Natural Capital AMM

Unlike traditional AMMs for fungible tokens, a Natural Capital AMM provides continuous liquidity for inherently non-fungible assets (e.g., forest carbon credits from different projects). It achieves this by using bonding curves or liquidity pool tiers that algorithmically price assets based on verifiable attributes like vintage, project type, and certification standard, creating a liquid secondary market.

The core pricing mechanism uses a verifiable attribute set for each natural asset. Key attributes include:

• Project Type (Afforestation, REDD+, Renewable Energy)
• Vintage Year
• Certification Standard (Verra, Gold Standard)
• Geographic Region
• Co-benefits (Biodiversity, Community Impact) The AMM's algorithm weights these attributes to calculate a fair market price relative to a base reference asset, enabling price discovery for heterogeneous environmental commodities.

Each liquidity pool is backed by real, retired, or tokenized natural assets held in a transparent reserve (e.g., a custodial wallet or on-chain registry). This creates a direct link between pool liquidity and the underlying environmental value. The reserve ratio and attestations (like on-chain proofs from registries) ensure the AMM is not creating synthetic exposure but facilitating trade of actual claims on natural capital.

The protocol can embed programmatic retirement functions. When a token representing a carbon credit is traded to an end-user (e.g., a company offsetting emissions), the AMM can automatically trigger its retirement on a public registry (like Verra) and mint a proof-of-retirement NFT. This "burn-on-settlement" feature ensures environmental integrity and prevents double-counting, directly linking financial settlement to real-world impact.

Transaction fees are often structured to fund long-term ecosystem stewardship. A portion of swap fees (e.g., 0.05%-0.3%) can be automatically directed to:

• A protocol treasury for development
• Project developers for ongoing monitoring
• Community/DAO governance pools This aligns economic incentives with the perpetual maintenance of the underlying natural assets, moving beyond a purely financial exchange model.

To price assets accurately, the AMM integrates decentralized oracle networks (like Chainlink) to feed verified off-chain data into its pricing model. This data includes:

• Spot prices from traditional carbon markets
• Registry status updates (issuance, retirement)
• Scientific data (satellite imagery for forest cover) This creates a hybrid financial model where on-chain liquidity is governed by real-world, verifiable information flows.

Unlike traditional AMMs that trade fungible tokens, a Natural Capital AMM creates liquidity pools for non-fungible or semi-fungible environmental assets. These pools often use specialized bonding curves or constant function market makers (CFMMs) adapted for assets with unique attributes like vintage year, project methodology, and geographic jurisdiction. This allows for price discovery and continuous liquidity for assets that are otherwise illiquid and difficult to value.

A primary function is to fractionalize large, whole-unit environmental assets (e.g., a 10,000-ton carbon credit retirement) into smaller, tradable tokens. Conversely, it can aggregate smaller units from similar projects into standardized basket tokens. This process enhances liquidity, reduces transaction costs, and lowers the barrier to entry for retail and institutional participants seeking exposure to natural capital markets.

A practical application is a pool containing tokenized Verified Carbon Units (VCUs) from a specific registry and methodology (e.g., Verra's REDD+ projects). Liquidity providers deposit VCUs and a stablecoin. Traders can then swap between the asset and stablecoin, with the pool's algorithm setting the price based on supply and demand. This creates a transparent, on-chain spot market for carbon, distinct from over-the-counter (OTC) deals.

These AMMs rely heavily on oracles and verifiable credentials to ensure the integrity of pooled assets. Oracles attest to off-chain data such as:

• Retirement status and double-counting prevention.
• Project issuance and registry updates.
• Environmental co-benefits (e.g., biodiversity scores). This trust layer is critical for maintaining the "green" premium and preventing the trading of invalid or expired credits.

Companies with carbon liabilities or net-zero commitments can use Natural Capital AMMs for hedging price volatility. By providing liquidity or using futures/options built atop the AMM, they can lock in prices for future credit purchases. This application transforms environmental assets into a financial risk management tool, providing price signals and stability for corporate decarbonization strategies.

The AMM's pricing relies on an oracle to provide the current value of the natural capital asset (e.g., a carbon credit). This creates a critical dependency. Key risks include:

• Oracle manipulation: A compromised or inaccurate oracle feed can lead to incorrect pricing and arbitrage losses.
• Data freshness: The value of the real-world asset must be updated frequently enough to reflect market conditions, but not so fast as to be volatile for the AMM's constant product formula.
• Attestation proofs: The oracle must provide cryptographic proof that the underlying asset (e.g., its serial number, vintage, registry) is valid and not double-counted.

Pools are inherently asymmetric, pairing a fungible token (e.g., a stablecoin) with a non-fungible natural asset. This affects liquidity provider (LP) economics:

• Concentrated liquidity: LPs may need to provide liquidity within a narrow price range for the natural asset, as its value is less volatile than typical crypto assets. This increases capital efficiency but also impermanent loss risk if the price moves outside the range.
• Single-sided liquidity: Deposits might be primarily in the fungible token side, creating an imbalance. The protocol must manage the minting/burning of representative tokens for the natural asset carefully.

The natural asset must be tokenized and brought on-chain, introducing custodial and bridging risks.

• Legal custody: The real-world asset (e.g., a forest carbon credit) is held by a custodian. The smart contract's ability to mint/burn the representative token must be irrevocably tied to this custody.
• Bridge security: If using a cross-chain bridge to bring the asset onto the deployment chain, the bridge becomes a single point of failure. A bridge exploit could result in the minting of illegitimate natural asset tokens.
• Regulatory compliance: The tokenization and trading mechanism must adhere to the legal frameworks governing the underlying asset.

Beyond standard AMM risks, unique vectors emerge:

• NFT pricing manipulation: An attacker could exploit the oracle or the AMM's pricing function to artificially devalue the NFT side, draining the fungible token reserves.
• Liquidity fragmentation: Each unique natural asset (by project, vintage, type) may require its own pool, fragmenting liquidity and making pools more susceptible to manipulation.
• Exit liquidity risk: For large, illiquid natural assets, providing sufficient exit liquidity for holders to swap back to a stablecoin can be a challenge, potentially leading to high slippage.

Control over core parameters is crucial for long-term security and adaptability.

• Parameter control: Who sets the protocol fee, oracle whitelist, and supported asset registries? A decentralized governance mechanism is typically required.
• Upgrade paths: The protocol may need upgrades to support new asset types or oracle standards. Use of proxy patterns or timelocks is essential to prevent malicious upgrades while allowing for evolution.
• Emergency pauses: The ability to pause swaps or deposits in case of a discovered vulnerability is a critical safety feature, but its activation must be governed transparently.

The process of creating a digital, on-chain representation of a physical or intangible off-chain asset. This is the enabling technology for Natural Capital AMMs.

• Key Steps: Legal structuring, asset valuation, and the minting of a digital twin (e.g., an ERC-20 token).
• Backing: Tokens are backed by claims to the underlying asset's cash flows or value.
• Use Cases: Carbon credits, timber yields, agricultural produce, and renewable energy credits.

A smart contract that holds reserves of two or more tokens, enabling decentralized trading and earning fees for contributors. In a Natural Capital AMM, one side of the pool is typically a stablecoin or crypto asset, while the other is a tokenized natural capital asset.

• Function: Provides continuous liquidity, eliminating the need for counterparties.
• Impermanent Loss: A risk for LPs when the price of the pooled assets diverges.
• Pool Composition: Critical for determining price discovery and slippage for ecological assets.

A Verifiable Credential is a tamper-proof digital proof of a claim. Measurement, Reporting, and Verification (MRV) is the framework for quantifying ecological impact. Together, they underpin trust in tokenized natural capital.

• Issuance: Credentials are issued by accredited bodies (e.g., a registry for carbon credits).
• On-Chain Proof: Credentials can be attached to tokens to prove their environmental attributes.
• MRV Systems: Use IoT sensors, remote sensing, and standardized protocols to generate the data for credentials.

A mathematical model that defines a relationship between a token's price and its supply. Used in some AMM designs and can be applied to Natural Capital tokens for programmed price discovery.

• Continuous Pricing: Price increases as more tokens are bought from the reserve and decreases when sold.
• Bootstrapping: Can be used to fund an ecological project by selling future tokenized yields upfront.
• Dynamic Supply: Allows for a more responsive pricing model than a constant-product AMM for non-fungible or unique asset streams.