Filecoin Sustainable Blockchain Summit - LATAM - October 2022, 31 Oct 2022

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From YouTube: Making ReFi Real - Liquidity and Pricing of Ecological Assets - Jahed Momand - Selva (Track 2)

Description

This is a continuation of the keynote at ETHBarcelona on Ecological Assets in DeFi, focused on how we can build a massive, distributed movement in climate finance by building liquidity and price discovery of ecological asset markets. I'll get into the pieces we have today in the market, and what needs to be built to usher in a real regenerative finance movement this decade, so we can take the learnings of climate impact of the last 20+ years and massively scale them.

- Sustainable Blockchain Summit LATAM 2022 - https://sbs.tech/

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Corporate demand is growing rapidly from energy Airlines energy, intensive, Industries Etc, uh thanks to clima and toucan, for really leading the way for tokenizing these credits to be doing something to the transmitter. Sorry, but it's not enough right.

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If you look at what's happening, if we do nothing else, we're going to hit Three Degree warming this century, and we need to throw the kitchen sink at all these things so that we can rapidly scale. Why? Because you know, if you talk about nature-based Solutions, if you talk about all these other approaches, nature based alone would require something like 35 times the size of the UK to sequester 10 gigatons of carbon.

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That's just not going to happen. There is enough land on Earth to do it. So we need everything. What is everything direct air capture? Forest, carbon biochar, soil, blue carbon, enhanced weathering? We need it all. This is a nice little tool. I encourage you to check it out. It's called the road to 10 gigatons.

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You can go mess around with this and see what it takes to get there and, in addition, we need these things now, which is why it's really important to have transparent Ford markets in contracts for all of them and I'll talk about why.

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So, when you start to mess around with this you're, like you get to see the scale of this and honestly, these numbers are probably wrong. It's a nice little calculator but they're, probably off by maybe a factor of 10., but we I'm gonna hold it on cost right, because we need to drive the cost curve for this stuff down rapidly. We need to do it now, because if we wait and say, if you take direct air capture, it's supposed to be cheaper later so everyone who's in the market now is going.

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I can just wait, but if we wait we're not going to have a habitable earth right, so we need to make this a tenable choice for right now, and the good news is that if we do that, it has compounding effects and I'll show you what this looks like in the yield curves right.

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So, what's preventing the scale liquidity, carbon assets are kind of treated as this one class of carbon credits, but they're radically different in terms of how fast they sequester carbon over what time period their co-benefits a bunch of stuff.

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Because of this, it's actually hard to price and if you're a corporate purchaser, you want to lock in that price, because you have year-end commitments you want them now and project Developers managing this is really difficult for them and it's hard to raise money and, lastly, and I hope this isn't too spicy about fungibility. A lot of these carbon assets are not fungible over methodology and they're, not foggable over time. So we're going to look at what that looks like.

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So if you just look at Carbon asset yield, this is a little uh credit to Peter Olivier from undo I love these diagrams. um You can kind of see that enhanced Rock weathering Forest carbon and biochar, actually sequester different amounts over their entire lifespan. Right. If you're looking at an enhanced Rock weathering project, it's an exponential Force, it's an s-curve, biocharged, linear and fundamental Financial Primitives for managing the risk. These projects do not exist so with forest, for example. Right.

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If you look at something like this, if there's a forest fire, your actual project risks is radically different than where it started, and what you're looking at is green, washing right, I'm, not saying people who are doing green washing are bad. This is just what they have to deal with right, like they're offloading the risk to the people who are doing the projects they're like well. I can just buy the thing and yeah it's greenwashing, but I can't go there and do anything about the forest fire.

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And furthermore, when you model the risk, there's also modeling risk and other methodologies right, so enhanced Rock weathering is pretty predictable, but that's what we think we scale it up. We might learn something different and, lastly, carbon assets, like I said, are not fungible by time and methods. So, if you take a sliver of time right there, how much an erw project is sequestering is radically different than Forester biochar, but we're selling them like they're. The same thing.

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Carbon acids I'm not going to I'm going to keep going on this one. All these factors contribute to illegible and illiquid markets even in blockchain right, because blockchains are for eligible markets, but it's actually really difficult to get to that level. So you have a non-fungability. You have non-existent yields for holding these things right because you're, basically just hoping that people buy more of them, but then there's nothing to do with them once you get them right, except retire them, and you don't have Financial Primitives to manage the risk of those projects.

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So what does this actually mean for an asset manager at say, Deloitte that has billions under management and wants to offset to Net Zero by 2030.? If you take carbon direct removal, these are mostly done as OTC forward contracts. Over-The-Counter forward contracts, they're done once and there's no liquidity. So let's say Deloitte in one year. Sequester is all they need to to meet their goals. They can't sell those contracts to someone else well. So what is that thing worth in year?

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Three, four, five ten there's no way to find out, and lastly, this is the worst problem. Cdr, like I said, is perceived as a depreciating asset, so people can say well. I'll buy Force carbon now because it's going to be worth more later and I'll wait to buy CDR till it comes down. This is just a classic strategy. The commons problem, no one is going to act till it's cheap enough and then it's going to be too late, so we have to solve that problem.

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So a quick recap: price discoveries, a problem. Transparency is we're bringing some transparencies markets, but it's still a problem. Fungibility, it doesn't quite exist the lower we want it to exist. For this to be a tradable aspect and the financial products on top. Once you have them, they don't exist, there's no way to go out and hedge, these positions.

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So what do I think we need glad you're, asked I, think maturity and methodology. Pooling is one place to start I'm going to walk you through that, once you have that you might be able to have markets and forward contracts and then, on top you fill from Phillip carbon and some other folks have been talking about. Derivative is markets so I'm going to talk about perps, so first pooling by maturity methodology. Why would you do it? How would you do it? This is just a hypothetical right, so the good news is toucan already exists.

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There is a pooling by methodology. It's the NCT. You'll buy it today. It also has some decent governance in place for who gets to join that pool. But it's just a start.

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You can see in these yield curves that these are radically different assets, so maybe it'd be interested in Boolean in my methodology, maybe there's a New York W token, maybe there's a biochar token, and then once you have that, like you can basically see from the erw curve that carbon delivered in 2028 is radically different from carbon delivered in 2025.. So you could price these by year. Right erw2028 is still in the atmosphere. The RW 2025 at the end of the year can be claimed and retired.

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So these would make the yields in these projects finally visible, because you could have these pools that exist where people can come in and say: hey I have an erw token I'm an enhanced weathering project. I would like to sell 50 of my project to be delivered by 2040 into this pool.

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I can get forward financing, but you get to hold an asset that is only going to appreciate because I've, given you a huge discount over time as people trade in and out of these pools, you get to the market price, for what carbon delivered by a certain methodology at a certain time is and I think that's really powerful, because a project developer can now come in and say, hey uh it's great to know the price of this, but you're telling me I can sell into this pool that's transformative for project developers.

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They cannot do that today, right so what's next, did we solve all the problems? Not not quite offsetting entities still can't lock in prices for their offsetting goals. This could be something like a carbon option: net neutral goals that are set for fiscal years. Everyone waits till the end of the fiscal year for their to actually meet their goals right, which means there's a flurry of trading activity in December.

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I already mentioned the commons problems. We cannot wait for CDR to have a better price than 2040. We have to do it now and lastly, while I look like I am saying we should speculate on these things. What's really important is we need physical settlement which I'll explain what that is, but basically we don't want to just speculate on the price. We want to actually be able to claim the underlying asset and retire it at the end of the year, which is what physical settlement will.

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Let you do so I'm going to talk about perps, real, quick if you've never heard about them, they're invented in 1992. They didn't find a use case until 2016 when bitmex introduced purpose for Bitcoin now I. Just all you need to know about this. Is this number right here?

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This is the purpose volume on just binance and uh FTX. Last year it's 11.7 trillion dollars all right. So that's just transactions and if you have a fee that maybe goes into a project developer fund from a exchange that funds A perp for carbon, that could be an interesting idea.

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So I'm going to run through this one, real, quick derivatives is a class of financial product are interesting because they let you hedge against directional movements. So let's say you bicarbon, that's worth 50 to 100, you get it for 55., but you're Deloitte and you have like I, don't know 20 million dollars worth of it. You want to be able to be insulated against that when the NCT pool moves against you right when somebody goes like actually Forest carbon is cheaper than we thought right.

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You want to be able to say: oh okay, well I can make some money on that, because risk Capital needs returns in order to be deployed. We can't just rely on their best behavior to do this so I'm not going to cover features or options. Don't worry about it very simply. Just think of it. This way, if the price of an NCT on polygon today is 10 bucks, but there's a bunch of people speculating on the future price and it moves from 10 bucks. That's the Mark Price. The price on Toucan is 10 bucks.

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That's the index price. At the end of each day, people go everyone who is long. Toucan who thinks this is going to go up, will take their price index minus Mark and everyone who's long will pay everyone who's short. If that number is positive, everyone who's short, will pay everyone who's long. If it's a negative, that's it all. I can show you in Practical terms what that means. So don't worry, let's assume we're trying to get Deloitte to invest in undo, which is a carbon direct removal project.

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Carbon dioxide removal project, so erw today is 550 per 10.. It's projected to decline to 100 by 2040.. So this is a real problem for enhanced Rock weathering projects because they're super cash strapped. Everyone says the thing I just said about the tragedy of Commons problem. Essentially this will be cheaper later I can buy it then, but it's really appealing for them to buy that stuff today to sell their forward carbon contracts today, so they can raise cash up front for these projects.

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Now, let's say that undo can sell tokenized forward carbon credits into one of these imaginary pools. I talked about right. They could go to Deloitte and say we'll give you a 50 discount on the projected cheap price of 100 bucks for erw in 2040 today.

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That will help us raise 50 of the project, costs up front, we're going to keep the first two years and we're going to sell them into those pools that I talked about, because I think the prices will be good for now, but you have a lot of significant upside potential for holding those now right, they're, not just credits that you retire they're actually sitting there. They might be worth more later um after this. Let's say you know, let's say they do that they fund it. Then they want to pursue a net neutral strategy.

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Don't worry you don't need to know what that is. I'll tell you real, quick!

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um Sorry, let's go back there. There you go so what they have here is if they then go and buy ncts as well. They have ncts which are projected to go up. Boris carbon gonna be more expensive in the future, enhance Rock weathering going to be cheaper in the future. So if they open up a perp lung position as a hedge on NCT, they can go along and on erws, so short, so they don't actually care which way the market goes right. This is super simple by the way, like I'm, neglecting a ton of complexity.

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Here, the point is just that. If you make these folks buy these contracts, they now have a way to not care about them being worthless assets. We can just get them to move right, so conclusions I think that we need to evolve pooling of these projects so that they're much clearer to corporate purchasers.

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I, don't think you should follow everything. I said here is just an example, but this will unlock the con before contract opportunity. I think right.

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It also brings that Clarity and transparency. We all want to see in the market, because it's still not there right. New Financial Primitives, like perps, will then enable these folks who then participate in these things to hedge their positions and just not care about where it goes, and that way they can deploy a ton of capital.

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um I want to reiterate what a lot of other people have said here too. We this little working group that we formed around this project is called fast forward, but we do want you to move solely because project developers and real life people are involved right um and if we iterate on this in the right way with the right data from the bottom up, we can really unlock like transformative liquidity for these projects.

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um Like I said, there are many many unaddressed challenges here. There's the governance of the projects that goes into the pools, there's uh regulation, the cftc will come talk to you, the second. You try to do this right.

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um But lastly, I would just like to acknowledge everyone to help me with this honestly there's a ton of people, Peter, Olivier, undo, Tom Duncan at earthbank, fruit, Gondor, neutral Sam, Bennett's, Ryan, Christopherson and Gregory landwood region, Icarus, Jensen, elenaburg, John, Hoops Denver, and everyone at bikeau.

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Also, my family, who hasn't seen me in three weeks and since I, think I have enough time for this. This is me uh co-founders, Early Adventures. We invest in refi if you're working on any of this come talk to me and thank you. That's it.