Natural Capital Backed Assets: Incentivizing conservation and regeneration with asset tokenization
The Earth's ecological balance is facing unprecedented challenges due to habitat loss, forest destruction, and ocean biodiversity decline, contributing to the escalating threat of climate change. This results have been devastating, with wild mammal biomass declining by 85% since the rise of humans while deforestation claims roughly 10 million hectares of forest annually. Additionally, the loss of ocean biodiversity has reached alarming levels, with the World Wildlife Fund (WWF) indicating that marine species populations have declined by nearly 50% in the last four decades.
As we grapple with the urgency of combating climate change, a novel solution has emerged - Natural Capital Backed Assets, harnessing the power of blockchain and asset tokenization to create economic incentives for safeguarding our natural resources while combating environmental degradation. In this article, we delve into the potential of these innovative assets to revolutionize conservation efforts and drive positive change in humanity’s fight against climate change.
Understanding Asset Tokenization
Asset tokenization involves converting tangible and intangible assets into digital tokens on a blockchain. These tokens represent ownership rights or value in a secure and transparent manner. This process has disrupted traditional finance and opened up new possibilities for the representation and trading of assets.
An obvious example of asset tokenization can be applied to real estate. Real estate investing has been one of the primary tools for generating intergenerational wealth over the past century, yet this valuable tool is becoming increasingly out of reach for many, with one survey finding that nearly 70% of millennials in the US feel that they cannot afford a home due to rising prices. One way that asset tokenization could help solve this problem is by reducing the barrier to entry to real estate investing. A collective of individuals could pool their money together, purchase a property, and “break it up” into “shares”, with each share being represented on-chain as a token. This way, individuals can still benefit from real estate investing, without having to make a $100,000 down payment. One organization that is doing something similar is Bonfire, a Web3 company using “blockchain technology to divide real estate assets into tokens, making it safe and easy to build a commercial real estate portfolio for as little as $1,000”. Check out our conversation with their CEO Joshua Kagan about how blockchain technology can democratize real estate access.
This is just one example of asset tokenization. In theory, this could be applied to almost all assets, including precious metals, artwork, and everything in between. One example that has emerged in recent years, that has gained a lot of momentum in the Regenerative Finance (ReFi) space, is Natural Capital Backed Assets.
The Significance of Natural Capital
While there are varying definitions of Natural Capital, for the purpose of this article, it can be referred to as “the finite resource of ecosystem services, which includes clean air and water, fertile soil, productive oceans and forests, and all of nature’s resources that contribute to human well-being.” In addition to physical resources, such as forests, wetlands, oceans, it can also include services such as carbon sequestration, water purification, climate regulation, and biodiversity maintenance. However, the alarming rate of environmental degradation due to deforestation, pollution, and habitat destruction has put natural capital at risk, exacerbating climate change and threatening the stability of our ecosystems. This is where tokenization comes in.
Harnessing Natural Capital through Asset Tokenization
Asset tokenization offers a unique opportunity to incentivize the preservation and sustainable management of natural capital. By converting natural assets into tradable tokens, individuals and institutions can invest in these assets and participate in their conservation. Let’s use the example of a section of rainforest that is prone to logging. A conservation NGO could purchase this plot of land, take it off the market and assure its long-term protection, and convert it into on-chain tradeable tokens, with a portion of the land being represented by each token. Individuals, such as conservation activists or climate investors, could then purchase a token as a way to both support the conservation efforts, and also to potentially make a positive return as the value of the land changes.
The tokenization process involves quantifying the ecological value of a specific area and dividing it into tradable units, thereby creating a Natural Capital Backed Asset. However, quantifying the value of these assets is easier said than done, as value has traditionally been based on economic considerations (i.e. the value of timer in a forest), instead of ecological considerations, such as the human and environmental value that will be created as a result of conservation.
We won’t go into the nitty gritty of how to tokenize an asset in this article. For a deeper dive into asset tokenization, check out this beginner’s guide on converting real assets into digital assets.
Benefits of Natural Capital Backed Assets
1. Economic Incentives for Conservation:
To date, regeneration and conservation efforts have largely been driven by altruistic activists and NGOs who are incentivized by their love for nature and their deep passion for protecting our world for future generations. While there has been a growing movement of entrepreneurs creating business solutions to climate change, there has been a noted absence of opportunities for the average individual to gain financial incentives for participating in conservation efforts
Natural Capital Backed Assets create entirely new incentivization structures that can also make it financially appealing to preserve and sustainably manage natural resources. By attaching economic value to ecosystems and environmental services, stakeholders are encouraged to protect them for long-term gain.
2. Global Participation:
Climate change is a global problem, and thus, conservation and regeneration efforts must involve global participation. Web3 solutions, like asset tokenization, are inherently global, and allow anyone, regardless of geographical location or financial status, to participate in environmental conservation. This democratization of investment can mobilize a broader base of support for protecting natural capital while at the same time creating a global awareness around local issues, such as the destruction of Indigenous rainforest land in Brazil, helping causes rally more supporters to their movement.
3. Transparency and Accountability:
Blockchain technology ensures transparency and traceability in asset tokenization. The immutable nature of blockchain records can all but guarantee that investments are directed towards legitimate conservation projects, fostering trust and accountability among investors and conservation organizations.
The importance of this can not be understated, as there has been a breakdown in trust in climate markets in recent years, driven largely by the Carbon Offsets scandal which found that more than 90% of rainforest carbon offsets from Verra, the largest certifier in the world, are worthless, and may actually be worsening climate change.
By bringing natural capital backed assets on-chain as tokens, investors can be assured that the asset they are purchasing are unique (not duplicates) and will be able to see exactly what natural asset their token is tied to, all verified on an immutable blockchain.
4. Scalability and Liquidity:
Tokenization enables fractional ownership of natural assets, making it easier for smaller investors to participate. In theory, investors could purchase a fraction of a fraction of a natural asset, minimizing the financial barrier to entry for the average retail investor.
Additionally, the tradability of tokens on digital exchanges enhances liquidity, providing investors with the flexibility to enter or exit their investments as needed. Investors could simply login to a natural capital asset exchange, and with a couple clicks of the mouse, acquire a natural capital backed asset.
Examples of Natural Capital Backed Assets
1. Carbon Offset Tokens:
Carbon offset tokens represent a specific amount of carbon dioxide that a natural asset, like a forest or wetland, can sequester or absorb. Companies and individuals can purchase these tokens to offset their carbon footprint and comply with emissions reduction targets. The revenue generated from the token sales can be reinvested in the conservation and restoration of the natural asset, fostering a positive feedback loop of environmental protection.
One example of a carbon offset token is Ecosapiens, which styles itself as “the world’s first carbon-backed collectible.” Each Ecosapien NFT is represented by unique humanoid artwork (see below), and is backed by 16 metric tonnes of CO2 (the average person’s annual CO2 emissions). Holders have the opportunity to “level up” their Ecosapien by infusing it with additional Carbon. As it levels up, the dynamic NFT transforms with additional traits and artwork, including “various flora, fauna, mineral, and technological elements, hybridizing the entire spectrum of Earth's biological kingdoms with human technology.” Ecosapiens is a great example of how Web3 tools like NFTs can be used to represent and protect natural assets while also gamifying conservation efforts. If you’re interested in learning more about Ecosapiens’ innovative approach, check out our chat with their Founder Nihar Neelakanti on climate tech, digital assets, and the first carbon-backed NFT.
Ecosapiens holders can “level up” their Ecosapien by infusing it with more carbon.
2. Conservation and Biodiversity Tokens:
Conservation tokens are linked to the preservation of unique and endangered species and their habitats. By investing in these tokens, stakeholders support conservation efforts, protect ecosystems, and ensure the survival of biodiversity hotspots worldwide. Governments and conservation organizations can also use these tokens to raise funds for wildlife reserves and protected areas.
One example of a natural capital backed project supporting conservation is Fund The Planet, which uses the funds from the purchase of their Rainforest Token NFTs to purchase and protect swaths of rainforest land. Each token certifies the protection of a specific piece of rainforest land, with 1.8M square meters of rainforest land being protected thus far. Each Rain Forest Token (RFT), can be viewed using Fund The Planet’s Rainforest Explorer.
Fund The Planet’s Rainforest Explorer makes it easy to see the land backing each Rainforest Token (RFT)
Conclusion
Natural Capital Backed Assets, enabled by asset tokenization, present a transformative approach to address climate change and protect the Earth's vital natural resources. By incentivizing investment in the preservation of ecosystems and the services they provide, we can create a sustainable future for generations to come. As more stakeholders embrace this innovative concept, the fight against climate change gains powerful allies, accelerating the transition to a greener and more resilient planet.
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