• Proposals
  • KIP-44: Aligning KLIMA Supply Expansion with DCM Supply Growth

Summary

Introduce a new framework that aligns KLIMA supply expansion with the growth of the Digital Carbon Market (DCM). This proposal aims to create a long-term sustainable and responsive mechanism for KLIMA issuance, directly tied to the expansion of the DCM.

Motivation

KlimaDAO's unique position in the carbon market necessitates a nuanced approach to supply expansion. KlimaDAO's treasury is intricately linked to the availability of digital carbon credits. Therefore, it is imperative to align KLIMA supply expansion with the growth of the Digital Carbon Market (DCM).

At its core, KlimaDAO is not just another OHM fork or DeFi protocol; it is an economic engine designed to drive the Digital Carbon Market (DCM). While expansion of the supply is one of the long term goals of KlimaDAO, doing so too quickly would be detrimental to our ability to generate revenue through bonding. The KLIMA token serves as a representation of carbon assets. Therefore, the health and growth of KLIMA are intrinsically tied to the growth of the DCM.

  • Liquidity and Market Depth: A growing DCM provides the necessary liquidity and market depth that make the KLIMA ecosystem more robust. More liquidity means less price volatility, which in turn attracts more participants to the KLIMA ecosystem.
  • Price Discovery and Efficiency: The DCM and KLIMA are two sides of the same coin. As the DCM grows, it provides better price signals, which are crucial for efficient market operation. This efficiency is transmitted to the KLIMA ecosystem, enhancing its economic viability.
  • Network Effects and Utility: The utility of KLIMA is maximized when it is deeply integrated into a thriving DCM. A growing DCM attracts more participants, which in turn increases the utility and demand for KLIMA. This creates a virtuous cycle of growth for both.
  • Sustainability and Long-Term Viability: A growing DCM indicates a healthy demand for carbon credits, which is a positive signal for the long-term sustainability of the KLIMA ecosystem. If KLIMA supply grows without corresponding growth in the DCM, it risks becoming a speculative asset detached from its fundamental value proposition.
  • Capital Allocation and Incentive Alignment: By tying KLIMA supply growth to DCM growth, we ensure that capital and resources are allocated in a manner that is directly beneficial to our core mission of carbon offsetting. This alignment of incentives is crucial for the long-term success of both KLIMA and the DCM.

Implementation
We propose a dynamic framework that adjusts the Annual KLIMA Rate (AKR) based on the growth rate of the DCM. The new framework will function as a market thermostat, where the AKR is dependent on:

  • The annual supply growth rate of the DCM.
  • The threshold (T) of supply divergence between current AKR and DCM supply growth

Optimal KLIMA supply expansion will be in sync with the growth of the DCM.

Framework

AKR = DCM supply growth

Initial Conditions:
Starting KLIMA supply: 8.75mn
Minimum AKR: 0.00%
Threshold for AKR adjustment: 0.50% DCM supply divergence from current AKR
Current AKR: 21.57%
Current DCM Supply: -0.23%
Resulting AKR: 0.00%
Adjustment Period: 40 epochs (2 weeks)

Mechanics:
Minimum AKR: The AKR will never fall below 0%, irrespective of negative DCM supply growth.
Threshold for AKR Adjustment: If the supply growth rate of the DCM diverges from the current AKR by more than the threshold (T), an AKR adjustment will be triggered.
Adjustment Period: Any adjustment in AKR will be implemented gradually over 40 epochs, to allow for market adaptation and to mitigate shock.
Proportional Change: The magnitude of the AKR adjustment will be proportional to the divergence from the current AKR, and will gradually adjust over 40 epochs at a standardized rate proportional to the divergence from current AKR.

Methodology:

  • Calculate the 600-epoch simple moving average supply growth rate of the DCM, annualize that SMA to get DCM supply.
  • Compare this rate with the current AKR. If the divergence exceeds the threshold (T), trigger an AKR adjustment.
  • Implement the AKR adjustment gradually over the next 40 epochs.
  • Re-evaluate the AKR and DCM growth rate at regular daily intervals to determine if further adjustments are needed, and automate as soon as the framework proves resilient.

Implementation:
Upon approval of this framework, the Policy Team will manually adjust the AKR based on these guidelines. Automation of this process remains a future objective, contingent on the framework's success and stability.

Proposal:
By adopting this revised framework, we align KLIMA's supply expansion more closely with the growth of the Digital Carbon Market, while also introducing safeguards and gradual adjustments to maintain ecosystem stability. We strongly encourage all members to engage with this proposal and cast their votes.

Ratify this new framework as the guiding principle for future AKR adjustments.
Implement the initial conditions and parameters as outlined in the Framework section.

Polling Period
The forum poll begins now and will end on 21/09/2023. If passed, the vote will go to Snapshot.

Align AKR with DCM supply growth?

This poll has ended.

    I just have a little question ? xd

    what does mean: Current DCM Supply -0.23% ?

    that carbon is disappearing from the chain (due to carbon burning?)

      I'm strongly in favor of this proposal. It is clearly based on sound principles and a cool-headed assessment of where KlimaDAO and the DCM are at, as well as what the entire ecosystem needs in order to scale.

      The proposal mentions that automation of the AKR adjustment process is a future objective and that, if passed, the Policy Team will be manually adjusting the AKR based on the guidelines outlined here. Can you expand on what this looks like under the hood a little, and also on what the future automated state will look like? Roughly how long would you expect the process to be done manually?

        This represents the next stage of Klima protocol mechanics and will result in a healthier DCM ecosystem. I'm excited to see how this develops over time, especially as we start to intake more robust data around expected carbon tokenization from new standards and carbon registries.

        One of the key innovations in the DCM is the ability to draw real-time data from what's happening on-chain. Adjusting AKR and, in the future, bonding parameters for different asset classes, will make the Klima liquidity engine more intelligent and effective in response to DCM dynamics.

        How do you measure growth of DCM? Do you count only tokens that can be bonded to KLIMA? How about If some other body hoards the tokens? The growth of the market can be high but not for Klima. Is that a scenario to be considered?

          KTOR Yeah, happy to expand.

          Realistically the calculation for modifying AKR and calibrations that get pushed to the Policy contract aren’t too difficult to automate via a python script.

          The primary concern is automation of on-chain activity, particularly the fact that interacting with the policy contracts can only be done via approved wallets (so the script needs access to keys).

          So the calculation itself isn’t really a blocker, it will be good to test in the wild over time - the main blocker is having a process that minimize and risks and potential errors when automating on-chain interactions from approved wallets.

          I hope to have this automated with little friction, but want to proceed with caution before having a fully-automated process live on-chain.

          Alanos86

          interoperability is the future and the treasury will eventually have complete ability to absorb any carbon asset it desires

          if some other entity hoards tokens (on-chain) -> then the DCM supply stat still records the fact that the tons made their way onto the blockchain.

          if the supply growth of DCM supply increases, the supply growth of KLIMA increases. If others are buying the new carbon (and there is more external demand than KlimaDAO’s protocol) -> we’d expect that demand to also reflect in the carbon assets KlimaDAO already has in its treasury

          so the underlying concept remains that $KLIMA is a de-facto index of the DCM, and when activity increases in the DCM it will increase in $KLIMA

          It is important to note that OlympusDAO (on which the KlimaDAO code is based) had also gradually reduced its APY. I think it currently stands at 0.5% (or less), even though it is a DeFi based protocol with continously growing supply of treasury assets / stablecoins in the DeFi ecosystem.

          It makes absolute sense to bring the AKR to 0% when carbon supply is -ve due to zero tokenization and increasing retirements. This is a double whammy on $KLIMA.

          Where can we see the current "For" percentage?

          Strongly in favor of this proposal. The staking rate should be determined by the overall DCM environment and supply of carbon on Polygon.

          13 days later
          Cujo locked the discussion.
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