Following the launch of our ReFi project database, we are publishing a series of articles that provide an overview of each category in our taxonomy. Next is investment instruments.
As per our definition, ReFi investment instruments are projects offering on-chain retail investment opportunities to incentivise ecological and social impact. The broader essence of projects in this category is to move away from the philanthropy model and towards a mutually beneficial system where everyone wins. They aim to create a strong connection between retail investment dollars and on-ground impact - something that is missing from today's ESG investment options.
In this overview, I dig deeper into the different models used by these projects, explore case studies, identify barriers to adoption, and provide a future outlook.
Investment Instrument Landscape
agriiDAO
agriiDAO is revolutionizing the African food system by creating a zero-waste, nutrient-preserving supply chain.
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Alternun
Alternun transforms mining reserves into ReDeFi-focused projects through digital exploitation.
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Deentra
Deentra is utilising the solar as a service model to provide green energy across Italy.
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EthicHub
EthicHub is a ReFi protocol helping unbanked farmers access capital at low interest rates.
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keenest
Keenest enables retail investors to invest in the most promising climate tech solutions in exchange for tokenized proof of impact.
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LandX
LandX bridges the gap between agricultural commodities and investors by tokenizing real-world crops.
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penomo
penomo brings decentralised finance and liquidity to accelerate the renewable energy revolution.
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Unergy
Unergy brings clean energy to anyone in the world through sustainable and digital investments.
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There are currently five core models used by investment instrument projects:
- Asset-backed tokens - Asset-backed tokens (ABTs) are backed by real-world assets such as agricultural or solar farms and give investors fractional ownership of the underlying assets. Investors generate ROI through price appreciation and dividends, while the project offering the ABT can invest the funds raised to increase the underlying asset's value.
- Green bonds - In the ReFi context, green bonds are debt instruments that impact ventures issue and sell through ReFi platforms. The capital is then used to acquire revenue-generating infrastructure, such as solar panels, that can be used to pay off the debt. Unlike other debt instruments in this category, green bonds are registered instruments that provide investors with legal recourse in case of default.
- Fixed-term deposits - In this model, users deposit tokens (usually stablecoins) to fund revenue-generative green initiatives, like regenerative agriculture, solar energy, and ecological credits, and earn interest in exchange. This model provides investors with a relatively low-risk and predictable instrument that directly connects to impact on the ground.
- Lending pools - Lending pools allow investors to aggregate funds for loan to impact ventures. To borrow from the pool, approved borrowers deposit tokenised collateral, such as real estate or equity, and are able to withdraw funds according to pre-determined advance rate. Upon repayment, the interest and principal are put back into the pool and the investors can decide to whether reinvest or withdraw their money.
- Peer-to-Peer (P2P) lending - ReFi platforms use the P2P lending model to enable direct loans between investors and impact ventures. Investors select the impact ventures, sign a loan agreement, and transfer the funds to the venture via the ReFi platform. Upon maturity, the project repays the loan with the agreed interest to the investor through the same platform.
| Asset-backed tokens | Green bonds | Fixed-term deposits | Lending pools | Peer-to-Peer (P2P) lending |
|---|---|---|---|---|
| Alternun | Penomo | Unergy | LandX | ReFi Hub |
| The SolarWise | EthicHub | |||
| Deentra | ||||
Examples
Let's look at five case studies of projects offering on-chain retail investment instruments:
Alternun
Alternun provides an alternative to extractive gold mining by minting ATNLP tokens backed by unmined gold reserves. Investors purchase the tokens, deposit them onto the protocol, and then collectively decide how to invest 50% of the pool. In return, the investors get 5% of the revenue from the projects they invest in.
Unergy
Unergy is a giga-solar infrastructure provider that enables investment in its clean energy portfolio through a fixed-term deposit model. It offers two investment schemes: uWatt and uAdvanced. Investments in uWatt are made by purchasing uWatt tokens. With uAdvanced, investors make an initial deposit of 2,700 USDT, followed by recurring monthly deposits of $100 or more. Interest on the deposits is paid out at the end of each month.
ReFi Hub
ReFi Hub is a platform that uses the P2P lending model to facilitate retail financing for private impact ventures. Investors can use it to select from a range of ventures, mint loan agreements as tokens, and transfer the USDC to the ventures. Over time, the venture repays the principal and interest into a smart contract. Investors can claim their payments at regular intervals.
The SolarWise
The SolarWise leverages the asset-backed token model to drive micro-investments and enhance liquidity in the renewable energy sector. Its first farm has 200 solar panels which have been tokenised into 3200 solar NFTs. Owners of these NFTs share in the profits generated from the energy produced.
LandX
LandX is an agricultural financing protocol that uses the lending pool model to provide farmers with loans for their operations. Loans are approved if the collateral value (the farmer's land, in this case) is significantly higher than the requested loan amount. For example, a loan of US$54,500 was approved against US$131,600 in real estate collateral.
Challenges
Despite their availability, why have we had so little success in incentivising ecological and social impact through these investment instruments?
- Accessibility - They are not available on Web2 investment apps, so the effort required to access them is beyond what most people are willing to exert. People want simple processes; the crypto industry is far from that.
- No independent evaluation - Given how early we are with ReFi, there are no widely accepted guidelines, standards, or tools for independently evaluating the legitimacy, effectiveness, or potential impact of ReFi projects offering investment instruments. Consequently, investors may find it challenging to determine which ReFi projects are worth investing with.
- The costs of regulation - Although regulating these investment instruments can increase investor confidence, it hasn’t been done because the process is complex, time-consuming, and costly. Even ReFi projects intending to register their investment instruments may not have adequate resources for it.
- Difficulty with impact verification - The challenge of independently verifying ecological and social impact claims makes investors question whether their capital is in fact being used for good as opposed to some greenwashing scheme.
- Market volatility - ReFi investment instruments, specifically the asset-backed tokens, are subject to the same market volatility as their underlying assets, but their association with cryptocurrency leads to a perception that they're all volatile.
Outlook
ReFi investment instrument projects have emerged as a potential catalyst for encouraging degens to embrace sustainable investments and incentivising mainstream retail investors to support ecological and social impact initiatives while earning a profit. And while we've seen some early success, I'd say they have yet to fully take off.
Going forward, there are four things we should consider:
- Better integration - We need more projects to integrate these instruments, such as bundling ABTs into their project infrastructure, issuing bonds on available ReFi platforms, and creating loan requests on P2P lending platforms.
- More awareness - We should focus on the demonstrable impact investors can achieve with through investments. This will set ReFi investment instruments apart from the current generation of ESG investments.
- Easier onboarding - It's important to recognise that our efforts will attract audiences outside of the Web3 space who may be uncomfortable with onboarding and volatility. To mitigate these risks, we need to meet these audiences where they are and, for example, use stablecoins to pay yield, not volatile ecosystem tokens.
- Trusted evaluation - We urgently need a trusted mechanism to evaluate projects and the investment instruments they offer. For example, a decentralised autonomous organisation (DAO) composed of experienced impact professionals utilising transparent methodologies could function as a regulatory body for projects and their instruments. This would reduce concerns about greenwashing because projects accredited by the DAO would be seen as more trustworthy.
The bottom line is if we can get an uptick in capital flowing into these instruments, we can generate the necessary data to understand which are effective and which are not. Plus, it would allow projects to build a track record of success. Hence, we must encourage the use of these instruments within the ReFi space itself as a precursor to achieving impact on a larger scale.
If you are an investment instrument project and would like to be added to our database, please let us know.
For more information about ReFi investment instruments, please visit:
Investment Instrument | CARBON Copy
Projects offering on-chain investment opportunities as a means to incentivising ecological and social impact.
https://carboncopy.news/projects/categories/investment-instrument/