• Proposals
  • KIP-42: KlimaDAO x Solid World x StarCB - CRISP-C Launch

Summary
Partner with Solid World and SCB, become a Solid World Guardian and deploy capital to create the first liquid forwards market of cookstove credits in the world.

Motivation
Solid World is a commodities trading platform that makes climate financing liquid and transparent. By leveraging innovations in DeFi, such as AMMs and non-custodial rewards contracts, Solid World can create forward liquidity for carbon projects. This creates broadly accessible options for any stakeholder to participate in climate finance at whatever scale is appropriate for them. Suppliers benefit by having a direct path to liquidity for additional working capital with no exclusivity requirements.

In addition to the legal contracts backing the on-chain primitives having supplier-side replacement clauses in cases of non-delivery, Solid World minimizes the chances of non-delivery by leveraging its CRISP (Carbon Risk Identification and Scoring Principles) framework. This informs the forward-selling allowances for projects, minimizing the chances of over-selling supply, in the first place. Currently, Solid World only considers existing planting activity when calculating allowances, as planting timelines can be a major source of uncertainty and subsequent shortfalls.

We will be able to create the first liquid-prepaid market for cookstove credits, expanding market accessibility for project developers via real-time price discovery and a deeply liquid market.

As we have learned from existing efforts to bring liquidity to the Digital Carbon Market, opinionated curation is needed to minimize race-to-the-bottom effects of projects with drastically different price points competing for the same liquidity. Solid World collaboratively defines narrow categories of carbon projects which share a single pool token for price discovery and liquidity. Access to any category of Solid World’s pools is not an arbitrary decision by the internal team, as the top Liquidity Providers have a veto on any new projects attempting to enter the pool. These are the grounds for how governance for pools is done - consensus from those with skin in the game.
Solid World’s smart contracts have been audited by Dedaub, a well-respected blockchain security auditor with a track record of working with major blockchains and protocols. The two audits we have received as well as our smart contracts can be publicly viewed on Github. We work with PwC Legal Estonia to ensure appropriate legal structuring.

Opportunity
Engaging as an LP in forward pools

This KIP provides a framework for KlimaDAO’s policy team to deploy ex-ante credits issued by SolidWorld for the Improved Cookstoves for Rohingya Refugees project in Bangladesh. KlimaDAO previously passed KIP-32 to deploy capital toward funding this project and now has an opportunity to earn yield in a liquid forwards market that SolidWorld can facilitate on their platform. Concrete steps to realize this opportunity are as follows:

Overview:

A New CRISP-C Pool Launched with KlimaDAO x Solid World x SCB

Initial Liquidity Deployment State

  • KlimaDAO brings $500,003 USDC (50% of initial LP value)
  • SCB brings 53,909 tonnes (50% of initial LP value)
  • 6-month lock-up: both parties can not move their position for 6 months from deployment.
  • KlimaDAO <-> SCB deployment value: $1,000,006 (USDC & carbon value at launch price)
  • Risk-mitigation: $403,590.85 Non-delivery fund (allocation from KlimaDAO)
  • KlimaDAO expected rewards: 10% vAPR USDC , 4% vAPR CRISP-C, 50k USDC/ yr
  • Solid World waives all fees for all KlimaDAO deployments.
  • KlimaDAO to be 1 of 7 Guardians on the Curation Council , securing a veto over new projects and newly tokenized CBTs.

Liquidity Deployment Update (est. 2-3 months)

  • KlimaDAO will swap in its own CRISP-C compatible tonnes with those deployed by SCB (31,152 tonnes)
  • LP distribution after this update is estimated at 78.83% for KlimaDAO and 21.17% for SCB
  • KlimaDAO expected rewards: vAPR 10% USDC, 4% vAPR CRISP-C, approximately $79k USDC/yr

Deployment details for the above scenarios can be found here. Note that parameters regarding fees and Guardian participation for the Curation Council remain the same after the liquidity deployment update occurs.

Auxiliary Opportunity
Listing prepaid carbon contracts on Carbonmark
Solid World is an ideal partner for Carbonmark when it comes to listing prepaid carbon credits. Our platform offers a unique opportunity for carbon project developers to tokenize their forward supply and access liquidity through our prepaid carbon liquidity pools. By collaborating with Solid World, Carbonmark can enhance its marketplace by providing a diverse range of premium forward carbon credits that meet stringent sustainability criteria.
One of the key advantages of partnering with Solid World is the transparency and reliability they bring to the table. The CRISP framework ensures that all collaborating projects adhere to rigorous standards and undergo comprehensive risk assessment prior to ex-ante tokenization. This level of transparency instills confidence in buyers and promotes trust within the VCM.
Additionally, Solid World's approach results in transparent pricing, enabling Carbonmark to showcase accurate and up-to-date market prices for prepaid carbon credits. This transparency empowers buyers and sellers to make informed decisions based on real-time market dynamics.
Solid World's forward carbon liquidity pools provide continuous access to inventory, enabling Carbonmark to list projects at various price points and cater to the needs of a diverse range of buyers.
Furthermore, Solid World is committed to fostering strong partnerships and providing incentives to successful integrators. We are open to working closely with Carbonmark to deepen our relationship and explore mutually beneficial incentives that encourage increased market activity and liquidity on the Carbonmark platform.

Risk Mitigation
KlimaDAO has already entered into a standard VERPA agreement with SCB ensuring delivery of these tonnes. However, given that a liquid market is now being created, a new long-tail risk is created in the black-swan event of non-delivery of KlimaDAO’s future position and a redemption from Solid World’s pool that could leave KlimaDAO with less carbon than is owed. In this rare event of future non-delivery with subsequent redemption of liquid credits, KlimaDAO elects to earmark a portion of USDC in a non-delivery fund. The non-delivery fund will be entirely USDC, will be equal to 140% the carbon value of deployment, and will be placed in Aave to maintain purchasing power against inflation. The fund will remain in the DAO wallet, will be earmarked for any potential non-delivery risks, and will be removed whenever the delivery risk is completely removed from the position.

Polling Period
The polling process begins now and will end at 17:00 UTC on September 11th, 2023. Assuming the forum proposal is approved, it will advance to Snapshot.

Partner with Solid World & StarCB to create a new CRISP-C forwards pool?

This poll has ended.

    This represents a great chance for KlimaDAO to support the development of the DCM by helping foster a transparent, liquid market for forward carbon credits. By deploying capital into Solid World's new CRISP-C pool for improved cookstoves, it seems the protocol would benefit from attractive yields while also partnering with a project that promises to be hugely impactful. I think the risk mitigation strategies outlined, including the non-delivery fund, provide prudent protection against potential downside scenarios. Further, listing forward carbon tokens from Solid World’s pools on the Carbonmark marketplace would expand the reach and visibility of these assets and allow Carbonmark to enrich its offering with a diverse range of transparently priced, rigorously vetted credits. Definitely a win-win and I'm strongly in favor of this KIP.

    I have a couple of questions:

    1) The proposal mentions KlimaDAO having veto power as one of seven Guardians on the Curation Council. Could you tell us whether all seven Guardians are in place and, if not, what the plan/vision is in that vein?

    2) For the non-delivery fund, how was the 140% figure determined as the appropriate size to mitigate risks? Were any specific scenarios or probability assessments done to quantify the potential downside risks and arrive at this sizing?

      Great write-up optima and SolidWorld Team 👏

      I'm very much in favor of the proposal. Being the first to do this in the DCM provides a notable opportunity for us on a marketing and public relations front, which we should definitely capitalize on. Additionally, there is a clear strategic benefit here with respect to Carbonmark, and making these credits more accessible to buyers.

      One initial question I have, most relevant for @TheLawyer, is whether we know any jurisdiction-specific legal challenges we'll face in trying to sell these credits on Carbonmark. Has PwC Estonia conducted a thorough examination of the major markets in the VCM, specifically the US, EU, Brazil, China, India and Australia? Are there any limitations that might prevent us from actually being able to sell these forward credits to certain buyers?

      Second thought - Taking a step back (and this is perhaps a little unrelated to this specific KIP), but I wonder whether KlimaDAO might be well-served by having an experienced advisory group who can specifically support the DAO on its carbon procurement efforts. If we are planning to continue using treasury assets to grow the supply side of the marketplace, it would be good to have advice on what credits we should purchase, and how much we should pay. Perhaps we can better leverage folks like Alik Hinckson (from WRI), or hire someone who can provide this service?

      Any thoughts on this @optima @Dionysus @0xy_Moron ?

      Cheers
      Hugh

        KTOR Thank you for your support, thoughtful analysis and questions about the proposal. I appreciate your enthusiasm for the potential impact and value this partnership could create.

        As for the Guardians on the Curation Council, KlimaDAO will be one of seven. At the moment, three Guardians have already been confirmed, Solid World, StarCB, and KlimaDAO. The remaining four guardians are appointed based on total amount of liquidity deployed - a clever systems design by Solid World ensuring maximum alignment between guardians and liquidity providers.

        The 140% figure for the non-delivery fund was arrived at through conservative risk assessment, accounting for the most dire of black-swan scenarios. This figure is intended to cover extreme market conditions and shortfalls, while still providing flexibility for the DAO. Quantitative models incorporated variables like price volatility, historical delivery shortfalls, and systemic market risks - and the 140% figure assumes the most volatility, a complete delivery shortfall, and systemic market risk. We do not expect this to occur, but we are prepared if it does. The 140% is a conservative yet pragmatic figure, designed to robustly secure against non-delivery risks.

        If you have any more questions or need further clarification, feel free to ask.

        Hugh Appreciate the support - agree on the strategic benefits and my hat is off to the team at Solid World for the stability and clear guidelines they are providing to market-makers entering their platform.

        W.R.T. procurement: The more engagement we have, the better. The more pricing comparables we have - the better.

        For the Solid World case, we have the opportunity to have an incentivized liquid market for assets that previously did not have tangible reference prices. Being able to make a market while adhering to quality standards ensured by a framework such as CRISP largely de-risks the liquidity process and ensures that all participants (Solid World, liquidity providers, market buyers, retiree's, etc.) are well-aligned around pricing and quality expectations.

        optima 05/09/2023 11:59 UTC, KIP edited to reflect clarity changes w.r.t. initial deployment & updated deployment, "StarCB -> SCB", risk-mitigation clarification

        As the CEO of Solid World, I am happy to see this proposal from our partners at KlimaDAO for deploying capital to create the first liquid prepaid market for cookstove carbon credits. This is a major milestone for the voluntary carbon market and will help to bring more liquidity to project developers, more transparency to an opaque market, and attract more investors and corporate buyers.

        The creation of real-time, publicly visible pricing and deep liquidity for prepaid carbon credits is a game-changer. It finally enables carbon project developers to access working capital in a frictionless manner to scale their climate impact. Just as importantly, the transparency we facilitate together shines a light on an often opaque voluntary carbon market.

        By collaborating, we are pioneering a new paradigm for carbon market participation that aligns incentives between project developers, corporate buyers, investors and carbon registries like Carbonmark. The incentives become completely symbiotic in growing a transparent and integrity-driven carbon marketplace.

        I see this as just the beginning of a hugely impactful long-term partnership. Our shared vision to accelerate climate action by empowering the entire carbon ecosystem is truly exciting. This proposal reinforces that we are stronger together, and I look forward to exploring further opportunities to drive innovation hand-in-hand with KlimaDAO.

        Hey @Hugh !

        Solid World has been mindful of legal implications from the day it was founded. We have been working with PwC’s legal division on legal interpretations, and have recieved favorable regulatory approvals from the Estonian government. We have legal opinions from both relevant regulatory bodies that we are not regulated under EU securities law, but instead regulated by consumer protection acts and contractual obligation provisions.

        Whoever purchases these contracts purchases them under Estonian law, which means that they have EU's protections.

        We do have partners who are looking into the transferability of the contracts for other markets and are currently working on legal opinions. US, Switzerland, UK and Germany are priorities, with other markets following.

        5 days later
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