The Problem and Solution
The lack of price and volume transparency in carbon markets makes it difficult for participants to predict their future earnings and losses. This leaves good quality carbon projects in a difficult spot - the financing necessary to run highly financially-additional carbon projects has to come from somewhere. With no predictable outcomes, it is difficult to find financing.
In nature-based solutions, the timeline for getting certified credits for their activities can be multiple years. Soil carbon methodologies from Verra require farmers to do soil sampling every 5 years, which means they need to work 5 years before they can get paid. Sustaining a multiple-year financially additional project can only be done via pre-purchases at prices that are not in the project's financial interests and hurt the sustainability of running the project.
These issues create a situation where only the bravest and most capitalized players are willing to embark on the journey of generating carbon credits. Our planet cannot rely only on the bravest. We need everybody to act fast. Financial opportunities need to be created for this to be possible.
The voluntary carbon offsetting market has a number of issues for suppliers, buyers, and traders alike. The biggest of which is the lack of price and volume transparency. The approaches and methodologies that create carbon credits vary greatly and come with distinct advantages and disadvantages. On top of this - every individual project is different and comes with its own story. Some carbon projects may have additional socio-economic benefits on top of carbon benefits, which end up being priced into the credit.
The projects creating carbon credits often have little understanding of what their final sell price will be, making it difficult to operate it as a business. This is another aspect that makes it unattractive to start up new carbon projects - even if they apply for financing - profit & loss estimates are extremely uncertain.
Because of all of these factors - complex financial products have not entirely emerged for the voluntary carbon market. The futures market was born in the farming sector and it allowed farmers to mitigate their risk of future prices of the grain, and provide some certainty about future investments. This market has protected farmers from market fluctuations and has allowed farming at scale to be a more sustainable business.
Forward deals in some form already exist in the voluntary carbon market. Some well-capitalized traders might make special deals with projects in order to secure forward supply. However, these deals then become illiquid assets on their balance sheets until the credits are finally delivered. Offloading credits in this phase involves manually finding buyers and signing secondary agreements to transact credits as they are delivered. The market is complicated, fragmented, and fundamentally illiquid.
The voluntary carbon market's financial infrastructure disincentivizes these forward deals, lowering the amount of capital that actually reaches carbon projects. This limits our collective ability to stop climate change. We can't let the status quo continue if we are to reach our 2030 climate goals.
Forward agreements are a completely different beast from the certified carbon markets. A forward agreement reflects a delivery in the future for compensation now. This poses unique risks like project failure, 'acts of god', and other factors that potentially result in non-delivery. Non-delivery poses significant risks to the forward market as a whole.
In order to counteract this - Solid World involves world-class experts in due diligence and risk management. Anything that touches the Solid World infrastructure has to have passed stringent tests and received approval from the governance process.
All of this is necessary to give confidence that the agreements moving through the infrastructure are legitimate, high quality, and have significant demand once certified. This is a necessity for forward markets to become liquid.
We are developing a process for real-life Foundation-signed agreements to be turned into tokenized equivalents. These tokens carry the promise of delivery from a specific carbon project, as well as relevant fallback scenarios in cases of non-delivery.
Once certified, Solid World provides delivery which includes on-chain registries like Toucan or Flow. The protocol allows for credits to be moved off-chain if the holders require - facilitating the full breadth of market activity around forward markets independent of the final destination.
We are designing infrastructure that allows for specific forward agreements to be commodified into a highly-liquid form. By leveraging major innovations in decentralized finance (DeFi), like automated market-making - Solid World can guarantee immediate liquidity for both buyers and sellers. All of this can be facilitated while giving traders the opportunity to arbitrage the commodity layer and therefore guarantee that the market can determine the value of forward credits.
In addition to all of this - Solid World's designs for the commoditized forward markets provide robust, sustainable incentives to Liquidity Providers - aligning the incentives of the whole forward carbon market. Projects get access to liquidity. Trading houses get the tools to leverage and hedge their positions. Brokers and buyers have easy access to delivery. And finally - the liquidity providers that facilitate the market get guaranteed, carbon-denominated payments in return for their service.
Collaboration has to be the only way forward.
The infrastructure that Solid World is building makes historically illiquid assets liquid, by leveraging the power of decentralized finance. This opens the door for new kinds of previously unimaginable structures to be created around it. Loan facilities, self-repaying loans denominated in carbon, liquidity-provision-based carbon accumulation, and on-chain delivery de-risking among many others.
Solid World sees the power of having a public spot price for forward assets. Solid World intends, after the successful launch of the core infrastructure, to develop a facility for specific forward agreements to be collateralized against the relevant commodity pool - unlocking capital efficiency for forward carbon trading.
Several more possibilities will become possible with liquid forward agreements - we intend to collaborate with the ecosystem to make sure the future arrives early.
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