Published Tue Feb 08 2022
Several weeks ago, our launch partner Toucan determined "that there was value at risk of being arbitraged from the BCT pool to the NCT (Nature Carbon Tonne) pool they are preparing to launch". In order to protect this value from being arbitraged and extracted from the ReFi ecosystem, Toucan coordinated with third-party liquidity providers to rebalance the composition of BCT.
Toucan’s liquidity partners redeemed qualifying TCO2s out of the BCT pool, and donated them to the upcoming NCT pool. This rescue operation ensured that the value of the nature-based offsets was protected, for the good of the ReFi ecosystem. Find out more details here.
While KlimaDAO contributors anticipated that Toucan would be creating a nature based pool, the specific TCO2 selection criteria and details of the mass rebalancing were not shared with KlimaDAO until after the rescue operation.
Note that as a DAO, Klima must initiate a public governance vote (KIP) prior to taking any action outside the existing remit of the Policy team. This governance process would tip off other market actors, and hinder the success of Toucan’s planned rescue operation. In this context, KlimaDAO was bypassed by Toucan as a liquidity provider for this operation.
After the rescue operation, several KlimaDAO contributors from the Policy and Partnerships teams met with Toucan core contributors to discuss the path forward for managing this rescued value, as well as Toucan’s plans for the launch of NCT.
There is precedent for returning rescued value in DeFi. For example, it is common for white hat hackers in the Web3 space to take advantage of smart contract exploits to rescue the value at risk. After the value is secured, the white hat hackers return that value to the exploited parties and share the security flaw publicly so the exploit can be patched. Typically a bounty proportional to the amount of funds rescued is set aside to compensate the white hats for identifying the exploit and conducting the rescue operation.
In this case, the value at risk includes the >500,000 nature-based tonnes that Klima originally bridged via Toucan from funds raised during the pre-launch Liquidity Bootstrapping Pool, as well as the proportional value of NCT-compatible BCTs that were bonded into Klima’s treasury prior to Toucan’s mass rebalancing operation.
Toucan intends to hand off allocation of the rescued value to an appropriate governance process for the good of the ReFi ecosystem.
During a meeting between KlimaDAO contributors and Toucan, KlimaDAO suggested that stakeholders be allocated governance rights based on the amount of nature-based tonnage they have bridged, and based on how much BCT they have held since bridging (i.e. bridging and immediately liquidating BCT holdings should not qualify a wallet for governance rights).
Since KlimaDAO was the largest single bridger of nature-based tonnage and has not sold BCT reserves, KlimaDAO would likely end up with the lion’s share of governance rights over this rescued value in this proposed scenario.
It will take some time to put this new governance process in place and pass proposals, so in the short term, Toucan intends to utilize the rescued value to provide initial liquidity for NCT trading. Given the importance of nature-based credits to finance high quality offsetting projects, KlimaDAO supports this use of the rescued offsets to ensure a smooth launch of NCT without further delay.
Using the rescued value, Toucan will work with their partners to establish a sizable NCT/USDC liquidity pool, as well as a smaller NCT/KLIMA liquidity pool, on Polygon SushiSwap. The resulting LP tokens will be sent to a multisignature wallet with signers from key ReFi organizations, including KlimaDAO.
Once the governance forum for the rescued value is launched, KlimaDAO will work with Toucan to put forward a proposal returning a portion of the rescued value back to the Klima treasury, as well as returning proportionate value to all those who bridged nature-based offsets and deposited them into BCT in good faith. This proposal will also set aside an appropriate bounty for executing the rescue operation to be left as permanent NCT liquidity in the multisig.
We anticipate Toucan’s governance process for the rescued value will be similar to our own: proposals are posted on a forum, followed by discussion plus an informal poll, and if the community supports the proposal then an on-chain vote will be held for governance token holders. If the vote passes, the multisig controlling the rescued value will carry out the proposed action.
Despite Toucan’s good intentions to establish governance, many in the KlimaDAO community have concerns about their market operations to secure the value at risk from the BCT pool. Since this value will be used as initial liquidity to launch NCT, the Klima community must have an opportunity to engage with Toucan’s plan to establish governance over the rescued offsets prior to NCT bonds launching.
As such, the Klima Policy team will not move forward with a KIP for NCT bonds immediately. Instead, Toucan will post a request for comment (RFC) on Klima’s governance forum proposing NCT bonds. This will give the Klima community an opportunity to voice any concerns about the NCT launch. The discussion will also help the policy team decide whether to wait until after completing the governance process to restore rescued funds back to the Klima treasury.
Only if there is strong consensus that NCT bonds should be launched promptly will the Klima Policy team progress the RFC to a Klima Improvement Proposal (KIP).
Ultimately, all parties in the regenerative finance (ReFi) space benefit when we cooperate — we have more influence in the legacy world as a united front than as individual projects. At KlimaDAO, we are all about cooperation — (3,3) is our core tenet. As such, we will maintain a healthy partnership with Toucan and engage in their governance processes as they come online, and encourage everyone in our community to do so as well, so that together we can ensure the robust development of the on-chain carbon market.
We believe that the ReFi movement is of utmost importance for the planet, and will increasingly capture market share from the traditional carbon market through cooperation. Together, we will create a more transparent, liquid, and efficient carbon market — thereby driving capital toward climate action at the scale necessary to avert the crisis at hand.
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