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KlimaDAO Policy: Inverse bonds report

Cover image announcing the Inverse Bonds Report

KIP-12 gave the Policy team the ability to add inverse bonds as a policy tool, to be used in the event of a sustained breach of the price of KLIMA below the value of the lowest carbon asset backing KLIMA (currently represented by BCT).

Although this sustained breach did not occur, the policy team decided to introduce inverse bonds, as an indicator to the market of the protocol’s willingness and ability to support the backing of KLIMA. The launch took place on 4 July 2022, earmarking 600,000 USDC to be inversely bonded for KLIMA. The experiment concluded successfully on 23 August 2022.

During the period of the experiment, KlimaDAO Policy also initiated a reduction in Annualized KLIMA Rewards (AKR) target to 100%, as too large of a supply expansion would have counteracted the supply contraction desired from this process.

For similar reasons, and due to adverse market conditions, Policy also stopped regular bonding. The contract to execute this were based on equivalents contracts from Olympus which can be found here. Link to KlimaDAO inverse bond contracts can be found here.

Data analysis

The performance of the inverse bonds experiment is summarized below:

Data analysis from the inverse bonds experiment conducted by KlimaDAO

Concluding remarks & future outlook

On the whole, the Policy team considers that the experiment successfully demonstrated the power of inverse bonds. Inverse bonding has proven itself to be a tool for the KlimaDAO treasury to step in and provide stability in the face of adverse conditions. There are a few takeaways to highlight:

  1. We have an active ecosystem of inverse bonders that is willing to take even small discounts. This validates that inverse bonds actually function as a tool for defending backing value.

  2. The Policy team allowed the market to drive the rate of inverse bonding: a certain amount of capacity was allocated for each week (initially 150,000 USDC per week), but if the bonders were aggressive and took large bonds or small discounts, inverse bonds for that week would sell out before all of the capacity was consumed. As a result Policy was able to conduct inverse bonds for longer than the original estimate of 4 weeks at 150,000 USDC per week.

  3. The Policy team now has a clearer understanding of how the parameters work for the inverse bonding contracts, and the effect that certain changes will make on the execution.

  4. Although Policy does not intend to deploy all available funds for inverse bonds alone, the KlimaDAO treasury still has a substantial amount of USDC (including USDC from BCT/USDC LP owned by the protocol that will soon be dissolved post KIP-29) to be used in the event of a sustained breach of KLIMA backing value.

We must consider that this experiment was run with USDC, rather than the tokenized carbon in the treasury. As a result, the wider market implications of inverse bonds with carbon is still to be determined. Keeping the above conclusions in mind, KlimaDAO policy is evaluating whether a standard inverse bond contract, with BCT allotted, should be prepared. This contract could be activated whenever KLIMA trades below its intrinsic backing value.

Disclaimer: 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.


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