Supporting sustainable agriculture with decentralized inclusive finance

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By Jan Stockhausen, Chief Legal Architect of Etherisc.

It can be difficult to understand why meaningful climate action is so difficult to achieve. While the science is clear on the matter, economics remains a major hurdle. Global agriculture is one sector where the misalignment of economic and climate goals has led to inertia when it comes to achieving meaningful change. As the trajectory of decentralized finance (DeFi) and blockchain applications continues to rapidly progress, there is a golden opportunity to realign sustainability and financial interests.

Smallholder farmers – those operating less than five hectares of land – account for approximately 95% of global farms, and in regions such as Asia and sub-Saharan Africa, provide up to 80% of the food produced. As we head towards 9.8 billion people on the planet by 2050With countries in these regions like India and Nigeria expected to lead in population growth, ensuring a sustainable food chain for smallholders will be crucial to mitigating global food security risks.

However, small farmers in emerging economies are also disproportionately affected by the effects of climate change and extreme weather events, with these devastating effects only worsening as global temperatures rise. These divergent trends – population growth and declining food security – point to a worrying future for billions of people around the world.

Financial support in the wrong places

Climate finance is a distinct form of finance aimed at supporting mitigation and adaptation actions to address climate change. Agricultural climate finance should provide smallholder farmers with better access to finance to enable them to withstand the impacts of climate change, as well as to implement environmentally friendly farming techniques. However, climate finance initiatives have unfortunately failed to provide the necessary capital to date, with pledges from governments in developed countries to the tune of barely 100 billion dollars per year remained dissatisfied after a decade.

Although well-intentioned, agricultural initiatives have suffered from a number of shortcomings that hamper their ability to produce lasting benefits. For example, while hundreds of dams and projects have been put in place across Africa through World Bank fundingthese large irrigation projects ultimately promised too much — providing on average only 18% of the irrigated production area initially proposed. This failure is indicative of broader issues in agricultural climate finance today, namely issues related to policy and management frameworks.

First, political imperatives can have a negative impact on the long-term success of projects. Motivated to simply produce more food in order to reduce import dependence and increase exports, governments tend to focus mainly on low-value staple crops, such as rice and maize by through these programs. These types of crops compromise the financial viability of the project because reliable and sustainable profits are not guaranteed, which means that farmers remain dependent on external investments and subsidies to maintain this infrastructure. Once the investment runs out, these programs quickly deteriorate.

Second, funding programs are usually for larger, centrally managed infrastructure projects. These more established projects are both easier to market and administer compared to a multitude of smaller-scale initiatives aimed at smallholder farmers, for example. However, many centralized government agencies in emerging economies are underfunded and under-resourced, lacking the capacity and knowledge to carry out projects of this scale.

Consider a decentralized solution

Currently, the general tenor of the blockchain and distributed ledger technology (DLT) industry has shifted from how these technologies work to the most efficient implementations. Like this year COP26 United Nations Climate Conference enlightened, now is the time to move from commitment to performance plan. As we move towards implementing climate commitments, having accurate climate data is essential to ensure that finance is allocated effectively and where it is needed most. As stated in the CLIs Report 2021, Blockchain is proving to be a useful tool for transparently managing the complexity of where climate data comes from and who is responsible for it, with impactful case studies already having tangible impacts across the globe.

An example is the provision of decentralized parametric insurance for small farmers against climate risks. Traditional crop insurance does not provide adequate protection to farmers in developing countries. Manual workflows, inefficient processes and high costs have contributed to 3% of smallholder farmers in sub-Saharan Africa be covered by agricultural insurance. To compound the problem, even those who are covered by insurance typically have to wait months for insurance payments to be processed, while in the meantime they are unable to reseed and bounce back from an agricultural disaster. By leveraging blockchain-backed smart contracts that automate the claims process based on predefined parameters – such as a shortage of rainfall during a drought – decentralized insurance for the first time makes transparent and reliable coverage, as well as payments fast.

Distributed inclusive finance can also provide smallholder farmers with the capital needed to implement more climate-sensitive farming practices. The combination of new capital from the growth of DeFi and cryptocurrencies, along with an appetite for transparent carbon offsets, has created an opportunity to use new pools of liquidity to offload financial risk from small-scale farmers exploring environmentally friendly techniques.

Align Web3 and environment

Bill Gates recently said that “climate tech startups will produce eight to ten Teslas, a Google, an Amazon and a Microsoft”, and that “future returns on investment in companies fighting climate change will be comparable to those produced by top tech companies for Date.” It is already an absolute necessity for companies to consider the climate implications of their operations, and this extends to all new facets of the Web3 movement.

We need to think carefully about the capabilities of emerging technologies and weigh their environmental costs and benefits, as well as the potential to undo the ruinous climate damage of what preceded them. From the deployment of microinsurance to crowdfunding and crowdlending, through the introduction of a carbon piece, we are already seeing opportunities emerge that can also bring prosperity and lessen our impact on the planet. The intersection between blockchain and climate action is poised to become the most important area of ​​technological innovation in our lifetimes.

Jan Stockhausen is the chief legal architect of Etherisk.

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