Bringing carbon credits to DeFi with Toucan
by Valentin Kalinov on Mar 1, 2023 12:30:00 AM
Toucan protocol is building tools for bringing traditional carbon markets on-chain. Founded in 2020, Toucan first launched on Polygon, and it is looking to expand to other infrastructure providers. The protocol bridges off-chain carbon credits on-chain and bundles the credits into liquidity pools called Carbon Pools. By bringing carbon on-chain, Toucan enables the use of carbon credits in DeFi protocols. For example, one could use carbon credits as collateral in a lending protocol. The challenges of bringing carbon credits on-chain are the fungibility of the credits, liquidity, and valuation.
Autors: Valentin Kalinov, Christian Viehof
What are carbon credits?
Carbon credits are a type of tradable certificate representing a reduction of one metric ton of carbon dioxide equivalent (CO2e) emissions from the atmosphere. They are used to help organizations and governments meet their greenhouse gas reduction targets by incentivizing emission reductions or removals in other locations.
The basic principle of carbon credits is that if one entity, such as a company or government, reduces its carbon footprint below a certain level, it can earn carbon credits that it can then sell to other entities that need to offset its own emissions. The sale of carbon credits creates a financial incentive for emissions reduction and helps drive investment in low-carbon technologies and projects.
Tracking emissions with carbon registries
A carbon credit registry, also known as a carbon offset registry, is a platform or database that tracks carbon credits’ ownership, issuance, transfer, and retirement. Carbon credits represent a reduction or removal of greenhouse gas emissions from the atmosphere, and the registry serves as a centralized system for managing and verifying these credits.
Carbon credit registries play a crucial role in the carbon market by providing transparency and accountability in the trading of carbon credits. They ensure that carbon credits are only issued for verified emission reductions or removals and that they are not double-counted or fraudulently traded. In addition, registries help to standardize the carbon credit market by establishing consistent methodologies for calculating emissions reductions and by ensuring that all credits meet certain environmental and social standards.
There are several carbon credit registries operating globally, including the Verified Carbon Standard, the Gold Standard, and the American Carbon Registry. These registries are often used by companies, governments, and other organizations to manage their carbon footprints and to purchase carbon credits to offset their emissions. Some carbon credit registries also offer certification and verification services to ensure the integrity of the carbon credits being traded.
The Vera registry
The Vera registry, also known as the Vera Platform, is a digital platform for managing and tracking carbon credits. It is operated by Vera, a non-profit organization that specializes in verifying and certifying emissions reductions and removals. The registry is used to track the ownership, transfer, and retirement of carbon credits, ensuring transparency and accountability in the carbon markets. The Vera registry has been widely adopted as a standard for carbon credit accounting and management and is used by a variety of organizations, including corporations, governments, and NGOs.
The Verra registry maintains a comprehensive record of each VCU (Verified Carbon Unit), including its project origin, issuance date, and retirement status. The registry also tracks the ownership and transfer of VCUs, which allows for efficient trading and market transactions. The platform is accessible to a range of stakeholders, including project developers, offset buyers and third-party verifiers. The Verra registry plays a critical role in facilitating the development of carbon offset projects, promoting sustainable practices, and advancing the transition to a low-carbon economy.
Toucan is currently partnering with the Vera registry to bring carbon credits on-chain. In the future, Toucan will add support for other registries.
Toucan provides infrastructure that allows carbon credit holders to tokenize their credits or registries to issue carbon credits on Toucan’s Open Climate Registry natively. The first step of bringing carbon credits on-chain is the Carbon Bridge:
The Carbon Bridge allows anybody to bring their carbon credits on-chain in a tokenized form.
The bridge works only in one way: carbon credits can be brought on-chain but can’t go the other way. So users need to first retire their credits before bridging these to the chain. The reason for retiring the credits is to prevent double-counting.
The retirement of carbon credits refers to permanently removing those credits from circulation in the carbon market. Retirement is the final stage in the life cycle of a carbon credit after it has been issued and traded multiple times.
When a carbon credit is retired, it means that the entity that owned the credit has decided to permanently cancel it, typically because they have used it to offset their own greenhouse gas emissions. Retirement ensures that the carbon credit is not used again, preventing double-counting and ensuring that the claimed emission reduction or removal is permanent.
Retirement can occur in different ways, depending on the carbon credit registry and the market rules. In some cases, the retirement of carbon credits is voluntary and occurs when an entity purchases credit for the sole purpose of retiring them. In other cases, retirement may be mandatory, such as when a company is required to retire a certain number of credits to comply with regulations or emissions reduction targets.
Once the carbon credits are retired on the Verra platform, users can mint BatchNFTs on Toucan. The BatchNFT is an ERC721 token standard, and it is the first step toward getting programmable carbon on-chain. In addition, each BatchNFT can be fractionalized into TCO2 tokens (ERC20) which can then be used in liquidity pools.
The Liquidity challenge (Carbon Pools)
Carbon Pools bundle multiple TCO2 tokens into more liquid carbon index tokens, enabling price discovery for different classes of carbon assets. Since all TCO2 tokens represent various offsetting projects, not all TCO2 tokens are equal. Users can mint a reference token representing the whole pool by putting TCO2 tokens in the same pool. Toucan has introduced two pools with two pool tokens: The BCT Pool and the NCT Pool.
Toucan Tokenomics: Explaining TCO2s, BCTs and NCTs
TCO2: As mentioned before, TCO2s represent fractionalized BatchNFTs from retired carbon credits on the Verra platform. In essence, TCO2s are tokenized carbon credits. TCO2s can be deposited into the Carbon Pools, sold on exchanges, transferred, or retired.
BCT (Base Carbon Tonne): BCT represents the first Carbon Pool created on the Toucan platform. The pool accepts a wide range of TCO2s. However, not all TCO2s are accepted into the pool. Limiting the type of TCO2s ensures a certain level of quality and a common methodology for all TCO2s in each pool. The pool has only one criterion: less than ten years need to have passed between the verification period and credit issuance. Each time TCO2s are deposited in the pool, an equal amount of BCT tokens gets minted.
NCT: The NCT token represents credits developed with nature-based methodologies, like reforestation initiatives. To generate one NCT, users can deposit suited TCO2s into the Nature Carbon Tonne pool.
Redeeming Carbon Pool tokens
At any point, the holder of a carbon reference token can redeem it for an underlying project-specific TCO2 token. For example, a BCT holder can burn their BCTs in exchange for TCO2 tokens from the BCT Carbon Pool. However, it is important to know that redeeming TCO2s for BCT will lead to getting the lowest-ranked TCO2s from the pool. If one would like to redeem a specific TCO2 token, one must pay a significant fee.
The classification of BCT according to the ITC:
Economic Purpose (EEP): BCT is listed as a Settlement and Access Token (EEP22TU02). The token is transferable and fungible.
Industry Type (EIN): The issuer of BCT is active in the field of Decentralized Derivatives, Synthetic Assets, and Insurance (EIN06DF03).
Technological Setup (TTS): BCT is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain or similar EVM Chains. BCT is currently issued on the Polygon chain.
Legal Clam (LLC): The BCT token does not entitle its holder to any legal claim or rights against the issuing organization; therefore, it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. BCT was developed by Toucan Protocol Association. Therefore, the issuer type of ONDO is Private Sector Legal Entity (LIT61PV)
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The BCT token qualifies as a Utility Token (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
Consensus Mechanism (TCM): The dimension describes the mechanism that is deployed to achieve consensus on the token’s distributed ledger. BCT tokens are issued on Polygon; therefore, they are listed as Proof-of-Stake (TCM71PS)
Type of Maximum Supply (EMS): The dimension describes the token’s type of maximum supply. The supply of BCT is only limited by the number of available carbon credits. Therefore, BCT’s supply is listed as Discretionary (EMS82DC)
Primary Mode of Origination (EMO): The dimension describes how the majority (>50%) of the circulating token supply got allocated to its owners. BCT is issued when users deposit TCO2s into the Carbon Pool. The mode of origination of BCT is unique. Therefore the token is listed as Other Primary Mode (EMO96).
Taxes (RTA): One common distinction can be drawn between crypto-assets: those crypto-assets that resemble ‘conventional’ assets, like securities, and which are merely recorded on DLT systems (Conventional Asset Tokens DTA71), and those assets and activities that raise new regulatory challenges such as virtual currencies (New Asset Tokens DTA 72; OECD 2020). BCT is listed in the Tokenbase as a New Asset Token (RTA72).
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via firstname.lastname@example.org and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via email@example.com and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.