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6 Sep, 22
Regenerative Finance (Part 1): How it Works and Why it Matters
Regenerative Finance (ReFi) is a model that uses money to incentivise communities to solve systemic issues. Deeply rooted in the theories of regenerative economics, this new financial layout encourages individuals to generate an income by working on and funding public good projects. Although it brings along negative connotations, the financialisation of ‘good deeds’ is an improvement over a system that rewards those who pursue their interests, regardless of the price. Many cryptocurrency and blockchain projects have begun working on developing technology that is founded upon ReFi ideals. In this ostensibly utopian society, we will put in value to get value without losing elements of the free market, instead giving people freedom in bettering their world. Hence, individuals and companies will not worry about the financial profits of business decisions, but rather about how these choices create positive externalities for the rest of society.
To understand Regenerative Finance, it is important to first comprehend the problem it is trying to remedy and blockchain’s role in achieving this purpose. In general, this financial model seeks to solve the tragedy of the commons. The idea of the tragedy of the commons, coined by American ecologist Garret Hardin in 1968, refers to the concept of overconsumption of public goods. Public goods, such as clean air or fresh water, are those which are non-excludable and non-rivalrous. This respectively means that one person cannot exclude others from utilising the good and that their usage of this good does not preclude others’ use. As individuals can freely make use of public goods, these items face the risk of being overused and eventually depleted.
Signs of the ramifications of the tragedy of the commons are clear. Coffee plants are a natural, shared resource, but the overconsumption of this good has resulted in the endangering of 60% of the plants’ species. Similarly, as the population grows, the need for food supply commensurately increases. This has pushed many species into extinction. Evidently, overfishing of the Pacific bluefin tuna has resulted in a population level of approximately 3% of their original population. In addition, fresh air is a public good that all humans rely on. However, in Australia, our air quality is depreciating due to private vehicle travel growing nearly 10-fold in the last 70 years, leading to increased levels of vehicle exhaust. Subsequently, Australia has become one of the world’s highest per-capita emitters of greenhouse gases.
A decentralised and trustless blockchain can be used to record individuals’ involvement in funding or overusing public goods. Moreover, blockchain technology has the capacity to create verifiable social incentives for communities to benefit the society around them through digital ownership certificates built with non-fungible token (NFT) technology. If ReFi is correctly implemented and widely adopted, the world would see adequate funding of public goods, ergo mitigating the detrimental effects of the tragedy of the commons.
The Tragedy of the Commons
Despite knowing the purpose of ReFi, this financial model is not an easy idea to understand. However, over 90% of us have heard a story about the tragedy of the commons and a world in need of a regenerative model of finance.
Though most remember the Lorax for his cranky nature, Dr Seuss’ story, The Lorax, actually speaks to the underlying societal and economic issue of overconsumption of shared resources – the tragedy of the commons. Many writers analogise the tragedy of the commons to The Lorax for this exact reason.
Without going into too much detail, the Once-ler begins cutting down the Lorax’s truffula tufts (trees) to make thneeds (jumpers). Although the Lorax attempts to stop the Once-ler, he is powerless to prevent the destruction of the natural habitat around him. Of course, the culling of the trees leads to the creatures who rely on the truffula tufts being forced out. What was the Once-ler’s incentive? To satisfy his paying customers’ desire for thneeds.
Like all public goods which are not sufficiently funded, the Lorax’s truffula tufts eventually are depleted. The natural environment is destroyed, resulting in the once vibrant, warm town descending into a bleak, lifeless landscape.
The Lorax flies away, leaving only a pile of rocks with one word; “UNLESS”. Initially, the meaning of “UNLESS” was unclear. Yet, once a young boy comes to the town the connotations of the Lorax’s message become clear. “UNLESS someone like you cares a whole awful lot, nothing is going to get better. It’s not.”
Rather than using up public goods, like trees, until they have been depleted, Regenerative Finance is about incentivising the financing of public goods – rewarding those who create positive externalities such as planting trees. Indeed, like the Lorax who proclaims; “I am the Lorax. I speak for the trees. I speak for the trees, for the trees have no tongues”, advocates for ReFi are striving to speak out for the depleting public goods. Ultimately, ReFi encourages us to care a whole lot about benefiting the wider society and the world we live in.
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