Can blockchain technology help farmers get climate insurance?

Climate change is creating a nightmare scenario for subsistence farmers around the world.

Subsistence farms are typically small operations, often less than 2 hectares, of outsized importance to the families who operate them and to the surrounding community that depends on the harvest. From 2013, Almost 2 billion people on the planet relied on small subsistence farms for survival. But these farms are in trouble: Rising CO2 levels have increased the likelihood and severity of extreme weather events like droughts, floods and wildfires — a trend that can leave these farmers without food and money to buy groceries elsewhere . According to the United Nations Food and Agriculture Organization, extreme weather disasters are costing agriculture in developing countries $108 billion between 2008 and 2018.

But one company believes it can help solve the problem with a seemingly unlikely tool: blockchain.

Using blockchain technology to protect people from climate change might sound a bit like using gasoline to protect against a fire, but the Lemonade Crypto Climate Coalition, which launched last week, says they are doing just that want.

Cocoa farmers dry their crops in sub-Saharan Africa [Photo: Pula/Lemonade]

Most blockchain technologies are notorious for being energy intensive: a bitcoin transaction uses enough energy to power an average US home for six weeks. after some analysis. In other words, every bitcoin transaction is equal 402 kilograms of CO2 released. The Lemonade Crypto Climate Coalition, a new nonprofit arm of insurance technology company Lemonade Foundation, believes it can use blockchain technology to insure more than 2 billion subsistence farmers on the planet against climate disasters while avoiding the planet getting hotter. The Lemonade Foundation focuses its early efforts on Africa, but would one day like to take its ideas to South America, Asia, and anywhere else small farmers need crop insurance.

climate insurance is not a new concept, but providing the service to subsistence farmers has historically been difficult. Claims are often small — on the order of tens of dollars — meaning it’s incredibly difficult for traditional insurers to underwrite and process claims and still make money. “Everything is upside down. Handling the claim will cost you more than the claim itself,” said Daniel Schreiber, co-founder and CEO of Lemonade.

[Photo: Lemonade Foundation]

Lemonade partners with weather technology company for weather monitoring and climate data used to underwrite and process insurance claims. “They did some pretty sophisticated and highly granular modeling of weather patterns. . . We really use the best available data,” says Schreiber. The dates should get even better as plans to launch a series of rain-tracking satellites later this year comes to fruition.

Lemonade’s proposed solution is to use smart contracts – a blockchain feature popularized by Ethereum – to basically automate the withdrawal process. Smart contracts are programmable functions that run on a blockchain-backed network. Users decide the terms of the contract in advance, and when the terms are met, the payment is automatically initiated. For example, a bet could be placed on a March Madness game and once the game ends, the network would automatically pay out the winner and deduct money from the loser. Or in the case of a sweet potato farmer in sub-Saharan Africa, if there is a drought in the region that exceeds a certain threshold, they may receive the cash value of their lost crops.

Such smart contracts are only as good as the data you feed them, but blockchains have developed an assistive technology known as oracles, designed to scrape and verify data from the digital world for precisely this purpose. In the case of Lemonade’s new insurance technology, oracles would continuously monitor data from weather stations and satellites to determine which claims to pay out.

Cascade Tuholske, a postdoctoral fellow at Columbia Climate School, says the idea makes sense at the regional level. “On a single farm, it would be quite difficult to resolve the actual crop loss with any existing meteorological product, but for a large-scale drought, the general meteorological pattern for West Africa or sub-Saharan Africa can be resolved quite well,” he says, adding that the models will only get better as data from satellites and weather stations in the region continue to improve. “Especially in West Africa, crop insurance has proven to be a robust strategy to cushion agricultural losses during tough times,” he says. “These farmers need help.”

What about the environment?

Lemonade is aware of the environmental impacts of many traditional blockchains and seems equally interested in avoiding them. His insurance product will run on the Avalanche Blockchainwhich is designed to be economical and environmentally friendly.

The main difference between Avalanche and many other crypto networks like Bitcoin or Ethereum is that it uses “Proof of Stake” instead of “Proof of Work” to validate transactions on the network. For those who need a refresher, most blockchains rely on it proof of work to validate transactions on the network. Essentially, a Proof of Work requires a system to perform resource-intensive mathematical computation as a mark of good faith. This prevents users from playing the system and limits vulnerabilities for denial of service attacks and other malicious activities, as users must invest significant computing power to participate.

Proof of Stake, on the other hand, is a consensus mechanism, which means users are chosen by the network to validate transactions. Users with more assets in the network (and therefore a higher stake in maintaining its loyalty) are more likely to be chosen. The “winner” of this selection process validates a transaction; other users can then confirm the validity of the transaction. (Each user who participates in the validation process earns rewards on the network, often in the form of native digital currency.)

[Photo: Lemonade Foundation]

While Proof of Stake is typically not quite as secure as Proof of Work, it requires orders of magnitude less energy and comes with cheaper, faster transactions, which is good for someone trying to claim a $60 insurance payout for one to settle lost crops. On Avalanche, “transaction costs are a tiny fraction of what they cost on Ethereum,” says Schreiber. “With Ethereum, you can’t do a $5 transaction because you end up paying $30 in transaction fees.”

Get people to sign up

Lemonade works with Pula, a Kenyan company that has been operating across Africa for years to provide microfinance solutions to farmers. If Pula can deliver on its promises and convince users to sign up, it could be a chance for the blockchain to undo some of the damage it has done to the planet. This is what makes the project so exciting for writers.

“Blockchain is an interesting technology in many ways, but one thing that nobody would blame it for right now is that it’s having an impact on the real world,” he says. “That is what makes this initiative so interesting. It’s an attempt to do just that: harness the full powers of this novel technology to apply it to a world that couldn’t be more real: subsistence farmers exposed to the elements.” Can blockchain technology help farmers get climate insurance?


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