Applying a powerful set of tools to a complex set of problems: A stroll through Toucan's history

This piece has been authored by Toucan CEO and Co-Founder Raphaël Haupt.

What happens when you use powerful new digital technology to address the biggest coordination failure of our time: the climate crisis? At Toucan we are building tools to unlock climate action at scale. We saw over 20 million tonnes of carbon credits flow onto the infrastructure we built within the first six months after launch, proving just how powerful blockchain technology as a tool can be. How did we get to where we are, what did we learn, and what is next? Here are some thoughts.

Which problem do you solve first? How Toucan got started

I’ve been involved in the Web3 space since 2018, and have looked at its various use cases: first, at improving supply chain traceability and peer-to-peer local electricity markets, then at how to use novel coordination tools to improve how people work together through distributed governance. I was passionate about the potential of blockchain technology and the Web3 movement, but struggled to justify the high energy usage of some blockchains, including Ethereum (at the time). I started to think about how we could use Web3 tools to solve climate change.

I began by creating a proof-of-concept with a small team at the ETHLondon hackathon in early 2020.  We called it CO2ken: a blockchain app supporting a single carbon token, a DAO (Decentralised Autonomous Organisation) for governing the decentralized issuance of this token, and a “green Solidity modifier”, i.e. a simple piece of code that anyone could add to a smart contract. This code would automatically retire carbon credits whenever the contract was used. It was a start, and it had the potential to address one of the biggest criticisms of crypto at the time: the immense energy use associated with running a public blockchain. Now, things of course are different: with the Merge, Ethereum moved from PoW (Proof of Work) to PoS (Proof of Stake), and its energy consumption was reduced by over 99%.

Before Toucan: CO2ken

I was (and still am) convinced that Web3 needs to transition from being a “dirty industry” to being planet-positive by design for mass and institutional adoption to happen.

Our project CO2ken received a lot of positive feedback after ETHLondon, which is why I decided to dedicate more time to exploring how blockchains could be used to support climate action. My co-founder James and I embedded ourselves in DSV (Deep Science Ventures) for nine months to do research on the intersection of climate and Web3.

The starting point for CO2ken and later Toucan had been to use carbon credits to compensate for crypto’s climate impact. But over the course of our work, we began to understand the depth of the challenges in the voluntary carbon market (VCM). Flaws in project finance, monitoring, reporting and verification (MRV), and double-use of credits resulted in a lack of trust in the market, and stifled growth. We realized that Web3 infrastructure can do more than clean up its own act — blockchains could improve the integrity of the VCM and help it scale.

Who operates the machinery? An overview of our launch with KlimaDAO

After our time at DSV, James and I brought on some new team members from Kernel, and together, we started building Toucan. Our goal was to develop a proof-of-concept to move carbon credits “on-chain”, converting conventional certificates into carbon tokens that still carried all of the relevant attributes. This would result in creating the backbone of a blockchain-native meta-registry.

Around the same time, Toucan’s early founding team started meeting regularly with two other groups that were part of the still small crypto sustainability community: Creol and Offsetra. We brainstormed ideas on how to build a community around using Web3 to fight climate change, discussed carbon credit bridge designs, and philosophized about the potential of a carbon-backed currency. Our thoughts were heavily influenced by Delton Chen’s research, which was later popularized by Kim Stanley Robinson’s book “Ministry for the Future”. This was the beginning of a decentralized working group later known as KlimaDAO.

One day, Archimedes — one of KlimaDAO’s core contributors — came to one of our weekly calls talking about Olympus DAO and how we could use its model to create a reserve currency backed by carbon. For context: Olympus DAO pioneered an incentive model designed to accumulate DAI — a USD-pegged stablecoin — in their reserves, in return for their own token (called OHM). The same model could be used to accumulate tokenized carbon credits. This is how the idea for the KLIMA currency was born.

But to make it work, we needed the infrastructure to move carbon credits on-chain in an open and transparent manner, and then pool them together to facilitate liquidity — this was exactly what Toucan had started building already. We collectively agreed that the infrastructure should live independently of the currency protocol KlimaDAO, and so the four Toucans went off building the technical rails, while the other eight founding members focused on bootstrapping KlimaDAO.

A powerful Proof-of-Concept

Before launch, Klima’s idea was to use incentives to get users to tokenize low-quality Verra credits and deposit them into their treasury, where they’d be locked forever in a “carbon black hole”. This strategy was intended to “sweep the floor” of carbon credits, and to raise the base price of carbon, which was in turn supposed to make it more expensive for polluters to offset their emissions. The Base Carbon Tonne (BCT) carbon pool token was designed specifically for this purpose.

In October 2021, Toucan launched its infrastructure alongside KlimaDAO. At the beginning of the year, our ambitious goal for 2021 was to facilitate the tokenization of 10k credits. But on the first day of deploying the Toucan Carbon Bridge, users tokenized over a million credits! Within a month post-launch, more than 12 million carbon credits have been bridged, and the trading volume of on-chain carbon credits surpassed 2 billion USD. KlimaDAO had created huge momentum, driven by a crypto bull market and compounded by the success of its “parent protocol” Olympus DAO. People were lining up to exchange carbon credits for KLIMA tokens, so they could be part of this new offering from the very beginning.

In the weeks before and after launch, a number of people made money brokering credits and trading them on-chain. During this time, Toucan’s core team, which had grown to seven members, solely focused on building and maintaining our infrastructure, and wasn’t participating in KlimaDAO’s policy or community initiatives. Toucan also wasn’t selling carbon credits, because we saw it as a conflict of interest, and preferred to fill the role of a neutral infrastructure provider. Toucan was still a proof-of-concept at this point, which is why we didn’t take any fees (for either bridging or pooling) for the first three months after launch. After that, we introduced a fee structure for our pools where a percentage of the fee would go to sustain Toucan. The rest was used to retire the oldest vintage credits in any given pool.

With KlimaDAO’s core team consisting of 12 members, each with one vote, divergences in culture, vision, and purpose may — in hindsight — have been inevitable. By the time of launch, these tensions continued to cause friction within the group. Since we were not able to influence the direction from within, we decided to go our separate ways soon after the launch in October 2021.

Nevertheless, we recognize the important role KlimaDAO has played in catalyzing the digital carbon market and its role in igniting the ReFi movement. While we may not always align with every initiative they pursue, we acknowledge and respect their important contributions to the space.

Matching tools to problems with what we’ve learned

We owe a lot to the initial hype that KlimaDAO was adept at capturing. The sheer volume of credits moving on-chain in the first weeks and months after launch was enough to draw the world's attention. That said, the infrastructure we created also helped some middlemen capture money that was meant to support climate action.

We exist in a market that is trying to be both planet positive and financially profitable — this contradiction needs more than code and our good intentions to be solved effectively. Toucan’s purpose is to unlock climate action at scale, and to transition the world towards an economy that thrives within its planetary boundaries. We have been working to optimize Toucan towards these ends more proactively.

We have the responsibility to pay attention and to adapt to feedback, while also not allowing mishaps to hinder progress. I recognize and own the mistakes that we’ve made, and appreciate the thoughtful critique we’ve received from several different perspectives. I also strongly believe that we are not in a position where we should be cutting off paths to innovation in climate action — we need to push forward and work out how digital tools can help us address climate change, as time is running out for all of us. We are building tools that meet the market where it is today, and support its evolution to a high-integrity, more efficient way of financing climate impact.

At the same time, we know that there is a lot at stake for us. That’s why rigorous research is crucial to our product development process. Our team works with impact creators, experts, academics, users, and builders in the VCM and Web3 to accelerate product discovery, gather feedback, and test new ideas. We challenge our own assumptions, and rely on data and feedback from stakeholders to verify the impact of our products. These practices are helping us to build the rails for a regenerative economy — both urgently and carefully.

Behind the scenes, we are engaging with and listening to experts, policy makers and other VCM stakeholders. We’re working closely with VCM’s governing bodies to make sure the tools we build are useful and solve real problems. We cooperated and closed the Carbon Bridge when carbon registry Verra requested the tokenization of their credits to be halted, and we’ve invested a great deal of time and resources into developing a tokenization mechanism that is in line with the standards’ and registries’ needs. We are also collaborating with organizations like IETA, Gold Standard and the WEF to form a blueprint for carbon tokenization, and to educate key decision makers on the risks and benefits of blockchain-based carbon markets. We are committed to creating solutions that take the best of what’s possible with Web3, and bring them to the VCM to accelerate global net-zero ambitions.

As we continue to build metaphorical and digital bridges, we’re excited by what the next chapter will bring. We see a variety of new carbon credits being bridged on-chain, increased utility for tokenized carbon credits, and close cooperation with standards and registries. Integrating tokenized carbon will be another promising movement. Already, more than 60 startups have integrated Toucan's technology, and they are creating innovative ways to utilize carbon to power digital applications. We’re also working with select partners to launch new curated pools that suit different audiences and keep improving our registry infrastructure to maximize data interoperability and transparency.

When I look around me and see all the builders in the ReFi space, I can’t wait to see what the future brings. We’ll certainly be along for the ride!