Institutional DeFi in 2023, Regenerative Finance (ReFi)

Executive Summary

This Coinchange Research report delves into the emerging paradigm of Institutional Decentralized Finance (DeFi), Regenerative Finance (ReFi) - its applications, implications, challenges, RWA Tokenization and the infrastructure enabling its rise. 

Part 1.0 explores the principles of Institutional DeFi, discussing how DeFi offers streamlined financial services through blockchain technology, including payments, trading, insurance, and asset management. Tokenization of assets, facilitated by DeFi, provides programmable business processes, reduces operational overheads, and opens up new product offerings. The report discusses the emergence of Institutional DeFi that meets security and regulatory standards while leveraging DeFi protocols. Institutions are transitioning towards DeFi through examples like J.P. Morgan's tokenization initiatives and the rise of Central Bank Digital Currencies (CBDCs). However, successful implementation requires careful design decisions concerning blockchain use, participation models, and token design.

Securrency, a leader in compliant tokenization, is transforming DeFi by developing an infrastructure that enables seamless value transfer and strict compliance. Their Compliance Aware Token® Framework combines on-chain and off-chain elements for seamless compliance across multiple ledgers.

Part 2.0 explores the strategic implications of institutional involvement in DeFi, focusing on Impact Finance, Regenerative Finance, and Real Estate Tokenization. Impact Finance aims for social/environmental impact alongside financial returns. It funds initiatives like microfinance, green bonds, affordable housing, and education. Regenerative Finance (ReFi) focuses on positive impacts while restoring and rebuilding natural systems for future resilience. DeFi integration with ReFi offers transparency, financial inclusion, and disruption of traditional systems. It allows for new impact investing models and Decentralized Autonomous Organizations (DAOs) for funding and managing initiatives. 

Examples of organizations utilizing this approach include KlimaDAO, Toucan Protocol, Nori, and Goldfinch. Platforms like RealT and Homebase demonstrate the possibilities of real estate tokenization by turning physical assets into digital tokens, making investment more accessible.

Finally, Part 3.0 focuses on the infrastructure supporting asset tokenization. It emphasizes that while Bitcoin's energy-intensive Proof of Work (PoW) process is often criticized, not all blockchains are created equal. Infrastructure like Celo, a carbon-negative blockchain, Chainlink, a bridge connecting blockchains to real-world data, and Polygon, a suite of Layer-2 offerings are driving the transformative power of Regenerative Finance, contributing to a more sustainable future.

Acknowledgment

Lead Authors: Jerome Ostorero and Pratik Wagh from Coinchange.io

About Coinchange: Coinchange is a FinTech firm operating in the blockchain arena, offering individuals and institutions worldwide a safe and risk-managed platform to earn optimal yields on their digital assets. Our work focuses on democratising access to innovative, blockchain-based financial investment products, thereby ensuring financial inclusivity for all.

We would like to thank the following co-authors, contributors and reviewers for their inputs in making this research report possible. 

Section: The True Value and Design of Institutional DeFi

Co-Authors: Patrick Campos, Tyler Carter & Jackson Mueller from Securrency (https://securrency.com/)

About Securrency: Securrency is a market-leading innovator in the development of institutional-grade, compliance-aware tokenization, account management, and decentralized finance technology based on blockchain. Their Capital Markets Platform, with its patented Compliance Aware Token® Framework, coupled with their powerful Digital Asset Composer, which automates complex financial operations, is transforming financial services. Securrency is laying the foundation for a truly global, interoperable digital assets marketplace.

Section: Impact Finance and ReFi

Co-Author: Ela Khodai from Toucan Protocol (https://toucan.earth/)

About Toucan: Toucan is catalytic infrastructure that (em)powers a vibrant on-chain carbon market with the sole purpose of addressing climate change. Toucan builds technology to unlock climate action at scale. Their digital infrastructure is helping to grow the voluntary carbon market in a transparent and high-integrity way. Their technology is designed to bring established and nascent environmental assets on the blockchain.

Reviewers: Aaron Collett and Blake West from Goldfinch (https://goldfinch.finance/)

About Goldfinch: Goldfinch is a decentralized credit protocol that allows for crypto borrowing without crypto collateral—with loans instead fully collateralized off-chain. Goldfinch’s mission — is to expand access to capital by creating a single global credit marketplace. At the heart of Goldfinch’s design are two core beliefs: that over the coming decade, low real bond yields will drive investors to demand new investment opportunities, and that over this same period global economic activity will move on-chain, making every transaction programmable. That means everyone from the smallest businesses in Nigeria to the largest institutions in New York will borrow from the same capital markets, and that all investors will be able to access those opportunities. 

Contributor: Charlie You from RWA.xyz (https://www.rwa.xyz/)

About RWA.xyz: RWA.xyz is the leading analytics company for tokenized real-world assets. View protocol statistics, industry aggregate metrics, and the issuers all in one place.

Section: Real Estate Tokenization

Co-author: Nick Halaris (https://nickhalaris.com/)

About Nick: Serial entrepreneur, author, avid early morning riser, and seeker of all things truth and wisdom, Nick Halaris is the founder of Metros Capital, a leading 8-figure real estate investment firm with properties across the United States. Over his 17-year career, Nick has started and grown multiple 8-figure businesses, invested in over $300M worth of real estate, advised senior executives at Fortune 500 companies, worked with dozens of major brands, and had his insights featured regularly on several media outlets. From living in the trenches of his own personal high-performing entrepreneurial journey, Nick truly understands the good and the bad side of pursuing modern success. It’s this firsthand experience that gives him his passion for helping others, including us by dedicating his time to contribute and review the Real Estate section of this report.

Contributor: Sherri Pelski from RealT (https://realt.co/)

About RealT: RealT is a union of seasoned real estate and blockchain industry executives, along with marketing, ecommerce and technology experts. They are executing their collective vision to create a new real estate ownership experience. For the first time, investors around the globe can buy into the US real estate market through fully-compliant, fractional, tokenized ownership. Powered by blockchain.

Reviewers: Domingo Valadez, Co-Founder of Homebase (https://homebasedao.io/)

About Homebase: Homebase is a digital platform fractionalizing residential real estate via NFTs. For too long, disenfranchised communities have been barred from homeownership, a traditional asset class that helps families build generational wealth over time. Homebase  was launched with the goal to democratize access to real estate investing and give everyone the opportunity to get involved.

Section: Infrastructure supporting Institutional ReFi 

Contributor: Matthew Blumberg (https://polygon.technology/)

About Polygon: Polygon started as a “layer two” or “sidechain” scaling solution that runs alongside the Ethereum blockchain — allowing for speedy transactions and low fees. More recently it operates a suite of layer two scaling solutions as part of their Polygon 2.0 launch. Polygon Labs is closely associated with Polygon blockchain as it actively contributes to the improvement of the Polygon ecosystem by developing protocols, forging partnerships, and promoting the use of blockchain technology in real-world applications. 

Part 1.0 The True Value and Design of Institutional DeFi

1.1 What is Institutional DeFi?

DeFi, or decentralized finance, is a term used to describe financial services that are provided via automated computer code on a blockchain as the settlement layer. These services can include payments, lending, trading, investments, insurance, and asset management. The crypto-asset industry that DeFi is a part of is largely unregulated.

Programmable business processes that can be executed automatically can be used to interact with any asset that has been tokenized. This code can greatly reduce the number of middle and back-office operations required by businesses and intermediaries.

Some of the notable benefits of DeFi are:

• Atomic settlement provides a secure method of delivering securities for payment, thereby reducing risk
• Real-time value movement and cheaper settlement are possible with mutualized and transparent ledgers
• In addition to being composable (able to interact with one another), DeFi protocols allow seamless collaboration across multiple services at the same time
• A more globally integrated finance industry is enabled by the interoperability of asset classes and markets
• Automating multi-party operational activities through programmable logic reduces middle- and back-office overhead, such as transfers and post-trade reconciliations
• The business logic being transparent and automated enables new product features, such as liquidations for collaterals and new product offerings.
• Innovative DeFi solutions make it easier to trade tokens and tokenized real-world assets by reducing the amount of money needed to participate, such as decentralized exchanges, synthetic assets, and flash loans

If the technology were applied to streamline transactions in foreign exchange, equities, bonds, and other real-world assets, it would have a lot of potential. This would require creating digital representations, or tokens, of real-world assets so that they can be used on the blockchain. Doing this could save a lot of money and create new business opportunities for issuers and investors, as well as for financial institutions that can adapt their technology and business models.

Firms that want to use DeFi in their client offerings must have the same, or even better, levels of safeguards and security standards that have been developed over decades in the finance industry.

Institutional DeFi are systems that use DeFi protocols while also meeting regulatory compliance and customer-safety requirements. This includes Anti-Money Laundering (AML), Know Your Customer (KYC), and Combating the Finance of Terrorism (CFT) requirements. As the technology is still rather new, cybersecurity is another risk that Institutional DeFi faces. There is also limited, if any, recourse for investors should something go wrong.

The design choices made will have an impact on aspects such as privacy and transaction efficiency, how fast users will adopt the system, and how well it will work with other digital assets. The key choices to be made are in three areas: the blockchain platform that will be used and who will have access to what information; the mechanisms for determining who can develop and use the system; and how the digital tokens will be issued, traded, and settled, as well as how they will be standardized.

In May 2022, the Monetary Authority of Singapore launched Project Guardian in order to test the feasibility of applications in asset tokenization and DeFi while also managing risks to financial stability and integrity.

The study also found that two key factors are essential for this process: 1) using regulated institutions to act as “trust anchors,” issuing and verifying credentials of participating entities to establish the identities of transacting parties and connect with existing legal frameworks, and 2) the need for an agreed set of technical standards around business logic and token standards for interoperability. These findings can help drive adoption and improve transaction efficiency for a globally integrated finance industry by providing legal clarity, adoption incentives, and technical standards alignment.,

Institutional DeFi will likely vary by jurisdiction and market structure, and as per a report by Oliver Wyman Forum, there are three ways financial institutions should start responding:

1. Develop a house view on Institutional DeFi implications
2. Decide on a participation strategy
3. Get the organization ready

The financial services industry is based on trust and information. This trust is held by financial intermediaries who are responsible for keeping accurate records of ownership, liabilities, conditions, and covenants among other things, across multiple ledgers that are not connected to the means of communication. Since each intermediary has a different piece of information, the system requires a lot of coordination after a transaction takes place in order to reconcile the different ledgers and settle the transaction. For example, many securities transactions, especially those that cross international borders, can take anywhere from one to four days to settle.

The technology behind distributed ledger technology (DLT) creates a shared ledger of transactional and ownership information. Tokenization converts assets such as stocks and bonds into digital representations on a blockchain. Institutions can further increase efficiency by adopting DeFi protocols, which use software code to automatically execute financial transactions in accordance with current rules and conditions.

Institutional DeFi can be defined as the use of DeFi protocols to tokenize real-world assets, with appropriate safeguards to ensure financial integrity, regulatory compliance, and customer protection.(Institutional DeFi does not refer to institutional players participating in crypto DeFi.)

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To reconcile their books and finalize settlement, financial intermediaries have to record transactions on siloed ledgers and communicate with each other. Using smart contracts, lending business logic can be codified transparently, ensuring adherence to rules and automating settlement processes.

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Here are a few examples of how big institutions are transitioning from Digital Finance to Institutional Finance:

1. J.P. Morgan leverages tokenization to offer intra-day repo solutions for clients on its Onyx Digital Assets platform, and DBS Digital Exchange offers corporates a platform to raise capital through the digitization of their securities and assets, with options to offer smaller denominations. These tokenization benefits are also welcomed by asset managers, as 70% of institutional investors expressed willingness to pay extra for increased liquidity and faster asset turnover, according to a recent survey conducted by Celent. 

2. On the public sector side, a 2021 survey of 81 central banks by the Bank for International Settlements (BIS) found that 90% of central banks were investigating the potential of central bank digital currencies (CBDCs), including 26% that were actively developing CBDCs or conducting pilot projects. 

3. Japan also passed a bill providing a legal framework for stablecoins that allows licensed banks, money transfer agents, and trust companies to issue them. 

4. DBS has successfully issued the DBS Digital Bond in May 2021 via security token offering (STO)

5. Mata Capital, a French asset manager, tokenized €350 million ($343 million) worth of funds according to a case study by Consensys Codefi. 

6. Last year, Switzerland implemented a so-called DLT Act granting tokenized securities the same legal status as traditional ones according to a Coindesk article.

This is the time for financial institutions to explore DeFi protocols and how to implement them into their business model. Institutional investors are still interested in digital assets even though the market is down. They are willing to pay more for digital assets that have increased liquidity and faster transactions.

1.2 What Design Choices Will Institutional DeFi Make?

Financial institutions need to consider areas where tokenization and programmability are most valuable and tailor DeFi protocols for their purposes accordingly instead of simply reusing what works in the cryptoasset industry. One can start by defining objectives of Institutional DeFi solutions. Objectives could range from creating new products and reducing data reconciliation tasks, to cutting costs and speeding up settlement times. They also include preparing for interactions with upcoming CBDC frameworks. 

After firms have established their objectives, they need to make choices in three key areas:

1) blockchain – which underlying network to build on and what information is visible to whom; 

2) participation – the mechanisms that determine who can develop and access solutions; and 

3) token design – how tokens are issued, transacted, settled, and standardized.

To understand each of these choices, let’s take a real world example called Project Guardian. Project Guardian is an initiative led by the Monetary Authority of Singapore (MAS) in collaboration with the financial industry. The purpose of the project is to explore the economic potential and value-adding use cases of asset tokenisation, particularly within decentralized finance (DeFi). The project was carried out with significant involvement from leading financial institutions including DBS Bank, J.P. Morgan, and the Japanese institution, SBI Digital Asset. The primary focus was to study secured borrowing and lending on a public blockchain platform, exploring how these financial interactions could be effectively managed and regulated. In November 2022, MAS announced the successful completion of the first pilot under Project Guardian. During this pilot, JP Morgan Onyx, DBS, and SBI Digital Asset executed trials for foreign exchange transactions and government bond trades. These transactions were carried out using a modified public lending protocol, Aave, and the decentralized exchange (DEX) Uniswap on the Polygon blockchain. Let’s dive into what the design choices mean for the institutions and how were they made in the case of this first pilot project. 

1.2.1 Choosing The Right Blockchain (Network type)

Public permissionless networks, such as Ethereum and Polygon, impose no restriction on access, and therefore have the potential to encourage wider participation. They are better equipped to facilitate interoperability with existing digital assets and DeFi protocols. On the flipside, this openness is also a potential source of risk unless additional safeguards are put in place.

Public permissioned networks, on the other hand, can facilitate the use of controls to authorize user access and restrict the visibility of transactions on these networks. This enables easier implementation of checks and balances, along with traceability for investigation purposes.

On one end of the spectrum, all transaction data is transparent and available for all participants to view, as is common with many public blockchains today. On the other end of the spectrum,

participants may access only data relating to their own transactions. Function-level access management can provide different levels of access to users, while encrypting data and providing a viewing key to selected participants can enable authorized viewership. Moreover, different techniques, such as zero-knowledge proofs (ZKP) and ensuring DeFi protocol uses only private messages, can be implemented for data privacy on public blockchains. This is especially important for solutions on the public blockchain as data is permanently recorded on a publicly available immutable ledger, introducing a higher risk of loss of privacy. 

In the example of Project Guardian, Polygon blockchain (a side chian of Ethereum blockchain) was selected. Ethereum blockchain is probably the most decentralized of all, but executing transactions on it is slow and expensive. Side chains such as Polygon, enable faster and cheaper transactions while still inheriting the underlying Ethereum blockchain security. Thus in this case the blockchain chosen was public and permisionless. 

1.2.2 Participation

On one hand, in a fully open model, anyone can develop and deploy smart contracts. This lowers barriers for application development and encourages competition, but it also entails risk as there are fewer checks and balances before protocols are deployed. 

On the other hand, in an assurance-based model, control and review/approval mechanisms are put in place to ensure adherence to specific standards before deployment. These can be industry standards widely accepted by institutional investors and clients or standards instituted through regulatory requirements. One approach is to allow only select developers or firms to develop new processes. Another approach is to ensure specific checks are made to protocols, allowing only verified protocols to be deployed.

In terms of access and usage, the design choice relates to how controls are put in place to manage user access and usage. Restrictions can be imposed at the service level (such as by controlling who can access a liquidity pool) or at the level of underlying functions (for example, by controlling trading permissions, such as instrument types and ticket size). A permissionless participation model is one where anyone can access the DeFi protocols and use all functions without restrictions (such as the Uniswap DEX), while a permissioned participation model is one where only authorized or verified participants can access specific services and use selected functions. Note that a permissioned model can still be enabled on a public permissionless blockchain, via access management mechanisms.

In the case of Project Guardian, they introduced the concept of Trust Anchors and Verifiable Credentials. Trust anchors are regulated financial institutions that screen, verify, and issue Verifiable Credentials to entities that wish to participate in DeFi protocols. Verifiable Credentials that are cryptographically attested to the identity of the entity/person using them, were used to enable compliant access to the DeFi protocols. Authorized traders were issued credentials by their parent institutions, through various internal processes and credential issuing software. These credentials were attached to trade instructions to the DeFi pool, and on-chain verification of these credentials ensured that only instructions with legitimate credentials were forwarded to the DeFi pool. What is even more interesting is that the smart contract system was designed to enable use of these credentials without requiring the DeFi protocols to be aware of the actual credentials. Unsurprisingly, since the trust anchors are centralized entities, they can revoke the Verifiable Credentials at any time. Upon revocation, traders would be prevented from trading with that particular DeFi protocol even though it is built on a public permisionless blockchain like Polygon. 

1.2.3 Token Design

Non-native tokens are issued to represent existing real-world assets. These non-native tokens are bound to existing off-chain processes and control mechanisms, such as custody and reconciliation. On the other hand, real world assets can be issued directly on a blockchain as native tokens, such as through security token offerings (STO).

The determination as to whether settlement can be recognized on-chain mainly depends on whether regulators and transaction participants can legally recognize the blockchain records as the final books and records of transactions, allowing the blockchain to function also as a de facto ownership ledger. This requires an understanding of the regulation and commercial law applicable to the transaction at issue, as well as any contractual arrangements in place.

Different public standards might be appropriate depending on the type of token to be issued. For example, the ERC-721 standard is designed for non-fungible tokens (NFTs) while ERC-1155 is suitable for both fungible and nonfungible tokens and can be explored for tokenized assets. There is no one-size-fits-all Institutional DeFi solution. 

In the case of Project Guardian, J.P. Morgan focused on transforming Singapore dollar deposits into digital tokens, while SBI Digital Asset Holdings did the same for Japanese Yen assets. In a separate project, DBS worked on digital tokens for both Singapore dollar deposits and Singapore Government Securities, whereas SBI Digital Asset Holdings dealt with tokenized versions of Japanese Yen deposits and Japanese Government Bonds. The token standard used was ERC-20, the most common token standard in the Ethereum ecosystem, to define token ownership, supply, type of issuance, and data to be stored on-chain, such as the token name and ticker. Using such a widely accepted token standard also enables seamless interoperability with other DeFi protocols. 

1.3 The Evolution of Securrency: Revolutionizing Compliance in DeFi

Securrency, a company specializing in compliant tokenization, has carved out a prominent niche in the regulated digital asset space since its inception in 2015. As part of their broader technology stack, their end-to-end infrastructure is designed to facilitate the seamless transfer of value while ensuring stringent compliance.

1.3.1 Building a Universal Compliance Framework

Initially, Securrency's primary focus was on tokenizing assets and incorporating smart contracts and compliance logic. Their goal was to automate compliance and business functions, with compliance being identified as the key to liquidity. This approach was critical in facilitating the movement of assets across different institutional environments, all the while adhering to jurisdiction-specific regulations.

Securrency recognized that assets such as payments and securities were treated differently and could transition between categories in different contexts. Therefore, real-time compliance that seamlessly crosses borders became a priority for them.

1.3.2 Focusing on Ledger Agnosticism and Interoperability 

Additionally, Securrency emphasized ledger agnosticism, acknowledging that different blockchains were preferable in various situations. Interoperability was vital, resulting in the development of a layer 3 infrastructure solution. They also offered a white-label implementation of their infrastructure, catering to both institutional and smaller brokerage needs. Their vision was to create a "global liquidity network," connecting diverse platforms and facilitating transactions.

Securrency was ahead of its time in its strategic positioning, focusing on institutional-grade compliance solutions while the market was dominated by ICOs in 2016 and 2017. They anticipated the convergence of the institutional and DeFi worlds, positioning themselves at the intersection of these realms.

1.3.3 Securrency and the Future of DeFi 

As institutions begin to adopt decentralized finance (DeFi) using permissioned blockchains due to regulatory concerns, Securrency's framework accommodates both permissioned and permissionless systems. They aim to address regulatory challenges by facilitating interoperability between decentralized networks and traditional systems.

Securrency's product, Composer, enables real-time pricing and compliance automation for DeFi, aiming to create a unified data source. Their constructive dialogue with regulators aims to further progress the industry, as institutions recognize the cost savings and automation potential of tokenized assets and smart contracts. 

1.3.4 Anticipating Market Trends and Institutional Adoption

Securrency foresees the asset class that will drive institutional adoption of tokenization in DeFi hinging on robust infrastructure support. Tokenized public funds and trade finance are promising drivers, given their established presence, multiple roles, and fragmentation. However, the lack of a core global pricing and compliance infrastructure continues to hinder real estate tokenization projects.

1.3.5 Introducing the Compliance Aware Token® Framework

Securrency's innovative token framework, combines on-chain and off-chain elements to ensure compliance. This system simplifies the process by focusing on participants' credentials and assets' policies, evaluates them during onboarding, and maps them to a wallet. The compliance Oracle then checks these credentials when a transaction is proposed and decides whether the transaction should proceed.

The off-chain policy instance reduces reconciliation risks and facilitates auditing for regulators and compliance officers. It's interoperable across multiple ledgers and legacy systems, aligns with the recognition of convergence between markets and products by regulatory authorities, and goes beyond credential verification.

Securrency has engaged extensively with regulators worldwide to showcase the Compliance Aware Token® Framework's capabilities. This proactive engagement demonstrates that such a framework is not a distant future possibility but a practical solution that removes existing barriers and provides infrastructure for massive adoption. It's flexible and can be used by institutions, individual brokers, and issuers at various levels, reinforcing Securrency's commitment to compliant tokenization and a more efficient future for digital asset management.

Part 2.0 Strategic Implications for the Finance Industry

In this section of the report, we delve into the potential ramifications of institutional involvement in Decentralized Finance (DeFi). We will identify and analyze sectors that present the most immediate opportunities for institutions to engage via tokenization, given their potential for disruption and growth. Specifically, we will focus on two sectors that stand at the forefront of this transformation: Impact Finance or Regenerative Finance, and Real Estate Tokenization.

2.1 Impact Finance

Impact finance is a type of investment or financing that aims to create positive social or environmental impact, in addition to financial returns. It is a way for investors and lenders to use their financial resources to support projects and organizations that are working to address social and environmental issues, such as poverty, climate change, and inequality. Impact finance can be used to fund a wide range of initiatives, including affordable housing, education and skills training, clean energy, and healthcare.

2.1.1 The Opportunities

There are many different forms of impact finance, including microfinance, which provides small loans to low-income entrepreneurs; social impact bonds, which use private capital to fund social services and pay investors based on the achievement of predetermined social outcomes; and green bonds, which finance environmentally friendly projects such as renewable energy or sustainable agriculture. Let’s look at the types of initiatives within Impact Finance. 

2.1.1.1 Microfinance

This is a type of impact finance that provides small loans, savings accounts, and other financial services to low-income entrepreneurs and households. The goal of microfinance is to help people who are excluded from the traditional financial system to start or expand their own businesses, and to improve their standard of living.

2.1.1.2 Social Impact Bonds

These are financial instruments that use private capital to fund social services and pay investors based on the achievement of predetermined social outcomes. For example, a social impact bond might be used to fund a program that helps young people in disadvantaged communities to find employment. If the program is successful in achieving its goals, the investors will receive a return on their investment.

2.1.1.3 Green Bonds

These are bonds that finance environmentally friendly projects, such as renewable energy, sustainable agriculture, and conservation. Green bonds can be used to fund a wide range of initiatives, including the development of renewable energy infrastructure, the adoption of sustainable farming practices, and the protection of natural habitats.

2.1.1.4 Affordable Housing

Impact finance can be used to fund the development of affordable housing for low-income families, seniors, and other vulnerable populations. This can include the construction of new housing units, the renovation of existing properties, and the provision of financing to help people buy homes.

2.1.1.5 Education And Skills Training

Impact finance can also be used to fund initiatives that provide education and skills training to disadvantaged individuals, helping them to improve their job prospects and increase their income. This can include programs that provide training in specific industries, such as healthcare or technology, or more general education and vocational training programs.

The potential for profitability can vary depending on the specific type of impact finance and the specific project or organization being funded. Some impact finance initiatives may offer a financial return that is comparable to traditional investment options, while others may offer a lower financial return in exchange for the opportunity to create positive social or environmental impact.

2.1.2 The Challenges

Like any investment or financing option, impact finance can have its own set of challenges and potential drawbacks. Some potential challenges of impact finance include:

2.1.2.1 Complexity

Impact finance can be complex, with a wide range of different instruments and structures to choose from. This can make it difficult for investors to understand the specific terms and risks of an impact finance investment, and to compare different options.

2.1.2.2 Limited availability 

Impact finance may not be available in all markets, and may be more difficult to access in some regions than others. This can make it challenging for investors to find opportunities to invest in impact finance initiatives.

2.1.2.3 Measurement and reporting

It can be difficult to accurately measure and report on the social and environmental impact of an impact finance initiative. This can make it challenging for investors to assess the effectiveness of an investment and to determine whether it is meeting its impact goals and thus its potential revenue.

An investigation into the world's leading carbon standard, Verra, revealed that the majority of their forest carbon offsets used by many high-profile corporations like Disney, Shell, and Gucci, are potentially worthless and could exacerbate global heating. The findings suggest that over 90% of the rainforest offset credits, which are commonly used by companies, are likely "phantom credits" and do not deliver real carbon reductions. This challenges the legitimacy of the carbon credits bought by several internationally recognized companies, many of which market their products as "carbon neutral". The Washington DC-based Verra, which manages a range of top environmental standards for climate action and sustainable development, has issued over 1 billion carbon credits through its verified carbon standard (VCS) and approves three-quarters of all voluntary offsets. The study showed that only a small number of Verra's rainforest projects demonstrated evidence of deforestation reductions. Further, a 2022 University of Cambridge study analysis found that the threat to forests had been exaggerated by approximately 400% on average for Verra projects. 

2.1.2.4 Alignment with impact goals

There may be situations where the financial goals of an impact finance initiative are not fully aligned with its social or environmental impact goals. For example, an impact finance initiative might prioritize financial returns over social or environmental impact, or vice versa. This can make it difficult for investors to know whether their investment is having the desired impact.

2.1.2.5 Market risk

Impact finance initiatives are subject to the same market risks as other types of investments, such as interest rate risk, currency risk, and credit risk. This means that there is the potential for financial loss, as with any investment.

Let’s take a specific example that can help illustrate Impact Finance. Assume that you live in a densely populated and expensive city that is in dire need of affordable housing. Let’s consider 3 scenarios: 

Scenario 1: You donate funds to a local charity that supports affordable housing projects. This is NOT impact investing (in fact it’s not investing at all).

Scenario 2: There is a local developer seeking private loans with interest rates that are lower than the US Treasury rate, to defer some of their construction costs. This is NOT true impact investing as the return expectation is clearly secondary.

Scenario 3: That same developer offers an opportunity for you to invest in a limited partnership, the proceeds of which will support the construction of affordable housing. It is expected to generate market (or better) returns. This IS impact investing as there is both an intended positive outcome and a clear financial return expectation. 

2.1.3 How has Impact Investment performed so far?

Below is a 3-year chart of two impact-focused, thematic funds. These have been compared against the S&P 500 return (denoted in blue).

The green line represents total returns for the SPDR SSGA Gender Diversity Index ETF (ticker: SHE). SHE is a fund dedicated to female empowerment; it holds shares in over 180 companies that are advancing women to senior executive positions at greater rates than the broader market.

The red line represents total returns for the First Trust Water ETF (ticker: FIW). FIW is a fund focused on all things water, including investments in businesses that are advancing initiatives related to purification and the equitable distribution of potable water, to businesses that are innovating in the wastewater space[2].

In spite of investors hoping for (at least) market returns, FIW outperformed while SHE lagged the broader market.

To summarize, impact finance is a type of investment or financing that aims to create positive social or environmental impact, in addition to financial returns. It can take many different forms, including microfinance, social impact bonds, green bonds, and affordable housing initiatives, among others. The potential for profitability can vary depending on the specific type of impact finance and the specific project or organization being funded, and can be complex, with a wide range of different instruments and structures to choose from. Potential drawbacks include limited availability, difficulty measuring and reporting on impact, alignment with impact goals, as well as market risks such as interest rate risk and credit risk. And maybe we have a solution for these challenges, and that is a blockchain enabled Regenerative Finance. 

2.2 Regenerative Finance

2.2.1 What is Regenerative Finance (ReFi)

Regenerative finance is a type of finance that focuses on creating positive social and environmental impacts, similar to impact finance. Like impact finance, regenerative finance seeks to create both financial returns and positive social and environmental impacts. However, the focus of regenerative finance is on initiatives that have the potential to go beyond addressing existing problems and actively work to restore and rebuild natural systems and build resilience for the future. 

Source: Sustainablebrands.com

“ReFi stands for Regenerative Finance and refers to a large-scale financial system that operates in a non-extractive way. A portion of the value generated and transferred flows back to the planet, and climate-positive actions become financially rewarding.”  - Toucan protocol

“ReFi stands for Regenerative Finance, and it broadly relates to a movement aiming to use finance as a way to support regenerative and restorative outcomes in social, environmental, and economic systems.” - ReFiDAO

2.2.2 Using DeFi for Impact Finance and Regenerative Finance

Both regenerative finance and impact finance can potentially involve blockchain and Decentralized Finance (DeFi). DeFi is essentially a financial system that uses blockchain technology and decentralized protocols to facilitate financial transactions and to offer financial services. It has the potential to enable greater financial inclusion and to disrupt traditional financial systems, and can be used for a variety of purposes, including impact initiatives. DeFi can be used to create new models for impact investing and lending, such as peer-to-peer lending platforms, that allow individuals to directly support impact initiatives. 

DeFi can be used to create decentralized autonomous organizations (DAOs), which are decentralized entities that operate using smart contracts and are governed by a set of rules encoded into the smart contract. DAOs can be used to fund and manage impact initiatives in a transparent and accountable manner, with all financial transactions and decision-making processes being recorded on the blockchain and visible to all stakeholders. Thus it has the potential to bring greater transparency to the space of regenerative finance

‍Regenerative finance is a growing field that is attracting the attention of a wide range of investors, including institutional investors such as pension funds, insurance companies, and asset managers. Institutional investors may be attracted to regenerative finance due to the potential for both financial returns and positive social and environmental impacts. Many institutions have sustainable investing strategies in place, and regenerative finance can be a way for them to align their investment activities with their sustainability goals. Combine this with the transparency of DeFi, the outcome is a favorable investment vehicle for institutions. 

As an example, Toucan Protocol is working on scaling carbon markets with integrity. Improving the integrity of carbon credits was a major theme in 2022, and innovative Web 3.0 solutions are emerging to address the issue, tackling the following areas:

• Accurate and transparent tracking of credits: Blockchain technology can provide a secure and transparent platform for tracking, verification, and trading of carbon credits.
• Pricing challenges: A public ledger helps carbon markets with better price signals. In the conventional system, trades are often conducted through brokers and intermediaries, rather than on a public exchange. This means there is no publicly accessible pricing data, and it’s hard to establish reliable pricing signals.
• Double counting: Blockchains can limit double counting issues, and ensure verifiable transactions. Double-counting refers to different claims that are simultaneously levied on the same carbon credit. Double-counting is a big issue in the VCM, as a former regulatory body reported.

2.2.3 Institutions’ concerns regarding unregulated permissionless DeFi

There are a few reasons why institutions may be reluctant to use open and permissionless (DeFi) platforms for Regenerative Finance. One reason is regulatory uncertainty. DeFi is a relatively new and rapidly evolving area, and there are currently few clear guidelines on how it should be regulated. This can create uncertainty for institutions, which may be hesitant to use DeFi platforms that are not subject to traditional financial regulations. 

Another reason is security concerns. There have been instances of hacks and other security breaches on DeFi platforms, which can create concerns for institutions. In many cases it is very difficult to identify who the attacker is, due to the anonymous and permissionless nature of these platforms. Additionally, some institutions may be hesitant to use DeFi platforms due to concerns about liquidity and market depth. DeFi platforms may not always have the same level of liquidity as traditional financial markets, which can make it difficult for institutions to buy or sell large quantities of assets.

2.2.4 Permissioned Institutional DeFi

There are a number of decentralized finance (DeFi) platforms that are specifically designed for institutional investors. These platforms often seek to address some of the concerns that institutions may have about using open and permissionless DeFi platforms, such as regulatory uncertainty, security concerns, and liquidity and market depth concerns. Earlier in 2022, we published a long form research report on Permissioned DeFi for institutional investors where we dived deep into three lending protocols that are taking a different approach to both onboarding new institutional clients, and how loans are distributed.

AAVE Arc delegates the onboarding process to trusted and reputable third parties like Fireblocks, Securitize and SEBA. This allows them to separate the (off-chain) permissioned aspect of rDeFi from their flawless, industry-leading AAVE decentralized lending protocol. Maple Finance similarly delegates the approval of loans to a trusted third party called a Pool Delegate selected by the protocol team themselves to assess the reputation and credit worthiness of a potential borrower. However, each loan and the terms of those respective loans are assessed on an individual basis by the selected Pool Delegate, following their own strategy.  

Alkemi Network, meanwhile, onboard and whitelist institutional clients thanks to their dedicated team. Alkemi Network process takes less than 72 hours to complete and, like AAVE Arc, allows users to take out loans with algorithmically pre-determined interest rates from any of their liquidity pools. 

2.2.5 Mapping out the DeFi landscape and ReFi subsegment

According to ReFi DAO, there are around 570 projects in this space spanning across 9 different blockchains! It would be impossible to cover all of them in this report however let’s discuss a few of the important ones that are gaining traction and network effects. 

2.2.5.1 Carbon Credits Use Case

Lowering the atmospheric carbon concentration to sustainable levels is an extremely daunting task, one that is usually hindered by a lack of transparency and liquidity. Nonetheless, recent advances in technology are making it easier for both big companies and everyday people to take part.

Ela Khodai from Toucan has written an excellent article on What is Regenerative Finance (ReFi) which we highly recommend reading. By utilizing blockchain technology, the emerging discipline of Regenerative Finance (ReFi) is aiming to address several issues, one of the main ones being climate change through the use of carbon offset credits. Various crypto protocols are establishing a platform for corporations and individuals to reduce their carbon footprint and connect the physical world of carbon consumption with the crypto community. One carbon offset credit is equal to one tonne of carbon dioxide being removed from the atmosphere, and is validated/issued by carbon standards or third party validators.

2.2.5.1.1 Toucan Protocol

In 2022, the digital (voluntary carbon market) VCM started to form. Carbon credits were tokenized and traded on blockchain-based marketplaces. Web3 projects began leveraging tokenized carbon in a wide variety of applications — for example as collateral in decentralized finance (DeFi) debt markets. Novel use cases and demand sources started to appear, and VCM stakeholders began to recognize how blockchain technology and carbon credit tokenization could help scale up carbon markets with integrity. Numbers confirm this trend: In 2022, projects in the ReFi sector raised an approximate $120 to $160 million in funding.  Most of these projects are built using the Toucan Protocol which builds the infrastructure for carbon markets to finance the world's best climate crisis solutions. Below are some stats from Toucan’s website. 

Toucan claims that 85% of all carbon tokens on the blockchain follow the data model developed by them. It is important to note that Toucan doesn’t issue carbon credits. Toucan only provides the infrastructure that allows carbon credit holders to tokenize their credits (TCO2s: tokenized carbon credits), or registries (such as Verra and Gold Standard) to natively issue carbon credits on Toucan’s Open Climate Registry.

In order to meet legal requirements, carbon credits are exchanged on mandatory markets, which use a cap-and-trade system. Additionally, entities not legally obligated to reduce their emissions may choose to do so under social, environmental, or governance pressures and can use the voluntary carbon market to trade credits. Compliance markets are regulated by governments, and entities have to adhere to carbon tax regulations. The voluntary market is unregulated and relies on entities wanting to do good. 

Though the United States private sector is not obligated to report or reduce carbon emissions, many large companies, such as Tesla, Microsoft, and Amazon, have committed to being environmentally friendly. Since the start of the COVID-19 pandemic, the global volume of voluntary carbon offset trading has increased by 30%. In the first half of 2021 alone, the carbon offset market generated approximately $750 million in sales.

The main issue with the current voluntary carbon market is the difficulty in connecting and incentivizing reputable carbon project developers. This difficulty is compounded by a lack of transparency, liquidity, and aggregation, as well as the presence of middlemen who not only sometimes offer unverified carbon credits but also take large fees. Additionally, suppliers face substantial barriers in terms of upfront costs, turnaround time, and return on investment.

2.2.5.1.2 Nori Marketplace

Nori is a platform that brings together suppliers, validators, and buyers to facilitate and accelerate the trading of verified carbon removal offsets. This marketplace serves as an opportunity for people to voluntarily reduce their carbon footprint. 

‍Nori's mission is to reduce carbon emissions in the atmosphere by incentivizing farmers to participate in regenerative agriculture projects. Through their blockchain carbon certificates, called Nori Carbon Removal Tonne (NRTs), they have already enabled over 15 farming projects to sequester carbon in the soil. Each Nori NRT is retired after it is bought, guaranteeing that a one-of-a-kind tonne of carbon was actually removed.

It is clear that tokenizing carbon credits has been by far the biggest use case here. There are several other projects contributing to this space as listed below: 

1. The Neutral platform allows users to trade tokenized carbon credits, renewable energy credits, and carbon forward contracts. 
2. Spirals Protocol empowers users to hold “green” versions of cryptocurrencies that fund climate impact projects across the world.
3. Senken is a transparent and easy-to-use digital marketplace for tokenized carbon credits.
4. Return Protocol is a climate action platform that automatically calculates and compensates for a user’s blockchain emissions.
5. disCarbon is building transparent and verifiable carbon retirement tools, for example a Flight Emission Offsetter that allows anyone to compensate for their flight emissions.
6. Atem is a platform that provides access to carbon credits through a simple API and web interface. It allows users to easily purchase and retire carbon credits.

2.2.5.1.3 KlimaDAO

KlimaDAO is a decentralized autonomous organization (DAO) and DeFi protocol that was launched on October 18, 2021. It seeks to combat climate change by using cryptocurrency to incentivize the reduction of greenhouse gas emissions. KlimaDAO developed a Web3-enabled tech stack to improve the performance of the carbon markets, creating an open-source social and technology layer to shape the future of these markets.

KlimaDAO is built on top of Toucan’s infrastructure, and they are using Toucan’s tokenized carbon credits in the form of its native KLIMA token. It provides a mechanism to reward those who participate in activism for the climate, develop and govern a carbon-backed currency that internalizes the cost of carbon, and fully integrate them into the emerging economic system. This is achieved through the treasury’s bonding mechanism, initially creating the incentives to bridge over 25 million carbon credits onto the blockchain. As of the most recent data available, KlimaDAO holds 17,520,563 tonnes of carbon.

A significant milestone for KlimaDAO was the launch of its advanced retirement tool for carbon offsetting in December 2022. This tool gives users the option to selectively filter, choose, and retire carbon credits from over 20 million tonnes of available digital carbon credits.

KlimaDAO’s digital carbon market, began to scale in early 2022, integrating the Voluntary Carbon Markets (VCM) with blockchain and DeFi technology. Since its launch, KlimaDAO has made considerable progress in growing with over 25 million carbon credits migrating onto the blockchain, accounting for 2.52% of all Verra-issued credits. There has been some argument over the quality of these retired credits being low and has led to them being viewed negatively in the carbon market circles. 

2.2.5.2 Private Credit Market Place (Goldfinch)

Goldfinch is a decentralized credit protocol that simplifies debt capital aggregation for real world companies without crypto collateral but with loans instead being fully collateralized with off-chain assets and income from the borrowers. Its historical focus has been on emerging markets with 69% of its outstanding loans, facilitating credit for established fintech companies in regions with less deep capital markets. It also does lending activity in developed markets, and will likely continue to grow in those regions. 

It addresses the core limitation of current decentralized crypto lending protocols which require borrowers to overcollateralize their loans with crypto assets, which creates barriers to entry and also decreases capital efficiency. On the other hand it allows investors to earn yield that is uncorrelated to crypto markets since it helps invest in real-world debt opportunities across the globe

Goldfinch incorporates the principle of “trust through consensus,” where borrowers can show their creditworthiness through collective third party assessment rather than based on the quality of their crypto collateral. 

Goldfinch is a protocol that facilitates interaction between Investors and Borrowers. 

• Investors are participants who provide USDC to the protocol to be utilized by Borrowers. There are three ways to become an Investor on Goldfinch: as a Backer providing junior capital, as a general Backer or as a Liquidity Provider

• Backers: optimize for yield and credit risk. They assess individual Borrower Pools and invest in them directly, either as first-loss capital or as a direct lender in unitranche deals.
• Liquidity Provider: optimize for diversification and liquidity. They supply second-loss capital to the Senior Pool that automatically allocates its funds across all Borrower Pools according to the assessment of Backers. Their exposure is tokenized as FIDU, a token that accrues value as interest payments are made to the Senior Pool

• Borrowers are participants who seek financing from Goldfinch by proposing Borrower Pools to be assessed by the network. Borrower Pools are smart contracts that contain the terms a Borrower seeks for their loan, such as the interest rate and repayment schedule. Borrowers are professional off-chain lending firms that handle loan origination and service businesses with easy access to capital in their local communities. As of now, the Governance Council approves borrowers, who have been independently assessed by community participants

Reconcile on- and off-chain: Goldfinch has off-chain facility agreements drafted by professional legal counsel that specify how funds will be received and repaid, bridging on-chain and off-chain mechanics. All lenders get to see these docs to match on-chain records with off-chain records, and borrowers cannot draw down until the docs that have been agreed are signed

UID NFT: This is their soulbound NFT that all participants in the protocol must have in order to participate (i.e. deposit or claim). People submit KYC to third party providers who then green-list who have passed the checks and can mint an NFT. These checks are refreshed daily making sure that they are taking a compliance-forward approach to managing their platform

Data room: All deals have two data rooms: one available to everyone, to help them underwrite deals; one if for everyone who provided capital to a specific deal, so that the borrower can keep them updated on performance. Borrowers can communicate directly with their lenders via token-gated channels on the Goldfinch Discord, which can only be accessed once someone proves that they own the NFT corresponding to that loan

Tokenization of assets: Goldfinch's senior pool is represented by a token called FIDU. As repayments come into the senior pool, FIDU's value increases. When there is liquidity in the senior pool (e.g. when new investment arrives or borrowers repay their loans), FIDU can be redeemed at par value. Backer positions on Goldfinch are captured as NFTs which specify how much someone has contributed to a specific pool. This NFT can be verified on the goldfinch app and gives holders the right to directly claim their repayments on the app

2.2.5.3 RWA.xyz - A one stop shop for investors to invest in RWA and ReFi initiatives

As the decentralized finance (DeFi) ecosystem evolves, the integration of real-world assets (RWAs) with blockchain technology is becoming increasingly significant. One organization spearheading this transition is RWA.xyz, a cutting-edge platform that provides analytics on tokenized RWAs on-chain. Through our conversations with their co-founder Charlie You, we got to know the platform in detail. 

RWA.xyz is an analytics platform dedicated to providing comprehensive insights on real-world assets (RWAs) in the crypto space. This platform acts as a crucial resource for investors seeking to understand the next wave of crypto adoption, with a particular focus on tokenized real-world assets. Through its advanced tools and analytics, users can view global issuance, volumes, and rates, analyze protocol metrics, examine defaults and new deals, and even drill down into individual loans.

The company operates with a primary objective to bridge the gap between crypto and traditional markets, offering investors a more profound understanding of decentralized finance (DeFi), loan details, and borrowers' track records. This valuable data and analysis is increasingly crucial as tokenized real-world assets become an emerging frontier in DeFi. Traditional funds and asset issuers have started to launch programs to tokenize assets via public crypto networks, creating new opportunities for yield generation within DeFi.

RWA.xyz users can understand the protocols involved in tokenizing real-world assets, their yield opportunities, and tokenomics. 

2.2.5.3.1 The Yield Aspect of RWAs

When it comes to yield, RWAs on-chain currently offer higher returns compared to common publicly available assets in both TradFi and DeFi, with figures hovering around the 10 to 11% range. However, it's important to note that these aren't risk-adjusted yields.

The future trends in yields from RWAs will largely depend on the supply and demand dynamics of the risk curve. If more safe, lower-yielding assets like treasuries are moved on-chain, this could potentially decrease the average yield. Conversely, the introduction of riskier assets could increase the yield.

2.3 Real Estate Tokenization- An Overview and Future Outlook

Real estate tokenization is the process of converting the value of physical real estate assets into digital tokens using blockchain technology. These digital tokens, often known as security tokens, usually represent shares of a company whose asset is a real estate property, allowing for their digital transfer and ownership. 

The tokenization process can drastically reduce the minimum investment threshold, making real estate investment more accessible. For instance, instead of a hefty upfront investment to buy a property, tokenization can allow investors to start with a significantly lower amount, such as $200.

Here are some examples of how real estate tokenization might work:

2.3.1 Fractional Ownership: 

Imagine an apartment building in a city that's worth $10 million. Instead of one entity owning this property, the value of the building can be tokenized into, say, 10 million tokens, each token representing a $1 share of the property. This allows multiple people to own portions of the building by purchasing these tokens. The owners who have tokenized their real estate can sell a portion of the equity, raise temporary funds, or even trade real estate tokens for other tokens.

2.3.2 Investment Funds: 

Similar to the example above, real estate investment funds could tokenize their assets, allowing investors to buy and sell tokens that represent shares in the fund. This could lower the barrier to entry for smaller investors and create liquidity in the market, as these tokens can be easily and securely transferred via blockchain technology.

2.3.3 Real Estate Development Financing: 

Developers of real estate projects can issue tokens that represent an ownership stake in a project that is under construction. This can help raise funds needed for the development, while giving investors the potential for returns once the project is completed.

2.3.4 So Why Tokenize?

To understand why people are excited about real estate tokenization, we should first talk about what happens now in the world of real estate investing. There are very few companies attempting to tokenize real estate because it's not easy, and the landscape around crypto has changed dramatically in a short amount of time. But there is a use case. In the traditional world of real estate investing, if you're an investor or developer trying to raise money, you form a general partnership or limited partnership and try to attract investors who commit sizable capital to make a deal happen. This can range from syndicating investors from high net worth individuals to attracting private equity companies. The idea behind real estate tokenization is to streamline this process by making it possible for investors to purchase fractional ownership in a property through a digital token, creating more liquidity in the market which has been traditionally illiquid.

The structure of the investment process is the same, with a general partnership and a limited partnership investing in deals using a waterfall system, and it works efficiently in the American market. However, it is inefficient in terms of transaction costs because finding new investors is difficult and it becomes illiquid almost instantly. Tokenization is a potential solution to the liquidity problem and a way to attract new investors, especially crypto native investors or through crowdfunding. Before crypto, crowdfunding platforms such as Realty Moguls and Fundrise had already tried to solve this pain point, which marked phase one of the innovation.

Nick Halaris, a well-known Real Estate investor in Los Angeles, believes that introducing liquidity into the market will provide opportunities for experienced investors who understand real estate investment. He likens this to the period following the Civil War when the stock market was in its infancy and stocks began trading. Many stocks were grossly mispriced as individuals didn't fully understand what they were investing in. Halaris predicts a similar scenario with real estate tokens. Investors may venture into complex transactions like development deals and choose to sell for various reasons, causing the underlying deal to be misvalued through this trading activity. Savvy investors, however, will recognize this and state, "The market is only valuing this limited partner's stake at 20% of its actual value. I should purchase all the available tokens currently on sale." This could potentially give rise to a whole new sector known as "real estate token hedge funds." 

In short, the implications for investors in the ever-evolving real estate market are considerable, with democratization and liquidity poised as the dual pillars of a changing investment landscape. Democratization is transforming the market, providing more accessible and readily available real estate investment opportunities. Liquidity, in turn, grants the investors the flexibility to seamlessly trade in and out of these positions. For real estate investors and entrepreneurs, this progression means not only a greater pool of investors but also potentially more favorable terms. Examples of such improvements could include more affordable financing options, coupled with a reduction in control or decision-making rights for the investors. 

However, the American regulatory framework is difficult to navigate, making it hard for companies to start off with publicly traded securities. As a result, many companies are starting with the idea of doing Reg D filings, which is essentially an exemption from the normal registration process.

The Reg D exemption allows skipping the costly registration process, but the downside is that the interest has to be sold to accredited investors. If we set aside the question of the SEC, such as the Reg D we just discussed, which applies statewide, complying with federal law for a real estate token is a known entity. You just need to follow SEC guidelines and you can get it done. However, real estate complicates things from a regulatory perspective because each state handles transactions differently, with specific regulations for title records and such. So if you were to set up something such as a  Property's NFT sales in 50 different states, you'd need to create 50 different versions due to the different regulations. 

In our interview with Nick, he made the point that the effectiveness of blockchain in providing liquidity is yet to be definitively proven. He argues that for tokenization to be valuable, there needs to be frequent trading that accurately represents the asset's value. For example, Aspen St. Regis, which tokenized $20 million of its limited partnership, saw little trading volume, indicating lack of liquidity. But the other side of the argument is that one day you get enough good properties on a trading platform,  and you will get liquidity. 

The main issue is that the liquidity is fragmented. There is no clear dominant player like the New York Stock Exchange. At the moment, multiple tokenization platforms are racing to become the go-to option for on-chain assets. Keep in mind that it is not just the property that can get tokenized to represent fractional ownership, but in some cases the RE investment funds themselves can be tokenized to almost appear like a REIT on a blockchain. The dream scenario for these big players is to have so much liquidity that if an investor wants to sell their stake, they can find someone else to buy it, rather than asking the fund managers to redeem their interest.

This world of Real Estate Tokenization used to be more fertile for smaller startups to disrupt, but the more recent frauds, and the regulations that are coming are so prohibitive that only the established Real Estate players might be able to tap into this.

2.3.5 Rent and Own at the same time

The vision for Homebase is to become the preferred platform for renters moving to a new city. Imagine you’re moving to San Francisco, instead of using Craigslist to find an apartment, you go directly to the Homebase platform to browse apartments available for rent. If you find one you like, you move in and purchase 10-20% of available shares of the home. By buying an equity stake in the property, you’re now a partial owner of the apartment you’re living in. Users can invest in rent-generating residential real estate for as little as $100 and gain the upside of investing in high quality real estate assets.

2.3.6 RealT - Current example of real estate tokenization

RealT is a platform focused on the tokenization of real estate, a process that represents the rights to real-world assets, like properties, as digital tokens on a blockchain. The platform's primary mission is to democratize access to real estate investment opportunities that are curated by a team of experienced professionals. Real estate properties on the RealT platform are represented by digital tokens on Ethereum or Gnosis Chains. In essence, RealT is a real estate crowdfunding platform that uses blockchain technology to manage asset ownership, voting rights, and distributions. 

RealT offers a platform where RealTokens can be purchased, representing an ownership interest in U.S. residential real estate. As such, RealTokens are offered under two exemptions of the Securities Act of 1933 (the Act), specifically, Regulation D for U.S. Accredited Investors, and Regulation S for non-U.S. persons. This approach ensures legal compliance while broadening access to this investment type to a global audience. To meet the disclosure obligations, RealT provides a host of supporting documentation. This includes a Private Placement Memorandum, which is an exhaustive document providing a comprehensive overview of the offering, and Subscription Documentation, which offers detailed information about the transaction process. Furthermore, RealT regularly provides updates on property performance and market evaluations for each RealToken offering. 

Structurally, each property on the RealT platform is owned by a unique single-purpose LLC or Inc. These entities exist with the sole purpose of owning the specific property's deed. When an investor purchases 'tokens' on the RealT website, they are in effect buying an ownership interest in the respective LLC or Inc, and by extension, obtaining an indirect ownership of the property's deed. As for the practicalities of property management, this is handled by professional property management companies engaged by RealT. These companies are responsible for renting the property, collecting rental income, and managing all aspects of property maintenance and repairs. Costs related to property management and maintenance are deducted from the rental income generated by the property.  The balance remaining is then distributed to RealToken holders.

As of May 18, 2023, RealT has 3119 investors and 357 properties tokenized worth $86,263,137 earning RealToken holders an average annual yield of 10.52 %

Part 3.0 Infrastructure enabling institutions to interact with Regenerative Finance

How can RWA tokenization be sustainable if blockchains use a lot of energy? It's a common misconception that all blockchains are energy-intensive, when in reality, the situation is more nuanced. Take Bitcoin, the largest blockchain network, which indeed has a high energy demand due to its reliance on the Proof of Work (PoW) process for adding data blocks to its chain. PoW involves computers vying to solve complex mathematical puzzles, a process known as mining. However, not all blockchains are created equal. Ethereum, the second-largest blockchain network, utilizes a mechanism known as Proof-of-Stake (PoS), which is vastly more energy-efficient and consumes a mere fraction of the energy required by networks like Bitcoin. For perspective, Ethereum's shift to the PoS mechanism resulted in a staggering 99.5% reduction in energy consumption. Other blockchain networks, such as Polygon and Celo, which we will explore further in this report, also employ the PoS mechanism.

3.1 Celo

Regenerative Finance (ReFi) is a multi-trillion dollar opportunity to do well by doing good, and Celo is becoming its home. Its participants want to accelerate the development of new, planet-positive technologies through better measurement and financing. Celo is a carbon-negative EVM-compatible Layer 1 blockchain. It’s unique among blockchains in many ways, including the fact that it has its own native stablecoins in different denominations – cUSD, cEUR, and cREAL, and in that it plans to back those stablecoins with 40% natural capital backed assets – like forest NFTs, tokens backed by carbon offsets over the next few years.

Celo’s mission attracted major companies like Kickstarter and Deutsche Telekom. As their millions of users onboard to Celo, and use Celo Dollars or Celo Euros to transact, they’ll be creating more demand for planet-positive projects without changing their behavior. That’s the beauty of a well-designed regenerative financial system. ReFi is one of the real-world use cases that wouldn’t be possible, or would at least be far less feasible, without crypto, and the technology, economic model, and community that Celo have built are the best chance of accelerating the ReFi movement and fighting the tragedy of the commons.

They architected a blockchain with unique features like: Mobile-first and Native Stable Currencies. It is carbon-negative thanks to its automatic purchase of offsets through Project Wren. Inspired by Tezos's on-chain governance, the team worked to launch Celo with full on-chain governance right from the start, allowing the Celo community to fine tune protocol parameters and even upgrade core protocol pieces.

Celo has attracted several projects that want to create impact in the real world. One such project is literally called Impact Market. Impact Market is a protocol built on the Celo blockchain that hosts a global dashboard showcasing the inflow of funds and distribution of basic income to beneficiaries through their UBI (Unconditional Basic Income) community contracts. It launched in 2020, as a “Decentralized Poverty Alleviation Protocol.” By far it is the biggest UBI project in the world. 

Celo’s Climate Collective has proposed transitioning 40% of the Celo Reserve (which backs the Celo Dollar, Celo Euro, and Celo Real stablecoins) to “transition to tokenized rainforest and other carbon sequestering assets to support natural capital backed currencies on the Celo platform” over the next four years.

The three main pillars of a regenerative financial system that call Celo home are – universal access to financial tools and UBI, community commerce, and health and biodiversity of global ecosystems.

This web3 Climate Map shows where climate projects are building today, and Celo seems to have a slight lead over Ethereum, with Polygon in the third-place.

In April last year, Toucan Protocol and Celo made a big announcement that Toucan is coming to Celo. With the credits on-chain, they create a transparent meta-registry and pools of Base Carbon Tonne (BCT) and Nature Carbon Tonne (NCT) tokens to increase liquidity. After initially launching on Polygon and getting traction for its BCT token via KlimaDAO, Toucan decided to go multi-chain and add Celo support in partnership with the Celo Foundation and the Climate Collective.

That said, there are challenges to building on Celo, namely liquidity. If a tree gets tokenized on a blockchain, and no one’s there to buy the NFT, did it really get tokenized? Certainly, the Ethereum, Solana, Polygon, and other ecosystems have more active financial communities and deeper pools of capital buying assets than Celo does today. Other blockchains are able to offer projects greater financial incentives to build on them.  

But through the $100 million DeFi For the People initiative, Celo is partnering with DeFi blue chips like Curve, Sushiswap, and Aave.

Building without the hype and yield farming and degens, focusing purely on how to build a regenerative financial system in the real-world using newly programmable money is Celo’s strength. It’s not going to be the blockchain to end all blockchains. It just wants to fulfill its own unique purpose as the mission-driven home neighborhood for ReFi within a connected, multi-chain ecosystem working together to create a regenerative economy.

3.2 Chainlink Social Impact Projects

Chainlink is a platform that extends the functionality of blockchains. It connects smart contracts to real-world data, events, payments, and off-chain computation in a secure and reliable manner through the use of oracles. 

One of the specific use cases of Chainlink is in climate markets. Chainlink supports a wide range of use cases across digital measurement, reporting, and verification (MRV); registries; exchanges; and other market participants, thereby enabling an efficient climate ecosystem. 

The Chainlink Community Grant Program is focused on funding social impact initiatives that reduce systemic risk in developed economies and create technological leaps in developing regions. Their goal is to incentivize developers and researchers who want to build tangible blockchain solutions that enhance people’s ability to independently improve their well-being and social-economic status. Below are some of the key initiatives that the grant expansion is targeting:

Supporting Nonprofit Organizations and NGOs: Chainlink is already engaging with several nonprofits and NGOs through the Community Grant Program. This includes the UNESCO Global Education Coalition.

One Chainlink Grant Program initiative already underway is the creation of parametric insurance solutions in emerging markets. Chainlink is collaborating with agricultural microinsurance provider ACRE Africa and decentralized insurance protocol Etherisc to facilitate the development of sustainable and blockchain-based parametric crop insurance solutions that help over 250,000 smallholder farmers in Kenya access affordable insurance policies and offset the effects of climate change.

Another grant recipient was Green World for their development of AIRS—a hybrid smart contract application that uses satellite data to automatically dispense financial rewards to people who successfully regenerate designated areas of land by improving soil health, contributing to greater carbon sequestration, increasing vegetative/tree cover, enhancing hydrology, and other rehabilitation techniques. These rewards are issued to stewards as “regenerative carbon” assets that are tokenized on the blockchain and represent Green World Credits.

It is extremely important to build new, high-quality data infrastructure to support hybrid smart contracts, which rely on reliable data feeds to confirm real-world events. With the significant expansion of data infrastructure over the past decade, there's a growing need for specialized datasets for unique use cases, coupled with a demand for better-quality data due to its direct role in automating processes involving real economic exchanges.

Chainlink is building this critical data infrastructure that includes open-source satellite data, drones, and IoT devices, which can measure a variety of environmental factors like carbon levels, soil quality, reforestation efforts, wind speeds, and rainfall. This type of data is particularly beneficial for applications such as carbon credit marketplaces, regenerative agriculture projects like AIRs, and parametric insurance solutions covering crop, disaster, and water level insurance.

3.3 Polygon

Polygon blockchain, formerly known as Matic Network, is a multi-chain blockchain platform designed to enhance the scalability and interoperability of the Ethereum network. It operates a suite of layer two scaling solutions as part of their Polygon 2.0 launch that runs alongside the Ethereum blockchain, offering faster transaction processing and lower fees. 

Polygon Labs is closely associated with Polygon blockchain as it actively contributes to the improvement of the Polygon ecosystem by developing protocols, forging partnerships, and promoting the use of blockchain technology in real-world applications. With that in mind they are one of the leaders in driving forward the concept of Regenerative Finance (ReFi) levering the crypto rails to rebuild our economies in ways that are more inclusive, sustainable, and most importantly, resilient.

The Polygon proof-of-stake (PoS) chain has been an important facilitator in this journey. It has emerged as a premier destination for ReFi activity. The network has innovatively transcended just carbon, and is now focusing on various critical components of a healthy environment, including air quality, biodiversity, climate, soil, and water. One of the shining examples of successful ReFi activity on Polygon is the Toucan Protocol, the first carbon credit bridge on Polygon. The Polygon PoS chain has been home to numerous other major projects such as Nori Protocol, KlimaDAO, and Regen Network. One groundbreaking example of ReFi innovation was the announcement by Solid World on May 18th, 2023, regarding the launch of liquidity pools for carbon markets on the Polygon PoS network. Moreover, Interwork Alliance is working to help track supply chain emissions accurately. REBO bottles, accredited by Gold Standard for SDG goals, generate plastic credits on Polygon in real-time as their bottles are being used. 

Polygon has made substantial strides in reducing its carbon footprint. The transition from proof of work to proof of stake in Ethereum wiped out 60,000 tonnes of Polygon POS chain's carbon footprint. Polygon has pledged to offset the network’s carbon emissions since inception and go carbon negative for all of the network’s future transactions. This has set a benchmark for other blockchain networks, demonstrating that sustainability and technology can coexist and flourish together.

At the Green Blockchain Summit 2 last September Polygon made it clear that there's institutional momentum building toward a more ecologically sound, systems-focused way of designing economies. As the foundation for ReFi, Polygon is driving the charge, providing the tools for projects innovating with blockchain technology to create regenerative solutions. This coupled with their institutional collaboration in other applications of RWA tokenization such as Hedge Fund tokenization, we believe that Polygon is poised to lead on this front.

In summary, impact investing and regenerative finance serve as influential forces aiming to create positive societal and environmental change alongside financial returns. Regenerative finance, an evolution of impact investing, seeks to replenish and restore the systems it engages, carving out a transformative path in the financial world. This revolutionary approach has found a sturdy ally in blockchain technology, with its unparalleled transparency, efficiency, and democratizing potential. We've examined three groundbreaking blockchain infrastructures that are fueling the applications of regenerative finance, each contributing to a paradigm shift in the way we invest and interact with the economic ecosystem. These innovations underline the potential of technology-facilitated regenerative finance to shape an inclusive, resilient, and sustainable future.

Sources used:

For Part 1.0 https://www.jpmorgan.com/onyx/documents/Institutional-DeFi-The-Next-Generation-of-Finance.pdf 

Securrency interview with Coinchange Research Team

For Impact and Regenerative Finance:

https://cointelegraph.com/news/finding-digital-answers-to-global-sustainability-threats 

SDG and UN: https://www.un.org/sustainabledevelopment/ 

Future of Finance webinars by IISD: https://www.iisd.org/events/future-finance 

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Investopedia, HBR, HBR, AMP Capital, Corporate Finance Institute

https://blog.toucan.earth/refi-is-driving-climate-action-with-gitcoin-grants/ 

https://www.weforum.org/whitepapers/blockchain-for-scaling-climate-action

https://www.refidao.com/ecosystem/content

https://www.klimadao.finance/blog/klimadao-one-year-on 

https://smartliquidity.info/2021/10/13/klimadao-launch-announcement 

https://coinstats.app/blog/what-is-klimadao 

https://www.klimadao.finance/ 

https://www.klimadao.finance/blog/klimadao-an-introduction 

https://www.globenewswire.com/news-release/2022/12/20/2577400/0/en/KlimaDAO-Launches-Advanced-Selective-Retirement-for-Carbon-Credits.html 

https://www.globenewswire.com/news-release/2022/12/15/2574794/0/en/KlimaDAO-Releases-Introduction-to-the-Digital-Carbon-Market-Report.html 

https://www.klimadao.finance/blog/klimadao-digital-carbon-market-research-literature-roundup 

https://verra.org/ 

https://en.wikipedia.org/wiki/Verified_Carbon_Standard 

https://www.offsetguide.org/understanding-carbon-offsets/carbon-offset-programs/voluntary-offset-programs/verified-carbon-standard/ 

https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe 

RWA.xyz Interview with Coinchange Research Team

Forn Real Estate Tokenization section

Nick Halaris Interview: https://www.coinchange.io/blog/blockchain-and-real-estate-a-match-made-in-heaven-to-unlock-the-future-of-property-investment 

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https://pixelplex.io/blog/real-estate-tokenization/

https://limeup.io/blog/real-estate-tokenization/

https://www.honeybricks.com/learn/tokenized-real-estate-investing 

https://scalac.io/blog/real-estate-tokenization/ 

https://www.dentons.com/en/insights/articles/2022/september/6/the-tokenization-of-real-estate 

https://dashboard.realt.community/rank 

For Part 3.0

https://www.notboring.co/p/celo-building-a-regenerative-economy

https://docs.impactmarket.com/

https://kumu.io/climate-collective/web3-climate-map

‍https://chain.link/use-cases/social-impact

https://blog.chain.link/social-impact-chainlink-grants-program/#post-title

https://polygon.technology/blog/introduction-to-refi-building-a-more-sustainable-future-with-polygon