Blockchain technology for pay-for-outcome sustainable agriculture financing: implications for governance and transaction costs

Abstract

Pay-for-outcome financing mechanisms have been used to address agricultural runoffs to overcome the inefficiencies associated with push-based solutions, which are dependent on subsidies or philanthropic funding. As a market-based approach, pay-for-outcome platforms seek to incentivize sustainable practices, compensated by beneficiaries of the positive outcomes. Execution of pay-for-outcome financing mechanisms in an agriculture context is a complex transaction, involving investors, farmers, third party verifiers of outcomes, government and corporate beneficiaries, and thus requires a costly governance structure. Effective governance mechanisms are needed to meet the transaction costs identified in performance measurements. This study investigates the efficacy of blockchain technology to address transaction costs in pay-for-outcome financing for sustainable agriculture. Through a proof-of-concept, this study quantifies and explores the potential cost-saving benefits of utilizing blockchain. The proof-of-concept is an application of blockchain within a pay-for-outcome incentive model, namely the Soil and Water Outcomes Fund, for sustainable agriculture. Utilizing the Ethereum blockchain, transactions are facilitated through crypto wallets and a hybrid smart contract, while precipitation is used as a proxy for agricultural runoff measurements. Drawing from Transaction Cost Economics theory, a discussion is presented on how blockchains can reduce transaction costs, enhancing the governance and efficiency of pay-for-outcome mechanisms. Furthermore, the article presents blockchain transaction fees in the context of the scale of operations, considering the total number of participants in the Soil and Water Outcomes Fund. Our findings indicate that blockchain technology has the capacity to simplify intricate transactions, boost measurement accuracy, cut administrative expenses, and foster trust and transparency among stakeholders, thereby reducing the overall transaction costs associated with pay-for-outcome incentives. While blockchain has its limitations and is not a universally applicable solution for every type of transaction cost, we believe that blockchains are well-suited to facilitate pay-for-outcome financing such as the Soil and Water Outcomes Fund.