Biodiversity Tokenization and Unassailable Reputations

Originally published in Portuguese at Valor Econômico – 16/10/2024 

The COP16 on Biodiversity, which began today (Monday the 21st) in Colombia, seeks to advance the implementation of the Montreal Agreement, whose goal is to protect 30% of the planet by 2030. The Biodiversity Credits Advisory Panel, an organization representing more than 25 entities, plans to present solutions for conservation financing, including biodiversity credits, which many believe are key to channeling the necessary resources.

However, I am skeptical about the ability of organizations seeking political consensus among multiple parties to present practical and implementable solutions. While deciding on the proportion of the planet to be conserved is a political issue, the strategies to achieve this goal and the pricing definition are technical and economic challenges that cannot be solved through persuasion. Attempting to resolve the technical difficulties of measuring biodiversity politically neither increase the reliability of assessments nor reduce the challenges of establishing values. Political consensus does not solve the fundamental problem of uncertainty.

Thus, I believe the solution is technological. Biodiversity is an objective reality that can be measured and compared statistically, regardless of beliefs or ideologies. The same goes for assigning value. In a free market, prices reflect an economic consensus, consolidating information from various agents and real conditions beyond political agreements. A lack of consensus on price usually indicates insufficient information somewhere in the chain.

The value of biodiversity, like any asset, is determined by its scarcity, exclusivity, and opportunity cost. Therefore, distrust in measurements is a significant impediment to assigning value. When one does not know what they are acquiring, no price seems appropriate.

I also disagree that the absence of a common unit for biodiversity is the main obstacle to assigning value. Many non-fungible goods (unique and non-interchangeable items), such as works of art, are valuable and traded. The impossibility of replacing a Botticelli painting with a Caravaggio does not prevent each from being valued in the millions. Similarly, an elephant does not need to be worth the same as its mass in butterflies, and Brazil’s biodiversity does not need to have the same value as Malaysia’s to be considered valuable.

For me, full accessibility to biodiversity information will offer security and compliance to the buyer, allowing for the correct assignment of value. Current technology enables this. It is a matter of adoption.

Species identification was once a monopoly of academia, and the risk was high. Biodiversity is vast and abundant, with many organisms largely inaccessible. Traditional taxonomy, based on morphology, is manual and individual, with reproducibility and replicability error rates of up to 25% and 50%, respectively.

Companies limited their involvement to the minimum necessary to comply with regulations, but the judicialization of regulatory disputes turned this risk into a reputational one. Certifiers emerged to mitigate this risk, but certification without reducing technological uncertainty does not alleviate doubts; it simply transfers the risk.

DNA sequencing technology is the answer to reducing uncertainty in measurement, providing backing for value assignment, and decreasing reputational risk. It has democratized organism identification, now accessible to any molecular biologist. It offers replicability, reproducibility, scalability, and speed, as it is automatable and digitizes biodiversity for computational processing.

Startups are beginning to replace academia in species identification and information presentation. DNA sequencing data, capturing the biodiversity of environmental samples such as water, soil, and sediment, are stored in machine-readable formats. They can be interpreted by systems that facilitate visualization, understanding, and decision-making.

Biodiversity profiles, which reflect geographic and temporal variations, are like fingerprints that allow for statistically verifying the origin of a sample, without the need to rely on declared information. The raw environmental DNA sequencing data, available online, have become the backing for biodiversity.

The conversion of these files into unique codes, called hashes, using cryptographic functions, and their registration on a public blockchain, adds an unprecedented layer of security, with absolute transparency and traceability. The files that contain the biodiversity backing cannot be altered without the modification being evident through the hash change. These solutions already exist.

Now, the legitimacy of a biological sample no longer depends on trusting an agent but on verifying the cryptographic hashes of the raw DNA sequencing data, available to anyone at any time. If the hashes are validated, the data are authentic, and the ecological conclusions can be confirmed.

Recording these biodiversity profiles on the blockchain creates an immutable history, which is the foundation of an unassailable reputation. A biodiversity offset client knows they are purchasing a verifiable and tamper-proof product. This is the tokenization of biodiversity.

Adopting this technological approach to defining biodiversity credits creates a business-friendly environment, as political alignment is not necessary for economic consensus to emerge, increasing the accessibility of the good or service and the effectiveness of conservation.

Tokenization also allows for the use of decentralized financial instruments, such as smart contracts that enable the integrated and secure exchange of digital assets on the blockchain or off it, in addition to the anticipation of future credits at present value. These records not only define the price of credits but also offer transparency on the volume of transactions, helping estimate the real size of the biodiversity credits market.