To say the financial markets are going through a downturn would be an understatement. As inflation rises, investors are increasingly concerned about how the Federal Reserve will continue to respond and the likelihood of future aggressive interest rate hikes. These sentiments, coupled with some other global events, have massively affected both the equities and bond markets. Through April, the S&P 500 dropped by 13.3% year-to-date, the steepest four-month decline to start any year since 1939. Through May 10th the index was down 16%. The NASDAQ has been hit even more severely, down nearly 25% year-to-date through May 10th.1 Bond markets have not fared any better. Through the beginning of May, ETFs tracking investment-grade corporate bonds and 20–30-year Treasury bonds are down 10% and 20%, respectively.2
Similarly, these macro-economic changes are also affecting cryptocurrencies. On May 11th the price for Bitcoin dropped below $26,000, a ~61% fall from its high price of over $67,500 and its lowest level since December 2020. At the same time Ether’s price fell below $1,800, a ~63% fall from its high of $4,800.
While poor market performance is never fun, a broader problem we are seeing is the correlation between all of these markets. Historically stocks and bonds have been seen as inversely related to one another. When stock prices go up, bond prices tend to go down. The opposite also happens: when stock prices go down, bond prices tend to go up. This happens because stocks and bonds compete for investor dollars. When markets are strong, investors are willing to take more risk and invest in equities. When markets are weak, investors shift to bonds, which are typically safer instruments.
Similar to bonds, cryptocurrencies are expected to have little correlation with major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes. However, this changed through the pandemic as crypto prices and U.S stocks both surged amid easy global financial conditions and greater investor risk appetite. As can be seen in the charts below, since the beginning of the pandemic Bitcoin and the S&P 500 have moved more in lock-step, rising and falling together.
For investors, this newfound correlation between stocks, bonds and cryptocurrencies can be disheartening. What’s the purpose of diversification if every asset class moves in-sync? Where can investors focus their time, efforts and money if each asset class moves similarly?
The carbon markets might be the answer to these problems. Through this downturn Carbon Credits have been particularly resilient. Pricing for CORSIA eligible and nature-based tokens have remained relatively flat, falling by just ~0.2%!
The reason for this is that demand for carbon credits doesn’t change based on how the broader markets are performing. Institutions that are committed to being net-zero emissions maintain that commitment regardless of market conditions. Interestingly enough, in market downturns, carbon credits may actually trade at a premium to their true values. As there’s less capital put towards the development of carbon credit-creating projects, the pricing of the credits currently in circulation may increase as demand persists.
However, as we explored in this linked article an interesting point to note is that while off-chain carbon credits have remained stable, prices for on-chain carbon credits have declined by nearly 30%. One of the main reasons for this is because current carbon credit tokenization models utilize a one-way bridge rather than a two-way bridge. This means that people can bring carbon credits on-chain, but have no way of taking them back off-chain, effectively disconnecting these two markets and causing price disparities between them. In situations such as the market conditions we see today, the ability for token buyers to access that two-way bridge is extremely important so investors can access the best pricing available.
At Flowcarbon, we are building our GNT token with a two-way bridge to both bring carbon credits on-chain and allow GNT holders to take them back off-chain. When the on-chain price is higher than the off-chain price, people can bring credits on-chain and sell them in the tokenized market. When the off-chain price is higher than the on-chain price, people can redeem their tokens for actual carbon offsets and sell them in the off-chain market. By building this two-way bridge, we are aiming to create parity between the two markets, which allows for maximum liquidity and provides our investors with a chance to find the best pricing for their assets possible.
On top of this two-way bridge, one other quality of our GNT token that is proving to be extremely important is its one-to-one backing by unretired carbon credits. In the crypto world we see a host of tokens that claim to be a representation of certain assets, but in actuality are not. This can be most clearly seen with ponzi game assets like Olympus Protocol’s OHM or algorithmic stablecoins like TerraUSD. Simply put, these protocols utilize clever tokenomic mechanisms that uphold or increase their token prices through relationships with other assets. When the value of those assets increases, those protocol’s tokens maintain their values or increase as well. Though, while these token-asset relationships prove effective when markets are bullish and asset values are increasing, during bear markets like the one we are experiencing today these projects tend to suffer.
However, during this bear market, asset-pegged tokens that are maintaining their values are those that do so via a direct one-to-one relationship. The best example of this is with the stablecoin USDC, a coin whose job is to maintain a 1:1 peg with the U.S dollar. Unlike algorithmic stablecoins (like TerraUSD), which maintain that peg through complex mechanisms, every USDC token that’s created is directly backed by a dollar held in reserve. That is, you can directly exchange one USDC for a real dollar.
At Flow Carbon we have designed our GNT token with this attitude of direct correlation. Just like every USDC is directly correlated to $1 held in reserve, so too every GNT is composed of carbon credits that are held in reserve. As the value of carbon credits shifts, our GNT token should shift similarly (if not at a slight liquidity premium), allowing GNT holders to understand the true value of the assets they hold.
In this way we are hoping to further enable parity and transparency, allowing GNT holders to understand the true value of the assets they hold.
One top of this 1:1 correlation, it's important to note that the carbon credits GNT is being pegged to are unretired, meaning the actual offset hasn’t been utilized yet. This is imperative for a number of reasons, the key one being that acquiring live credits directly (or indirectly if in a secondary trade) supports carbon sequestration projects. By giving those projects capital, you are incentivizing the development of future projects which will lead to further carbon sequestration attempts.
Additionally, using live carbon credits is another way we hope GNT tracks the pricing of carbon credit markets one-to-one. As the price of live off-chain carbon credits changes in value over time, so too will their live on-chain counterparts.
While bear markets rarely lead to prosperity, they are effective in weeding out assets that have design flaws. Through this current cycle it has become clear that carbon credit projects built to date are riddled with glitches. Whether they only utilize a one-way tokenization bridge, don’t correlate their tokens directly with assets held in reserve, or utilize retired credits that have no ability to accrete in value over time, it’s clear that carbon credits do not have an accurate on-chain representation. Because of these problems, while off-chain carbon credits have remained stable through this downturn, their on-chain counterparts have experienced price deterioration.
The GNT token solves for each of these problems. Its two-way tokenization bridge, one-to-one carbon credit pegging mechanism, and usage of unretired carbon credits creates true parity and transparency between the off-chain and on-chain markets. At Flow Carbon we believe the carbon credit markets need to be unlocked in order to create a more sustainable and environmentally friendly world. By designing the GNT token to be an exact parallel of an accessible and unretired carbon credit, we believe we are accomplishing just that.
1. https://www.reuters.com/business/finance/why-us-stock-market-is-tumbling-2022-2022-05-11/
2. https://money.usnews.com/financial-advisors/articles/how-bad-can-this-bond-crash-get
