Toucan Protocol Review – Carbon Markets on the Blockchain

In our quest to find influential and ethically-driven projects in the blockchain industry, we bring you this Toucan Protocol review. While we have already mentioned this project in our Ethical DAOs article, we wanted to go deeper into the tech that makes it tick.

Toucan has a mission to bring carbon markets to the DeFi marketplace. It wants to empower both individuals and businesses to contribute towards a cleaner planet. But how does this exactly work? Scholars have criticized carbon markets in the past for greenwashing, so does Toucan help us alleviate this issue? In this Toucan Protocol review, we analyze how this protocol functions and how its essential elements intertwine. We will also provide its pros and cons which should allow us to answer these questions thoroughly.

Before you can understand the solutions that Toucan brings, let’s explore the notion of carbon markets and how they function.

A Short Introduction to Carbon Markets

The carbon market is an initiative that places an economic cost on carbon emissions. This monetization of pollution has a goal to encourage countries and businesses to reduce their CO2 emissions. Currently, governments set a price for CO2 emissions, which incentivizes businesses to pollute less. Otherwise, they need to pay for the CO2 they release into the atmosphere.

Businesses and governments can participate in various schemes that reduce the amount of GreenHouse Gasses (GHG) released. This reduction, prevention, or removal of carbon emissions, is called a carbon offset. Businesses or governments can contribute to generating carbon offsets by participating in various activities such as renewable energy, biogas, or reforestation.

Users can trade these carbon offset on the carbon market to receive carbon credits. These financial units of measurement represent a tonne of CO2 removed from the atmosphere. Various entities can purchase carbon credits to offset their unavoidable polluting activities and contribute financially towards GHG reduction projects. Once these credits are used, they are converted into offsets, retired, and cannot be traded anymore. Independent organizations such as Verra or the Gold Standard track and verify the creation of carbon offsets, as well as their usage.

This mechanism has given birth to the voluntary carbon market. You see, compliance markets are heavily limited to political entities and only a set number of industries. The voluntary carbon market, on the other hand, empowers businesses across all industries to offset carbon credits.

That said, like many heavily regulated practices, the carbon market is rife with red-tape barriers. Accessing the market requires long and tedious administrative efforts, and the entire process ultimately remains quite opaque for everyone involved. And this is where Toucan Protocol comes into play.

What Is Toucan Protocol?

toucan homepage

Toucan Protocol is a blockchain project that aims to bring the carbon market into everyone’s reach. To ensure that it doesn’t cause more harm than good, Toucan runs on Polygon, an energy-efficient and eco-friendly layer 2 solution for Ethereum.

With Toucan, individuals and businesses that are recognizing the importance of reducing their GHG emissions can buy tokenized carbon credits on the blockchain. The goal is to make these carbon credits more liquid and easily interchangeable between companies that create them and companies that want to buy them for offsetting.

To achieve this, Toucan uses three essential mechanisms, the Toucan carbon bridge, carbon pools, and Carbon Tokens. Let’s have a look at these in more detail to better understand the core of our Toucan protocol review.

Toucan Carbon Bridge

The Toucan Carbon Bridge is the backbone of the protocol, which enables users to bring their registered carbon credits onto the blockchain. Toucan is in partnership with the Verra registry and as such, has worked out a set of rules on how bridging verified carbon tokens can be done using its protocol. In a nutshell, the main steps for bridging are:

  • Initializing – the first step of the bridging process begins with the creation of a new NFT on Polygon: the BatchNFT. At this point, the NFT doesn’t have any offset metadata linked to it, but has a unique identifier.
  • Retirement on Verra – the next step is to retire the carbon credit that will be tokenized on the Verra registry as if it has been already used. This way the credit cannot be double-spent or another token created using the same credit. For this step, the user needs to own a Verra account and have some offset credits stored there.
  • Linking the BatchNFT with the retired carbon credit – next, the protocol requires that the previously created BatchNFT is linked with the unique serial number provided by Verra at the moment of retirement. This step allows linking the legacy registry with the on-chain registry of the Toucan protocol.
  • Verification and approval – the final part of the process is the validation of the previous data entries by a Toucan Validator. This trusted entity in the ecosystem verifies the veracity of the data and approves it before it is recorded on the blockchain.

That being said, NFTs, in general, can be quite impractical regarding their liquidity. You would need to find a buyer for the entire BatchNFT, which can be tricky in a highly illiquid market. But there’s one final step in the bridging process that solves the illiquidity of the carbon-based NFTs.

What Are the Toucan Carbon Tokens (TCO2)?

The last step in the Toucan bridge process allows users to fractionalize the BatchNFTs into smaller, fungible ERC-20 tokens. These so-called Toucan Carbon Tokens or TCO2 represent  1 unit of carbon offset which equals 1 tCO2e (tonne of carbon dioxide equivalent).

It’s this last step that adds much-needed liquidity and transparency to the market. Each ERC-20 token minted though the fractionalization has a proof of origin that links it to the BatchNFT used to create it. This means that every TCO2 can be traced back to the Verra registry entry and use the distributed ledger to verify every transaction where it has been used.

The TCO2 tokens carry the metadata from the NFT, which is essential in this narrative. You see, not offset types are equal in the carbon market and some are more sought after than others. Different carbon offsets can trade at different prices, and for instance, forestry projects have better ratings than renewable energy projects.

This creates another problem, as TCO2 tokens lose their liquidity. Users could discriminate against them and select those that are more likely to find a buyer. This brings us to the next point in our Toucan Protocol review, the Carbon Pools, which creates a liquid market for all types of offsets.

What Are Carbon Pools?

As we mentioned earlier, carbon offsets are not equally created. They depend on various innate characteristics that impact their appeal and value – the country of origin, type of project, carbon standard used, and additional certifications. This results in users trading offsets like differentiated products instead of fungible commodities.

Carbon Pools solve this issue by regrouping multiple project-specific tokenized carbon tonnes (TCO2 tokens) into more liquid carbon index tokens. This allows for better price discovery for different classes of carbon assets and removes the issue of discrimination of different TCO2 types.

Users can deposit their TCO2 tokens in these pools and receive pool-specific tokens. They will be able to trade these index tokens on the DeFi marketplace like any other token. For instance, they can be deposited on lending platforms or used for liquidity mining, instantly increasing their financial use cases and liquidity.

How Does Toucan Protocol Work in Practice?

To complete our Toucan Protocol review, let’s try to help you understand how these pieces fit together and form a complete DeFi puzzle. The best way would be to illustrate it with an example.

For instance, the initiator could be any carbon credit owner. This could be a business that produces carbon offsets or an international company that purchases credits for offsetting.

  1. The user bridges the purchased credits through the Toucan Protocol and retires them from their respective registries (Verra or GS).
  2. The Toucan Bridge links these credits to newly created BatchNFTs.
  3. The protocol uses the BatchNFTs to mint TCO2 ERC-20 tokens.
  4. The user deposits the newly minted TCO2 tokens into the KlimaDAO Carbon pool which issues BCT (Base Carbon Tonne) tokens.
  5. The user can now trade these BCT tokens on various decentralized exchanges, use them as collateral, and even make profits through lending protocols.

All in all, the Toucan Protocol provides liquidity to carbon credit owners. But more importantly, it allows them to use them on the decentralized blockchain marketplace like any other tokenized commodity.

Blockchain-Powered Carbon Markets – Greenwashing or Genuine Solution?

And just like that, we are back to our initial debate. In this Toucan Protocol review, we saw some of the advantages of the protocol and how it can provide a more transparent, liquid, and accessible carbon market. What’s more, tokenized carbon offsets provide increased monetary incentives to businesses to buy or produce more carbon credits.

With the possibility of linking carbon offsets into DeFi, businesses that produce credits can receive additional rewards for their efforts. As such, the Toucan Protocol and tokenized carbon offsets can become a major driving force in the carbon market.

However, the main subject for debate here should be the carbon market itself. Many believe that this mechanism is just allowing big corporations to continue polluting. Big oil has the means to buy sufficient credits without reducing its carbon footprint in the slightest. It’s true that these funds would go towards companies that actively produce carbon offsets. That said, for a significant reduction and a sustainable future, we would need to see big polluters cut down their own CO2 production.

Monetary incentives like Toucan Protocol could play a double role in this narrative. On the positive side,  it could help businesses get initial funding towards entering the carbon offset industry (reforestation, carbon soil improvement, etc.). On the other hand, it can also allow big corp to make even more money from their carbon credits. It would reduce their overhead from carbon credit purchases, removing the incentive to pollute less.

Concluding our Toucan Protocol Review

So, what’s the verdict for this Toucan Protocol review? Is Toucan Protocol a genuinely ethical project or does it just contribute to more greenwashing in the carbon market? Well, while experts believe that carbon offsetting is far from being a standalone solution, we need to start somewhere.

The carbon market is an intermediary solution that should ultimately contribute to carbon emission reduction at a grand scale. It provides incentives to smaller businesses to produce offsets and contribute towards reducing GHG emissions. Toucan Protocol, at its core, empowers these businesses by providing them with increased liquidity for their carbon offsets. The project manages to streamline the process through the blockchain ledger and improve it in almost every way.

However, there’s a reason why experts often link carbon markets to greenwashing. Corporations will always find a way to manipulate the system and continue polluting. Without a global regulative,  big oil could exploit projects like Toucan to reduce overheads and even further diminish their polluting penalties.

To conclude, while it isn’t ethically wrong, using this protocol won’t magically make you a savior of the planet. While the carbon market sector will certainly grow in the future, we are yet to see its true impact on the reduction of GHGs.

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