Historically, KlimaDAO’s deployment of its USDC has been opportunistic and driven by individual KIPs, often leaving significant reserves idle. This approach has led to inefficiencies in spending decisions, with deliberations occurring in an ad-hoc manner, focused in isolation on the merits of a proposal on the forum.
This RFC proposes the implementation of the “Green Ratio” – a framework that will introduce guidance on how the DAO should use its resources at any given time. It is intended to give the community and market stakeholders more clarity over how the DAO intends to act, and ensure the community and contributors can be more efficient and wholistic with economic decision making.
Essentially, the framework will see the DAO codify how it deploys the marginal dollar, which fall into three primary opportunity areas:
The strategic implications of this framework are such that, during periods of high USDC holdings, the Protocol will be more inclined to take long positions within the Voluntary Carbon Market (VCM) and other environmental commodities markets. Conversely, during periods of stagnation and decline where USDC is not replenished, the Protocol will necessitate the transition from capital intensive activities to "labour" intensive activities that are lower cost, such as: operationalizing treasury carbon assets; Protocol innovation; small-scale incentive spend; partnership and strategic collaborations.
Green Ratio Introduction
The Green Ratio framework dictates the strategic allocation of KlimaDAO’s assets, deployed at a foundational ratio in the range 50:30:20 into the following opportunity areas - and help guide the protocol to equilibrium as returns and losses are realised
Furthermore, the ratio will lead to the implementation of:
- Give hard indicators on DAO economic decisions and performance across its priority areas.
- Impose restrictions on the DAO for certain activities when the ratio is not aligned, for example:
- requiring strong justification in a KIP as to why deployments into carbon forward agreements when the ratio is over 60%;
- or forcing reduced capital and OpEx spend during extended periods with no new inflows into the the Protocol.
- establishing KlimaDAO’s intentions to the market allows stakeholders to understand the DAO’s current state and leverage its governance to pull on its resources and incentives:
- in the form of USDC that can be deployed into forward carbon incentives for project developers;
- for contributors via an increased OpEx allocation for those who contribute to Protocol activities.
- for builders looking to acquire funding to develop technology on top of KlimaDAO’s base layer infrastructure.
- Furthermore, all of these groups will be implicitly incentivised to actively support the DAO’s growth and move carbon through the system in order to generate the returns that will lead to the freeing up the ratio for further market incentives.
- Through the creation of a KIP-ratified framework, the ratio can drive and inform KlimaDAO’s growth and economic decision making, and ensure that any work undertaken by the DAO is accountable towards a common, agreed objective; thereby reducing ambiguity and complexity within the DAO.
The policy team will strive to maintain close alignment with this ratio at all times, deploying specific rebalancing activities as needed. Actions that move funds from the treasury to the DAO wallet (i.e. internal accounting), and vice versa are not anticipated to require KIPs, nor are activities that bring inflows into the DAO (e.g. selling carbon).
However, standalone KIPs will still be required to facilitate general economic decision making (such as whitelisting deployments of idle treasury assets into yield opportunities; ratifying VERPA agreements for carbon forward agreements; defining contributor and bounty budgets / initiatives).
The below table defines a number of example actions that can be taken to rebalance the ratio.
Reports at the end of each fiscal quarter will be issued by the Policy Team to the community defining which activities were taken, and detailing the variance from the ratio.
The 50:30:20 ratio is proposed as the starting ratio, although it may be modified via future KIPs as data and performance metrics come to light.
Tactical Allocation for Rebalancing
To account for fluctuations in market conditions that may cause the asset ratio to drift from the foundational 50:30:20 allocation, a tactical allocation of up to 10% of the net asset value is permitted. For example, at any given time as little as 10% or as much as 30% of the treasury may be ring-fenced for OpEx. This shift is not for the exploration of alternative investments but serves as a rebalancing buffer.
The tactical allocation allows the DAO to adjust holdings in each of the primary categories in order to realign them with the foundational 50:30:20 ratio. Such adjustments should be data-driven and predicated on market analytics.
The tactical allocation will be reviewed in each quarterly report, aiming to restore the foundational allocation, unless market analytics provide a strong justification for maintaining the current course.
Interaction with KlimaDAO’s Workstreams
The Green Ratio creates a high-level framework from which to think about KlimaDAO’s various work streams within and state how they should be funded, without specifying restrictions or requirements on what they should be. Outside of climate financing initiatives, it will define the available funding to experiment and iterate within the DAO, activities which are ultimately funded from the Treasury and OpEx. This brings certainty for funding of BAU activities, but limits spending spinning out of control for activities that do not have prior community sign off.
The framework is presented at a time where the DAO has reduced its operational spend significantly after the passing of KIP-45 – removing the most capital intensive activity (i.e. R&D spend) from the budget. Practically speaking, the Green Ratio creates an opportunity to codify to what extent future R&D activities may get funded, whilst also taking a broader perspective across the DAO’s other areas of strategic focus.
Furthermore, with the passing of KIP-45, the DAO’s Decentralization Working Group is driving towards the development of more comprehensive frameworks that are conducive to further automation and optimal decentralization of the Protocol, that build on its Interim Report. Bringing clarity around how economic decision making happens at KlimaDAO will allow the group to prioritise activities that focus on improving the DAO’s operating model.
For the Green Ratio to be a success additional work is required. Specifically, a public “Protocol Data” dashboard on the KlimaDAO website should be developed to inform community members of the state of play and how it is performing against the ratio.
This dashboard will define the ratio at any given time, and be used as a signal to the market as to how they can (and should) use and leverage the DAO's governance and resources, for example:
- Underallocated Carbon pot - e.g. “there is an opportunity for the market to acquire funding from the DAO for climate financing initiatives”.
- Overallocated OpEx pot - e.g. “there is an opportunity for builders on top of KlimaDAO's base layer infrastructure to apply for funding for an ad-hoc project”
KlimaDAO aspires to coordinate with, and empower organisations to scale-up their impact on the planet via environmental commodity markets; similarly the DAO itself requires organisations to tap into the governance process and leverage the DAO's resources in order for it to be a long-term success and valuable resource for the market.
Ostensibly, this symbiotic relationship that KlimaDAO seeks to have with the market is becoming more understood as exemplified by the more consistent use of its governance Forum by climate finance market stakeholders, builders, and community members who are tapping into the DAO’s knowledge and resources.
The Green Ratio is another step in the direction of bringing more clarity to how KlimaDAO is designed and how it can be used by the market.
The Green Ratio stands to provide a modulating effect on DAO that allows it to react to both the market cycles, and its current exposure, by organising the way that it thinks about its resources: a requirement for long-term success and consistent growth. On a macro timeframe the Green Ratio can ensure that the DAO ebbs and flows in a manner more aligned with market cycles, whilst also giving it the flexibility needed to take agile tactical decisions across its OpEx, Treasury and Carbon initiatives – ensuring it maintains its edge in the dynamic markets it operates within.
Worked Examples of Tactical Rebalancing
1. Carbon Overexposure Example
Due to favorable market conditions and strong returns, KlimaDAO finds that its asset allocation has drifted from the foundational 50:30:20 ratio to 60:25:15:
- Carbon: 60%
- Treasury: 25%
- OpEx: 15%
Tactical Allocation Shift Decision is implemented with the Community:
- After a rigorous data analysis, the DAO decides to maintain the overexposure to Forward Carbon Agreements at 60%, diverging from the foundational 50:30:20 ratio.
Rationale for Maintaining Overexposure:
- Market Momentum: Forward Carbon Agreements are currently benefiting from strong market momentum, indicating that the sector is in a high-growth phase.
- Regulatory Tailwinds: Recent government policies favouring carbon-neutral initiatives have bolstered the forward carbon market, signalling a more robust and sustainable growth trajectory.
- Competitive Advantage: KlimaDAO's existing agreements are with industry leaders, ensuring both stability and high potential returns.
- Risk Mitigation: The DAO assessed the risk associated with the overexposure and concluded that it falls within acceptable limits, especially given the expected returns and the mitigative properties of the other asset categories.
Review and Oversight
- This decision will be subject to a review at the end of the next fiscal quarter, aligning with the Green Ratio’s Tactical Allocation Shift provision.
- A continued overexposure to Forward Carbon Agreements will be maintained only if market analytics continue to justify this strategy.
- If exposure continues to increase due to price appreciation, some forward carbon exposure will need to be reduced.
2. Treasury Underexposure Example
Due to various market factors, KlimaDAO’s asset allocation has shifted away from the foundational 50:30:20 ratio to 55:20:25:
- Carbon: 55%
- Treasury: 20%
- OpEx: 25%
Following a thorough analysis, the DAO decides to increase the allocation to Treasury Assets specifically targeting on-chain yield opportunities, moving it from 20% to 30% while decreasing OpEx funds held to 15%.
Rationale for Increasing Exposure:
- Under Foundational Ratio: Treasury assets were underexposed to yield opportunities, creating a need to increase exposure.
High Yield Rates: Current on-chain yield opportunities are offering higher-than-average returns, making them a compelling addition to balance lower-yielding assets.
- Liquidity and Flexibility: On-chain assets provide liquidity and flexibility, enabling KlimaDAO to quickly respond to market changes.
- Portfolio Diversification: Increasing exposure to on-chain yield opportunities serves as a counterbalance to the current overexposure to OpEx, enhancing portfolio diversification and extending operational runway through revenue.
- Using the Tactical Allocation Shift provision, the DAO reallocates 10% from OpEx into Treasury Assets focused on on-chain yield opportunities - a KIP is required to whitelist specific yield opportunities.
- Thereby a revised ratio of 55:30:15 is realised.
Review and Oversight:
- This shift will be re-evaluated at the end of the next fiscal quarter in accordance with the Green Ratio’s Tactical Allocation Shift guidelines.
- Continuation or adjustment of this allocation will be determined by market analytics and performance data.