Backing sustainable agriculture with decentralized inclusive finance

By Jan Stockhausen, chief legal architect of Etherisc.

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

Smallholder farmers — those operating on less than five hectares of land — represent around 95% of the world’s farms, and in regions such as Asia and Sub-Saharan Africa, provide up to 80% of the food produced. As we move towards 9.8 billion people on the planet by 2050, with countries in these regions such as India and Nigeria expected to lead population growth, securing a sustainable smallholder food chain will be crucial to mitigating global food security risks. 

However, small-scale farmers in emerging economies are also disproportionately experiencing the effects of climate change and extreme weather events, with these devastating impacts only set to worsen as global temperatures rise. These divergent trends — population growth and declining food security — spell out a worrying future for billions of people across the globe.

Financial support in all the wrong places 

Climate finance is a distinct form of financing aimed at supporting mitigation and adaptation actions to address climate change. Agricultural climate financing needs to provide smallholder farmers with greater access to finance to enable them to withstand the impacts of climate change, as well as to implement eco-friendly farming techniques. However, climate financing initiatives have fallen woefully short in providing the necessary capital to date, with pledges from developed nation governments to the tune of just $100 billion per year remaining unfulfilled after a decade.

While well-intentioned, agricultural initiatives have suffered from a number of shortcomings inhibiting their potential to deliver lasting benefits. For example, while hundreds of dams and schemes have been set up across Africa through World Bank funding, these big irrigation projects have ultimately overpromised — on average delivering only 18% of the irrigated production area they originally proposed. This failure is indicative of wider issues in agricultural climate finance today — namely problems associated with the political and management frameworks.

First, political imperatives can have a detrimental impact on projects’ long-term success. Motivated to simply produce more food in order to reduce dependence on imports and increase exports, governments tend to focus primarily on low-value staple crops, such as rice and maize through these schemes. These types of crops undermine the financial sustainability of the project as reliable and sustainable profits aren’t guaranteed, meaning farmers remain dependent on external investment and subsidies to maintain this infrastructure. Once investment runs dry, these schemes deteriorate rapidly. 

Second, funding programs are typically directed at larger, centrally-managed infrastructure projects. These more established projects are both easier to market and administrate in comparison to a multiplicity of smaller-scale initiatives geared towards smallholder farmers, for instance. However, many centralized government agencies in emerging economies are underfunded and poorly resourced, lacking the capacity and knowledge to deliver such large-scale projects.

Envisioning a decentralized solution 

At this moment, the general tenor in the blockchain and distributed ledger technology (DLT) sector has shifted from how these technologies work to what are the most effective implementations. As this year’s COP26 UN Climate Conference illuminated, it is now time to move from pledge to plan to performance. As we shift towards the implementation of climate pledges, it’s essential to have accurate climate data to ensure that funding is allocated efficiently and to where it is needed most. As outlined in the CLI’s 2021 Report, blockchain is proving itself a useful tool in transparently managing the complexity of where climate data has come from and who is in charge of it, with impactful case studies already having tangible impacts across the globe.

One such example is the provision of decentralized parametric insurance for small-scale farmers against climate risks. Traditional crop insurance is failing to provide adequate protection for farmers in developing countries. Manual workflows, inefficient processes, and high costs have contributed to just 3% of smallholder farmers in Sub-Saharan Africa being covered by agricultural insurance. Further exacerbating 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 resow and bounce back from a crop 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 is making transparent and reliable coverage, as well as prompt payouts, a reality for the first time.

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

Aligning Web3 and the environment

Bill Gates recently stated that “climate tech startups will produce eight to ten Teslas, a Google, an Amazon and a Microsoft,” and that “future returns from investing in companies fighting climate change will be comparable to those produced by the largest technology companies to date.” It is already an absolute necessity for businesses to consider the climate implications of their operations, and this extends to every new facet of the Web3 movement.

We must think carefully about the capabilities of emerging technology, and weigh up their environmental costs and benefits, as well as the potential to right the ruinous climate damage of what has preceded them. From the rollout of microinsurance to crowdfunding and crowdlending, to the introduction of a carbon coin, we are already seeing possibilities emerge that can equally bring prosperity and mitigate our impact on the planet. The intersection between blockchain and climate action is primed to be the most significant area of technological innovation in our lifetimes.

Jan Stockhausen is the chief legal architect of Etherisc.