What is Regenerative Finance in DeFi?

The end goal for cryptocurrency and blockchain technology is mass adoption. Sustainability is a major concern for the global economy, which is why many sustainable initiatives are taking the route of financial incentives. If the crypto industry stands to play a part in this sustainable future, new concepts that replace exploitative practices with sustainable ones need to be introduced. One concept that does exactly this is regenerative finance (ReFi). Regenerative Finance, or ReFi, is a concept that envisions how cryptocurrency will fit in and support a sustainable ecosystem. This article explores the topic, its features, and how it can work with the blockchain industry.

History

Regenerative finance is a concept that emerged from the term regenerative economy. Discussions surrounding a regenerative system with ecological and natural systems have long been in conversation. Still, no person or entity can be awarded with being the concept’s originator.

However, we can attribute the topic’s publicizing to notable individuals and organizations. The oldest is Paul Hawken’s book, The Ecology of Commerce. Published in 1993, the ecologist Hawken discussed the idea of creating a sustainable economy with regenerative cycles, thus avoiding waste and the depletion of resources. Another notable individual is John Fullerton, founder and president of the Capital Institute. The well-known advocate for regenerative capitalism published a paper expanding on eight principles underlining a regenerative economy.

Aside from individual personalities, organizations like the Regenerative Communities network and the Ellen Mac Arthur Foundation have contributed to the growing discourse on regenerative finance.

What is Regenerative Finance?

Source: Blockdata

The term regenerative finance refers to a financial model that advocates for blockchain-based financial projects and services that contribute to regenerating the ecosystem rather than depleting available resources. A major argument against the cryptocurrency industry is that mining operations negatively impact the environment.

ReFi aims to solve environmental as well as communal and social problems by using blockchain technology to create projects that are not only sustainable but feed into regenerative cycles that benefit ecosystems and communities. Regenerative Finance is built on the eight core principles of a regenerative economy, its originating concept.

Main Features of ReFi

Traditional finance is about exchanging value for value, be it in the form of a product or service, and traditional business models are built around exploiting individuals and influencing buyer sentiment. With regenerative finance, projects are shaped with sustainability in mind, and it has the following features:

Blockchain technology

Since the emergence of the first cryptocurrency, the most common goal across crypto projects is to achieve mass adoption. Even though crypto has not yet become a day-to-day currency, the underlying blockchain technology has been adapted to numerous use cases. Blockchain has been applied to gaming, real estate, identity management, supply chain management, and even healthcare. ReFi aims to use smart contracts, NFTs, tokens, blockchain technology, and decentralized applications to realize regenerative principles.

Regenerative Economy Principles

ReFi would not be regenerative finance without the core principles of a regenerative economy. According to Capital Institute, there are eight core principles of a regenerative economy, ranging across holistic approach, innovation, community engagement, and balance.

Accountability and Transparency

Regenerative finance prioritizes transparency in business dealings. Thus, crypto projects built on this model are expected to be honest by reporting on what sustainable practices are being implemented and the environmental and social footprint left by business operations.

Decentralization

Much like decentralized finance, Regenerative finance encourages community engagement and participation. On DeFi, community members in the form of DAOs contributed important changes on the platform and ReFi plane to retain or replicate this feature. One of the principles of the regenerative economy is increased community participation, so the regenerative finance model recognizes the priceless insight that local communities can bring to financial projects.

How Can ReFi and Blockchain Work Together?

Regenerative Finance brings sustainable practices and initiatives to the blockchain with the help of blockchain technology like DEXs and smart contracts. Regenerative finance projects achieve this purpose with blockchain technology like smart contracts and dApps. Some of the ways blockchain and ReFi can work together include:

Tokenized Carbon Credits

One of the major concerns when it comes to the topic of sustainability and a better ecosystem is carbon emissions. Carbon emissions, part and parcel of many industrial processes and equipment, are very harmful to the environment, causing issues like climate change and global warming. The most famous solution to this issue is carbon credits, which incentivize companies to reduce their carbon footprint.

The most popular use case for ReFi on the blockchain is the tokenization of carbon credits. An article on the Ethereum blog describes it as transitioning from the previous voluntary carbon market (VCM) to a blockchain-based digital carbon market (DCM). This transition will introduce benefits like high liquidity, faster trading speed, scalability, and transparent transactions.

Tokenization of carbon credits works this way: registries like Verra must first verify the reliability of projects creating carbon credits, blockchain projects like Toucan Protocol will act as a carbon bridge to tokenize existing carbon credits, and finally, users will be able to sell or buy carbon credits with projects like KlimaDAO.

Decentralized Green Bonds

Green bonds are those fixed-income investments that go towards addressing environmental issues. These instruments are set aside for raising money for climate issues, pollution, sustainable agriculture, clean water, and the protection of ecosystems, among others. Another use case of the ReFi model would be making these investment options available to crypto users through tokenization. Since tokenization is the digital representation of real-world assets, DeFi platforms can list decentralized green bonds, tokens that contribute to funding sustainable and regenerative initiatives. Platforms can write the terms and conditions, interest rates, maturity dates, and distribution schedules into the token to improve transparency through smart contracts.

NFTs Cultural Heritage Preservation

ReFi can also contribute to the preservation of indigenous communities using NFTS. In the blockchain space, NFTs are a popular way of representing real-world assets because they can be traded, exchanged, bought, and sold by any user. ReFi represents a method for indigenous communities and artists to preserve their culture and heritage through cultural artwork. The NFT space is all about artists having full control over their work, how it is traded, and how it is priced. ReFi removes the exploitative part of the art industry and gives indigenous users a chance to commodity their local heritage on their terms. For example, Ukraine has taken to the preservation method by digitizing and recording all artifacts of cultural significance on the blockchain.

Popular ReFi Projects

Despite being a relatively new movement, the crypto space has responded positively with the launch and operation of some projects that merge web3 technology and regenerative economy principles. Popular refi projects include:

Flowcarbon

Source: https://www.flowcarbon.com/

Flowcarbon uses blockchain technology to improve the carbon market with a direct focus on stopping deforestation and promoting ecosystem reforestation projects. Using blockchain technology, Flowcarbon is able to make the voluntary carbon market (VCM) transparent and more liquid. Flowcarbon directs its efforts towards innovative projects like biochar production and EV charging.

Toucan Protocol

Source: https://toucan.earth/

Toucan protocol is a blockchain-based project that provides on-chain functionality for carbon credits. The infrastructure of Toucan Protocol introduces features like transparency, scalability, and interoperability to bridge the gaps in the VCM. Launched in 2021, Toucan protocol has generated over $4 billion in revenue from carbon trading. The protocol’s products include carbon retirements, carbon bridges, and carbon pools.

Klima DAO

Source: https://www.klimadao.finance/

KlimaDAO is a decentralized autonomous organization made up of members who are committed to making change. Klima is an impact DAO that works together with traditional carbon market corporations, crypto projects, and other players to bring about positive change in the environment.

ReFi Hub

Source: https://www.refihub.io/#

ReFi hub is building the largest community of impact investors on the Solana network. The project is geared towards inspiring the web3 community to invest in healing the planet and restoring the ecosystem.

ReFi vs DeFi

Other than the similar abbreviations, ReFi and DeFi are finance concepts with separate goals. Decentralized finance (DeFi) advocates more user control by removing centralized bodies. ReFi has many similarities with DeFi, such as decentralization and community engagement. But ReFi goes beyond that to promote initiatives that positively impact society and the environment.

So, it isn’t ReFi vs. DeFi but ReFi & DeFi. By incorporating regenerative finance principles into DeFi platforms, ReFi makes it possible for investors to impact the environment directly. This protocol can do this first by transitioning the project’s business model from extractive or exploitative to sustainable and regenerative. An example of an exploitative business model is the popular proof of work consensus mechanism, which takes a lot of energy to run. Blockchain projects that combine ReFi can only be built on sustainable business practices. Beyond that, ReFi protocols must provide opportunities for the larger community to contribute to regenerating the ecosystem.

Is ReFi a Good Investment?

Whether or not ReFi is a good investment depends on individual financial goals, risk tolerance, and morals. Regenerative finance is a model that focuses on sustainability and positive outcomes for society and the environment. All of these principles will align with some investors’ morals and values. Nevertheless, before investing any capital into the ReFi space, it’s good to remember that it is an investment like any other. It comes with risks, and returns vary from asset class to asset class. Be sure to research specific ReFi projects to decide whether they fit in with your objectives and risk appetite.