Considering growth projection of the digital carbon supply, the Policy team recommends a realignment of target AKR from its current rate of 20% to 7%.
The Policy team proposed a dynamic model in KIP-23 that regulates KLIMA supply expansion based on market conditions. The framework functions as a market thermostat, where for a given state, the AKR is dependent on:
- The ratio of KLIMA supply over eligible digital carbon supply, and
- The 90-day moving average growth rate of the eligible digital carbon supply over KLIMA supply.
This will be the first data-driven change under the KIP-23 framework, where we adjust KLIMA supply growth in line with digital carbon supply growth.
Note that the current 90-day moving average growth rate is -0.0034% (bridged carbon has been retired without new tonnage becoming available). The KIP-23 expansion framework uses the 90-day moving average growth rate of digital carbon supply, but in order to maintain a reasonable framework in current conditions, we can instead substitute a projected growth rate for digital carbon supply. If we did not use projected growth rather than historic growth, the proposed AKR should be slightly negative or approximately 0%.
KIP-23 Framework Parameters
Policy recommends using projected digital carbon supply growth:
- Baseline AKR (B): 7% constant
- Expected growth (GE): 1.00%
- Higher growth (GH): 2.85%
- Lower growth (GL): 0.00%
The DAO could strictly adhere to KIP-23, using observed digital carbon supply growth:
- Baseline AKR (B): 0% constant
And re-evaluate parameters when observed digital carbon supply growth changes substantially.
Since May of 2022, Toucan, Moss, and C3 have not been permitted to bridge tonnage from Verra, Gold Standard and other traditional registries, while those organizations react to the 0-1 moment of KlimaDAO igniting demand for digital carbon.
Thus, the digital carbon supply has been relatively stagnant in 2023. While in a period of low growth in digital carbon supply, KLIMA supply growth outpaces carbon supply growth, indicating that the AKR should be reduced.
Meanwhile, other players are stepping up to facilitate new supply of digital carbon. Although the digital carbon supply has not grown in the past year, reducing down to 0% AKR just as there are finally digitally-native tonnes being issued from novel registries seems inappropriate.
Examples of Novel Standards Expected to Issue Credits in 2023
Coorest: Coorest introduces a new carbon standard based on blockchain technology and facilitated by digital measurement, reporting, and verification (dMRV) gleaned from satellite data. They have a project pipeline that is expected to bring thousands of tonnes on-chain in 2023.
Coorest in particular has already advanced an RFC on the forum for inclusion of their CCO2 credits in Carbonmark.
Nori: Nori is a Polygon-based issuer specifically oriented toward carbon removals (currently using soil organic carbon) . Per their partnership announcement with Bayer, Nori has a project pipeline projected to deliver “hundreds of thousands” of tonnes of carbon removal this year onto Polygon.
Regen Network: Regen network is a blockchain-native solution housed on the Cosmos network. They connect project developers and stakeholders across a variety of regions and methodologies, facilitate retiring of NCT and other credits, and have a pipeline that is expected to issue a few million digitally-native tonnes in 2023.
However, given the limited interoperability with the Cosmos network at the moment, and the high premium Regen projects charge on tonnage, we should significantly discount these tonnes when accounting for the digital carbon growth rate.
NOTE: the individual issuers provided as examples here may or may not pass the governance process to integrate into KlimaDAO’s infrastructure - but they are indicative of the scale of tonnage expected to be issued natively on-chain over the next year.
Projecting Expected Supply Growth
The observed slowdown in the growth rate of digital carbon supply in 2023 dictates an adjustment to the AKR.
While the exact tonnage expected from bridging once two-way bridges are permitted by traditional registries remains uncertain, aligning AKR more closely with current expectations is crucial. In the revised KIP-23 reward rate framework, a 90-day moving average growth rate was proposed. However, due to limited data and bridging volume, this proposal slightly amends the KIP-23 methodology to match KLIMA supply growth with the expected growth of the digital carbon market.
An AKR of 7% will create 583,920 KLIMA over the next 12 months in staking rewards.
To achieve a 7% growth in the Digital Carbon Market, approximately 1,427,468 tonnes need to be added to supply (assuming 0 retirements). This total is roughly in line with the expected issuance over the next year from the project pipelines of alternative standards highlighted above.
It is vital to ensure alignment between the growth rates of digital carbon and KLIMA supply. In case of any divergence, the Policy team will propose adjustments to the AKR in accordance with the principles of the KIP-23 framework.
For the immediate future, the Policy Team will manually re-evaluate reward rates at regular monthly intervals based on the framework, with the potential to automate this process. Policy still retains responsibility for correcting minor deviations from the adopted target AKR.
Lastly, the Policy Team does not commit to this being the final state of the reward rate framework. Time and data are needed in order to build confidence in this framework, and future KIPs may be proposed as required to evolve the reward rate framework as the protocol matures.
Reduce AKR to 7% or 0%, correlating to 5-day reward rates of 0.093% or 0.00%, respectively.
The polling process begins now and will end at 18:00 UTC on 29/05/2023. Assuming the forum proposal is approved, it will advance to Snapshot.