The climate crisis is escalating rapidly, demanding immediate and decisive action.
Market-based mechanisms such as the Voluntary Carbon Markets have a critical role to play in climate action. They facilitate the flow of finance from those who fall outside of regulation but want to compensate for their emissions, or otherwise make a positive impact on the environment, to those who take action to protect and restore the environment.
KlimaDAO has been building decentralized infrastructure for the carbon markets for over 3 years, with its north star objective to demonstrate how things can be done differently – by leveraging Web3 technology, in a way that is transparent, scalable, and that empowers carbon project developers, carbon market participants, and carbon credit buyers.
Genesis
What was intended to start off as a small-scale, experimental and innovative project that leveraged novel tech to address market failures present within the market’s demand-side, quickly exploded into a high velocity and disruptive demonstration of technology and decentralized communities.
KlimaDAO’s early impact within the market was due to blending a number of decentralized concepts with the carbon markets:
Incentives: offering $KLIMA incentives to holders of carbon credits to bring them into the KlimaDAO ecosystem, as well as to individuals to contribute their knowledge and experience to the project.
Open-source: KlimaDAO's codebase is open-source and publicly available for the community and wider market to critique, examine, and build on.
Technology: leveraging DeFi 2.0 tokenomics and AMM technology to facilitate the development of Protocol Owned Liquidity for carbon credits.
Governance: distributing all decisions that would change the initial state of the project to a community of 10s of thousands of token holders via Snapshot.
This combination of directly incentivising engagement with the ecosystem and creating an open and permissionless segment of the carbon markets, coupled with the post-covid market run-ups across the board, led to KlimaDAO achieving a $1 billion marketcap within weeks, the tokenization of 23,000,000 carbon credits, and over $4bn worth of carbon credit trading volume through its decentralized market infrastructure.
Despite apparent success, the climate change debate is divisive, crypto can be toxic, and the carbon markets are political.
KlimaDAO quickly became a much needed scapegoat for a plethora of issues within the carbon markets (including the pre-existing supply of credits within it!), as well as being pugnaciously blamed for the flailing “crypto x climate” market segment that was struggling to find Product-Market Fit as millions of dollars in pre-seed investment raises dwindled.
The transition from hero to zero culminated in a statement from Verra in May 2022 to effectively ban tokenization, implicitly blaming (at least in-part) the decentralized nature of KlimaDAO for the move. Although a commitment to a public consultation was made, and questions were issued to the market, there has been no further announcement from the world’s largest carbon standard to suggest they are open to discussion with the broader Web3 climate movement.
Notwithstanding Verra’s position, KlimaDAO’s impact did serve to spur on thinking around the role of Web3 in climate markets, as well as to amplify the work that early trailblazers within the segment undertook, including Moss, Regen and BICOWG (an antecedent organisation to BxC). Multiple working groups across other major carbon registries have gone on to analyse the role that blockchain tech can play for them, and we’re pleased to see the progressive action of a number in enabling blockchain interoperability, as well as the continued growth of core projects that have continued to build within our critical market segment throughout the bear market, even as the hype faded.
Beyond external challenges that KlimaDAO faced during this period, the project also faced internal change. The months before and after its launch saw the protocol onboard hundreds of contributors with little to no structure, with a subsequent transition to a more formal internal working model that would increase accountability and transparency of contributors; though this turned out to be fractious, and ultimately took over a year to implement.
The project itself has now transitioned from a peak of almost 100 contributors, to a handful of committed and passionate contributors who have demonstrated their ability to act in good faith, and to pursue the project’s original mission through thick and thin, irrespective of what's been thrown at the project internally and externally.
KlimaDAO’s so-called “rise and fall” has been a humbling experience for those who have stuck it out – but it hasn’t changed the project’s mission, nor reduced the remaining contributors’ conviction in what they are doing. To date, KlimaDAO has established the first liquid, 24/7 open market for voluntary carbon credits, made significant forward carbon investments to the tune of $2.8mn, and developed an end-user marketplace for environmental commodities that was spun out into Carbonmark. This experience displays the potential impact KlimaDAO can achieve in the coming years if it continues to dig in, improve and deliver.
Taking into consideration the feedback KlimaDAO has received from its partners, the criticisms it has received from market stakeholders, and the learnings from its operation as a decentralized carbon market institution, Klima 2.0 will continue to address market inefficiencies: opacity, nonfungibility, and liquidity fragmentation.
Metamorphosis
KlimaDAO intends to relaunch its tokenomics.
The Protocol’s next iteration would provide a decentralized mechanism to increase liquidity for carbon credits via a homogenized index token, act as a perpetual buyer of carbon, and price carbon dynamically via a data-driven mechanism informed by a decentralized carbon curation network powered by token staking.
With this new mechanism, KlimaDAO intends to continue to empower project developers, market participants, and carbon buyers. Fundamentally, the DAO intends to be an accessible, on-chain partner – for those who choose to use its technology – to drive demand or deposit supply.
Fundamentally, KlimaDAO’s next steps involve splitting the existing $KLIMA token into two distinct tokens: an Asset Token directly linked to carbon credits that acts as an index of the carbon market, and a Governance Token to facilitate market based governance of environmental commodity indices by expressing demand preferences across classes of credits through a staking mechanism. Names, distribution and mechanisms for these tokens are still under development.
This new token model also features a dynamic carbon yield curve, which will parameterize a new open-source smart contract architecture, ultimately creating a decentralized end-to-end economic engine for carbon markets - and one day additional environmental commodities - owned by a community of tens of thousands of token holders.
The details of the economic model, specifically tokenomics and mechanisms for solving the problems of fragmentation, nonfungibility, and transparency in carbon markets - will be fully released in the Klima 2.0 whitepaper later this year.
Furthermore, to support the implementation of Klima 2.0, the transition to a Swiss Foundation has also been proposed, allowing the project to formalise a traditional, widely-accepted legal structure for DAOs, and in-turn establish clear accountability and responsibilities into KlimaDAO.
Endgame: Seizing a $10+ Trillion Opportunity
The tokenization of real-world assets (RWAs) has the potential to scale into a $10+ trillion market; with environmental commodities anticipated to benefit from this trend. Commodities markets are in need of robust and transparent financial infrastructure, and environmental commodity markets in particular require further innovation given their importance to society.
Currently, the total annual trading volume of the voluntary carbon market is only $2 billion, but that is projected to grow 15-fold to 100-fold by 2030. This explosive growth will be driven by increasing demand for carbon offsets as companies, governments and individuals seek to mitigate their carbon emissions and support verified climate impact.
However, to achieve lofty growth targets, new market infrastructure will need to be adopted – market infrastructure that can bring confidence to the market, reduce inefficiencies, and ensure the demand signals from buyers are transmitted effectively to boots on the ground.
We believe that KlimaDAO can play a meaningful role as an innovator and a challenger to the status quo.
Engage with KIP-65, Klima 2.0 here, and dust off your wallet to prepare to vote on this critical KIP in KlimaDAO’s journey.