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Published on: Aug 29, 2024
#Financial Markets
A combination of finance, sustainability, regeneration, and social responsibility, regenerative finance (ReFi) seeks to achieve financial and social benefits for everyone as it imitates the regenerative model of nature.
➔ ReFi is trying to foster the growth of a regenerative economy which looks at nature as the primary asset being used to produce goods and services.
➔ ReFi seeks to regenerate environmental, social, and financial harmony.
➔ The twin goals of ReFi are value for all and conservation of nature.
➔ As different stakeholders come together, we expect ReFi to gain wider adoption in the next few years.
The blockchain technology has disrupted the finance sector by offering a decentralised model, leading to a surge of cryptocurrencies and other Web 3.0 ventures over the last few years.
A desire to escape the control of a centralised leadership in a traditional financial system is what lies behind the success of decentralised technologies. Yet, it didn’t imply any desire on the part of organisations to pursue sustainable economic goals which didn’t sacrifice nature for the sake of maximum profits. This is where Regenerative Finance (ReFi) comes in.
Though a lot of people aren’t aware of ReFi, it is slowly gaining currency among the blockchain community. ReFi seeks to bring about a positive impact in society by pursuing a green agenda in business which prioritises value for all and uses resources in a regenerative manner. In short, ReFi dreams big. Its goals are rather holistic, with social, economic and environmental harmony in focus.
ReFi seeks to do so through a regeneration of natural resources while utilising them for producing goods and services. ReFi is well complemented by other elements of Web 3.0 such as blockchain technology, cryptocurrency, smart contracts etc. to pursue its green financial agenda. Let's learn about the concept of ReFi in detail.
Regenerative Finance (ReFi) is a relatively less discussed topic but is worth all your attention due to its value. ReFi is a combination of finance, sustainability, regeneration, and social responsibility.
ReFi envisions a financial order that not only focuses on profits but also regenerating environmental, social, and financial harmony. The goal of ReFi is economic growth and social well-being through a sustainable usage of resources. It does so by restoring, renewing, and regenerating resources.
Image: Key Traits of ReFi, by Onchain
Traditional finance (TradFi), on the other hand, focuses on maximising profits even at the cost of ecological damage. The long-term and holistic approach of ReFi to the environment is what sets it apart from other types of financial model.
ReFi is closely related to the blockchain and crypto economy as several Web 3.0 projects are developed and run in such a way that the resources being used over time are regenerated. These projects utilise funds or profits for a positive impact on the environment and society.
Blockchain projects following the principles of ReFi rely on decentralised finance (DeFi) to run its financial matters.
Recommended Read: Breaking Down Blockchain Technology
Since the Industrial Revolution in the 18th century, traditional economy has been exhausting natural resources for production and consumption of goods in a linear, extractive manner. It is based on an exhaustive usage of scarce natural resources for the production and consumption of goods and services and the profit of a few at the expense of the broader society.
As we can see, conventional industry practices don’t bother with using resources in a conservative manner so that they are available to future generations too. This traditional economic model is linear in which products are manufactured, distributed, purchased, used and thrown away. Its “take-make-waste” pattern doesn’t care for recycling or reusing, let alone regenerating. It has nearly no concern for the negative environmental and social impact.
Image: Linear Economy, by EcoChain
Regenerative economy looks at nature as the primary asset used to produce goods and services. Unlike traditional economy, regenerative economy doesn’t believe in exhausting the earth’s resources to achieve maximum profits. It believes in using the earth’s assets in a regenerative manner so that they can be used in a sustainable way.
Regenerative economy suggests a circular way of utilisation of natural resources in which products are manufactured and used but never thrown away. Instead, products are reused and recycled so that the waste is minimum.
This way, resources are used in a judicious manner and are not exhausted. Meanwhile, the products don’t just expire and can be used for a long period of time. In a way, ReFi is only attempting to implement the principles of regenerative economy.
Image: Regenerative Economy, by Adobe Stock
There is a decades long run history that lies behind the recent surge in popularity of regenerative economy. Paul Hawken is an American entrepreneur who is well-known for his advocacy of ecological conservation through a sustainable usage of natural resources. His 1993 book, “The Ecology of Commerce,” was among the first to introduce the concept of regenerative economy that deployed the eponymous cycle of nature, instead of exhausting the earth’s resources.
Michael Kramer of Natural Investment Services was the first leading businessperson to introduce the idea of "regenerative investing" in 2003. Regenerative investing is a sustainable strategy to fund projects that imitate the regenerative cycle of nature. American economist John B. Fullerton was the one who introduced the term “Regenerative Economy.” He is the Founder and President of Capital Institute, and he wrote a white paper in 2015, titled “Regenerative Capitalism: How Universal Patterns and Principles Will Shape the New Economy.”
Fullerton explains,
“A Regenerative Economy maintains reliable inputs and healthy outputs by not exhausting critical inputs or harming other parts of the broader societal and environmental systems upon which it depends.”
The definition of regenerative economy is still evolving as other commentators and practitioners come up with new ideas.
ReFi deploys several innovative products of the blockchain economy to achieve its goal of sustainable development:
ReFi uses blockchain technology to track the progress of its goals in a transparent manner. Suppose a project wants to conserve a water body in a city. Blockchain can be used to regularly track the impact of the conservation effort on the water body, bringing accountability and transparency to the process.
ReFi makes use of a lot of DeFi tools such as smart contracts, crypto wallets etc. The lack of central leadership makes DeFi protocols crucial for ReFi to pursue its goals without any pressures. The democratic nature of DeFi makes it more inclusive and accessible.
A decentralised autonomous organisation (DAO) is an organisation that runs on a blockchain in which all the decisions and actions are taken with the support of all the participants, not central leadership. A green DAO, as the word suggests, works on environmentally sustainable projects. Since it’s decentralised, all members can come together to support green, sustainable projects.
Tokenised green bonds are issued to fund projects of ecological importance such as alternative energy. Such bonds are available for sale to both retail and institutional investors on decentralised platforms.
Recommended Read: Green Finance 101
Users can purchase impact tokens or acquire them for free via airdrops so that they can participate in a blockchain’s decision-making around investing in or supporting regenerative projects.
Tokenisation of ReFi such as alternative energy or ecological conservation projects makes them more widely available to prospective traders.
Decentralised platforms can offer regenerative insurance policies which marginalised communities can avail themselves of against the negative impact of a project on their lives and surroundings.
ReFi can create decentralised marketplaces for carbon credits where they can be traded easily and conveniently to offset emissions and minimise environmental damage.
ReFi doesn’t merely remain an idea anymore. As more investors and users become aware of and concerned about the environment, they are abandoning projects which leave a negative impact on the earth. A few companies and organisations that have adopted ReFi principles are:
Based in the Netherlands, the Triodos Bank engages in regenerative investing in renewable energy, regenerative farming etc. in the European market.
The Climate Trust is a U.S.-based carbon offset project developer and funder that deploys blockchain technology to track the carbon emissions and credits in a transparent manner.
Moss is a Brazil-based organisation working towards the conservation of the Amazon rainforest in the country. It converts carbon credits into tokens and offers non-fungible tokens (NFTs) to performers.
Learn more: Will Tokenisation of RWAs Continue in 2024?
The Toucon Protocol is a Web 3.0 project that is a marketplace of tokenised carbon credits from the Voluntary Carbon Market (VCM).
Please note that the list is not exhaustive at all and there are a lot of large and small companies across the world that are engaging with ReFi.
The chief goal of ReFi is economic growth and social well-being through a regenerative, sustainable utilisation of resources. Here are the broader goals of ReFi:
ReFi aims to foster a comprehensive growth in which all the stakeholders can claim their rightful shares while not disrupting the natural cycle of the environment.
The previous goal automatically leads us to talk about sustainability. ReFi supports green projects that focus on both ecological and economic sustainability.
Recommended Read: Can Green Finance Shape Tomorrow's Economy?
Another goal of ReFi is inclusive development instead of the growth of merely a few wealthy individuals. It aims to address the growing disparity among different strata of our society by taking a holistic approach to business. It even supports initiatives related to education, health, housing etc.
ReFi focuses on creating a transparent economic model in which all the relevant details of a business that impacts society are publicly available. This helps conscious investors choose the right kind of projects to fund and customers avail themselves of the right kind of products.
There are several benefits of ReFi that we must underline to highlight how advantageous it can be if done right:
First and foremost, ReFi fosters sustainable growth that is crucial for the future of humanity. We just cannot afford a depletion of natural resources at the current rate. ReFi projects imitate the cyclical, regenerative nature of our environment.
Inclusivity lies at the core of ReFi as it believes in the growth of all stakeholders. It seeks to address the widening gap between the haves and have-nots through a comprehensive approach to business.
ReFi that run on blockchains are, by nature, driven by community participation. This way, all the impacted stakeholders have a say in every decision being taken. A CEO or a board alone cannot take any decision that harms the interest of the larger community.
ReFi, though seemingly progressive, is not without its risks:
A lot of ReFi projects want to do a lot of things... ecology conservation, upliftment of marginalised communities, profits for all, etc. While admirable, these lofty goals are not supported by a concrete road map. Ambiguity around what a ReFi projects seeks to achieve leads to confusion and frustration among the participants.
Like every financial programme, the sector is abounded with scams. Given how niche ReFi is, a lot of users simply don’t understand a new project and end up investing in scams and rug pulls, leading to a loss worth millions of dollars.
There is a similarity between ReFi and DeFi: both rhyme - but ReFi and DeFi are two different concepts.
• ReFi, as explained above, aims to utilise natural resources in a regenerative way for the economic and social well-being of all.
• DeFi, on the other hand, is a decentralised financial system that is free from the control of any centralised authority such as a monetary authority or exchange.
ReFi and DeFi, both comparatively new concepts in the world of finance, often interact with each other.
• ReFi deploys DeFi tools such as smart contracts, crypto wallets etc. to achieve its goals.
• ReFi has also tried absorbing the decentralisation feature of DeFi to escape the oppressive control of the corporate structure to pursue its goals.
• At the same time, even DeFi has adopted ReFi’s goal of sustainability. The Ethereum (ETH) blockchain changed its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) during the Merge upgrade in 2022. The decision cut the network’s energy usage by 99.99%.
• A lot of conscious crypto users even stake their tokens in DeFi protocols that are geared towards sustainability-focused ReFi initiatives.
Image: DeFi & ReFi, by Sandro Stark on Medium
The goals of ReFi are noble as it aims to create a regenerative and sustainable economy. It seeks to bring benefits to all without causing any serious damage to the environment. ReFi is well complemented by DeFi in pursuing the said goal as both envision an equitable future of finance.
The surge in ReFi’s populairty underlines a strong recognition of a need for a sustainable economic policy for the future of humanity. As entrepreneurs, governments, economists and concerned citizenry come together, it is expected that the adoption of ReFi will growth and its principles will guide economic policies in the future.
ReFi is a financial model that aims to secure the economic and social well-being of a community via a regenerative, sustainable usage of natural resources.
The key differences between traditional and regenerative economy are:
• Traditional economy follows a linear and extractive model in which scare resources are exhausted to produce goods. Regenerative economy, on the other hand, follows a circular model in which resources are utilised judiciously.
• In a traditional economy, goods are consumed and thrown away instantly, leading to negative environmental impact. In a regenerative economy, goods are used, repaired, reused and recycled, with minimum damage to the environment.
• Traditional economy secures profits for a few at the expense of others. Regenerative economy is inclusive which creates value for all.
ReFi makes use of blockchain technology and deploys Web 3.0 services such as smart contracts, crypto wallets, green DAOs, impact tokens etc. to pursue its goal of sustaianable growth.
The main goals of ReFi are:
• Comprehensive Growth
• Sustainability
• Inclusive Development
• Transparency
ReFi offers the benefits of:
• Sustainable and inclusive growth
• Community Participation
These are the risks of engaging with ReFi:
• No clear goals
• Scams
ReFi and DeFi have adopted the definitive qualities of each other in order to complement one another.
• ReFi has adopted DeFi’s decentralisation feature to free itself from the clutches of strict corporate control.
• DeFi has adopted ReFi’s sustainability feature to pursue eco-friendly practices.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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