This summer, many regions around the world are experiencing record-breaking heat. The Kyoto Protocol, the international treaty adopted more than 25 years ago in 1997, was designed to prevent this by reducing greenhouse gas emissions via, among other things, initiatives that incentivize positive environmental impact, such as emissions trading. However, the ways that organizations have executed the protocol have been uncoordinated and opaque.
At SBS Boston (opens new window) last April, the startup Topl (opens new window) presented a new solution from the perspective of creating a new blockchain to go beyond carbon offsets. The goal? To unlock tangible financial value for businesses whose core operations are centered around making a positive impact.
In this Transcription of their talk (opens new window) at SBS Boston, Topl’s Chief Growth Officer, Erin Murphy, and Head of Developer Ecosystem, Nik Edmund, dive into the current problematic patterns of capital allocation associated with the Kyoto Protocol, the team’s philosophical approach to building, and the importance of reversibility for impact tokenization.
# Topl’s Community-Driven Approach to Blockchain Building - 00:04 (opens new window)
When I say we've been building a blockchain, we’ve been building a blockchain from scratch. We've been lucky to be able to work with the community members and projects on the ground, like reference customers, reference projects, and currently this impact token pilot, to really have a community-driven and community-first approach to build a blockchain from the ground up.
Everything from our consensus layer to the way we’re distributing both nodes, creating transactions and tokens has been crafted and created with feedback that we've received through the years from the committee.
# Behind Topl’s ‘Impact Token Pilot Program’ - 00:47 (opens new window)
We use a mode of developing with the community. We call it Reference Customer Programs. What this typically means is that we identify a product that we're thinking of building and we build it alongside the community that it's built for. One of the projects that we're working on now is the Impact Tokenization Pilot. It incentivizes impact beyond carbon offsets.
Most people in this room are familiar with carbon markets. Generally, we can say that the Kyoto Protocol (opens new window) set things in motion so that we can actually assign a monetary value to something that was previously deemed an intangible asset. That's obviously a step in the right direction, but if we look at the market right now, it's pretty fragmented.
So, what are the repercussions of that? We actually see several organizations, and large institutions, vanguarding carbon tokenization or carbon credits. In response to that, there's been sort of a groundswell of smaller, more focused carbon accounting and carbon credit issuance organizations that are really rooted in more climate science.
If we think about soil carbon, biomass, or blue carbon, these are really specific types of registries. We think that this is a really interesting trend that we wanted to examine in the world beyond carbon.
Topl posits that the growth of the sustainable, high-quality token ecosystem offers an opportunity to test the demand for non-carbon impact tokens.
We know that there's no shortage of supply side when it comes to doing good things and making an impact in the world. But it's taken us long enough – and it's been complicated enough – to get people to agree to pay for a carbon offset. Will they do that for other types of environmental impact or even social impact? To assess this demand side, we've launched this pilot
# The Community Pioneering Impact Tokenization - 2:52 (opens new window)
We're working with nine organizations that span from INGOs, to smaller NGOs, to social companies, and what they have in common is that impact is core to their business operations. They often haven't been able to find real value creation in that.
Sometimes they're able to secure a ‘green premium’ for their products or they build goodwill with their communities and with stakeholders, but we're talking about tangible, financial value, and they're not able to garner that.
We're trying to understand if we can actually develop the marketplace for these positive externalities.
Here is a sampling of the organizations we're working with: Jibu (opens new window), Sanergy (opens new window), Interpeace (opens new window) and Médecins Sans Frontières (opens new window). As you can see, they work across Sustainable Development Goals (SDGs).
For example, Sanergy (opens new window) is a for-profit company. Doctors Without Borders (opens new window) is one of the largest nonprofits in the world. What the companies we work with have in common is interest in entering the Web3 space in a way that actually has a tangible financial value for them.
So, they are asking: ‘Can I create a token that represents the positive externalities that someone will actually buy?’
What's important to note is that we use the SDGs as a framework. We realize it's not perfect, but the SDGs are a globally recognized framework created in a truly consultative process.
What's important is that most of these organizations aren’t just pigeonholed in one area of impact. That's the complexity that we're talking about here, and that's what we think is really important with our token development. How do you actually develop a token that can help mirror what's going on in the real world – for example, we work in water, but this actually has knock-on effects in education, public health, or other areas.
# The Patterns of Capital Allocation: Fragmented and Problematic - 4:45 (opens new window)
I'll quickly touch on some of the benefits for investors and investees — but the primary thing we're trying to do here is drive liquidity. Right now, there's this space, in impact investing in particular, that is primarily the purview of multilaterals, some bilaterals, and institutions — sophisticated family offices, institutional investors, etc. Unless you know Ethic Hub (opens new window), an awesome project building on Celo, there's not really an easy way for a lot of people like you and me to just invest in an impact project. We can go to Donors Choose (opens new window) or GoFundMe (opens new window) and donate to a project, but there are other projects, like Ethic Hub that are returning 9 percent to investors.
This not only creates an opportunity for retail investors, but also for this huge amount of supply. Right now, there are so many organizations in the world that can benefit from ancillary revenue or a democratized capital allocation pool. We're really trying to break these legacy patterns of, ‘okay, we're going to invest money into this large institution that's going to – once again – invest on our behalf into something that we decided was important in an office in Geneva.’
# Topl’s Philosophical Approach to Creating a Token Ontology - 6:06 (opens new window)
Some of the best ways we can really capture a lot of that value, a lot of that data, and contextualize it from all the streams of data we're already collecting on a day-to-day basis, is through tokenization.
Data has become ever-increasingly important to markets and has become a market in itself. Tokenization is a really great way to do that.
An even better way to do that is through creating standards around how we're actually collecting that tokenization into different standards. If you're familiar with ERC 20 and ERC 721—fungible and non-fungible tokens—and ERC1155s or Hypercerts (opens new window), you know these are fantastic projects.
What I'm seeing and what I'm not seeing is that with these token standards, they are really chasing after the functionality of ‘what are the things I can and can't do with tokens?’
Hypercerts has been a great answer but more from ‘the form’ side of things. You have this great impact token standard that Hypercerts (opens new window) is developing, as far as scope of work and scope of impact. They are, for example, setting the dates of when this impact happens and trying to get better evaluation and measurement of the impact.
You have the form and you have the function, but we're still trying to figure out where the form follows the function.
When I'm creating these token standards, I ask, ‘what can I do with them to create the forms on top that make sense for a more intuitive angle or more intuitive sense?’ When I am looking at this hypercert sitting in my wallet, I am trying to figure out how I would almost immediately know what to do with it or how it works.
What we've taken is more of a philosophical approach to creating a token ontology. This is really digging down and pulling apart the threads of what are the commonalities and differences between these different standards. We’re then drilling down further into ‘how we can create more of a foundational framework and layer that we can build upon so people can create standards on top of this?’
We've been working on this challenge of mapping impact tokens and having some sort of impact data where we can see commonalities between everything from carbon credits to water credits, and even nitrogen credits. From there, we start mapping the commonalities, but more importantly, the differences between them.
The most important thing is the relationship between them. We are talking about atomicity, fungibility, or reversibility? What are the different relationships between those concepts, and how do they work together?
# The Value of Reversibility for Impact Tokens - 8:54 (opens new window)
Fresh Life (opens new window) is the non-profit arm of a for-profit social good company operating in Nairobi, Kenya. They operate primarily in informal settlements or what is colloquially called ‘slungs’. They have developed a really sustainable and circularly economical latrine system. The ultimate goal is to provide more people with clean sanitation options and to remove human waste from water sources.
This can't really be neatly bucketed into clean water and sanitation, because they're also, through their model, empowering a lot of micro-entrepreneurs who run these latrines. They're also empowering the entrepreneurs who take the waste and create fertilizer and other byproducts, so it really is a very complex web of knock-on effects or other types of impact that are in themselves impact. These are assets and in the carbon context. The carbon space thinks about these things as co-benefits, but we would argue that these co-benefits are assets in and of themselves.
To extend upon that, I see assets as splitting the data as it's coming in into the tokens themselves.
Before we even get to the step of something like a hypercert, we would take the data that you would put into one hypercert and split that apart.
In this example, we have actually four different tokens:
- The amount of waste removed
- The number of people served, and
- The credit that is created from the actualization of that data together
I use reversibility, just as an example, to highlight where data collection is easier if you can split assets apart and look at relationships. You make that data collection easier if you can split it apart. I don't have to have all that data immediately available at the time I want to go create the credit at the end. I can put that data up there as quickly as I receive it, and then once I have enough to contextualize that into a credit, then I can create that credit afterward.
But what if there's a problem or a dispute with how that credit was created or the amount of waste that was removed was actually far less than had originally been noted?
How do I actually roll that back or burn that token and destroy it because that dispute exists?
One of the nice things about reversibility in this, is that you could talk about fractionalizing an NFT. This is where you break the NFT into a thousand pieces and the way you merge the NFT back together is how you roll the thousand pieces backward to reset things to a new token after you fix a problem. But you need to know what the problem is in the first place. Reversibility, in this aspect, is referring to the fact that I can take the NFT and the transaction I create and burn the NFT so that I have a better lock on it. I can, for example, make you give me a reason as to why you are burning that asset. I can have someone tell me which one of several issues, if not all of them, is the core reason for burning this asset in the first place.
That transaction is recording the actual events and increasing the transparency around both the creation of that token, but also the destruction of that token.
# Get Involved in Topl’s Impact Token Pilot - 12:45 (opens new window)
We have a couple of asks for the community.
We really love for people to interact with us on social media and ask them questions to help them understand their challenges. That's really core to what Topl does– building alongside the people that we're building these products for.
We’re also working on Topl Improvement Proposals (TIPs), which is a formalization of both implementations on a blockchain level, but also standards or documentation around building on the blockchain. It’s for both developers and non-developers to help us work with companies to build out TIPs and create formalizations of how we can actually create these token standards from the model that we're viewing them at.
I would love for anybody interested to follow up with us and help!