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## What is ReFi? {#what-is-refi}
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**Regenerative finance (ReFi)** is a set of tools and ideas facilitated by Ethereum that create economies which are regenerative in nature rather than extractive or exploitative. Eventually, extractive systems deplete the resources available and collapse; without regenerative mechanisms, they lack resilience. ReFi operates on the assumption that the creation of monetary value must be decoupled from the unsustainable extraction of resources from our planet and communities.
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**Regenerative finance (ReFi)** is a set of tools and ideas built on top of blockchains, that aim to create economies which are regenerative, rather than extractive or exploitative. Eventually, extractive systems deplete the resources available and collapse; without regenerative mechanisms, they lack resilience. ReFi operates on the assumption that the creation of monetary value must be decoupled from the unsustainable extraction of resources from our planet and communities.
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Instead, ReFi aims to solve large-scale issues like [climate change](https://www.un.org/en/climatechange/what-is-climate-change) as well as more regionally concentrated crises—environmental, communal, or social—by creating regenerative cycles. These systems create value for participants while simultaneously benefitting our ecosystem and/or communities. In economic parlance, regenerative financial systems incentivize the production of [positive externalities](https://www.economicshelp.org/micro-economic-essays/marketfailure/positive-externality/).
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Instead, ReFi aims to solve environmental, communal, or social problems by creating regenerative cycles. These systems create value for participants while simultaneously benefiting ecosystems and communities.
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ReFi leverages one of capitalism’s strong suits—its ability to rapidly deploy capital toward activities that offer a return to stakeholders—in the best interests of said stakeholders, our planet, and future generations. It draws on the theory of [regenerative economics](https://www.klimadao.finance/de/blog/refi-and-the-realization-of-a-regenerative-economy) pioneered by John Fullerton of the [Capital Institute](https://capitalinstitute.org) to work toward the realization of eight interconnected principles that underlie systemic health:
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One of the foundations of ReFi is the concept of regenerative economics pioneered by John Fullerton of the [Capital Institute](https://capitalinstitute.org). He proposed eight interconnected principles that underlie systemic health:
To do this, ReFi projects utilize[smart contracts](/developers/docs/smart-contracts/) and tools pioneered in the [decentralized finance (DeFi)](/defi/)space to incentivize regenerative behaviors and facilitate large-scale collaboration.
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ReFi projects realize these principles using[smart contracts](/developers/docs/smart-contracts/) and [decentralized finance (DeFi)](/defi/)applications to incentivize regenerative behaviors and facilitate large-scale collaboration.
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ReFi also overlaps with the [decentralized science (DeSci)](/desci/) movement, which uses Ethereum as a platform to finance, create, review, credit, store, and disseminate scientific knowledge. Such processes for distributed knowledge generation play a critical role in developing verifiable standards and practices for implementing and monitoring regenerative activities like planting trees, removing plastic from the ocean, or restoring a degraded ecosystem.
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ReFi also overlaps with the [decentralized science (DeSci)](/desci/) movement, which uses Ethereum as a platform to finance, create, review, credit, store, and disseminate scientific knowledge. DeSci tools could become useful for developing verifiable standards and practices for implementing and monitoring regenerative activities like planting trees, removing plastic from the ocean, or restoring a degraded ecosystem.
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## The current state of ReFi {#refi-current-state}
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ReFi is in its early stages, and has so far found its best fit in projects that seek to shape financial incentives toward the meeting of United Nations [Sustainable Development Goal 13 on Climate Change](https://sdgs.un.org/goals/goal13). Tokenization of carbon credits from the **[voluntary carbon market (VCM)](https://climatefocus.com/so-what-voluntary-carbon-market-exactly/)** is currently the most prominent use case.
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ReFi is still very young, and so far it has found its best fit in projects related to carbon markets. Tokenization of carbon credits from the **[voluntary carbon market (VCM)](https://climatefocus.com/so-what-voluntary-carbon-market-exactly/)** is currently the most prominent use case.
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Carbon credits and carbon markets existed long before the term ReFi was coined. The seeds were planted at the Earth Summit in Rio de Janeiro in 1992, when 160 countries agreed to the [UN Framework Convention on Climate Change (UNFCCC)](https://unfccc.int/). There are now several government-mandated carbon markets (‘compliance markets’) that aim to establish a carbon price via laws or regulations controlling the supply of permits to be distributed by national, regional, and global regimes. The VCM is an entirely separate market in which private actors voluntarily buy and sell carbon credits that represent certified removals or reductions of greenhouse gasses in the atmosphere. However, despite its development over recent decades, the VCM continues to suffer from a variety of issues, such as highly fragmented liquidity, opaque transaction mechanisms, high fees, very slow trading speed, and lack of scalability to meet the necessary 10–20x growth that the [Taskforce on Scaling the Voluntary Carbon Markets](https://www.iif.com/tsvcm) predicts is needed in the coming decade for the VCM to deliver on its potential to mitigate the climate crisis.
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Existing technology for validating, transacting and consuming carbon credits can be improved drastically by transitioning the VCM to the new blockchain-based **[digital carbon market (DCM)](https://www.klimadao.finance/blog/klimadao-introduction-to-the-digital-carbon-market)**. This open, transparent ecosystem ensures publicly verifiable data, access for a broad range of users and greater liquidity to scale up the amount of capital deployed to fund climate action.
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Transitioning the VCM to the new blockchain-based **digital carbon market (DCM)** might be an opportunity to upgrade the existing technology for validating, transacting and consuming carbon credits. Blockchains allow for publicly verifiable data, access for a broad range of users and more liquidity.
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ReFi projects employ blockchain technology to alleviate many of the problems of the traditional market:
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- In the DCM, liquidity is concentrated in a small number of [liquidity pools](https://www.gemini.com/cryptopedia/what-is-a-liquidity-pool-crypto-market-liquidity) that can be freely traded by anyone. Large organizations as well as individual users can use these pools without manual searches for sellers/buyers, participation fees, or prior registration.
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- All transactions are recorded on public blockchains such as Polygon, a scaling solution for Ethereum. The path each carbon credit takes due to trading activity is traceable forever as soon as it is made available in the DCM.
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- All transactions are recorded on public blockchains. The path each carbon credit takes due to trading activity is traceable forever as soon as it is made available in the DCM.
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- Transaction speed is nearly instant. Securing large amounts of carbon credits via the legacy markets can take days or weeks, but this can be achieved in a few seconds in the DCM.
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- Trading activity occurs without intermediaries, which charge high fees. Data analytics firm AlliedOffsets found that digital carbon offset assets represent a [62% cost improvement compared to equivalent traditional credits](https://www.klimadao.finance/blog/klimadao-analysis-of-the-base-carbon-tonne).
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- Trading activity occurs without intermediaries, which charge high fees. Digital carbon credits represent a [62% cost improvement compared to equivalent traditional credits](https://www.klimadao.finance/blog/klimadao-analysis-of-the-base-carbon-tonne), according to data from one analytics firm.
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- The DCM is scalable and can meet the demands of individuals and multinational corporations alike.
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Many of the issues responsible for slow growth and impracticality in the VCM, as well as its inability to scale, are either mitigated or solved completely by the transition to a fast, energy-efficient DCM and the applications built on it.
|**Opaque**: Process often handled via RFPs to source carbon based on type, volume, price, etc. Majority of trades take place via **over-the-counter (OTC)** deals negotiated with little-to-no record afterward. |**Transparent**: All products and trades are immutably recorded and accessible to all interested parties in the DCM. Multiple offsetting pool types exist with defined criteria, pricing, and immediate liquidity. |
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| **High cost**: The process is time-consuming, with high engagement costs. There are numerous decentralized exchanges providing reliable trading outlets 24/7, reducing both time and fee costs. Broker and other fees, including margins, can range between 2.5% and 200%. | **Dynamic cost**: Costs are dynamically shown in real time. Fees are in the region of 0.5%.
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|**Not scalable**: Multiple product sources and intermediators make for a highly fragmented space. High friction due to due-diligence complications affecting market participants in one-off deals. High levels of counterparty risk. |**Readily scalable**: Carbon bridging infrastructure leveraging blockchain technology provides immense scaling potential to build digital carbon credit liquidity. New automated infrastructure provides a highly efficient route to the blockchain-enabled DCM. |
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|**No yield**: Holders of carbon credits lack additional return opportunity without trading and incurring additional costs. |**High yield**: Through digital carbon assets, additional returns are possible by utilizing other DeFi-native applications that integrate carbon as collateral. |
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| **Slow speed**: Forward purchases of future carbon credits are made using a bespoke **Voluntary Emission Reduction Purchase Agreement (VERPA)** contract, while immediate orders typically take weeks to execute OTC, and even longer if you are buying at scale. | **High speed**: Purchase any amount of carbon in minutes rather than weeks, at almost any size and with low slippage.
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|**Low liquidity**: Offsets in OTC trades are often broken into pieces as there are not enough offsets in a particular project (or held by a particular broker) to satisfy the trade. |**Deep liquidity**: With deep liquidity having already been established on chain, particularly on Polygon, large trades are possible with low slippage and can be executed with speed. |
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### The current building blocks {#current-building}
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Four major components make up the current landscape:
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