How blockchain is reshaping our economic, environmental and social orders, Pt II

How blockchain is reshaping our economic, environmental and social orders, Pt II

In part I we explored the implications of blockchain for the economy, in part II we look at its environmental potential:

  1. The role digital currencies and blockchain will play in paying the $2.4tr annual climate debt that governments and corporations are too indebted to pay by underlying a new ‘green bond’ market
  2. How token-economics complement the degrowth movement when people earn and spend in a multitude of currencies
  3. Shrinking our institutions which have become too big to mange by decentralizing power and a future of autonomous ‘antifragile’ organizations
  4. How token-economics may be able to shift the priority of climate change to the fore of human behavior and avoid an ecological tipping point.
  5. Blockchain protocols that are enabling the issuance and governance are very first resource-backed currencies and creating liquidity
  6. Some examples of cryptocurrencies exploring and incentivizing regenerative practices

By now we should be living in the Age of Leisure presaged by futurists for over a century: a society where with each efficiency gain of new technology workers’ hours have been reduced as machines did “the work of a thousand men”. The gains in productivity and output were to be enough to keep everyone paid while working a fraction of the hours.

But, the opposite has happened. Instead of taking the extra leisure time people have doubled-down on the consumption of cheap goods driving demand higher and the need to produce and work faster with each year to keep economies growing. Ironically, this now inhibits future growth.

“Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century.”

US National Climate Assessment

Exponents of ecological-based economics, including Keen and Rifkin, trace our current situation to the prevailing Cobb-Douglas economic production model, developed in 1927, and the Leontief function which largely ignore energy as an input to production and output.

The alternative approach they propose is to treat energy not as an independent input to production on the same footing as labor and capital, but as an input to both labor and capital that enables them to produce output.

1. Paying off the $23tr annual global climate debt

With $250tr in global debt outstanding and most of it denominated in US dollars (much of emerging market debt is external owed in USD) countries are caught in a dilemma where they can’t afford to slow growth to cut carbon emissions as it would impair their ability to pay off external debt.

The status of USD as the global reserve currency is one of the root causes for inflationary debt crises in emerging markets and its ‘exorbitant privilege’ is being challenged.

Blockchain could form the basis for a new type of sovereign bond as the technology allows more innovation and fungibility. It will inevitably form the basis of future green financial instruments but it could also unwind countries overhang of foreign-denominated debt by converting it to ‘green bonds’.

Instead of the US Treasury market being the world’s largest bond and sovereign debt market blockchain would make it easier for countries to create a more autonomous bond market backed by carbon credits, regenerative programmes and natural resources — not another country’s currency.

France leading green finance

In 2016, France was the first country in the world to issue ‘green bonds’, 5 billion Euro created by several local government entities. Between 2016–2017 the size of the market quadrupled and has since since grown to 37.7b in 2018.

French President Emmanuel Macron has described the process as the “greening of public and private finance”.

“The world is at a tipping point. All the voices of change and all the energies need gather in Paris in order to set in motion the world of tomorrow.”

France President Emmanuel Macron

The French green bonds are denominated in the currency of the issuers choice, overall the mix is: 84% Euro, 11% USD and 1.5% JPY. One French company denominated 16% of their green bonds in emerging market currencies, which demonstrates their ability to diversify risk.

The green bonds finance renewable and regenerative projects and are issued by private and public companies — and also sovereign green bonds — and certification of the bonds ensures that assets or projects financed by a green bond are aligned with the 2C warming limit set by the Paris Agreement.

“The idea was to help the green bond market to develop, by providing investors sensitive to the environmental issue a liquid asset, with a sovereign risk profile, and to contribute to the defining standards not as a regulator but by imposing ambitious reporting obligations.”

Jean Boissinot, French Treasury, 2017 Climate Finance Day, Paris

Other avenues France is looking at is providing green market access to SMEs through ‘green securitisation’ platforms and a sustainable market section on the Paris Stock Exchange. With the digitization of securities and the migration of stock exchanges to blockchain platforms imminent, the process of securitising sustainable business practice will be as simple as tokenising any equity and the French government wants global green bond issuance to hit $1tr by 2020.

2. The degrowth movement and token-economics

It isn’t just the government in France that is pushing green finance but it is part of a larger décroissance or degrowth movement originating from France.

Degrowth is a social, economic and political movement based on ecological economics which advocates for the downscaling of production and consumption and is premised on The Limits to Growth findings published by MIT researchers in the 1970s, who projected the world’s growth trajectory into the 21st century using dynamic systems models.

In it the authors concluded that if the historic behaviour of the economic man continued in the same manner, it would push the world to a ‘natural limit’:

“The basic behavior mode of the world system is exponential growth of population and capital, followed by collapse.”

The Limits to Growth

Degrowth of consumption and production is vital, it is argued, to reduce dependency on energy dense fossil fuels and make a quicker transition to renewable energies. The shift to renewable energy is in fact happening at a much slower pace than the mainstream narrative would have many believe: we are still in the weaning process off coal and just last century there was more coal burnt than there was oil.

The current energy mix shows we are still heavily reliant on coal, let alone oil, as it is the most energy dense commodity and the transition to renewables is negligible.

Although it sounds like the most logical strategy to tackle climate change,governments and corporate oligopolies in particular are disincentivised to change the corporate structure as changing the status quo (or “equilibrium”) in such a large fragile and complex system could tip it into chaos.

According to renowned energy scientist Vaclav Smil, the historical shifts to new forms of energy are much more gradual than believed and a significant move to renewable energy could be yet another 50 years away — which is far too long to avoid a tipping point.

Towards a world of more currencies and less growth

Pursuing the notion of infinitely elastic demand and exponential GDP growth has led to much over consumption and overcapacity in a world operating beyond its carbon-absorptive capacity.

Infinitely elastic demand dictates that demand for a product is constant with its price, any price above that will drop demand to zero.

In the infinite elastic demand model, demand is kept in equilibrium between quantity and price and assumes after any exogenous shocks in price or quantity they will return to equilibrium. This assumption of infinite elastic demand is the premise for chasing exponential GDP growth.

However, most economic models only assume there is one currency available to citizens. What will happen to demand and GDP when there are thousands or millions of complementary currencies to exchange the same good with?

There are only 180 official currencies in the world (all created by bank debt) which is a very high concentration for 8 billion people.

The many new regenerative currencies that people will use (whether earned for carbon friendly behavior such as carsharing or selling their excess solar power) will play a large role in the circular economy, replacing the need to continuously consume new things with money earned in one currency from just one source.

The essential concept of a circular, or stationary/steady-state, economy is where a constant supply of stock capital already in the system is met by demand of a steady growing population.

3. 1.5C or 2C? Reaching consensus on tipping points

Not only are we in the realm of an economic tipping point as the global economy has grown in complexity and interconnections but also an environmental one. An ecological tipping point can be defined here as “a point at which an (ecological) system experiences a qualitative change, mostly in an abrupt and discontinuous way”.

Although we may not know precisely when and where the tipping is, the increasing frequency of early warning signs could tell of its probability increasing.

The many attempts to find universal agreement on emission or temperature targets — such as a 1.5C or 2C temperature rise target— at international level have been unsuccessful largely due to the short-term self-interest of politicians to grow their economies and their subjective expected utility (SEU) on the topic — decision weights people attach to an event based on their belief of the likelihood of the event occurring.

Human’s are innately wired for instant-gratification and self-preservation which leads to prioritising short-term benefits that might be detrimental in the long-run.

Humans are innately wired for instant gratification and self-preservation which leads to prioritizing short-term benefits that might be detrimental in the long-run. We tend to overpay for risk aversion as a last resort instead of moderating our risk over time — for instance, the dental industry thrives off patients deferring regular visits until faced with the choice of either costly treatment or ongoing pain. This behavior is alluded to in finance as long-run risk.

In their model for ambiguous tipping points and climate change policy, Lemoine and Traeger found policymakers are even more risk averse to uncertain or ambiguous outcomes than the average person — and this is within generous parameters.

“The long-run risk literature in asset pricing finds that risk aversion is significantly larger than the willingness to smooth consumption over time… The policymaker is more averse to risk than to known changes in consumption over time. We have shown how aversion to uncertainty (or ambiguity) affects optimal policy in the face of poorly understood tipping points.”

Lemoine and Traeger, Ambiguous Tipping Points

Further, they found that “The lack of knowledge governing tipping point locations in the climate system is severe. We find a framework that explicitly incorporates the Knightian nature of this uncertainty leads to only small upwards adjustments of the optimal carbon tax”.

There are climate change as a smooth process (shown in figure a below) in which there is no tipping point and the ecosystem responds gradually by itself or alternatively by an abrupt discontinuous change of state (b and c) from which it is more difficult to return. Lemoine and Traeger found that climate policy adjustments remained small even when there is a significant hazard or major losses faced by a regime shift, such as in b and c.

Different types of ecosystem responses to changing external conditions Source: Scheffer and Carpenter, 2003

When working across borders and cultures to find universal agreement on a topic as contentious as climate change, SEU and the incentives for policymakers and corporate executives to prioritise short-term goals over long-term (i.e. voter and shareholder approval) it is unlikely we will find international consensus on temperature limits so, collectively, individuals may be the best chance to avoid an environmental regime change.

4. Decentralizing to create more ‘antifragile’ systems

In trying to bring equilibrium and stability (QE stimulus and bailouts) to such a complex system as the global economy it has lost its resilience to shocks and grown “too-big-to-fail”. The government intervention to keep many financial institutions afloat when they would otherwise have perished has created a false state of stability in the global economy.

Black Swan author Nassim Taleb advocates decentralizing our systems to make them more ‘antifragile’ — a process of shrinking the centralized models of government and finance to increase their robustness.

“If antifragility is the property of all those natural (and complex) systems that have survived, depriving these systems of volatility, randomness, and stressors will harm them. They will weaken, die, or blow up. We have been fragilizing the economy, our health, political life, education, almost everything … by suppressing randomness and volatility. … stressors.”

Nassim Nicholas Taleb

Professor Marten Scheffer who focuses on change in complex systems posits the loss of resilience in a system will eventually be reflected in it being unable to get back to original positions after disturbances. Through this lens we can see why after each recession since the 1980s when the US government has lowered interest rates it has been able to get them back to the point they were previously but instead grew public and private debt — the ten-year treasury yield is a barometer for the economic system losing its resilience.

Currently around 2.5% the US 10-year interest rate (TNX ETF) has little room to adjust downward if there is a recession. It has been in a downtrend since the early 80s when public and private debt started rising exponentially around the world.

Unlike the last epoch of record corporate and private debt, during 1920s-30s, which was paid down during the existential crisis of World War II, the dismantling of our current debt edifice could come by force of facing the climatic crisis.

Decentralized autonomous organizations

Proof-of-stake blockchains and in particular those ambitious protocols developing on-chain governance will gradually shrink the size of our institutions and corporations by removing much of the bureaucracy and human decision-making from their operation.

The first step towards this was The DAO (decentralized autonomous organisation), which before its premature end was the first Ethereum-based venture capital fund in which token holders voted on projects to invest and the smart contract automated the buying and distribution of dividends.

Instead of the thousands of people employed in layers of bureaucracy and millions of pages of legal documents Aragon proposes to codify laws and supranational governance protocols for decentralized organizations ‘bureaucracy free’. From customer to business disputes and settlements and providing tools for building decentralized businesses the intent is to be the ‘world’s first digital jurisdiction’. Similar to how the Hanseatic League operated in the middle ages as a cross-jurisdiction trade association Aragon intends to increase collaboration and organization between DAO developers and projects across the world.

Tezos’ ‘self-amending protocol’ enables the blockchain to upgrade itself based on improvements voted by Tezos stakeholders; its governance becoming more decentralized and autonomous over time. Hedera Hashgraph is a distributed ledger alternative to the blockchain designed to handle large transaction throughput and tailored to streamline corporate operations.

Its ‘gossip about gossip’ and ‘virtual voting’ protocols obviate the need for decision-making between people in an organization by extrapolating what decision they would make based on previous votes and decisions they made in the past. One example could be whether to release a patient’s medical records to a certain party.

Tokenizing environmentalism instead of token environmentalism

Ant Forest, the game on Alipay’s mobile app and the world’s biggest payment processor, in which users can offset the carbon emissions of their purchases and exchange carbon credits between friends. A year after launching in 2016 Ant Forest had 220m users who had contributed to the planting of over 8 million trees.

How does Alibaba manage one of the world’s biggest tech companies in the world’s most populous countries with a network of companies that span multiple industries from e-commerce and banking to social media?

Alibaba CEO Jack Ma has said:

“Management. The word is there for regular companies. At Alibaba, we treat it more like governing an economy, as we have to manage so many companies’ dependent upon us as partners… By 2036 we will have built an economy that can support 100 million businesses for billions of users. We won’t own that economy. We will just govern it.”

This style of governance of organizations and economies is exactly what blockchain expedites: a future in which countries and governments will be run more like cooperative organizations than the centralized top-down structure today and organizations will be run more like economies as internet native companies scale to sizes that transcend national borders and encompass communities bigger than any country.

5. How Bancor supports local currencies

There are many regenerative local currencies in existence without the use of blockchain such as the Eco-Pesa was one of Grassroots’ Economic’s currency projects.

Backed by the national currency in Kenya it targeted the lack of waste management services and where hundreds of tonnes of waste was being dumped in front of households. By paying residents in Eco-Pesa, which could be spent at local businesses across several regions, the residents were incentivized to collect 20 tonnes of waste and plant thousands of trees.

Grassroots Economics is currently working with Bancor, a non-market making exchange that provides constant liquidity across community currencies, in the Sarafu Network. This will ensure its currencies are convertible to real goods and interchangeable, solving what Bancor describes as “the double coincidence of wants”. Money can be more easily scaled and distributed through airdrops into wallets (Kenya has more phones than ATMs) and project funding can be accurately tracked.

Bancor has been described by its late chief architect Bernard Lietaer as facilitating a “peaceful transition from the conventional national currency networks to a post-industrial blockchain space.”

How Bernard Lietaer envisioned the Bancor protocol creating an ecosystem of liquidity for local and resource-backed currencies.

Bancor will tie in with digital governance protocols such as Aragon which acts like a traditional trade association for DAOs. Where throughout the industrial age business has been organized nationally either by communist or capitalist structure, in the information age we will see the first form of digital sovereignty.

We are living in the first epoch in which individuals have the ability to create their own form of currency. With it will come the issuance of many local cryptocurrencies backed by commons (land, air, water, minerals etc) people will instead have the choice and even be incentivized to offset their own emissions and that of companies.

Elinor Ostrom’s principles of a resource-backed currency

According to economist Elinor Ostrom, the first woman to win a Nobel prize in the field for her work on resource economics and governance, the 8 principles for governing a commons-backed currency are:

  1. Define clear group boundaries

2. Match rules governing the use of common goods to local needs and conditions

3. Ensure that those affected by rules can modify the rules

4. Develop a monitoring system

5. Use graduated sanctions for rule violators

6. Provide accessible, low-cost dispute resolution

7. Make sure the rule-making is accepted by authorities

8. Bottom up responsibility for governing the common resources

For the first time in history, all these criteria can now be fulfilled in a currency by on-chain blockchain voting protocols — one of the evolutionary steps in cryptocurrencies.

6. Crypto’s role in decarbonizing and regenerative farming

Since it has taken so long for countries to agree on temperature limits the next 10–20 years will vital to remove carbon from the atmosphere and reverse climate change, known as regenerative practices. Swedish furniture giant IKEA is making plastic from co2 removed from the atmosphere and industrial carbon capture is now an option for most large companies. However, they still need an incentive to do so.

Nori is a carbon blockchain marketplace striving to create the first universal price on carbon removal in which One NORI token represents the equivalent of one tonne of CO2 removed. Unlike other existing carbon credits which exchange the right to emit carbon, this is a digital certificate of carbon removal which would appeal to corporations trying to boost their sustainability image — similar to the certification of organic or Fair Trade — or players in the food supply chain that want to prevent soil erosion.

The marketplace for carbon removal credits brings together suppliers of carbon removal, verifiers of the removal process and buyers of NORI tokens. Paul Gambil, founder of Nori describes it as “the Stripe of carbon removal.”

Regen Network

The creation of soil is also known to sequester carbon and is the aim of the practice of regenerative farming. Regen Network is another project using blockchain to generate and incentivize trusted attestations about the health of ecosystems to the Regen Ledger. Using its own open-source “ecological protocols” Regen will also allow users to issue ecological tokens upon it.

Users earn the XRN token on Regen for their data input and this allows organizations to allocate funds and distribute them to specific projects that need funding according to the data.

Microtransactions for IoT

Graph-based technology (opposed to blockchain based) such as Hashgraph, Burst or IOTA facilitate the exchange of value for data or electrons between machines. Projects such as Power LedgerWePower and LO3 Energy are already using blockchain to decentralize the energy sector — developing applications for microgrids, electric vehicle (EV) charging, however, this use case is still in early stages.

Conclusion

Blockchain allows for a new decentralized way of organizing society in exciting ways from the ground-up instead of the centralized top-down capitalist and socialist models we’ve had before — the latter has collapsed several times before and the former is arguably on the verge of collapse.

On-chain governance protocols allow individuals for the first time in history to issue and organize a currency around society’s needs instead of individuals being forced to accept a currency that no longer works in their favor.

If we are in a transition phase of economic and environmental tipping points it will have unpredictable effects socially. Already we are seeing the violent foment of environmental and social inequality among the Yellow Vest movement in France. This should serve as an early warning sign.