions surrounding the governance for MRV methodologies and digital infrastructure in the Gold Standard Impact Enhancement Proposal (IEP). 

The Road to COP28

Since its inception and rapidly accelerating following our successful presence at COP27, the SIF, and its ecosystem partners have driven tirelessly towards our goals of making climate finance accountable, digitizing and open-sourcing methodologies, scaling validation and verification, discovering a global carbon price, and making ESG reporting credible. 

Our results to date have far surpassed even our most optimistic expectations. But in hindsight, this shouldn’t be surprising. We have simply mirrored the relentless pace of web3 innovation itself, which neither a bear market nor regulatory uncertainty has yet been able to slow.

As we move towards COP 28, the SIF looks forward to showcasing our work in ever greater detail, with even more institutions and partners, and in light of the Hedera network’s latest suite of digital tools, which surge ahead week after week, day by day. Together as the SIF and our many grantees and ecosystemic partners will do our part to ensure that the promise of COP27 as “the year of implementation” is kept. And so we invite you to stay tuned.

In the next six months, we look forward to sharing some big news. From large-scale organizations offsetting emissions and other environmental liabilities on the Hedera network to educating institutional market participants, enterprises, and policymakers - 2023 will be the year that on-chain implementation on Hedera becomes a reality.