As blockchain technology rests on the promise of greater transparency on how humans transact, it is imperative at these early stages of development to turn attention towards our digital footprints’ great impact on the environment. As Toucan protocol emerged with the rise of ReFi (Regenerative Finance), our team of 5 SheFi cohort graduates took a deep dive into the technologies created to address the carbon offset market and promote ecological responsibility and accountability.

What is SheFi?

SheFi is a decentralized finance "DeFi" and broader crypto educational initiative and community aimed at onboarding more women into the new financial economy enabled Web 3.0 or blockchain technology.

What is Toucan?

Toucan Protocol is a public infrastructure for carbon markets running on open blockchains. Put simply, Toucan is a blockchain protocol that aspires to make the carbon market more accessible to the general public. They aim to do this by introducing and bridging carbon markets to the decentralized finance marketplace. By creating “programmable carbon”, they hope to incentivize individuals and corporations to contribute towards a cleaner planet.

With Toucan, individuals or corporations can buy tokenized carbon credits on the blockchain. The goal is to make these carbon credits more liquid and easily interchangeable between companies that create them and companies that want to buy them for offsetting.

In October 2021, Toucan Protocol was launched as the infrastructure provider behind Base Carbon Tonne (BCT), their first carbon reference token. In the first month of launch, BCT achieved $2B in trading volume — about double the voluntary carbon market’s volume for the entire year of 2021.

What are Carbon Credits?

In order to understand what the Toucan protocol is, it’s important to first understand what a carbon credit is and what they’re used for.

Investopedia defines a carbon credit as “a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas.”

That’s all well and good, but why would someone want a credit like this, anyway?

You can think of it like this: each of us has a carbon footprint. Most activities we engage in on a daily basis, like driving, using our phone, or taking a shower, give off carbon emissions. This means that as fossil fuels are burned for energy, carbon is being released into the atmosphere in order to sustain these activities. It’s estimated that the average individual gives off 4.47 metric tons of carbon per year.  Like individuals, corporations also have a carbon footprint, and some of them are at a much greater scale. It’s estimated that the global oil and gas industry is responsible for 18.5 billion metric tonnes of carbon emissions per year.

As more and more carbon enters the atmosphere, we continue to experience an accelerated rate of climate change and witness the real, detrimental impact that extreme weather that can be experienced across the globe. To tackle this, both individuals and corporations have moved towards using more sustainable sources of energy like wind, solar, electric, and nuclear. While this is a great step, the adoption of these alternative energy sources is oftentimes difficult due to their limited supply and availability.

This presents an issue for large corporations in particular, as they’re not able to fully shift their carbon producing activities to alternative sources of energy without measurable impact to their business. Due to these constraints, it’s close to impossible for many large corporations today to be carbon neutral solely by using alternative energy sources.

This is where carbon credits come in.

Carbon credits help to bridge this gap by allowing both individuals and corporations to purchase ‘credits’ that represent a certain amount of carbon that is being reduced or absorbed by verified projects across the globe. By purchasing these credits, individuals and corporations are simultaneously financing these projects while offsetting their own carbon emissions.

Credits can vary based on the specifics of the project they represent (date launched, location, quality of project, verification status etc.) and this can make it difficult to have a standardized format. This, coupled with the fact that credits are typically over-the-counter certificates, makes them hard to trade and limits their use cases and adoption.

This is where the Toucan Protocol comes in.

The Toucan protocol provides a platform that allows you to tokenize your carbon credits. In other words, it acts as a bridge where you can take your over-the-counter carbon credits that are off-chain and bring them on-chain to the decentralized finance marketplace in the form of tokens. In exchange, these carbon credits become more liquid and easily interchangeable between companies that create them and the companies that want to buy them for offsetting.

How it works

Toucan has three different functionalities that make up the protocol: Toucan Carbon Bridge, carbon pools, and carbon tokens.

Toucan Carbon Bridge

The Toucan Carbon Bridge (TCB) is the first step in bringing carbon credits on-chain – it’s the tool that turns real-life carbon credit into a token on the blockchain. Toucan allows users to bring registered carbon credits on chain by partnering with the Verra registry, where they’ve worked out a specific set of rules on how to transfer carbon credits into tokens.*

• As of May 25th, 2022, Verra has halted all tokenization of carbon credits. Toucan is currently working out a solution and alternative way to bring carbon credits into the ecosystem.

For the sake of understanding how the entire ecosystem works, we’ll break down how the Toucan Carbon Bridge worked in the past before the Verra announcement:

The first step in bridging begins with creating a new NFT on Polygon. This is called the BatchNFT.

Next comes retiring the carbon credit that will then be tokenized on the Verra registry as if it has been already used. The user needs to have a Verra account in order to do this — this is to prevent any double spending and prevent multiple tokens being created under the same credit.

Toucan then links the NFT with the now retired carbon credit. A unique serial number is provided by Verra at the moment of retirement which will then be tied to the NFT. This allowed linking the legacy registry with the on-chain registry of the Toucan Protocol.

Last, a Toucan Validator validates all of the data entries and approves it before it is recorded on the blockchain.

Now you might be thinking: “Okay so now I’m left with this BatchNFT…what do I do with it?” Because NFTs are not known for their liquidity, Toucan has devised one additional step you can take if you’d like to easily sell or trade your token. Instead of having to find a buyer for every BatchNFT you have, you can fractionalize BatchNFTs into smaller, fungible ERC-20 tokens called Toucan Carbon Tokens or TCO2.

1 TCO2 = 1 unit of carbon offset.

Each ERC-20 token minted through this fractionalization has a proof of origin that links it to the BatchNFT used to create it. This means that every TCO2 can be traced back to the original Verra registry entry.

Since each TCO2 token carries the metadata from the original NFT, you can see which type of offset is tied to each token. Not all offsets are created equal; some are more valued than others and can trade at different prices. For example, some value renewable energy projects over other types. Because of this, Toucan has created the Carbon Pool, which creates a liquid market for all types of offsets.

Carbon Pools and Carbon Tokens

Users can deposit their TCO2 tokens into Carbon Pools and receive pool-specific tokens in return. This allows you to trade these index tokens on the DeFi marketplace just like any other token.

Their first Carbon Pool was designed in partnership with KlimaDAO and it’s the Base Carbon Tonne, or BCT. By pooling different TCO2 tokens that all consist of varying attributes, this allows for the creation of a single token that is much more liquid and easy to trade.

Imagine having multiple fiat coins (like pennies, dimes, etc), but you’re at the farmer’s market and the vendors only accept $1 bills (disregard the fact that all farmer’s markets take tap-to-pay now). You would have to find a place where you could exchange all of your coins for the currency that all vendors can accept. Essentially, that is the function of the Carbon Pool; it allows you to take your TCO2 tokens (which all have varying levels of value), and pools them together in order to receive the more-desired token – BCT.

Why we think it’s important or relevant

As crypto continues towards mainstream adoption, the conversation about how this industry impacts the environment is an ongoing yet crucial one. Projects like Toucan offer a new solution to a global problem that many people are trying to solve. While it may not be the perfect solution to reducing the impacts of climate change, it certainly allows us to think about new applications of Web3 technology in a way that we might not have before.

Understanding Toucan and how it works is relevant because regenerative finance (ReFi) has risen in popularity in recent months. Toucan is an interesting case study to learn about how one group is taking concepts from the larger sustainability movement and attempting to apply it in terms of web3 and DeFi.

The big question now that Verra has backed out of the deal is how will Toucan move forward? Perhaps they will try to partner with another carbon registry organization, or perhaps they will need to pivot completely. It does show us that Web3 still has a long way to go with integrating into and being adopted by environmental organizations and addressing the bigger climate issues we collectively are facing.

Key Improvements to the current carbon market

The current carbon offsetting market is growing rapidly, with increased legislation and consumer demand for carbon reduction. Although the recommended strategy is always to work on the absolute reduction of carbon, carbon offsetting allows a company to account for the emissions they haven’t yet reduced.

Here are some of the ways the Toucan Protocol helps support this process:

• Rather than a company buying a carbon credit and having it be listed as a cost with no return, the Toucan Protocol can actually increase the value of a carbon credit because it turns the credit into a token that then can be traded and lent out for a profit. This makes offsetting more desirable because you could get a tangible return.
• If you speak to anyone in carbon markets, you’ll quickly hear about issues of transparency. There are so many different suppliers and intermediaries that when you buy a credit, it can be incredibly hard to know where it actually came from to know if it’s legitimate. The lack of transparency means that it’s incredibly hard to tell how effective offsetting is in tackling global carbon reduction.
• Because of this lack of transparency, the amount of intermediaries, and how hard it can be to measure carbon capture, double counting often occurs. This means that two different companies could be paying for the same 1 tonne of carbon capture, but both claiming it as their offset. Although Toucan doesn’t address the issue of measuring carbon capture, it does make it so that each tonne of carbon listed can only ever be claimed once.

Concerns, barriers for the current carbon market

There are a number of challenges and barriers we see with Toucan including educational hurdles and issues with incentivizing carbon offsetting.

Educational Hurdles

For the general population, the concepts of both web3 and carbon offsetting are not ones that the layman has a solid understanding of. Combining these two complex industries and ideas only creates something that’s further out of reach of the everyday person. There are huge educational hurdles when it comes to understanding how Toucan and other ReFi projects operate. On top of that, these projects are still fine-tuning their tactics and working out how they’re going to utilize and differentiate themselves in this new intersection of cryptocurrency and sustainability. It’s going to be several years, if not decades until we see projects like this reach mainstream adoption.

Issues with Incentivizing Carbon Offsetting

Although making carbon credits more desirable is good, there is also a downside. By making the purchase of carbon credits potentially profitable, it de-incentivizes us to reduce how much carbon we are emitting.

It also continues the mindset that nature is a resource for us to capitalize on, rather than our invaluable home planet.

Conclusion

It’s clear that blockchain technology and crypto will only continue to advance and transform as time goes on. In the earlier stages of development, there is great opportunity to utilize new tools to minimize environmental effects that we are already suffering from in the present. Although we do see challenges with education and incentivization, we are glad to see a new generation of environmentally conscious technology.

With the knowledge that even our virtual transactional decisions cause detriment to our ecosystem, we will be paying closer attention to different protocols, DAOs, and organizations that take initiative towards environmental responsibility. The cost of our actions should no longer hurt the environment, but rather utilize what we have earned to build something better for the future.

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A review on Toucan and Carbon Offsets On-chain by SheFi cohort graduates on Team MoShe - Kim Chen, Arrianne Talma, Hannah Phang, Porter Geer, and Myra Tumlos.

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