From Carbon Credits to DePINs: How Tokenization Supports Green Initiatives
- By Jonathan Gill, HashKey Group
- February 13, 2024
Tokenized green financial products are revolutionizing sustainable investing. By combining blockchain technology and green finance, these innovative instruments offer new opportunities to support environment-friendly projects.
This article begins by exploring green financial products. It then explains how blockchains can be used to record and share data, how tokens could be used to raise capital for green projects, how decentralized physical infrastructure networks, or DePINs, can be used to grow green projects, and how a virtual asset trading platform can facilitate liquidity and unlock value for green financial products.
Exploring green financial products
Green financial products span a range of environmentally sustainable initiatives. These include renewable energy, clean technology, energy efficiency, sustainable agriculture and green infrastructure. By facilitating investment in these sectors, green financial products promote the transition to a low-carbon economy and help to preserve natural resources.
How blockchains can be used to record and share data
The quality and integrity of a green financial product’s data are vital for it to have any value.
A product issuer must be able to record and store that data efficiently and transparently. Just as importantly, a potential purchaser of such a product must be able to verify the authenticity of the data and how it has been collected.
This verification exercise has typically been labor-intensive and costly, requiring extensive human involvement. This, in turn, introduces the possibilities of human error and fraud. However, blockchain’s trustless nature reduces such possibilities.
Hashing data onto a token creates an immutable and transparent data record. This simplifies due diligence and, therefore, the valuation of tokens. This should encourage the tokens’ liquidity.
How tokens could be used to raise capital for green projects
Green projects can have long potential durations and might not earn revenue immediately. For example, it might take several years for a carbon credit project to start producing such credits and begin earning revenue. Accordingly, raising seed capital is a common problem for the sector.
A green project could raise capital by issuing bonds. This would allow the project to receive funds upfront and pay bondholders interest as the project earns revenue.
A tokenized bond could allow investors to access real-time information about the underlying project, such as the project’s carbon footprint.
The predictable nature of bond coupon payments lends itself to smart contract automation. This has significant efficiency benefits for token issuers.
A green project could also sell carbon credits as forwards. This would allow it to receive funds upfront but only need to deliver such credits later. Given blockchains' transparency, tokenized forward credits could be priced more accurately. This is particularly important for carbon credits sold as forwards since their value tends to decline over time. Investors would appreciate the real-time ability to discern any difference between a credit’s discounted forward price and the sale price of the issued credit.
How tokens could be used to grow green projects
It is often costly and challenging to build, operate and maintain the physical infrastructure network required for a green project. Only governments or small, deep-pocketed consortia have traditionally created and run such networks.
In contrast, a DePIN is a different model of infrastructure development. A DePIN issues tokens to community members to incentivize them to build, operate and maintain infrastructure. A DePIN can be built and run decentralized by collaborating stakeholders using the crowdfunding infrastructure. This is particularly attractive for green projects, many of which have community-focused aims.
As a DePIN’s network grows and develops, the demand for its tokens should increase. This should drive the tokens’ value upwards, broadening their investor base and incentivizing further network development. This growth flywheel has a powerful effect over time. It can help a green project to proliferate as it leverages participants' collective resources.
How a virtual asset trading platform can facilitate liquidity and unlock value for green financial products
A virtual asset trading platform can significantly enhance the value of green financial products by facilitating investment, capital allocation, and economic growth.
A liquid 24/7 virtual asset trading platform with close to real-time settlement efficiently raises capital for green projects. It can also help with establishing a market price for green financial products. This will make it easier for such products to be used as collateral because their valuation will become more transparent.
Tokenized green financial products represent a groundbreaking approach to sustainable investing in the digital age. By leveraging blockchain technology, these instruments unlock new opportunities to support environment-friendly projects, promote liquidity, enhance transparency and drive positive environmental change. Tokenization paves the way for increased accessibility, efficiency and global collaboration within the sustainable finance ecosystem. As the world seeks innovative solutions to address pressing environmental challenges, tokenized green financial products offer a promising avenue for leveraging digital assets to build a greener and more sustainable future.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of CDOTrends. Image credit: iStockphoto/robertsrob