Title
DeCO2Risk: A Protocol of Decentralized Carbon Insurance
Team member names
Qianni @WuLiumu
Pingfeng @byobu4
Background Information
Currently, emissions are at an all-time high and the gap between the proposed amount of carbon dioxide removal and the amount of carbon dioxide removal required to meet the Paris Agreement temperature targets is expected to be between 0.9-2.8bn tonnes of CO2/yr in 2030 and 1.8-6.9bn tonnes of CO2/yr in 2050. The carbon removal industry needs to grow by 1,300-fold in three decades to meet climate targets.
Engineered carbon removal credit deliveries as of March 2023
Source: Cdr.fyi
However, of the c.800,000 carbon removal credits sold to date, less than 10% have been delivered as ex-post credits, meaning that buyers are inherently taking a delivery risk by investing today in carbon removal credits projected to be delivered in the future, which hinders the expansion and development of carbon markets.
Insurance products, can address delivery risk by paying a claim if the purchaser’s carbon is not delivered. By reducing the financial risk associated with upfront investment, insurance makes purchasers feel more comfortable to invest greater capital in projects at an early stage, mobilising the necessary finances for project development and the scaling of supply within the market. Thus, insurance provides a solution to the problem of limited carbon removal supply.
HOWEVER, there are a series of problems with traditional insurance, such as non-transparency, slow claims settlement, and high insurance costs, which hinder the further development of the carbon insurance market.
Decentralized insurance represents a transformative innovation in the insurance industry. It offers a range of benefits that traditional centralized insurance models struggle to match. Decentralized Insurance uses blockchain technology to provide transparency, trustlessness, and community-driven decision-making in the insurance ecosystem. As DeFi gained traction, decentralized insurance emerged as a natural extension. It addresses flaws in traditional insurance models. However, the current decentralized insurance is more about providing protection for crypto assets, lacks other application scenarios, and certainly doesn’t address risk management in carbon credit trading markets.
Short summary of your improvement idea
Our proposal advocates for the improvement of traditional carbon insurance protocols based on existing decentralized insurance technology (or, based on existing carbon insurance knowledge, improving existing decentralized insurance protocols) to address the inefficiencies, lack of transparency, and transaction risks faced by carbon credit buyers in existing carbon trading markets. This is intended to accelerate the expansion of the carbon trading market, facilitating the entry of more private capital into the carbon removal market, as well as the involvement of more carbon removal solution providers in addressing CO2 emissions. Simultaneously, it aims to broaden the usage of decentralized protocols, attracting more traditional insurance professionals, people involved in carbon trading market experts, and blockchain developers to achieve openness, transparency, scientific validity, and effectiveness in climate action.
Q&A
Q1： What is the existing target protocol you are hoping to improve or enhance? Eg: hand-washing, traffic system, connector standards, carbon trading.
Carbon Insurance Protocol. Our protocol improvements focus on the intersection of decentralized insurance and traditional carbon insurance, which can be understood from two perspectives:
From the perspective of traditional carbon insurance protocol: We aim to change the insurance structure of traditional carbon insurance. Currently, carbon insurance relies more on centralized insurance companies.
From the perspective of decentralized insurance protocol: We aim to improve the existing scope of decentralized insurance applications, focusing on addressing the risk issues in carbon credit trading markets to accelerate the expansion of the carbon market.
Q2: What is the core idea or insight about potential improvement you want to pursue?
Our core idea is to create a more transparent, efficient, secure, and flexible decentralized carbon insurance protocol to address various risks in the carbon credit trading market (such as transaction price, quantity, quality, etc.). This ensures that buyers of carbon credits are able to make early investments in carbon removal projects, receive carbon credits in a timely manner with guaranteed quality and quantity, or avoid the loss of carbon assets due to price volatility, removes buyers’ concerns about the transaction, and thus attracts more carbon removal solution providers (sellers/providers of carbon credits) and accelerates the expansion of the carbon trading market.
Currently, the insurance protocols surrounding carbon removal investment and carbon credit delivery face the following challenges, which we outline from two perspectives:
From the perspective of traditional carbon insurance protocols:
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Lack of carbon insurance products/protocols: Carbon insurance is still in its infancy, with most people not fully realizing its importance, leading to a lack of products. This makes it difficult for market buyers to find suitable carbon insurance providers.
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Non-digitalization: Current centralized insurance companies mainly engage with policyholders through offline communication, resulting in inefficiencies and limitations in expanding their application scope.
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Lack of standardization: Even for relatively standard risks such as price fluctuation or quantity delivery risks, current policies are highly customized, lacking standardized contracts, leading to wasted resources and ineffective competition among insurance companies.
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Low information transparency: Lack of transparency in risk information impedes buyers’ trust in carbon credit sellers and insurance products, hindering the development of both the carbon credit and carbon insurance markets.
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High insurance costs: Each decentralized insurance company incurs high costs in developing insurance products, exacerbating insurance costs for policyholders and wasting societal resources.
From the perspective of the decentralized insurance market:
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Lack of more decentralized insurance products: Decentralized insurance is still in its very early stages and decentralized carbon insurance has not been observed yet.
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Focused on providing security for crypto transactions: Existing decentralized insurance products primarily focus on providing insurance for crypto transactions, without addressing real-world issues such as carbon trading market risks. However, these issues serve as the basis for our protocol improvement.
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Lack of understanding and design for carbon trading market risks: Current decentralized insurance products have standardized designs for specific risks, such as flight delay insurance from Etherisc. However, carbon credit trading risks differ from flight delay risks and have their own characteristics.
To improve existing protocols and accelerate the carbon credit trading market, we will implement the following principles in our carbon insurance protocol improvement:
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Openness: We will openly publish project progress and content related to carbon removal, carbon credit trading markets, carbon risks, carbon insurance, and decentralized insurance to facilitate knowledge dissemination, increase attention to carbon insurance, and generate climate impact, which is currently lacking.
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Transparency: Improvements to the protocol will be based on transparency principles, including framework design, participant information (excluding sensitive information), and code, to ensure public scrutiny and oversight.
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Scientific validity: We will seek input from scientists and utilize science-based insurance knowledge and data to control the protocol’s efficiency and fairness.
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Scalability: We will implement protocol improvements based on modular principles to reduce design waste, as there are still risks in other areas, such as agriculture, that also have the potential to utilize decentralized insurance models.
These improvements will not only accelerate the implementation of decentralized carbon insurance protocols, efficiently matching carbon credit sellers and buyers, and accelerating the expansion of the carbon trading market, but also attract more traditional carbon trading market professionals, traditional insurance practitioners, and blockchain developers to enter the field. Most importantly, we will leverage decentralized carbon insurance to better accelerate CO2 removal and thus combat climate change.
Q3: What is your discovery methodology for investigating the current state of the target protocol? Eg: field observation, expert interviews, historical data analysis, failure event analysis
The research methodology will include mathematical modeling(game), interviews, and case studies.
Mathematical modeling research: Considering that the risk diversification effect of carbon insurance on the carbon trading market (mainly including price, quality, and quantity delivery risks) and its related impacts have not been sufficiently confirmed, based on our current research foundation, we will first confirm the impact of carbon insurance on carbon credit sellers and buyers (or trading platforms) by constructing game models. We hope to understand the impact of changes in different parameters of carbon insurance on the participating entities.
Key role interviews: In addition, we will conduct interviews with different participants in the carbon credit market. For example, interviewing carbon credit buyers to understand their demand for carbon insurance and their specific risk concerns; interviewing carbon credit sellers to understand their acceptance of carbon insurance, etc.; interviewing the initiators of existing decentralized insurance projects to understand their views on decentralized insurance and the challenges they face.
Case studies: We will mainly study two types of cases, including traditional carbon insurance policies (such as the Pacific Insurance Carbon Emission Reduction Insurance Service Program) and currently decentralized insurance products, such as Etherisc, AsureNetwork, INS3Insurance, to further understand the operation mechanism of decentralized insurance and its compatibility with carbon insurance, in order to further discover opportunities for improvement.
Q4 : In what form will you prototype your improvement idea? Eg: Code, reference design implementation, draft proposal shared with experts for feedback, A/B test of ideas with a test audience, prototype hardware, etc.
Through various methods, this project will explore the categories of insurable risks in the carbon credit trading market and the specific operational mechanisms of decentralized insurance. Based on these findings, we will develop a prototype that can take two forms:
Most likely to provide an Evidence-backed proposal(or a comprehensive analytical framework): This will include the principles and structure of decentralized carbon insurance (improvement of existing carbon insurance and decentralized insurance protocols) and guidelines for different roles.
Code-based prototype if possible: A code-based, usable prototype product.
Q5: How will you field-test your improvement idea? Eg: run a restricted pilot at an event, simulation, workshop, etc.
Three phases are considered in our improvement idea:
Phase One:
Logical testing of the decentralized carbon insurance protocol framework design through workshops, expert exchanges, etc. We hope to first find suitable roles (insurance experts, insurance buyers, etc.) to evaluate the decentralized carbon insurance framework for adjustment and continuous improvement of the model design.
Phase Two:
Prototype development of the code and simulation testing of the platform.
It is challenging to find real carbon credit buyers and sellers to use the insurance platform. Therefore, we will collaborate with the supporting community to test the platform through simulation. However, some carbon risk-related factors, such as carbon credit prices, will be tested using real data via oracles.
Phase Three:
Market deployment of the platform. In this phase, we will invite more market participants to use the platform. We have already made contact with some carbon credit market trading platforms, which can connect us to more carbon credit buyers and sellers.
Q6: Who will be able to judge the quality of your output? Ideally name a few suitable judges.
Insurance experts and scholars (including carbon insurance experts, designers of decentralized insurance protocols, such as Zeng Yan), buyers and sellers of carbon credits, other risk assessment roles in protocols, environmental departments, etc., will assess whether the decentralized carbon insurance framework or prototype successfully achieves insurance objectives and promotes the expansion of the carbon credit trading market.
Q7: How will you publish and evangelize your improvement idea? Eg: Submit proposal to a standards body, publish open-source code, produce and release a software development kit etc.
All outcomes of the decentralized carbon insurance protocol development process (including mathematical model analysis, interview results, case studies, prototype development code) will be shared openly through scientific publications, popular science articles, and community sharing. Ideally, we will collaborate with climate change-focused nonprofit communities, carbon credit development or trading projects (such as OpenForest_, ToucanProtocol, Biosphere3) to promote the real-world adoption of the protocol. We will seek sponsorship and reach out to experts in the field as much as possible.
Q8: What is the success vision for your idea?
The core of this project is to create a decentralized carbon insurance protocol that can help accelerate the expansion of existing carbon credit markets by reducing carbon credit trading risks. This will reduce the skepticism of more carbon credit buyers towards the market, increase purchases, promote the participation of more carbon removal solution providers in the market, and thereby accelerate CO2 removal to address climate change.
In addition to forming the final improved protocol, we believe that raising awareness of carbon risks, educating and disseminating knowledge about carbon credit risks and carbon insurance will help more people pay attention to climate change solutions and issues in carbon credit trading markets. Understanding the role of carbon insurance therein will provide references for other teams capable of launching relevant foundational designs.
We hope that everything about this project is open-source and that its success is attributed to its open nature.
Reference links/projects:
Current research basis:
https://www.sciencedirect.com/science/article/abs/pii/S1366554523003228
Smith et al. State of Carbon Dioxide Removal, 2023.
Cdr.fyi
Why carbon insurance? Carbon Insurance Products — Kita
ZengYan’s profile:https://lingnan.sysu.edu.cn/en/faculty/ZengYan
BS3 World Carbon Exchange Platform: BIOSPHERE3|Carbon Credit Exchange
OpenForest_ https://www.openforestprotocol.org/
ToucanProtocol (link not support here）
Etherisc (link not support here）
AsureNetwork (link not support here）
INS3Insurance(link not support here）