Summary:

Grant Policy the ability to create Inverse bonds as a tool in the policy team’s arsenal.

Motivation:
Klima aims to become a decentralized reserve currency for the carbon market. Through integrations, partnerships, and bootstrapping an entire new market on-chain, becoming the defacto currency utilized in the space. Klima is trading at a premium because of this.

The backing of Klima is composed of carbon assets, which assist in giving Klima a treasury to derive value from, and market operations that the Klima protocol does should aim to increase this backing. In order to do this, the policy team proposes to introduce inverse bonds.

Inverse bonds allow the protocol to acquire KLIMA from the open market by offering an asset in the treasury to the bonder.

This allows users to acquire assets in the treasury at a discount, reducing supply, increasing the intrinsic value of the protocol, and adding buy pressure to the token.

Additionally, regular bonding under backing is disadvantageous to the protocol. This proposal allows the protocol to retain operations under all market conditions.

Example:
Klima trades at 2 BCT each. Klima is backed by 5 BCT. An inverse bond can be issued, where a user can obtain 3 BCT worth of assets for 1 KLIMA, obtaining the spread of 1 BCT. Similar to regular bonding, this is given over the course of 5 days.

Proposal:
Allow policy to create inverse bonds as an additional bond lever.

Allow inverse bonds to be enabled under market backing.

Polling Period:
The informal forum poll begins now and will end at Feb 13th 18:00 UTC. Assuming in favor, this vote will go to Snapshot.

Poll

If Klima is minted by bonding carbon (BCT, GNT, NCT, etc.), then does inverse bonding burn a corresponding amount of Klima as the carbon leaves the treasury? Or am I misunderstanding the reserve backing concept

    The treasury mainly consists of BCT, if we reverse bond BCT and it has no other buyers, the price of BCT will dump. This will dump the value of our backing, which will dump Klima.

    If Klima dumps, our Klima LP positions go down significantly (as we have seen the last months).
    If BCT dumps, both our treasury and our BCT/USDC LPs go down significantly.

    Getting pretty worried here we will see a death spiral if we pull out these tools without having a sufficiently diversified demand base for the assets we reverse bond. I definitely see the short term value of doing this, but the second order consequences might be quite bad.

      Could the protocol disperse the KLIMA to acquires through these inverse bonds as a way to award those who stake the longest vs. those who have the most staked?

      DonkeyKong
      This is also a worry from the policy side as well. With KIP-13, we would use the USDC as a portion here to curb volatility from the BCT token. Ideally, these BCTs would be used for offsetting, but it stands to see whether that is the case or not.

        I'm not sure I understand the motivation for this. From the initial post:
        "...Klima is trading at a premium because of this."

        "The backing of Klima is composed of carbon assets, which assist in giving Klima a treasury to derive value from, and market operations that the Klima protocol does should aim to increase this backing."

        Based on the example given, people would take advantage of inverse bonds until Klima is backed by the amount that it trades for. In this example, it would eventually drive Klima to be backed by 2 BCT. The actual value is 6.23 BCT ( ~$27.72). So it would almost certainly cause downward pressure on the price in the short term.

        On the other hand, "This allows users to acquire assets in the treasury at a discount..." So it seems like the KLIMA treasury would become a market maker for whichever carbon assets it supports. Allowing you to trade KLIMA for BCT, MCO2, etc. at certain times and BCT, MCO2, etc for KLIMA at other times. But until when? What is the balance we are trying to achieve?

        I suppose it would be a useful tool if used responsibly to meet the Treasury's goals. The more and more I type this, the more and more I have respect for how difficult the Fed's job is 😆 . (Stimulate growth while fighting inflation)

        Brian33 so inverse bonding 4 BCT, I'd expect 4 Klima to burn in order to keep the backing accurate?

        Brian33 yes, the Klima would be burnt, contracting supply and alleviating pressure on the protocol.

        So we would reduce the assets in treasury in exchange for burning some Klima.

        Meanwhile we are inflating supply by about 50% per month in order to get those assets. This feels very counterproductive.

        Brian33 these BCTs would be used for offsetting, but it stands to see whether that is the case or not.

        Appreciate the clarification and understand you have thought this through as well.

        That would be ideal but if we burn the BCT it becomes worth nothing so we would need to find corporates or DAOs that we can OTC sell BCT to for them to offset which would require a big effort to grow the ecosystem around BCT. I just don't see that happening as we try to diversify from BCT and major portions of the Klima team jump ship in favor of launching a BCT alternative.

        If we don't secure alternative demand for BCT, we can't really use it for inverse bonding without blowing ourselves up. But we barely have any other assets to inverse bond so why should we allow the use of this tool? Not sure what I am missing but this isn't making much sense to me how this benefits Klima holders.

          This is not how carbon blackhole works. How can we get anything back from the otherside of blackhole?

          Very interesting.

          1. How is the backing decided? The backing keeps changing depending on the price of KLIMA, the BCTs in treasure vs KLIMA issued.. etc. Is it based on a moving average (MA)? MA could be considered for calculating the backing.
          2. Assuming no additional demand for KLIMA (say in a crypto winter), the price will hover around the backing and it'll be a cycle of bonds and inverse bonds. Wouldn't the backing value stagnate? We should've a mechanism to keep increasing the backing.
          3. Currently KLIMA is backed predominantly by BCT. But in the future each KLIMA would be backed by xBCT + yMCO2 + zNCT +...+... and so on. Then, how would the backing be determined and how would inverse bonds work for all the assets.
          4. Are those who buy the inverse bonds primarily bonders, who'll eventually bond with KLIMA? If so this is just a stabilizing mechanism and won't help in increasing the backing.
          5. Any thoughts on increasing the floor of KLIMA? This would automatically bring up the IV and hence the price. But yes if the floor is increased, then if the KLIMA price falls, then the protocol might have to shell out more KLIMA to buy a high quality Carbon Tonne.

          1 KLIMA was supposed to be backed by 1 Carbon Tonne (CT) not 1 BCT. But what happens if the price is below 1 CT. For example, at present, if we had BITMOs and an EU based CT was $100, then based on today's price, we've to issue 3.33 KLIMA for 1 EU CT...

          I'm confused on this aspect... Maybe Brian could shed some light on this during the policy chats that are planned.

          Brian33 I think that this should be given a lot of thought as I see the potential of a death spiral where people sell the BCT as a huge possibility.

          is this pertaining RFV (~$18) or the IV?
          Is the Intrinsic Value 1 BCT?

          Agree with all the sentiments of skepticism here.

          I understand the mechanics of the proposal, but not sure I understand the incentive from Klima's side of things?

          How does this benefit the protocol? Unless I'm missing something, seems like it only hurts it. Would love to be proven wrong and shown otherwise though!

          In this proposal the protocol can buy Klima from the market with less price than backing value of each outstanding Klima. So it is profitable because after protocol burns the newly bought Klima token the backing value per Klima token goes up. So I’m in favour of this proposal.

          It’s possible that inverse bonders’ Carbon tokens get then dumped and Carbon price in USD terms go down. But Klima backing in terms of Carbon tons go up; that is the priority. The Carbon price should then be bought up again to fair market value by those willing to burn tokens for offsetting alongside new investment flowing to klima. At least I hope so but it remains to be seen. I think burning is the key missing piece to validate onchain Carbon market. It’s just not very likely that DAO participants can suck up all that Carbon and alone fund the onchain Carbon market forever. At least not with current market conditions.