February 26, 2022
KlimaDAO’s policy team is integral to the growth of the protocol, and the wider ReFi ecosystem. This entry introduces the KlimaDAO policy team’s role, defines the key mechanisms that they can use to guide growth, and takes a forward look at what the DAO’s policy development could look like as the protocol matures and moves through its Roadmap.
Establishing the on-chain ReFi economy is critical to make climate action accessible for all. As the reserve currency for ReFi, KLIMA aims to support sustained growth of the on-chain carbon market. KlimaDAO governs the tokenized carbon ecosystem for the benefit of ReFi, ensuring long-term liquidity and providing predictable demand via bonds. The Policy team is informed by economic models and data analysis, aiming to make objective decisions that optimize the long-term success of ReFi.
Ultimately, the goal of policy is to nurture a regenerative on-chain economy that incentivizes actions which protect our planet, with the KLIMA token at the center as the reserve currency. To this end, KlimaDAO’s policy team aims to facilitate growth within ReFi. The growth of ReFi will unlock adoption for KLIMA, and create a virtuous cycle of growth.
The policy team works on behalf of the KlimaDAO community to understand and analyze the available data, evaluate the market, and advise the DAO and community on how the protocol can best position itself for long-term growth.
The policy team itself has only limited decision-making power, and instead primarily functions as an agent of the DAO to inform decision-making and propose optimal solutions. Proposals are posted on the KlimaDAO Forum for discussion with the community; Forum discussions that are received well are progressed to KlimaDAO’s Snapshot where Klima Improvement Proposals (KIPs) are voted on via on-chain token votes.
While DeFi markets move at lightning speed, ReFi’s tighter connection to the legacy markets has led to slower-than-anticipated growth. KlimaDAO’s partnerships team is working to establish demand through programs such as Klima Infinity, but ultimately we need a robust ecosystem driving adoption of on-chain offsets to keep the flywheel spinning. As such, the Policy team views the recent appearance of innovative bridges such as two-way bridging (Flow/GoddessDAO) and automated one-way bridging (C3) as healthy competition that breeds innovation and mitigates centralization - as well as spurring adoption by bringing more external demand into the on-chain market.
This new narrative shifts the Policy team’s priorities from an ambition to rapidly expand supply of KLIMA, to more measured growth that aims to align with the growth of ReFi, prioritizing long-term resilience and tangible climate action.
KlimaDAO launched with attractive bonding and staking rewards to incentivize new market participants and rapid supply expansion. The KlimaDAO treasury started with nothing, and attractive incentives were fundamentally needed to bootstrap the treasury. KlimaDAO was the ignition for the development of the wider ReFi market which stands to be one most significant evolutions of DeFi this year.
The common challenge of policy makers, be it government officials, international associations, or blockchain protocols, is the balance of interests across parties. In the context of KlimaDAO, that could be between the DAO contributors, the community, those who have been a Klimate prior to launch and those who are new.
The strength of DAOs and distributed decision making is that all stakeholders are given a voice. KlimaDAO takes the DeFi approach of governance, whereby token holders are the arbiters and decision makers. This is embedded into the DAO and helps it deliver on the virtue of egalitarianism and the development of public goods. KlimaDAO is able to achieve this by leveraging the Ethereum blockchain and building on the processes of existing DAOs.
What is perhaps most challenging for KlimaDAO today, is that it is moving in uncharted territory. Moss' MCO2 token was the first major innovation for tokenized carbon credits launching in August 2020 and demonstrating to KlimaDAO and others the art of the possible. However, the on-chain carbon market did not exist on Polygon in early Autumn of 2021, and there remains are still few examples of successful carbon solutions on the blockchain.
For DAOs focused solely on DeFi, there is a significant amount of data that can be used to identify optimal strategies, and composable assets that can be used to deliver on specific objectives and generate revenues.
However, in the case of KlimaDAO, it is helping facilitate this market from the bottom-up. The off-chain data for the carbon market is hard to access and is fragmented. The data for the on-chain ReFi space is available, but it lacks depth and duration. Building up a picture of the possible future is difficult, without a rich history of data to leverage.
Hence, for the time being KlimaDAO’s Policy team develop their vision and proposals based on the best available data and forward-looking analysis. As this space matures, more data will become available to ensure robust and evidence-based decision making can be achieved.
As more ReFi solutions come online, KlimaDAO will be able to inform its policy development in line with new players in the space through symbiotic relationships. The data and value created by new partner protocols will be key to scaling KlimaDAO.
OlympusDAO mechanics have been used by KlimaDAO as an inspiration to the protocol. However, new mechanics may need to be developed to benefit the community, and strengthen the position of our collaborators within ReFi.
The below mechanisms detail policy approaches that could be developed by KlimaDAO through policy proposals and token votes. A cost-benefit analysis of these approaches would be required to ensure that they are the appropriate approach to help scale the adoption of KLIMA and ReFi. This analysis becomes more viable and accurate as more data for ReFi becomes available, although new mechanisms unavoidably add a layer of complexity and uncertainty to KlimaDAO’s trajectory, and do come with trade-offs that could create market inefficiencies that must be understood prior to taking action.
KlimaDAO needs to be agile – it needs to marry the need for healthy expansion of the protocol itself with the needs and development of ReFi. The bottom line is that KlimaDAO is here to build accessible and impactful tools that can coordinate activities and generate high-integrity financial flows to carbon projects across the globe.
In addition to using specific policy mechanisms outlined above, KlimaDAO and its policy team have the objective of establishing KLIMA as a base carbon trading pair.
Again, a comparison between KlimaDAO and OlympusDAO is a useful exercise to demonstrate the difference in how these protocols need to operate, and how they must scale. Fundamentally, OlympusDAO has to hold liquidity in two pools to build out and achieve its objective of being the native currency of DeFi: OHM/DAI and OHM/ETH. DAI is one of most prominent stable coins, and Ether is the most transacted cryptocurrency. OlympusDAO can leverage established and liquid assets to realize its vision.
In ReFi (similarly to OHM in DeFi) KLIMA stands to be the native trading cryptocurrency for carbon tokens on the blockchain. The gateway to achieving this is the KLIMA/USDC pool; this pair is used to efficiently facilitate on-chain carbon market operations. By owning LP tokens, KlimaDAO is creating liquidity with KLIMA pairs. This liquidity will be the foundation of ReFi, and will unlock the growth of KlimaDAO.
However, for the KLIMA-carbon pairs, with a limited supply of KLIMA and tokenized carbon tonnes on the market, deep liquidity will take time to build. That said, excessively deep liquidity is not required, nor necessarily wanted. Excessively deep liquidity on certain KLIMA-carbon pairs can inhibit growth as it creates dependence between pairs.
Hence, KlimaDAO aims to adjust the model to have multiple dependencies and establish a resilient and diversified ecosystem. This can be achieved by bootstrapping each carbon pair, and utilizing BCVs to moderate the incentives against each pool to ensure harmonic growth of these pools for ReFi.
The first step in achieving this was KIP-8, which introduced KLIMA/USDC bonds. This established the role of KLIMA as a base carbon pair through a horizontal development model.
Bonds can be used to incentivise pool development over time to match and perpetuate the growth of ReFi. For example by moving from the dominant KLIMA/BCT, to KLIMA/MCO2, to new KLIMA pairs as they come online, we empower the growth of new partners and maximize protocol resiliency.
This approach has an added benefit for KlimaDAO – rather than routing directly through the deep USDC pools, the pressure of bonding into single KLIMA pairs can be isolated and reduced. This will create a level of independence between the various ReFi carbon tokens, enabling KlimaDAO to hold an index of independent carbon tokenswithin its treasury.
Ultimately, this positions KLIMA as the foundational carbon cryptocurrency, providing liquidity and facilitating efficient market operations across ReFi.
The demand for ReFi and KLIMA surpassed all expectations at KlimaDAO’s launch.
Five months after launch there has been less supply within ReFi than KlimaDAO requires to achieve 80, 100, 200x growth in the next year. KlimaDAO requires new products to be developed ahead of the next market cycle to scale-up its impact. By developing symbiotic partnerships across ReFi, KlimaDAO can amplify the climate impact of partner projects, and maximize adoption of KLIMA.
Near-term policy change will reflect that the KlimaDAO community has voted to adjust to current market conditions and appropriately reduce bond capacity. The KIP-14 vote enables the DAO to move forward in this regard. This approach mitigates the impact associated with overly aggressive supply expansion during a slower market, and it aligns staking rewards with a lower risk environment compared to at launch.
In addition, it allows KlimaDAO to use this time to lengthen its runway and increase the resilience of the protocol with a longer-term horizon.
KlimaDAO needs to meet the ReFi market halfway, and the team needs to work diligently to balance the interests of the KlimaDAO protocol and its community with the long-term growth of the ReFi ecosystem.
The information provided in this blog post pertaining to KlimaDAO (“KlimaDAO”), its crypto-assets, business assets, strategy, and operations, is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any securities, options, futures, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws. Information contained in this blog post should not be relied upon as advice to buy or sell or hold such securities or as an offer to sell such securities. This blog post does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. KlimaDAO and its agents, advisors, directors, officers, employees and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and KlimaDAO expressly disclaims any and all liability that may be based on such information or errors or omissions thereof. KlimaDAO reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof. The information contained in this blog post supersedes any prior blog post or conversation concerning the same, similar or related information. Any information, representations or statements not contained herein shall not be relied upon for any purpose. Neither KlimaDAO nor any of its representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to you or any person resulting from the use of the information in this blog post by you or any of your representatives or for omissions from the information in this blog post. Additionally, KlimaDAO undertakes no obligation to comment on the expectations of, or statements made by, third parties in respect of the matters discussed in this blog post.