Web3 x Climate
The Neutral Vision

The Neutral Vision

Neutral is an exchange for environmental assets. We combine tokenized carbon credits, renewable energy credits, and carbon forwards with specialized market infrastructure to deliver efficiency, transparency, and trust in these markets.

The way we do business needs to evolve

For centuries, extractive economies with misaligned incentives have led to the degradation of our natural ecosystems and the planet’s climate. The need for intervention is clear.

We believe in the power of Regenerative Finance (ReFi) to restructure our economic system, which does not price degradative externalities and does not reward producers of public goods. ReFi strives to correctly price public goods, such as carbon sequestration or renewable energy production, and provides a mechanism for funding those activities.

While ReFi shows tremendous promise, the ecosystem is still in its infancy, and needs significant infrastructure to reach its full potential. At Neutral, we want to drive the ReFi ecosystem to maturity, providing infrastructure for growth and increased regeneration.

An introduction to Neutral

Neutral is an exchange for environmental assets. We combine tokenized carbon credits, renewable energy credits, and carbon forwards with specialized market infrastructure to deliver efficiency, transparency, and trust in these markets. With Neutral, users can easily access a wide variety of assets through our partners, commoditize them in pools, and trade them on a high frequency order book designed for the specific requirements of these semi-fungible assets.

The markets we operate in
Neutral Assets

With Neutral, users will trade renewable energy credits (RECs), carbon credits, and carbon forwards. All of these assets can be classified as semi-fungible. This means that each credit in a specific class is meant to represent a similar outcome–e.g. one ton of carbon sequestered from the atmosphere. However, typical ReFi assets such as carbon credits are not easily interchangeable, because they’re created using different methodologies, in different locations with varying co-benefits, and at different times. Buyers and sellers have strong preferences over these differentiators, resulting in a significant range of prices for different environmental assets.

Environmental assets, therefore, are not created equal. While their differentiators make trading them more complex than trading homogeneous commodities, such as gold or corn, we still need efficient, liquid markets to generate a consistent and reliable price signal for these assets.

Pooling protocols solve for this by grouping together similar credits into pools, and creating reference tokens that represent the whole pool. For example, one could group together nature-based carbon credits from the past five years to create a fungible reference token for that grouping. To offset a certain amount of CO2 emissions, one can also exchange pool tokens for the underlying carbon credits, and retire those. Similar asset pools have been developed for RECs and carbon forwards.

Limitations of environmental asset pooling & commoditization

Pooling credits together thus increases liquidity and consequently produces better price signals. However, pooling forces sellers to sacrifice control over the specific credits they’re selling, reduces a buyer’s ability to select a specific type of credit, and can result in the decay of the quality of the underlying credits.

This is because sellers are disincentivised from selling high quality credits into the pool, as they’re forced to take the average pool price when they may be able to get a higher price for the same credit in OTC markets. Conversely, sellers are incentivized to deposit low quality credits into the pool as those credits would sell at a lower price in an OTC market relative to the average pool price. Buyers are incentivized to redeem the high quality credits from the pool as they’re paying the same amount to receive them. This creates an arbitrage opportunity resulting in a race to the bottom: individuals can deposit low quality credits into the pool, redeem high quality ones, and make the difference.

Bundling a variety of credits into a pool or contract can lead to the degradation of the quality of the underlying credits.
Differentiated markets require differentiated exchanges

The unique characteristics of environmental assets and the unique challenges from their pooling and commoditization necessitates a differentiated exchange. History has shown that differentiated markets with specialized assets require differentiated exchanges to trade them. This is because the physical infrastructure, technical architecture, target customers, and regulatory frameworks vary depending on the asset(s) that an exchange trades.

These different requirements result in a necessity for tailored market infrastructure to match those differentiators. Whether it’s Nasdaq for stocks, ICE for commodities, Coinbase for fungible tokens, or OpenSea for NFTs, the story has always been and always will be that market infrastructure needs to match the markets they operate in.

Environmental asset markets are not different. If we simply adopt traditional commodity contracts used for homogenous commodities or list tokenized carbon on existing crypto exchanges, we will perpetuate market inefficiency and restrict the potential growth of the markets we operate in.

The Neutral exchange (Neutral X)

A functioning, reliable spot exchange is the foundation of any market. When designing our spot exchange we wanted to ensure that it can scale to handle large volumes, produce a reliable and accurate price signal, and address the current limitations in the commoditization or pooling of environmental assets. On top of that, we are including quality controls and building it on rails that embed the trust and transparency necessary in these markets.

This is no easy feat. To achieve our goals we’ve built a high-frequency order book exchange trading tokenized environmental assets with a special design to handle and price the semi-fungible commodities available on our platform. Our order book system’s special design allows for users to interact with the liquidity of a pooled asset while still expressing preferences for the characteristics of the underlying assets. It will allow sellers to retain control over their credits when selling into a pool and buyers to express preferences in addition to price and quantity.

Our order book design will allow us to deepen liquidity without sacrificing specificity, a sacrifice environmental asset traders have to make today when deciding to transact between OTC markets and liquid ones.
The Neutral order book design.

Our stack optimizes for outcomes and leverages the best tools available to achieve them. Blockchains are the best tool we have for trade settlement so we adopt them as our settlement layer. Off-chain servers are the best tool we have for running computationally intensive matching so we leverage that for our matching engine. Surrounding the exchange, we are building out quality controls for project origination, asset curation, and data availability in collaboration with our partners. This will result in an exchange with embedded auditability, or assurances that any asset on our platform has been audited by an agnostic third party and meets a certain quality threshold.

Embedded auditability is absolutely essential to rebuild trust in environmental asset markets.
The Neutral vision

The markets we work in are built on trust. In the case of carbon credits, the necessity for trust permeates the market’s entire value chain, from issuance to trade and retirement. In the case of issuance, we have to trust that the methodologies and the Measurement, Reporting, and Verification (MRV) against those methodologies are legitimate. In other words we have to ask: were the trees actually planted or was renewable energy actually generated? In trade, we have to trust that a commoditized pool has high quality underlying assets representative of real regenerative practice. Finally, if someone makes a retirement claim we have to trust that they are retiring high quality credits that actually offset their emissions. For markets that require trust to function, we need to build market infrastructure that embeds transparency and traceability across the entire value chain.

Blockchains are the best mechanisms we have for embedding transparency and traceability into the exchange of value. One can imagine a future blockchain-based system by which credits are issued against methodologies and ddMRV (decentralized, digital MRV) governed by a scientific-local community run foundation, bundled in transparent pools for improved price discovery & trade, and retired on-chain with transparency into who's retiring them. It's a system of full traceability from issuance to trade and retirement. It’s a system that allows for distributed ownership and involvement in an asset that has implications on all of us.

Assets that support public goods should be available to the public.

This is the Neutral vision. This vision of the future is one shared by many of our partners. What makes me and the Neutral team so excited about ReFi is that we’re already seeing the prerequisite infrastructure coming together to bring this vision to fruition. At Neutral, we will  build out a crucial building block of that future - an exchange that truly caters to the requirements of the unique ecosystem it services. We’re excited to play our part in bringing ReFi’s shared vision to life.

About Neutral

Neutral is an exchange for environmental assets. We combine tokenized carbon credits, renewable energy credits, and carbon forwards with specialized market infrastructure to deliver efficiency, transparency, and trust in these markets.

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