Smart Contracts for the Warming World

Smart contracts are the bread and butter of blockchains. They’re often used in the complex money legos of decentralized finance (DeFi), often unintelligible to the general public and even most businesses. But can smart contracts also be deployed to help address the needs in, say, mostly analog industries like agriculture?

When blockchain evangelists talk about smart contracts, they tend to cite real-world use cases like smart contract-enabled insurance payouts to farmers in the event of on-chain conditions triggered by certain types of weather.

Sid Jha, a Wall Street veteran, has slowly built a business empire leveraging smart contracts just like in that example.

His duo of businesses are dClimate and Arbol.

dClimate is a decentralized marketplace for a rich array of climate data – forecasts and models – where data providers meet with buyers. It has a built-in feature to make the data more transparent by scoring the reliability of that data.

Think of it like a clearinghouse for the climate data. Under current centralized systems, different parties aren’t really encouraged to contribute data in a common open-source standard, Jha told CoinDesk. “An open-source platform brings trust and accountability to the platform,” he said.

Decentralization also allows a much wider group of contributors. Many of the best climate models are in academia, Jha explained, but they have difficulty accessing users and reaching a broader audience.

“So by being able to access the climates network, which can grow in a very organic way, you can have people putting up the best versions of forecast models, carbon monitoring models, and these can then be validated by how good your forecast for drought in, say, the Midwest is,” Jha said. “And these can all be validated in an immutable way on-chain.”

One of the beneficiaries of that climate platform is Arbol, Jha’s New York-based insurance company, offering weather insurance powered by smart contracts.

Smart contracts are programs composed of functions (“if X happens, then do Y”) and input (like the rainfall data). That input could come from external sources via oracles, which are like bridges between the blockchain and the real world. For Arbol, that bridge is provided by Chainlink, an Ethereum-based oracle network. Chainlink oracles provide access to blockchain-enforced weather coverage that helps smart contracts settle the terms immediately based on that weather data.

Once a smart contract is deployed on the blockchain it can never be deleted and any interaction with it is irreversible. This immutability is a big deal for the financial aspects of climate risk, like insurance underwriting.

“A lot of the climate data sits in very archaic servers for government agencies, academic agencies, other nonprofits, and often can be overwritten which makes it difficult to use for financial applications, like parametric insurance,” Jha told CoinDesk.

“Blockchain creates that immutable ledger and tracks all the revisions, and all the different changes that happened in the data.”

Blockchain helps Arbol differ from others in the insurance market. Its risk evaluation process for the purposes of insurance payouts is parametric, which means its contracts payout takes into account predetermined, verifiable and objective metrics set at the time of policy underwriting.

It is predetermined in the sense that the client chooses a relevant index at the beginning of their contract. If that index is met according to the applicable dataset, the client receives a payout. By design, parametric processes reduce the risks of fraudulent claims, speed up the claim process, and simplify the whole process, freeing everyone from piles of paperwork.

Arbol transacted $100 million of premium in the first half of 2022, more than in 2021. It has more than 700 institutional clients and more than $1 billion of available risk capacity.

“Climate risk affects us all,” Jha said. “If you run a small business, then your supply chain and your revenues are often very much linked to weather, and unexpected weather can be devastating. Farming is a great example, but that's just one example.”

“It could be a hotel in a tourist area. It could be a wind farm, where wind speed variations have caused big disruptions to their cash flows. Or a power utility, where sudden spikes in summer temperatures can lead to excess air conditioning demand and sudden need to buy power and very expensive rates to supply the consumer,” Jha explained.

“So this is about really taking a broader view around the effect of climate risk on our supply chains across the economy, large and small.”

Prior to Arbol and dClimate, Jha worked for more than 13 years in the financial industry. As a quantitative researcher and also trader, he specialized in interest rates and commodities.

At one point, Jha was a vice president of interest rates strategy at JPMorgan. He also authored a book on the subject, "Interest Rate Markets," published in both English and Mandarin.

“I spent 2008–2009 in the interest rate world and that showed me many of the vulnerabilities of the banking system,” Jha said. “And so there was always a natural attraction to a decentralized solution to do finance.”