Ways that Blockchain technology can improve the carbon credit markets

Create a ‘trusted’ marketplace for users to trade carbon credits

The first solution is to create the user’s trust in the marketplace (Exchange) itself. While ‘trust’ in a centralized system needs participation from ‘licensed’ entities to confirm the ‘trust’ which can be costly. In a Blockchain-based system, ‘trust’ is already a given fact, since by design the system has been structured as a decentralized database. This essentially means there is no single entity that controls it, control of the database is spread amongst many validators (in the hundreds of thousands in the case of Bitcoin or Ethereum blockchain), and any new data to be included in the database must be validated and confirmed by ALL validators, and past data in the database cannot be changed nor deleted. All these built-in features are meant to increase users’ confidence in the integrity of the system hence creating ‘trust’.

Transparent pricing & traceable transactions

The first step to increase liquidity in any market is to increase pricing transparency, this is important since investors trade on information that they believe is fairly available to every other investor. Another important factor to increase investors’ confidence is transaction traceability, investors would like to know if brokers are involved, and whether there is a front-running activity on their trades. A Blockchain-based system provides full transparency since all users or even non-users will have read access to the database. The ‘chain’ feature of the blockchain also means that each subsequent transaction on a particular digital asset can be traced right to the first ever transaction of that digital asset.

Provide an ownership register of carbon credit tokens that are secured and immutable

The issue here is safety since most computer systems that operated in a centralized manner can be hacked, data can be stolen or even deleted, and this happens even to a government computer system. Safety issue doesn’t affect a well-designed blockchain system, for the simple reason it is decentralized and each validator have a copy of the blockchain database, and new data can only be added using a consensus mechanism by validators, so in theory to compromise a blockchain system hackers need to gain control of a majority of the computers & servers that acted as the validators. In the case of a large public network like Ethereum, that means hacking and gaining control of at least 100,000+ computers, something that is virtually impossible. Hence a blockchain system is ideal for safely storing digital property titles.

Real-time transactions and self-executing contracts

All transactions in a Blockchain are executed in real-time. Self-executing or automated actions pursuant to another action being completed can also be programmed in the blockchain. These are called ‘smart contracts. Every term & condition of the contract can be constructed using codes and once triggered the execution is irreversible. With these features, any terms in a legal agreement can now be strictly enforced without facing any delays due to human intervention. These two features are important since they will provide integrity to the system.

Reduce the investment size making it affordable

Digital tokens can be issued with a maximum of 18 decimals, which means transactions can be executed at the smallest denomination of 0.00000000000000001 tokens. Allowing smaller transactions will result in increasing the affordability of the products and attracting newer investors to the market. For carbon credits, this means transactions can be done on an amount lower than the current industry standard minimum size of 1 tCO2e.

Reduce transaction costs

In order to attract more users to a marketplace (exchange), it is crucial that transaction costs be kept at a reasonable level, this does not mean smaller percentages, but smaller absolute amounts. Which in our view is crucial for smaller investors. Also, these costs should not be paid on an upfront basis but added to the overall payment.