Liquidity and the Role of Bundles

Carbon Token Bundles pool multiple project-specific tokenized carbon tonnes (BCO2 tokens) into more liquid carbon index tokens, enabling price discovery for different classes of carbon assets.

Not every carbon offset is created equal 👼

As stated in the BRIDGE section, a carbon offset represents a measurable and verifiable removal, reduction, or avoidance of greenhouse gas (GHG) emissions - a tonne of CO2 equivalent that is not in the Earth's atmosphere.

It makes a difference whether or not emissions are being drawn down from the atmosphere—commonly referred to as carbon removal—or if the flow of emissions into the atmosphere is being reduced or avoided. The classification into removal vs. reduction/avoidance credits is a good example of the diversity of carbon credits and form the core of carbon accounting and reporting best practices.

But within these broad categories, many more differentiating criteria dictate the price carbon projects can expect to get for their credits. A few important ones are:

• Project Type: Different approaches to reducing greenhouse gases in the atmosphere are more or less effective - techniques like reforestation, protecting forests from deforestation, renewable energy projects (solar, wind, hydro), methane capture, soil carbon, or carbon capture and storage (CCS) projects.

• Country: Project costs are higher in some countries than others, plus credits from some countries may be perceived as higher-quality than from other countries.

• Carbon Standard: Some standards are more rigorous than others or demand additional data points to be collected during project monitoring and verification.

• Co-benefits: Some projects seek additional certification from standards like the Climate, Community and Biodiversity Standards (CCB Standards), which certifies additional benefits like an increase in biodiversity or specific Sustainable Development Goals (SDGs).

The unique attributes tied to a carbon project results in credits being traded and sold like differentiated products (e.g. wine) rather than like commodities (e.g. corn or rice). The majority of carbon transactions happen over-the-counter (OTC) and behind closed doors, meaning the prices of different offset types aren't public information — there is no clear price signal. This makes it hard for end customers to know whether or not they are paying a fair price and which percentage of the money lands in the hands of the initial project developer. The lack of liquidity and efficient price signal in the carbon market today has discouraged organizations looking to reduce their carbon footprint from participating and made it difficult for project developers to secure funding.

Liquidity is at the heart of any efficient market. It is critical for a couple of key reasons. First, it guarantees that buyers and sellers can trade easily. This reduces market volatility and overall risk for the market participants. Second, and arguably most importantly, it creates a transparent price signal for the underlying commodity.

The tokenization process for batches of carbon credits brings them on-chain, but this alone does not solve the liquidity problem. It is likely that different BCO2 tokens will trade at different prices and BCO2-specific liquidity will be shallow or non-existent. This is where bundles come in. The sole purpose of the development of bundle tokens is to introduce liquidity to the market. Holders will be able to exchange their BCO2 tokens for bundle tokens as long as the BCO2 tokens meet the acceptance criteria of the bundle. The bundle tokens are backed one-to-one by an underlying BCO2 token and represent a claim on the aggregated collection of BCO2 tokens. Through the aggregation of multiple BCO2s, liquidity will be introduced to the market and an on-chain price of carbon will emerge.

Carbon reference tokens allow liquidity to be pooled, which is necessary to create a liquid market and produce a transparent price signal to the market for different categories of carbon credits. These standardized carbon tokens can be traded on DEXs (decentralized exchanges) with much deeper liquidity than a single project's credits ever could.