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.