Blockchain & Environment
Typically when talking about applications of blockchain people start by talking about currencies, finance and then more general business applications such as supply chain, then possibly learn about its potential use for the Internet of Things. What is rarely talked about is its applications to the environment, but this could turn out to be one of its most important potentials. To understand why we need to appreciate that the reason we are in an environmental crisis is largely a function of the design of our economic system. We developed our modern economic framework in a world that was industrializing with abundant natural resources and limited industrial infrastructure. The system was set up to grow GDP by producing and consuming more products with limited interest to the effects this had on the environment. As a consequence natural capital was not accounted for in the system creating a strong incentive for people to simply overuse natural resources, converting what was not accounted for into increase GDP and profits.
Today, of course, we realize that this whole linear economic framework is unsustainable and one of the most effective ways to alter the model is to try and incorporate the costs and benefits that accrue from ecosystems into economic accounting. This means essentially placing a value on the ecosystems so that people factor the full environmental cost of their actions into the cost-benefit equation under which they are acting, this is called full cost accounting or natural capital accounting. The idea is not new, indeed it is becoming ever more mainstream, in a recent Ernst and Young report entitled, “Accounting for Natural Capital — the elephant in the boardroom”. The executive summary starts by saying, “Natural capital will become as prominent a business concern in the 21st Century as the provision of adequate financial capital was in the 20th Century… We are already ‘drawing down’ on 50% more natural capital a year than the earth can replenish — and the rate of depletion is accelerating. All too soon, businesses will face a stark choice: adapt or fail.”
This powerful capacity of blockchain token economies to design new incentive structures has the potential to fundamentally alter the current dynamic. When designed properly token economies can provide powerful incentive structures for people to collaborate on growing some underlying source of value to the community. This same capacity can be harnessed to develop and grow the natural capital of a community to build their ecosystem. Unlike our traditional industrial age economic system that simply quantifies and incentivizes people to consume products, by creating token systems we can actually incentivize and reward people for any action that is of benefit to growing ecological resources. Tokens can be gained by choosing less consumptive options that conserve and replenish resources.
For example, think about a small town in rural Australia that has a limited amount of water to go round, a finite amount of water tokens could be issued and earnt for any activity that conserves on water. For example, if you replace your plumbing with a system that leeks less you would earn water tokens that could be used elsewhere or traded for fiat currency, meaning that people can earn by conserving creating an economy around it and an incentive system. Or with respect to carbon emissions, a token economy could likewise be created to manage this in a distributed fashion, every time you emit carbon you pay for it with a kind of carbon coin. Every time you sequester carbon, you get paid in carbon coins. When all carbon coins have been redeemed, the world is running at net zero carbon.
Likewise, any community could take account of its stock of natural capital and issue a finite amount of tokens to the community members, if someone does something that is ecologically beneficial to grow that underlying stock they could earn more tokens. Likewise, if someone wanted to chop down lots of trees they would have to purchase tokens from others, this would incentivize people to go and plant trees or perform other activities that contribute to their ecosystem in order to earn tokens. In such a way ecological services would not have to be managed and performed by a central authority as anyone could clean the lake or switch to a renewable energy to earn carbon tokens and thus provide environmental services.
Of course closed organizations have always seen the benefit of conserving in their production because it directly affects their balance sheets, but what is happening with token economies though is that we can push that capacity to benefit from conserving out to the end user and the edges of the network so that we can harness everyone’s incentives to conserve, which is potentially a much more powerful mechanism than centralized organizations simply telling people to be nice and environmentally friendly which doesn’t really work because it lacks real incentives. Of course, the move towards a full cost economy will not happen overnight, already it has been growing over the past decades with such things as organic food, green bonds, carbon trading etc. Incentivised recycling systems are already made possible on the blockchain via the Ethereum based token-based Dapp RecycleToCoin. The token platform allows the Public to exchange harmful plastic at their reverse vending machines and central collection charity shops for tokens. This cryptographic reward is then exchangeable on participating crypto exchanges for other currencies.
The recognition and increasing quantification of ecosystems services coupled with the development of a fully fledged blockchain natural capital accounting system could support a fundamental reorganizing of the incentive structures in our economy towards one that is systematically more sustainable. As Prince Charles noted “The ultimate bank on which we all depend — the bank of natural capital — is in the red; the debt is getting ever bigger and that is reducing Nature’s resilience and considerably impeding her ability to re-stock. It leaves us dangerously exposed.” Fixing that equation requires a new accounting system and the blockchain could be a critical enabling technology.
The blockchain would not only be important in enabling a token economy for managing ecosystem capital but also as a system for tracking, authenticating and making transparent the underlining workings of supply chains and business activity. At present when we go buy something, we have little idea where it comes from or how it’s made. Supply chains are conventionally held secret, limiting the stakeholders who can prevent environmental, social and health and safety problems. There are so many intermediaries, and it’s very easy to be deceitful. Companies can perform all sorts of actions without it being revealed to the end user who gets greenwashed by massive amounts of advertising so that they don’t know what to think when they walk down the supermarket aisle.
Blockchain could enable environmental transparency along the supply chain of products. A blockchain could ensure that a grouper fish being tossed through Tokyo’s Tsukiji Market actually came from a sustainable fisherman in Indonesia or to track the price that villages in Kenya were paid for their coffee beans. The Provenance blockchain has been used to verify proof of payment to 55 farmers whilst tracking coconuts from South East Asia to Europe. The initiative has demonstrated the possibility of using blockchain technology to track ethical claims and digitally prove fair trading practices. Working with NGO Fairfood, Provenance tracked ethics claims on 1000 coconuts. Using a grassroots certification approach, they tracked the moment of payment one way and product the other way, registering the harvest via SMS, and verifying chain of custody along the supply chain.
As discussed previously the blockchain is not magic, it can only authenticate what is within the network, in order to ensure that the information that is inputted into the system is authentic and correct it needs to work in tandem with other technologies. Here again, the blockchain will have to intersect with IoT systems and big data advanced analytics if we are going to be able to automatically ensure that the fish was fished at the date and location inputted to the network. Data automatically inputted from tamper-proof IoT systems and cross-correlated with data points from a multiplicity of other sources could work to create truly trustworthy inputs and reliable information to someone on the other end of the supply chain automatically without human intervention via the distributed database. For example, an IoT device in a warehouse might scan the RFID tags on pallets when they come in to verify the date of entry.
This is one of the advantages of big data, it is also decentralized not relying on a single data source, but multiple varied sources cross-correlated. The blockchain itself can’t provide a trustworthy supply chain it will have to be integrated with these other technologies to enable trusted, automatic and distributed oracles for data input that are not dependent upon corruptible third-party institutions. This is of course particularly relevant in parts of the world where government organizations are not trustworthy. Knowing that the apple you bought has been certified organic by a country at the bottom of the list of corrupt nations doesn’t really tell you very much.
On a broader level, we can identify the centralization of many existing systems as a huge source of vulnerability in a world of climate and environmental change. In a world of stability centralization appeared to create efficiencies and stability, but today we are increasingly recognizing these large centralized components create critically vulnerable single points of failure with huge dependencies. Large centralized components like large financial institutions, electrical power stations, or factories also create inertia within the system and reduce adaptive capacity and the agility required to deal with systemic changes. By supporting peer-to-peer distributed systems the blockchain can enable greatly more agile, adaptive and potentially more resilient networks with lower dependencies on critical centralized elements. Removing the need for the centralization of resources can also greatly increase the efficiency of these networks as resources can be exchange locally peer to peer without having to be always routed to a centralized component. Blockchain platforms can enable local food systems, where the food is grown locally disintermediating the long complicated supply chains of supermarkets, by matching producers and consumers peer-to-peer locally.
Or as another example blockchain based Power Ledge provides a platform for people to trade energy peer to peer within a local smart grid. With this people simply trade electricity with one another and receive payment in real-time from an automated and trustless reconciliation and settlement system. There are many other immediate benefits such as being able to select a clean energy source, trade with neighbors, receive more money for excess power, benefit from the transparency of all trades on a blockchain with very low-cost settlement costs. Likewise, power ledger supports carbon trading via smart contracts.