Toucan Protocol: Tokenised Carbon Trading

Tokenised carbon trading brings together two fundamental concepts: - ESG (Environmental, Social, and Governance) principles and blockchain technology. In recent years, there has been much discussion about sustainability and the potential of tokenisation for carbon trading. However, it is surprising to note that the crypto industry has not seen an abundance of projects dedicated to this process. Currently, very few crypto projects directly focus on enabling carbon credit buying and selling via blockchain and cryptocurrency. The most prominent among these is the Swiss-based Toucan Protocol launched in October 2021.

What is Toucan Protocol?

Toucan Protocol is a crypto project that provides a blockchain-based platform for tokenised trading of carbon credits from the Voluntary Carbon Market (VCM). Carbon credits can be transferred into the Toucan platform from external non-blockchain carbon registries and stored as TCO2 crypto tokens. These TCO2 tokens can be purchased and “retired” by emitters to offset their environmental impact. The process of retiring TCO2 tokens takes them completely out of circulation on the blockchain.

How Does Toucan Protocol Work?

A crucial component of Toucan Protocol is its Carbon Bridge. The Toucan Carbon Bridge is connected to registries operated by respected standards bodies, such as Verra (the world's largest issuer of carbon credits on the VCM) and Gold Standard. This connection ensures that only credits from trusted sources are brought onto the platform as tokens. These tokens are then moved onto the Open Climate Registry, which operates on energy-efficient blockchains, currently Polygon and Celo.

Both Polygon and Celo are Ethereum Virtual Machine (EVM) compatible chains, which means they can execute smart contracts. Toucan emphasises that these chains are based on Proof of Stake transaction validation, which is much more environmentally friendly and energy-efficient compared to the Proof of Work validation used by Bitcoin.

Once a carbon credit is moved onto the Open Climate Registry, it becomes tokenised as a TCO2 crypto token. TCO2 tokens contain all the relevant data of the carbon credit, including information about the project, the year the climate impact occurred, and the issuer. Businesses looking to offset their environmental impact can purchase and retire these TCO2 tokens, just like in a traditional registry. The retirement of a carbon token permanently removes it from circulation.

Toucan also has "Carbon Pools," which allow for a certain level of commoditisation by pooling similar carbon tokens. All carbon credits, regardless of their origin and nature, are brought into the Toucan system as TCO2 tokens. Carbon pools are a way for Toucan to add some customisation and provide a classification system for the otherwise similar TCO2 tokens.

TCO2 tokens from similar types of projects are allocated to the same pool, and these pools issue their own crypto tokens. These crypto tokens can be considered synthetic index assets composed of various TCO2 tokens in the pool. For instance, the largest pool on Toucan, known as Base Carbon Tonne, is represented by the BCT crypto token. TCO2 tokens allocated to this pool must meet specific criteria, such as being based on Verra-certified carbon credits and having a vintage of 2008 or later.

Advantages of Tokenised Carbon Trading via Toucan

A key advantage of tokenised carbon trading via Toucan is transparency. Since all transactions and carbon credit unit information are recorded on the blockchain, the process becomes highly transparent. As tokenised carbon trading becomes more widespread, this blockchain-based transparency will play a crucial role in combating instances of greenwashing and ensuring the credibility of carbon credits.

Another advantage is the potential for increased accessibility in carbon trading. With further tokenisation of the carbon trading market, even consumers will have the opportunity to participate actively. Currently, carbon trading is primarily dominated by businesses, but the tokenisation enabled by Toucan opens doors for broader involvement.

Additionally, tokenisation of carbon trading can help reduce complexity in the market. With numerous standards, certifiers, and project types, the carbon trading landscape can be challenging to navigate. By tokenising carbon credits on a blockchain, Toucan Protocol aims to simplify the process, making it more streamlined and understandable for all participants.

Toucan Protocol stands as the leading project that directly addresses the process of carbon credit tokenisation via blockchain. While the project is still relatively small, it holds a unique position as the most notable crypto platform dedicated to this important endeavour. With its blockchain-based approach, Toucan Protocol brings transparency, accessibility, and reduced complexity to the carbon trading market. As the concept of tokenised carbon trading continues to evolve, Toucan Protocol's pioneering efforts are likely to have a significant impact on the future of sustainable finance and environmental accountability.