Defining ReFi and Its Potential

I am writing this to provide a succinct reference for what ReFi is to advance the conversation beyond definitions. For a ReFi deep dive, see John Ellison’s “What is ReFi?” article here or Packy McCormick’s “Building a Regenerative Economy” here.

A working definition of Regenerative Finance (ReFi), Open Finance, or Regenerative DeFi is finance with positive externalities. While much of our financial system is extractive, contributing to inequality and environmental degradation, ReFi enables a new wave of business models that are both financially and ecologically sustainable.

ReFi is still emerging, but three promising categories include global access to financial tools, community commerce, and natural capital restoration.

1. Natural Capital: Smart contracts enable programmable value transfer that breed new economic activity for a regenerative environment. While the focus on GDP growth and interest-bearing debt made sense in the post-WWII era, it now fails to account for the accelerated destruction of biological systems and communities. The European Union’s Emissions Trading System alone accounts for over 600 billion Euros of value.
2. Community Commerce: Web3 enables value transfers in new ways by tokenizing services, products, and assets ($5 trillion of global e-commerce spend in 2021).
3. Financial Tools: Web3 enables anyone with a mobile phone and internet connection to access financial tools, delivering financial products to the masses (e.g. financial inclusion).

One of the key hypotheses of ReFi is the rise of collaboration alongside competition. ReFi puts a price on externalities, rewarding those who create positive externalities.

Critically, positive externalities do not mean subpar products and services, but rather utilizing new business models uniquely enabled by smart contracts to create new products and services that satisfy existing and latent market demand. There shouldn’t be any quality compromise just because products are “ReFi.” Indeed, it’s the only way to scale positive impact. Tesla popularized electric vehicles not by being environmentally sustainable, but by producing an excellent product people wanted.

Below are a few examples of existing ReFi projects:

Natural Capital:

1. Tokenizing real-world assets on the blockchain, such as land (Moss) and carbon offsets (Flow Carbon, Toucan Protocol) via climate-positive products and decentralized applications (Uniswap, FlyWallet). Blockchain technologies can solve the challenges facing the growing carbon markets while creating a new form of collateral.
2. Enabling local impact economies through geospatial integrations (Astral, Protocol) and DAO governance (Kolektivo).
3. Using stable assets (Mento) backed by a diversified, overcollateralized reserve, including an allocation toward natural capital assets. Transparency and accountability via decentralized ledgers prevent double counting and potential greenwashing.

Community Commerce:

1. Building bankless infrastructure for circular trade and mutual credit networks that benefit small businesses (ReSource)
2. Web3 community commerce is not limited to startups, Kickstarter is working with Celo to bring builders and supporters together at scale (see here).

Financial Tools:

1. Facilitating community banking (HumanityCash) and implementing poverty alleviation mechanisms, like Unconditional Basic Income (UBI), for vulnerable communities (ImpactMarket).
2. Deutsche Telekom is working with Celo to bring financial tools to its 300 million plus mobile users (see here).

These examples are the tip of the iceberg, there will soon be tokenization of other natural capital backed assets and financial tools reserved for a small percent of the population will be available to the masses. New business models are also enabled by the intersection of ReFi and other technologies like ever-cheaper satellites and sensors as well as wider access to machine learning algorithms. As an example, Open Forest Protocol (OFP) incentivizes distributed monitoring, reporting, and verification (MRV), eliminating accounting as a key growth bottleneck. OFP can verify that a specific piece of the rainforest has been protected or reforested and issue tokens on the blockchain, and those tokens, representing pieces of the rainforest, can be programmatically bought and sold.

ReFi creates positive feedback loops for communities and the environment with financially viable fee-generating business models that provide access and solutions to existing demand from both individuals and institutions. In looking at the driving forces that underpin climate change, biodiversity loss, and inequality, you’ll find money at the core. ReFi is a multi-trillion dollar opportunity to build regenerative financial systems and applications that change the story of money.