"We have proposed a system for electronic transactions without relying on trust" - Satoshi Nakamoto
Figure 7: Illustration of GainForest's Smart Contracts
The advent of cryptocurrency provides us with a frictionless and radical financial alternative that circumvents many of the pitfalls of existing financial institutes and carbon certificate policies. This section will discuss our reasoning for adopting a cryptocurrency-based solution and the design of our smart contract system for financing the forest economy.
Challenges of traditional bank transfers
Currently, many obstacles are put in the way of ecosystem restoration. Donors who want to support local community-based climate action face an often expensive and difficult financial process. Some of these obstacles are:
- Non transparency. Transactions and decisions within the bank (e.g. hidden fees) and the community (e.g. spending purpose) are nontransparent. Donors have to trust banks and communities that received donations and are used as promised.
- Censorship and exclusion. For many communities in developing countries, access to traditional financial services is difficult if not impossible, thus excluding many small communities that can't afford to work with a larger partner. Furthermore, banks can deny transfers at any time for various reasons.
- Large transaction fees. Financial transactions from developed countries to developing countries are slow and expensive. Outbound bank transfer fees cost on average 40 USD while the receiver usually pays an additional inbound transfer and exchange fee.
- Slow processing time. Depending on your bank, this transaction can take several days up to weeks to process.
- Donor's dilemma. If communities aren't transparent about when they are using their funds, donors are faced with the choice to either donate now or first invest their funds for a fixed period of time to then donate a larger sum (initial donation + earned interest) at a later stage.
Benefits of cryptocurrency for donations
The wide-scale adoption and innovation of Blockchain ecosystems enable donors to use cryptocurrencies as a novel way of avoiding many of the aforementioned pitfalls. A crypto-focused donation approach provides us with several benefits:
- Radical transparency. Every transaction is immutable and visibly recorded on a public ledger. There are no hidden fees and smart contracts can provable enforce that donations are only released when a certain impact has been verified.
- Decentralization and inclusion. Cryptocurrencies are decentralized and therefore censorship resistant. Users have full control of their respective funds and only require an internet connection to manage and receive funds.
- Low transaction fees. Transaction fees for tokens on Solana are usually around 0.00041 USD for an arbitrary transaction amount of money.
- Instant processing time. The transaction fees determine the speed of processing, enabling funds to be transferred usually between 30 seconds to 1 min.
- Supercharging donations. Unused funds can be staked to earn real-time interest, enabling donors to maximize their impact at any given point in time.
Did you know?
Our initial system was built on top of Ethereum, however, gas costs often exceeded 40 USD per transaction which made small-holder donations and dynamic NFT updates infeasible.
Figure 8: High-level overview of the GainForest Fund smart contract architecture
Leveraging smart contracts for provable trust
The reliance on mutual trust between all parties causes friction and a lack of sustainable funding for climate action. Smart contracts are able to overcome this problem by providing automated trust. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. If certain conditions are true (e.g. we can computationally measure that you preserve forest area above a certain threshold), then the smart contract will automatically execute the agreed-upon transaction without the need for a potentially biased third party. This provides trust, transparency, and full auditability. We will describe in the following section our backbone design of the GainForest decentralized smart contract fund.
The green fund smart contract
GainForest Fund is a smart contract living on the Solana network that channels donations in cryptocurrency (e.g. SOL or stablecoins) from donors to communities. When donors send a payment to the GainForest Fund they can optionally provide a list of verified target addresses and trusted verifiers (or leave it empty to enable all partner projects to unlock the donation).
Did you know?
DAI and USDC are stablecoins on Solana that tracks the value of the USD where 1 DAI or USDC is exchangable to 1 USD. This provides the needed stability when sending and receiving donations.
Funds are released through impact verification tokens that are provided by GainForest's Proof-of-Care oracles (more in Chapter 5). Local communities can receive their dedicated funds and imvestors receive their impact verification tokens. This provides an immutable trace of the impact for investors and individual donations.