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Now, after spending a decade in crypto, I believe the most important real-world use case of tokenization, blockchain and smart contracts could be tokenizing weather derivatives and not merely creating a digital warehouse of traditional yield-generating assets such as bonds.
Let me explain why.
Weather derivatives are financial instruments that pay out when specific climate conditions cross predetermined thresholds. For example, a utility company might buy a contract that pays if winter temperatures stay unusually warm, cutting heating demand and revenue. An airline might hedge against the cost of flight cancellations caused by storms. A farmer in India might protect against a failed monsoon.
These instruments exist precisely because weather is one of the largest unhedged financial risks in the global economy. According to estimates by the World Meteorological Organization, weather-related disasters have caused a global economic loss of over $2 trillion in the past decade alone.
The traditional weather derivatives market is broken
The problem is that the market built to manage this risk is itself broken.
Weather derivatives are highly specific, mostly bespoke contracts based on localized risks and are frequently short term, which severely curtails secondary trading activity. The entire market has a notional value of roughly $25 billion, a rounding error compared to interest rate or credit derivatives markets, and an equally striking rounding error relative to the $2 trillion in weather-related losses recorded over the past decade — let alone the scale of potential disasters ahead.
