Categories
Uncategorized

3. Cryptocurrencies and Tokenization

Down to basics

Cryptocurrencies are digital currencies designed to work as a medium of exchange through a computer network that is not reliant on a centralised intermediary (such as a bank, government or credit company). They utilise blockchain to verify transactions and holdings (‘who owns what?’) and to store the currency’s protocol code, which defines attributes such as the creation of additional coins and overall supply and utility in a transparent and unchangeable manner. The fact that any participant can access and review the immutable supply mechanisms and holdings, potentially increases their trust in it.

Cryptocurrencies have several use cases. The most common types are payment tokens, which allow payment for goods and services (whether in real life or in a closed environment, such as a project or a game); and utility tokens, which provide holders a specific right or access within a network (such as voting rights in an organisation).

Cryptocurrencies are innovative and unique in that they are highly customisable and can be designed with various supply and utility mechanisms, eventually driving the currency’s demand and value. This enables the ‘permissionless’7 experimentation and creation of new markets that otherwise may not have been possible. As such, they are often used to create game-theory-based incentive mechanisms by projects or organisations – the cryptocurrency’s value can incentivise certain behaviours. This implies having a market that works to align people’s incentives with maintaining and growing an underlying resource.

Other value propositions that derive from cryptocurrencies’ decentralisation include:

  • The fact that they allow the transfer of value from one person to another in a ‘frictionless’, fast, secure, transparent and economical manner regardless of geographical location makes them much more efficient and cost-effective than current, centralised alternatives.
  • The fact that participation does not require the authorisation of a centralised entity makes them accessible to anyone with an internet connection regardless of their banking status.

These may enable the participation of people who may otherwise be excluded from global or local markets within the traditional system due to high costs of transactions, their distance from banking services, lack of required identification documents, and more. It is estimated that there are over 1.5-billion unbanked adults in the world today, to which cryptocurrencies may promote financial inclusion (a value proposition that is referred to as ‘banking the unbanked’).

The number of different cryptocurrencies available for exchange today is estimated to be between 10,000 and 20,000. Some succeed and others fail, emphasising the extent of experimentation occurring with this concept and the exponential adoption the space has experienced through its decade of existence.

The tokenization of everything

Cryptocurrencies can be viewed as one use case of a broader concept: tokenization. A ‘token’ refers to a quantified unit of any form of value, which can be represented on a blockchain. This includes, for instance, a property, kilowatt per hour of energy, or number of planted trees. Registering such tokens on a blockchain enables their exchange in a transparent manner and opens the door to the creation of new markets. This is covered further in the next chapter, NFTs – Non Fungible Tokens.

More on how we can tokenize anything, and the value this practice creates for society (including conservation)  can be seen in this video.

7 ‘Permissionless’ is a blockchain-specific term that means that users or developers do not require permission to create or use a blockchain protocol or a related system.

Down the rabbit hole

The following are just a few ideas of what cryptocurrencies and tokenization could potentially enable for nature conservation:

1. Faster, more cost-effective and inclusive conservation transactions

At a time when the conservation sector is seeking to bridge the biodiversity finance gap while engaging diverse global audiences, cryptocurrencies may enable more efficient models of conservation finance and inclusivity. For instance, big international NGOs and grantmakers mobilising money for projects face high transaction costs and slow processes, which may be significantly reduced by the use of cryptocurrencies. As cryptocurrencies can be accessible to some unbanked populations (estimated at over 1 billion people globally), their use for conservation purposes could enable the inclusion of actors who might otherwise  have been excluded. In a future with better cryptocurrency regulation, and countries issuing their own digital currencies (also known as ‘CBDCs – Central Bank Digital Currencies’), cryptocurrencies could enable much more efficient models, resulting in more funding reaching on-the-ground conservation efforts.

2. Nature-backed economies

The customisable nature of cryptocurrencies may enable the rethinking of money, and experimentation with new financial systems that might otherwise be impossible. For instance, new cryptocurrency coins can be programmed to be issued only once, backed by a verified natural asset. De-facto, this enables a form of experimentation with a financial system that is backed by natural assets as an alternative to current systems to which nature is an externality. Such currencies can be designed to tokenize any form of natural asset, creating potential new markets,funding streams for conservation, and acting as a driving force to protect nature.

3. Introduction of new incentive mechanisms 

Across all scales, from global to localised projects, cryptocurrencies can be used to create new mechanisms that incentivise the adoption of nature-positive behaviours. This does not necessarily mean using monetary incentives. For instance, citizen science or data collection could be encouraged with rewarding coins that grant voting, participation or other rights within a conservation organisation, potentially leading to wider engagement and agency. Similarly, some projects gamify learning experiences and offer their audiences incentives to learn more about a particular topic by issuing coins to participants (a model known as ‘Learn to earn’). With many other models to be explored, cryptocurrencies can be seen as vehicles to drive certain behaviours among currency-holders and participants.

What’s out there?

1. Single.Earth has created a token called MERIT, which is issued to partnered landowners or organisations that commit to preserving nature and follow through on this commitment. Land is monitored using satellite data and other technology, and assessed based on forest coverage, biodiversity and carbon sequestration. Tokens are issued to the partners as long as the land stays intact. MERIT can also be purchased by anyone who wishes to make a direct contribution to the conservation goals of the project.

2. BirdBot aims to give the general public incentives to participate in citizen science activities, with a focus on birds as a key indicator species. Users install the BirdBot software, which is equipped with machine learning for bird species identification, then set up a camera near a feeding station. The resulting data recorded by the camera and software is stored on the blockchain and users are rewarded in BIRDS tokens every 24 hours.

3. Fishcoin is attempting to improve transparency and traceability within the seafood industry by creating a token called Fishcoin. The tokens move down the supply chain from buyers to sellers. Those who make the extra effort to capture and communicate data are rewarded and the economic burden is shifted to the sellers, such as restaurants, who benefit most from traceability. The data is collected to empower seafood buyers with information to make better decisions, enable governments to better manage fisheries, and reward producers and intermediaries for data sharing and responsible behaviour.

4. SEEDS was inspired by the Mayans’ use of seeds for currency. It uses algorithms that place importance on collaboration, distribution of wealth, and the health of the whole system. It has created a ‘global passport’ app to enable the boundary-free transfer of SEEDS currency while also acting as a space for community content and voting on projects, campaigns and other proposals. SEEDS users are rewarded for using and spending them and a portion of the token’s growth is dispersed as grants for regenerative projects.

Things to keep in mind

Interested in creating a cryptocurrency? Here are some points to consider:

1. All previous considerations under the ‘Keep in mind’ section in the Blockchain and Web 3.0, and Smart Contracts chapters.

2. Do you want to create a new coin (called a ‘native coin’), which requires building your own blockchain, or create a digital currency (classed as a ‘token’) on a pre-existing blockchain?

3. How many coins do you wish to issue and do you want to release them all in one go or gradually increase the supply over time? (See ‘Tokenomics’ below).

4. Your reasons why. Building a digital currency can be a great learning opportunity, but creating a successful one requires time, ongoing maintenance and technical skills.

5. The protocol code underlying a cryptocurrency is difficult to change once deployed. Ensure thorough security audits are done prior to release to avoid cyber security risks.

6. On which crypto exchange platforms do you want your coin/token to be listed?

7. A community of supporters and early adopters to back your project can be key to success.

8. The legal framework regulating cryptocurrencies varies by country. These legalities impact whether you can use, create, promote, or raise money using cryptocurrency.

Tokenomics

Tokenomics (or, Token Economics), is a catch-all term for the elements that make a particular cryptocurrency valuable, robust and appealing to its users. Tokenomics should be carefully designed when initiating a new project. This includes considering:

1. What is the token’s supply? An infinite supply might cause inflation, while a limited supply may create deflation.

2. How are new coins issued? Some cryptocurrencies add more coins via a ‘mining’ process, granting new coins to the individuals operating a validating node. Others may couple the creation of more coins with real-world data, such as the amount of sequestered carbon or restored landscape, opening the door to create new markets for conservation. 

3. What utility does it have? Should the token be used for payments, voting rights, membership or something else?

4. Token allocations. How many coins does the project’s team get? Does  the community supporting the project get allocations of free or low-priced coins?

5. Governance plays a big role in tokenomics. While the above considerations are made by the project’s developers whilst they establish the inherent rules of the token, some tokens function as ‘governance tokens’. Holders of governance tokens are granted voting rights to influence the future rules and decisions of the project in which the token is being used.

Tokenomics are game theory in action.8 While the list above lays the groundwork, this is just the start. Cryptocurrencies are essentially a gateway to introduce any type of game theory mechanics the creators would like.

8 Frank DM and Sarkar S (2010) Group Decisions in Biodiversity Conservation: Implications from Game Theory

Further resources