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:
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:
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.
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.
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.
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.
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