Revise KlimaDAO’s current token mechanisms to slow down supply growth and give time for the on chain carbon market to develop.
Reduce KlimaDAO reward rate substantially in order to facilitate the time needed.
When KlimaDAO first launched, the high APYs were justified as the growth potential for the ReFi space was very high, and untapped. Since the treasury started with very little, it was feasible and necessary to double, triple, or 10x the treasury. The metrics of KlimaDAO’s first two to three months vindicate this approach.
Within the current landscape, however, the growth rate of KlimaDAO has significantly reduced. The total BCT supply has also stagnated.
Other protocols, such as Moss, GoddessDAO, and C3 are coming up in the ReFi space, and they stand to unlock further growth of ReFi. However, we need to be more conservative with our own growth, in order for these protocols to flourish. At the moment, KlimaDAO is the primary source of demand for on-chain carbon credits. Moving forwards, we need to work in tandem with our partners to develop this nascent market for long-term stability. This includes ensuring that a robust and mature supply side of the market is developed, and it requires us to tap into the latent demand for tokenized carbon tonnes within Web3 and beyond.
During this period of building resiliency into ReFi, the policy team carries the view that we need to reduce overall bond capacity significantly as currently the majority of bonds are simply recycling the value in our treasury, rather than gaining value outside of the treasury, mainly due to a lack of supply. This can be seen in the treasury total carbon chart, where most of the BCT in our treasury looks to be taken from the KLIMA/BCT pool:
Ideally, we should be bringing in fresh carbon assets into the treasury.
While reducing bond capacity means that we lose out on revenue, it also means token holders become less diluted, especially with the low premium on KLIMA that we see today. This also means a large reduction in sell pressure from bonds. With a reduction in bond capacity, we have to reduce the supply expansion allocated to stakers as well, so that our metrics don’t suffer (review our KIP-3 reward rate rationale article for a refresher on this topic).
KlimaDAO’s policy team will focus on delivering a series of Office Hours and policy content to engage with and educate the community on the rationale and decision making processes for these changes:
This supply expansion change (APY) facilitates two things:
- Allows for a fair and proportional distribution of new rewards to the users of the protocol, as well as expanding supply to the amount that a currency needs to facilitate trading.
- Reduces the dilution that occurs to token holders from bonds.
If KIP-14 passes, a shift in approach will materialize. When the protocol was first introduced, we were aiming to rapidly grow KlimaDAO’s supply as we expected large demand for ReFi – in the first 3 months this did occur with around 15,000,000 tonnes of carbon making its way onto the blockchain and the majority of them becoming locked in the KlimaDAO treasury. However, we must take a step back and adjust our expectations to the market conditions we see today: we consider it prudent to curtail our supply growth rate (i.e., reduce our reward rate).
While we heavily take inspiration from OlympusDAO and their mechanics, our trajectory is different from theirs, and we are tied to conditions in the real-world carbon markets. We are creating a carbon currency for ReFi from the ground upwards; they are creating a currency for DeFi and are able to leverage the existing (and mature) systems.
The numbers in the below table indicate the conditions met under the existing policy conditions of KlimaDAO, compared with the proposed APY changes (1000% and 2000%).
The high numbers needed to simply retain backing per KLIMA is a huge pressure for KlimaDAO. This pressure is compounded by the fact that the supply external to KlimaDAO is minimal right now. For reference, KlimaDAO is acquiring around 20,000-30,000 tonnes per day. By reducing reward rate, we are able to reduce the daily carbon needed to retain the backing by around 10,000 - 15,000 tonnes. This will allow other metrics to flourish.
Reduce APY to around 1000% or 2000%, equating to a reward rate of 0.164% or 0.209% respectively.
For this vote, ranked choice voting will be implemented. All users will select a primary and secondary vote. In the event of a plurality, the choice with the fewest votes is eliminated. The voters who selected the eliminated choice as their primary will then have their votes added to the totals of their secondary choice.
Ranked voting is only for the snapshot step.
The DAO does have the option to take immediate action, rip the band-aid off, and that is to go directly to 1000% APY. However, in the spirit of KIP-3, there is also an option to go to 2000% APY. While 1000% APY would certainly create a healthier situation for other KlimaDAO metrics, the policy team wants to respect the guidelines that KIP-3 set in place.
If the vote concludes for 2000% APY, we will do another reward rate reduction proposal after reaching 10 million total supply of KLIMA.
The informal forum poll begins now and will end at Feb 18th 18:00 UTC. Assuming in favor, this vote will go to Snapshot.