• General
  • RFC: Separate Carbonmark from KlimaDAO and fund expansion strategy

Summary

  • KlimaDAO aims to significantly impact the global mission of reducing carbon emissions by the middle of the century. By increasing the supply and diversity of carbon credits and other environmental assets within the ecosystem, we believe our technology can accelerate the growth of these markets.
  • Eighty percent of KlimaDAO's current activities focus on extending Carbonmark, which deviates from our core mission. Despite these efforts, we struggle to connect with the Voluntary Carbon Market (VCM) due to technological and operational constraints.
  • We propose to separate Carbonmark into an independent legal entity, allowing each project to focus on its core competencies. This separation will involve transferring intellectual property, talent, and seed capital from KlimaDAO to Carbonmark.

Context

KlimaDAO is a long-term endeavor. We aim to play a meaningful role in closing the shortfall between global projected emissions and where we need to be by mid-century to avoid the worst impacts of climate change. We intend to achieve this through the creation of transparent, interoperable and scalable solutions for the climate finance space – that prioritizes outcomes for the developers of pro-climate projects across the globe, and those that consume the environmental benefit they represent.

Ultimately, the success and impact of KlimaDAO will depend on maximizing throughput through its infrastructure – this entails increasing and diversifying carbon supply, ensuring it is accessible, and exploring opportunities to scale other environmental asset markets.

To set the Protocol up for long-term success - in this RFC we propose separating the core Protocol functions from the additional research, development and commercial activities that the project pursues. This can allow KlimaDAO itself to further decentralize itself as a credibly neutral protocol, and create the conditions for the technology that has been built to thrive as an independent, commercially incentivized entity.

A Brief History

KlimaDAO demonstrated the role that Web3 and novel tokenomic mechanisms can bring to the carbon markets when it launched in October, 2021. Within six months, KlimaDAO’s protocol mechanisms resulted in over 25 million carbon credits being bridged into its ecosystem and onto the Polygon blockchain. In partnership with Toucan, KlimaDAO developed the first 'carbon liquidity pool token.' Leveraging innovations from DeFi such as Automated Market Makers, these 25 million credits became transparently listed, accessible to market participants, and priced based on market demand.

KlimaDAO then began to develop the infrastructure layer that would be needed to bring external activity to the DCM ecosystem - and pass on the benefits of public blockchain technologies and DeFi tooling to the climate finance space at large. Key releases included the retirement aggregator (allowing users to claim the environmental benefit of digital carbon assets and builders to leverage digital carbon), carbon dashboard (providing access to real-time market data) and Carbonmark (an intuitive marketplace for buyers and sellers to transact digital carbon credits). The infrastructure allows Web3 builders, carbon project developers, market participants and consumers to benefit from public blockchain systems for the carbon markets.

Grounded in the well-known, but often lesser discussed issues of the Voluntary Carbon Market’s demand-side, KlimaDAO has been unwavering in pursuit of its objective to build out solutions for this critical market that leverage Web3 technology. Political issues, macro market conditions, and competition have all led to conversation, criticism and innovation within KlimaDAO. But they have not reduced conviction in what the project sets out to do.

The DAO itself has iterated and grown, and today 80% of KlimaDAO’s activity, expenditure and challenges are incurred through the development Carbonmark.com.

Whilst these development activities perform a critical catalyzing function for the DCM, they fall outside of the scope of developing core Public Goods market infrastructure, and instead drift towards broad competitive pursuits across the voluntary carbon market (VCM) and emerging digital carbon market (DCM) – with that comes a number of challenges.

In response to the increased clarity of the DAO’s direction and the overall maturity of the project, the internal operating model of the organization has already evolved, with a clear split between those active on the “Protocol” team (responsible for management and iteration of core protocol functions), and the “Carbonmark” team (responsible for developing the infrastructure which connects the broader VCM and demand sources for carbon credits to KlimaDAO).

Current State

What KlimaDAO does best, works.
KlimaDAO provides services to the DCM through its liquidity pools, treasury management, and decentralized governance. It generates transaction fees across trading, retirement and bonding. Trading and retirement volume is driven by demand, which is a result of the assets we hold (and how they resonate with the market), and how useful our technology is (and how many integrations we have). Bonding volume is driven by new supply of digital carbon on-chain and the $KLIMA premium.

For success, we need adoption of the underlying tech.
KlimaDAO therefore succeeds in the long-term by securing adoption of its infrastructure and its assets, which maximizes the throughput of carbon via the ecosystem. In order to onboard new users into the Digital Carbon Market and drive that throughput, new products and services that are more familiar and understandable must be built – indeed, this is why Carbonmark.com was born.

Today, KlimaDAO performs two key roles within the market.
KlimaDAO’s core Protocol continues to provide solutions – powered by public blockchain technology – for the DCM, guided via its governance. In addition, through Carbonmark, KlimaDAO has enabled the development of key infrastructure that allows traditional market participants to interact with, and build on top of, the DCM’s technology and carbon supply.

Challenges

A number of challenges have arisen due to the dual focus that KlimaDAO has developed.

Further development of Carbonmark requires the ability to provide and use traditional business services

Due to the nature of being a DAO, KlimaDAO will always require third-parties who are able to facilitate on-chain / off-chain interactions when required. As the Protocol intends to only ever operate on-chain this is not an issue – as users who see value in the protocol can interact with it at their discretion via their own means.

The launch of Carbonmark however lays the foundations for more specific services to be provided to off-chain entities. To further develop solutions the market tells us it needs, whilst also remaining compliant with regulatory frameworks, it needs to be in a position to:

  • Streamline KYC processes.
  • Acquire appropriate operating licenses.
  • Develop custody solutions.
  • Open bank account and custody accounts.
  • Send, receive and pay invoices.

Being unable to do these things, functionally restricts Carbonmark’s ability to grow further and interact with its intended customer base.

There is a divergence of objectives and incentives

The KlimaDAO Protocol operates in a decentralized manner; it is feature-complete, can generate revenues for itself, and has a clear and established governance process which guides the development of the protocol.

Whereas Carbonmark functionally represents KlimaDAO’s R&D department – developing key infrastructure for the DCM – but in a siloed manner more akin to an early stage tech company than a “DAO”; given license to do so via the community, but without clear accountability to it.

Carbonmark's readiness level means that there is an opportunity to isolate the development and stand it up for success by giving it the resources to put in place the appropriate legal and business wrappers (to address challenges in point #1) – enabling the platform to become self-sustaining whilst also delivering long-term value to the KlimaDAO ecosystem.

However, it will not pursue viability alone for as long as it can be subsidized through KlimaDAO’s governance mechanisms.

Thus, there is a tension between our long-term strategic objectives

KlimaDAO’s priority is to drive value to the DCM (and other environmental asset markets in the future) by providing liquidity for the market as a Common Pool Resource; and to allow its resources to be manipulated through decentralized governance to address market needs – whether that is accelerating the bridging of new carbon assets into the ecosystem, or catalyzing the development of infrastructure within the Digital Carbon Market that can help it scale.

The baseline approach (i.e. continued R&D funding for Carbonmark) compromises the amount and certainty of capital that KlimaDAO itself can deploy into its strategic priorities (e.g. forward carbon agreements; providing liquidity for partners; catalyzing the development of adjacent tech). Simultaneously, the current model creates risk for Carbonmark’s long-term viability, as – at the community’s discretion – it could be left at funding cliff-edge with development halted if the Community’s priorities change and no further development funding is agreed to.

Opportunities

It is perceived that acting now to isolate the two key roles KlimaDAO performs can set both areas of work for long-term success.

Creation of synergistic DCM opportunities

One of KlimaDAO’s major strategic priorities is to deploy resources that support the integration of an increasingly diverse set of climate solutions within the DCM. This approach increases the attractiveness of the DCM, on behalf of those that build on it and use it, in-turn, helping KlimaDAO derive value by increasing throughput via the system.

Ensuring Carbonmark can compliantly and effectively develop the DCM’s demand-side, can be a catalyst of value for KlimaDAO, whilst allowing Carbonmark to be in a position to pursue traditional commercial incentives for the quality services it provides (e.g. APIs; integrations) – unlocking a win-win symbiotic relationship within the ecosystem.

Achieve Credible Neutrality

Clarifying KlimaDAO’s objectives, by making them simpler and disentangling core Protocol activities from activities that look more like traditional business activities, can allow KlimaDAO to be perceived as a credibly neutral organization. This is in contrast to its current perception in the market, where KlimaDAO’s R&D activities are often considered before and above its core protocol activities.

Ensuring that KlimaDAO can operate as a credibly neutral organization can increase participation from market participants – for example by requesting support and funding via the Forum. This can create an ecosystem of DCM market participants who are more prepared to leverage the DAO’s capital, knowledge, and technology, without being concerned about KlimaDAO’s own development activity.

A pathway to full decentralization

KlimaDAO’s governance model ensures that every voice has the potential to be heard and that decisions are made in a democratic fashion. This level of decentralization has not only been effective but has also been a testament to the power of collective governance in driving meaningful and impactful change within the climate change arena.

KlimaDAO itself is ready to decentralize further given that it is feature complete – and all changes at the protocol level are routed through on-chain governance on Snapshot. It has however struggled to meaningfully decentralize further due to the intensity and resource requirements of the continued development of Carbonmark. A number of the challenges for KlimaDAO’s further decentralization that were articulated in the Decentralization Working Groups’ interim report are directly related to the DAO’s R&D activites.

Hence, by separating out its non-core Protocol activity, KlimaDAO can proceed to pursue full decentralization. Benefits of which may include: clearer and more focussed frameworks for supporting demand-side development for partner organizations; incentives and pathways to contribute to the DAO; and strategic deployment of USDC into diversification of on-chain carbon; full community influence and oversight into all Protocol activities.

In addition, from a legal perspective, the evolving legal landscape around DAOs presents an exciting opportunity for KlimaDAO to pursue the next step in its journey towards full decentralization. Several jurisdictions are now recognizing DAOs, providing a more secure and defined framework for decentralized organizations to operate within. This proposal represents a clear opportunity for KlimaDAO to align itself with emerging legal frameworks, thereby solidifying its position as a fully decentralized entity.

Implementation

We propose moving Carbonmark into a neutral and independent entity that is separate from KlimaDAO “Protocol”. Practically speaking, this constitutes allocating a tranche of funding for operational expenses and conferring the Intellectual Property of the Carbonmark platform into a legal structure that will be identified by KlimaDAO’s legal team.

Prerequisites of the chosen entity are as follows:

  • Carbonmark will be able to compliantly provide a full suite of marketplace services to the Voluntary Carbon Market.
  • The entity will be able to set-up strong foundational infrastructure that will enable it to have a bank account; pass KYB; invoice entities; augment the audience of KlimaDAO and the protocol’s products.

We therefore propose:

  • Grant funding of $3 million USDC for initial funding, including:
  • $300,00 in legal and administrative spending
  • $2,700,000 in OPEX to cover a further 18 months development (current burn of $150,000 / month)
  • Conferring the IP of Carbonmark into a separate entity.

It is anticipated that the new entity will undertake a number of actions to demonstrate strategic alignment with KlimaDAO over the long-term:

  • Accumulate governance rights to the protocol in the form of $KLIMA
  • Explicitly leverage digital carbon from the KlimaDAO ecosystem to maximize demand through the protocol, including via retirement bonds and utilization of LPs.

Subject to agreement of this proposal from the Community, KlimaDAO will pursue options for compliantly carving out a Carbonmark entity from the DAO, and will duly articulate its vision for full decentralization utilizing its Decentralization Working Group and community as a steering group for its next steps.

Very interesting! So basically separate Carbonmark from the KlimaDAO and turning it into a company that uses KlimaDAO on-chain carbon reserves.

Would like to know more about the Carbonmark as a separated company, what country it would be registered, can it issue shares to be listed, can it do capital risings for exchange for shares of the company and are klima holders going to get shares of that company in anyway?

Maby do snapshot before forming that Company structure for Carbonmark and issue shares of that company to current klima holders? Shares could be something like tokens or NFTs that are similar to wsKlima.

Looking how the global markets are going down, is this good time to do this kind of move and separate funding? What kind of position Carbonmark should be after 18 months so we could say it was worth it?

    Nikodemos Would like to know more about the Carbonmark as a separated company, what country it would be registered, can it issue shares to be listed, can it do capital risings for exchange for shares of the company and are klima holders going to get shares of that company in anyway?

    The target is Switzerland, that has a robust legal framework for these kind of platforms

    The idea is to keep it in a neutral entity such as a foundation/association/similar in order to respect the scope of KLIMA

    Nikodemos Looking how the global markets are going down, is this good time to do this kind of move and separate funding? What kind of position Carbonmark should be after 18 months so we could say it was worth it?

    Carbonmark is a vital platform for KLIMA'S growth and in preparation for the market growth, seems the right fit

    This is an exceptionally detailed and well written proposal.

    Are issues faced by Carbonmark on the demand side such as KYC, bank account, invoicing etc, also on the supply side?

    I would also like to know what would be the expectations from Carbonmark in 18 months.

    Currently, Carbonmark's fees are at 0.

    In the future, if Carbonmark is a different legal entity, and if people at Carbonmark wanted to raise the fees, who would get the say? The Carbonmark team, or would it be a vote?

      Excited about this RFC! Few more questions;

      1. Is Carbonmark burning 150k USD per month at it's current state?

      2. If this modification goes through, is it true that only additional spending to current situation (150k/ month) is the 30k for legal and administrative spending that comes with the registration of Carbonmark?

      3. Is the spending rate of Carbonmark gonna stay at 150k/month level for ever?

      4. How Carbonmark would operate if it's budget runs out after 18 month? Is It going to continue working and only R&D is put on hold or what's the teams plan?

      5. Can klimaDAO participate into Carbonmark decision making in anyway?

      6. Is there examples about partners who has signaled that they would use Carbonmark if it's more like registered business?

      7. Can VCs or private individuals invest directly into registered Carbonmark so it could continue R&D?

      8. What would be the name of new legal structure? Klima labs, Carbonmark lab, etc.?

      And finally there was a mention at the OH that current budget going to fall short at december 23. Is this overall budget or budget for this year?

      Thank you guys and welcome onboard David! 💚

      vishkap I'll let others confirm it, but this is the way I look at it.

      Currently, the DCM and more specifically the KLIMA LPs are limited by the tokenized carbon credits from Verra (issued prior to May 2022) and it is skewed significantly towards BCT. This reflects in the carbon credits available on Carbonmark. With all the FUD surrounding Verra methodology (and VCM in general) over the last 12 months, adoption of carbon credits has been challenged significantly.

      The new supply from partnerships with Aither, Coorest, ICR, Limenet and forwarded funded projects, would enable Carbonmark to provide a variety of carbon credits making the marketplace more attractive.

      Carbonmark's goal is not to focus on revenue generation (which would be needed to repay a loan), but rather on 'retirement volume' and thereby the adoption of DCM and more specifically the KlimaDAO eco-system. This in-turn would result in increased adoption of $KLIMA and would restart KLIMA Bonds, which would generate revenue for the protocol.

      This is more like a strategic investment into Carbonmark which would in-turn help the protocol growth.

      vishkap The financial facilitation being provided to Carbonmark is not, in any manner, to be construed as a "grant." This is a crucial distinction. What we are discussing is a budgetary provision specifically earmarked for the continued development and advancement of Carbonmark. This aligns with the precedent set over the past two years, where funds were allocated for its growth, innovation, and service improvements.

      Channeling resources in this manner allows us to maintain a consistent trajectory in support for Carbonmark, while also ensuring it is able to develop as needed to satisfactorily integrate within commercial and regulatory realms, per the RFC post.

      Choosing to give Carbonmark a loan depends on a number of deliberate factors. We are aiming to create an innovative and symbiotic Digital Carbon Market. With this in mind, the earmarking of specific development budget allocations allows targeted work to promote the achievement of expected results without incurring repayment obligations.
      Also, it would change the terms of the relationship as for pursuing the repayment, Carbonmark would have to look for the best economic relationship, while in this case it's more of solidifying the relationship and having CM being the storefront of Klima.

      The synergy between Carbonmark and KlimaDAO's activities is intended to create a unique relationship that is defined beyond financial transactions. Carbonmark can operate and thrive on a budget while being closely aligned with KlimaDAO's strategies, ensuring both ongoing business' efficiency and effectiveness. Adding loans to the equation may inadvertently create financial stringency and potentially tie Carbonmark's growth efforts to repayment plan constraints.

      On the other hand, this approach intends to create a sense of trust that allows Carbonmark to operate smoothly and focus on its development goals and innovative activities - directing value back to the KlimaDAO ecosystem. Similarly, by separating KlimaDAO's work from Carbonmark's, we intend to preserved the integrity of its mission and ensured that the larger vision is not diluted (and we can proceed with further implementations at the protocol level for progressed decentralization).

        TheLawyer

        Appreciate this perspective, and the answer provided.

        That said it is referred to as a grant in the proposal above. If there's a crucial distinction to be made, it would be sensible to have that made more clearly in the proposal.

        Whilst I see the benefit of a non-financial relationship between Carbonmark and KlimaDAO, I also think the governance of the ongoing non-financial relationship needs attention to ensure it stays productive, especially as Carbonmark could be considered a spin off with its differentiation and potential legal differentiation specifically whereby a unique entity may be required to qualify for KYB etc. (not a lawyer so feel free to chime in on the entity structure).

        There's a concern from my side that the funds of the DAO are declining whilst the market remains bearish. I appreciate the need to turn supply into value via Carbonmark. That said, I would highlight a concern that governance between entities and value to existing klimates may dilute as Carbonmark progresses.

        Concerns about loan repayment could be offset by favourable terms in terms of length of time and low or no interest to repayment. I would argue it's perhaps better for the organisation than to spin off a new subsidiary without any accountability to the parent or token holders in terms of financial performance and additionally may help with a complex governance problem. There was discussion about yield farming being hazardous due to the potential to investment tending to zero, which is very sensible; perhaps this is a lens for all DAO investment to be more hawkish in the bear market. With this lens a loan vs. a grant is quite a minimal step.

        Whilst work progresses on the DWG or the establishment of a formal plan for KlimaDAO's operations, it would be wise to also consider the financial and legal relationship (or indeed formalising the social contract in some other way) between Carbonmark and KlimaDAO. Making this clear internally and externally could be of value going forward.

        I appreciate the strategy may be complex between entities, which sometimes warrants this sort of family office type relationship. That said I think having some basic structure which passes a sense test internally and externally is valuable alongside a tense market position.

        Whilst I agree that there is need for the bridge to DCM credits, I would argue that (even minimal) financial accountability can only help the focus.

        Good luck on next steps.

          Garmon based on the proposal, it'd be Carbonmark team, as that isn't a DAO.

            Would klimaDAO get equity in return for the seed funding? if yes, how much and at what valuation?

              Z33 theres a bit of a mixup. Carbonmark is actually part of the DAO
              The difference is minimal, but it allows with the real world entity to be more scalable

              • Z33 replied to this.

                Z33 there is no intentions of putting it in a private entity with shares,as clearly stated
                More likely a no profit entity such as a foundation or association

                • emc replied to this.
                • Z33 likes this.

                  vishkap financial accountability is necessary, but I don't understand how a loan can be different.
                  Klima has requested more than once the budgets for building. The request now is a bigger budget (less future requests therefore), and provide a real world entity that has the possibility of accepting more and bigger clients.

                  The idea, is of course to be as more decentralized as possible, and there it's clear and shown in the past months with for instance QV and other moves.

                  The split will allow the protocol to focus 100% on the protocol itself, and allow carbonmark to build the infrastructure where Klima will benefit, and the infrastructure that so far Klima doesn't have and need (rw entity).
                  On the other hand, the difference is truly minimal

                    Garmon Currently, Carbonmark's fees are at 0.

                    In the future, if Carbonmark is a different legal entity, and if people at Carbonmark wanted to raise the fees, who would get the say? The Carbonmark team, or would it be a vote?

                    So far the decision the DAO delegated it to the heads of the departments
                    I see no difference if carbonmark will use a RW entity

                    Engaging with the Klima DAO team's decisions, it's crucial to see things straight and cut through the noise. Here’s the breakdown:

                    1. Carbonmark is already a part of the DAO. Making a big deal out of this doesn't make sense. We should be focusing on the main goals.
                    2. Carbonmark is open-source. Anyone can clone it. If we keep opposing its integration, we might end up watching someone else reap its benefits while Klima gets nothing. On the other hand, in this scenario, Klima will have the most upside.

                    Why keep poking with more questions when everything's already lined up? Both entities are on the same page, aiming for the same goals. Instead of going in circles, let's keep our eyes on the prize and get things done. Let's not waste time on stuff that’s already clear.

                    Im in favor in anything that can give resonance to Klima

                      Z33 but DAO is not a specific entity form, but a set of rules to govern assets
                      Be more specific so I can help at the best of my abilities

                      The goal of this RFC is two fold.

                      1. Enable Carbonmark to become a real world entity with an address, bank account, etc to build partnerships and service customers in the real world (read web2). This is a big thing because

                        a) 99% of the customers in web2 are either unaware or don't understand or are skeptical of web3. Imagine a customer of Carbonmark asking "where are you based?" and the answer is "Uhh..We are on the blockchain. Present globally." Companies work with partners who are in the real world.

                        b) All of the web2 customers are the ones who contribute 100% of carbon emissions and need carbon credits of offsetting. We've to be in web2 to service web2.

                      2. Clearly demarking KlimaDAO and Carbonmark would enable proper allocation of resources and funds and define the role played by each of them.

                        • KlimaDAO is focussed on the protocol (decentralization, public good, open source, being the base layer for carbon) and how to add value to the $KLIMA token.

                        • Carbonmark would focus on increasing the adoption of DCM, bringing more customers into web3 (by existing in web2), retirement volumes, increasing the supply of new carbon credits and promote blockchain as the technology of the future for carbon retirement.

                      The activities and growth of Carbonmark would feed into the KlimaDAO ecosystem.