18th Jun 2024 Gemini 1.5 Pro
In this episode of The Regeneration Will Be Funded, host Matthew Monahan interviews Rez, co-founder of Solid World, a startup focused on scaling the climate finance markets by addressing key bottlenecks and challenges. The discussion delves deep into Solid World's system design, covering intricate financial and technical details, showcasing Rez's expertise and commitment to revolutionizing climate finance.
Rez highlights a significant challenge in the carbon markets – the lack of upfront financing for carbon projects. He explains that projects like mangrove restoration require substantial initial investments with long payoff timelines, often exceeding 10-20 years. This delay in realizing returns makes such projects less financially viable. Solid World tackles this challenge by providing forward financing, enabling projects to access funds for their carbon credits much earlier than traditional models allow.
Rez argues that projects facing difficulty securing financing are often the most impactful and additional. He contrasts community-based reforestation initiatives, which genuinely depend on carbon finance, with projects like eucalyptus monoculture forests, which might proceed even without carbon credits.
"The thing I am seeing is that the harder a project is to finance, generally also the more additional and more real it is."
Solid World recently introduced CRISP (Carbon Risk Identification and Scoring Principles), a framework for assessing the delivery risks of nature-based carbon removal projects. Rez emphasizes the need for such frameworks to mitigate the risk of under-delivery, citing examples like Vera registry community reforestation projects, which have historically under-delivered by as much as two-thirds.
CRISP analyzes potential causes of under-delivery, including overestimation of project impact and unforeseen events like natural disasters. Rez explains how Solid World uses CRISP to determine the maximum forward-selling capacity for projects, ensuring financial stability and transparency.
"So we need some sort of frameworks to protect the industry from itself to some degree."
To address the lack of liquidity and standardization in the carbon markets, Solid World creates fungibility between projects by grouping similar projects together. They achieve this through a two-tiered governance system: Solid World conducts due diligence on projects, while a Curation Council, comprised of liquidity providers for each project category, holds veto power. This system ensures the integrity and comparability of projects within each pool.
Solid World then issues fungible tokens representing forward contracts for carbon credits. For instance, CrispM tokens represent Crisp Scored Mangroves. Projects receive a fraction of a CrispM token for each ton of carbon they commit to delivering, with the fraction determined by the delivery timeframe. This mechanism accounts for the time value of money and allows for the discounted purchase of future carbon credits.
"The thing about the voluntary carbon market is that a ton is not a ton is not a ton. Every ton is priced differently because it's perceived differently by the market because there's more or less value perceived in it."
Solid World leverages Automated Market Makers (AMMs), a DeFi innovation, to facilitate efficient trading in the carbon market. AMMs replace traditional order books, which struggle in low-liquidity environments like the carbon market. In an AMM, liquidity providers deposit assets into a pool, and a mathematical formula determines the exchange rate between the assets.
Solid World also employs concentrated liquidity, another innovation pioneered by Uniswap, to enhance market depth and facilitate larger trades without drastically impacting prices. By concentrating liquidity within a specific price range, the platform reduces slippage and improves overall market efficiency.
"So in DeFi, we have this great innovation called an automated market maker, which is a structure where instead of having this organization that does a bunch of very complex math to figure out like where the buy and sell orders are supposed to be, it's a more simplified model where you have, for example, two piles of assets, like, you know, let's say token A and token B."
Recognizing the importance of incentivizing liquidity providers, Solid World has developed a mechanism to distribute a portion of the value accrued over time to these crucial actors. As forward contracts held in the system move closer to maturity, their value increases due to the diminishing time discount. Solid World captures this value increase and distributes it to liquidity providers through a reward staking contract. This model aligns incentives by rewarding those who contribute to the market's liquidity and stability.
"So at SaltWorld, we have this, well, a couple of interesting innovations, but one of them is just the fact of, I'm reminding you of this discount, right? So before we talked that when you are five years away from issuance, you might only get like, let's say 0.6 Crisp M for every one ton."
Solid World generates revenue by charging fees on transactions within its marketplace. They currently charge suppliers a 2% fee and buyers an approximately 5% fee for redeeming their carbon credits. This model ensures that Solid World's success is directly tied to the volume and value generated within its platform, promoting a healthy and sustainable ecosystem.