In my previous posts, I have explored core concepts in DeFi, or decentralized finance, and why it is a popular and practical application of blockchain. Bitcoin, the original cryptocurrency which widely popularized blockchain technology, sought to solve existing issues in traditional financial systems and did so quite successfully. But as blockchain and DeFi evolve, it can be easy to get pulled into creating or buying tokens without much real-world application in an attempt to “get rich quick”. These tokens, however, miss the point of blockchain and DeFi, leading to the creation of ReFi, which seeks to realign DeFi apps with the underlying “financial-revolution ethos” upon which cryptocurrencies were originally built by “adding tangible and sustainable value” ( Phil Fogel, Ben Noel, and Sebastian Frankel).
From DeFi to ReFi
ReFi stands for “regenerative finance” and is the natural evolution of DeFi. In DeFi, key innovations such as automated market makers and decentralized lending protocols have proven the usefulness and resilience of blockchain technology in solving key financial issues, even during bear markets or economic downturns .The same, however, cannot be said of all the DeFi protocols using these technologies, as has been shown time and again by ponzi-style DeFi protocols such as TerraLuna, Celsius, and FTX (Phil Fogel, Ben Noel, and Sebastian Frankel). It can be argued that these projects failed because they were not truly decentralized but, even more importantly, they were focused on building wealth rather than building community.
As a decentralized system, DeFi simply cannot work without an engaged community moving towards a clear, shared purpose. However, most DeFi protocols operate under game theory economics, in which individuals seek to build their wealth through finding short-term advantages and undermining other actors in the community. This competition leads to a recreation of the financial problems that blockchain technology originally tried to solve by consolidating power in the hands of a few wealthy individuals, resulting in gatekeeping and lack of diversity in participation. ReFi seeks to reorient this gaming ethos to one focused on community outcomes rather than wealth.
The term ReFi comes from a combination of DeFi and regenerative economics. Regenerative economics, as its name suggests, seeks to stimulate the economy in a way that can “regenerate what has been lost and conserve what remains while ensuring long-term financial prosperity” (Phil Fogel, Ben Noel, and Sebastian Frankel). Instead of focusing on short-term wealth building, ReFi seeks to take care of people and community resources in a sustainable way. GitCoin founder Kevin Owocki sums up ReFi in the following way: “…what we wanna do is we wanna route capital and talent to the projects that are going to be the most regenerative in the world” (Kevin Owocki, GitCoin Founder).
ReFi Ethos:
When building a web3 project, one of the first questions that should be asked is “what is the use-case?”. In other words, how does the project use blockchain technology to solve a specific problem. DeFi, for example, solves the issue of allowing banks to control the economy through the printing and burning of money. However, one of the most important aspects of web3, particularly as it is still early in the technology’s adoption and development, is that “we can now program our values into our money… we can create political economies that reflect our values” (Kevin Owocki, GitCoin Founder). In blockchain, a decentralized approach offers a chance to undermine these power structures through the inclusivity and accessibility of blockchain technology.
Institutional power has been able to thrive due to the effect of the “tragedy of the commons”, in which open access to a resource causes overuse and rapid depletion of that resource. Blockchain technology has turned this on its head by promoting open access, inclusion, and diversity. DeFi, for example, allows for individuals open access to more financial resources, without the gatekeeping of centralized banks, who can deny an individual access based on such arbitrary criteria such as gender or race in order to promote existing power structures. With blockchain, these power structures can be undermined or even dismantled. DeFi protocols can be competitive, realistic alternatives to banks.
ReFi seeks to take this further by creating economic incentives to solve systemic issues (Mashiat Mutmainnah, Nathan Lenga). Unlike DeFi, where the goal is typically reduced to building individual wealth, participants in ReFi seek to conceptualize social change “uninhibited by the bureaucracy and politicization” that exists in legacy systems (Evin Cheikosman). Through community-driven approaches, minority voices are able to drive change outside of existing power structures, allowing them to coordinate grass-roots movements and effectively solve global issues. It is no surprise, then, that the primary example of ReFi involves tackling a long-standing global issue– climate change.
Climate Action in ReFi:
Regenerative economics in climate action seeks to create systems that “restore and preserve the physical resources essential for planetary well-being” (Evin Cheikosman). This makes climate change an ideal example of how ReFi can be used to harness community power for beneficial global changes in a way that centralized institutions can’t. There is a simple reason why these institutions are not able to effectively address climate change– it is not profitable. The UN’s “Environmental, social, and governance (ESG) measures.. don’t align with financial incentives. ESG investments have both statistically underperformed the market and lack transparency, as shown in an HBS study and an investigation into Goldman Sachs ESG funds.” (Phil Fogel, Ben Noel, and Sebastian Frankel).
ReFi addresses this problem by creating economic incentives for positive climate actions. Additionally, the inclusion of marginalized groups such as women and indigenous populations are crucial to climate efforts, adding more weight to the effectiveness of decentralized, community-driven approaches to tackling climate change over traditional, centralized ones. In this way, ReFi is uniquely positioned by using blockchain technology to “improve coordination around tackling climate change because they use local knowledge and actors to guide policies and put funding where it’s needed” (Evin Cheikosman). As Vinay Gupta states, “crypto wins by solving problems that nobody else can solve, profitably”.
Most ReFi solutions to climate change involve tracking carbon credits. These carbon credits already exist and could be used in web2 applications “for farming data and an exchange for credits based on the carbon farmers put back into the ground”. However, like other blockchain applications, ReFi improves the tracking of carbon credits by making the process “more efficient, transparent, and composable” (Packy McCormick). The adoption of ReFi, and the proof of its profitability, can be seen in the World Economic Forum’s creation of “The Crypto Sustainability Coalition”, which is focused on “[leveraging] blockchain tools to achieve positive climate action” (Evin Cheikosman).
Conclusion
While DeFi solves problems specifically in the financial sector, ReFi is an extension of DeFi that seeks to program values, as well as value, into protocols. For this reason, ReFi can be called “DeFi with a conscience”. Most current projects in ReFi focus on harnessing community power to combat climate change. However, the potential applications of ReFi go beyond sustainability goals. As a natural evolution of DeFi, ReFi’s adoption has the potential to reshape society to be more sustainable, more inclusive, and more profitable than ever before.
For a list of the most impactful ReFi projects to date, check out this article by Kevin Owocki.
