The proposed financial instrument is a smart climate bond, whose yield and maturity would be tied to prevailing global temperatures.This new form of capital could fund anything from community block grants to getting electric vehicles on the road sooner and more affordably.
Climate-based smart contracts are already used for crop insurance. Rainfall datasets from NOAA and other sources allow insurers to automatically settle claims for farmers, via Chainlink’s decentralized oracle technology.
What is a decentralized oracle? To connect an Ethereum or other smart contract to real-world data you need another layer. This is known as an oracle, sometimes called the “God Protocol.” The first oracles relied on a single data source and were vulnerable to attack. Next generation oracle systems rely on multiple data sources and reputational scoring, as well as hardware-based controls, to ensure data integrity.
Smart climate bonds create economic incentives tied to real-time scientific data, on a macro or a micro scale. Anyone, anywhere, can set up a smart climate bond: private parties, the national government, or city and state governments. Climate bonds simply use the mechanism of the blockchain to verify contract conditions and execute payment. Coin-based and NFT green finance solutions are also possible.
Crypto exchanges could use a portion of transaction fees to fund climate bonds. This would do a lot to rehabilitate their image. The more actors buy into climate-based smart contracts, the greater the potential for success.
