Summary
Introduce KLIMA/USDC bonds.
Motivation
Currently, the official KLIMA liquidity ecosystem is a simple 2 pool setup: USDC/BCT, and KLIMA/BCT. For most users, the most liquid route to swap USDC for KLIMA first swaps USDC for BCT, then BCT to KLIMA.

This system was initially made to bootstrap a robust BCT/USDC pool to incentivize users to bridge offsets on-chain via Toucan. We feel that this liquidity pool has been made large enough today, $50m in BCT/USDC. The utilization rate of this pool is consistently under 10%, which signals to the policy team that we have accomplished the goal of facilitating a carbon market for BCT in the short term.

With many new carbon assets coming onto the Polygon network (notably Moss’ MCO2, GoddessDAO’s GNT in short order, and a hint from Toucan about their next pool ), it's time to discuss how the Klima liquidity ecosystem should be developed.

At a high level, as we grow, we can expand liquidity vertically or horizontally. Vertical growth is shown in the diagram on the left, and horizontal growth on the right. By developing KLIMA horizontally, we place KLIMA at the heart of the on-chain carbon economy. This benefits Klima as every trade in the on-chain offset market generates more volume through KLIMA, allowing the ecosystem to grow further by channeling demand and fees into the Klima treasury.

What are the benefits of a KLIMA/USDC pool?

1)Lower fees for the end user:
For most retail users of KLIMA, they will route through the KLIMA/USDC pool, meaning fees are slashed in half for this route. Further, whenever we pair a new carbon asset (e.g., GNT) with KLIMA, a user trying to buy the asset through our pools will have to pay trading fees for the swap from USDC --> BCT --> KLIMA --> GNT. Going forward, they will only have to pay fees for the swaps from USDC --> KLIMA --> GNT. This allows new carbon assets to plug into KLIMA's existing liquidity, while reducing the trading cost for users.

2)Capital Efficiency:
When you create liquidity for a carbon/USDC pair, the liquidity is fragmented from each pair. By having one single pair, you gain much greater depth, which benefits all users. Say that we incentivize 1 single 200m KLIMA/USDC vs. 4 separate 50m carbon/USDC pairs. The 2% depth (the amount needed to move the price 2%) would increase from 250k, to 1m.

Every future carbon asset that decides to incentivize a carbon/KLIMA pair, will have immediate access to the KLIMA/USDC liquidity pool on day one.

3)Better alignment of demand.
Currently, BCT buying pressure comes from 3 things:
i) Users buying KLIMA, which buys BCT because of the two pool system.
ii) Users buying BCT.
iii) KlimaDAO’s BCT bonds.

Ideally, point ii) and iii) would represent the majority of the demand of BCT, but because of the 2 pool system, point i) siphons pressure from KLIMA to BCT. While this isn’t a bad thing in itself, more of this should flow to the KLIMA token instead. This is accomplished by growing the KLIMA/USDC pool.

By incentivizing liquidity for the KLIMA/USDC pair, it will lead towards a much healthier, more robust Klima ecosystem, that all current and future participants will benefit from.

Other:
As the Polygon ecosystem grows, other stablecoins will be evaluated. In the future we may migrate to a different stablecoin.

The BCT/USDC capacity will be adjusted/removed as necessary, and can be reopened if demand is sufficient.

Polling Period:
The polling process begins now and will end at 1/15/2022 23:00 UTC. If voted in favor, a Snapshot vote will be put up shortly after, which will run for 2 days.

Should we introduce KLIMA/USD bonds?

    Ease of onboarding for retail is an important step and this pair furthers that goal. It is, as pointed out, more efficient and better for spot pricing as well.

    Edit to add Leaving the BCT/USDC pool as-is should also be discussed, but liquidity drawn down to levels that reflect current usage. The DAO may not want to surrender majority ownership (and fees) on an established pair.

    Sound logic, great explanation and cheers for the diagrams!

    Main worry I have in the short term is that BCT/USDC bonds also represent a source of buying pressure for BCT currently. Could you confirm how much BCT the treasury has accumulated recently when also including the BCT/USDC liquidity? Ie what proportion of the buy pressure comes from the LP bonds? Should the naked BCT capacity be increased to offset part of the effects of this?

    I could be completely wrong about this but I'd assume the reduced pressure might have some knock-on effects on Klima's short-term treasury MV. Klima's treasury value is partially a function of BCT value currently so there might be some pain associated with this change in the short term. Long-term what you have explained here makes a lot of sense.

    Brian33 This is forward thinking and is in line with the overall goal of protocol diversification and ultimately becoming the center of an efficient carbon market.

    Sounds like a great idea. I agree with @REG, this is another step toward KLIMA being the digital carbon reserve asset.

    Appreciate all of the hard work the policy is doing to grow the DAO.

    This helps position Klima as the nexus of the on-chain carbon market.

    Wonderful explanation and I fully support the proposal 🙂

    Definitely see the point though of decoupling the protocol from being completely driven by BCT (since 2/3 of treasury and 40% of mcap = BCT), though wonder if this cannot be achieved in other ways eg pairing GNT or MCO2 against BCT to diversify the sources of trading through BCT so it's not all Klima?

    The benefit of having Klima be paired against BCT is given their 90% correlation we significantly reduce impermanent loss. A USDC pair will be an even bigger money loser (not sure if we have modelled these losses yet?). We have lost over 70m$ in the BCT/KLIMA pair, primarily due to the 95%+ drop in Klima price, I question if it is really more capital efficient to deploy all pairs against Klima when those pairs are losing us so much money. The only assets in our treasury holding up is BCT and BCT/USDC LPs, feels more reasonable to double down on the strategy that has worked.

    I think the second diagram explains pretty clearly what we'd like to achieve - make the carbon economy possible (constructing both the floor of the marketplace while putting up the roof at the same time - make it possible to route the liquidity through one efficient terminus=Klima). I am in favor of this change.

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