KIP-18: pKLIMA Redemption Framework + Redeem and Utilize 25% BCT/USDC LP

optima

Summary
Allow up to 1 million total pKLIMA from the DAO allocation to be utilized for bolstering KLIMA-paired liquidity pools.

Disband an additional 25% of BCT/USDC LP to deepen KLIMA/USDC liquidity and better utilize capital.

Motivation
The community allocation of pKLIMA is a strategic reserve that can fulfill key DAO initiatives requiring KLIMA, such as seeding new liquidity pools or bolstering existing pools. The initial use of pKLIMA to deepen our KLIMA/USDC LP is an example of how we can utilize pKLIMA to direct treasury funds where they are most needed.

In the two weeks since our deployment of 100,000 pKLIMA per KIP-16, we have seen KLIMA trading utilization for USDC vs. BCT increase from roughly 45% to 75%, reducing slippage as KLIMA onboards users and facilitates the market.

We must be mindful of the fact that redeeming pKLIMA is essentially pulling inflation forward to today, and then assigning the benefits of that KLIMA production to a specific use. In our first case, it was expanding the horizontal development of KLIMA and reducing slippage for users by centering trading around the KLIMA/USDC LP. In order to counteract the inflationary impact of this pull-forward, Policy correspondingly reduces bonding emissions for the KLIMA/USDC pair. Further increase of the KLIMA/USDC is desirable now to position a robust pool of liquidity at the center of the ReFi ecosystem, which will similarly be counterbalanced with reduction of KLIMA/USDC bonding.

As the protocol matures, delegating a liquidity bolstering budget of pKLIMA to Policy will allow future efficient expansions of liquidity, within the bounds and powers allotted by the community. This initial 1,000,000 pKLIMA (of 480,000,000 total pKLIMA community budget), will serve as a case study for delegating limited authority to Policy. A community announcement will be released within one week after any completion of a liquidity bolstering exercise via pKLIMA.

Proposal

Policy requests permission for the following:

1) A strategic liquidity bolstering budget of 1 million pKLIMA, to be utilized no more frequently than once every 2 weeks, in batches not exceeding 3% of circulating KLIMA supply.
2) Disband an additional 25% of the current BCT/USDC liquidity, for similar reasons outlined in KIP-13, based on current % utilization and trade size of this pool.

Polling Period
The informal forum poll begins now and will end March 25th, 18:00 UTC. Assuming in favor, this vote will go to Snapshot.

Dunnsy

I am all for modifying the lp pools to withdraw BCT and put it in the treasury and maximize routing through Klima/USDC

I question the need for pklima though. Could we take the Klima from the BCT/Klima lp? That would double the amount of BCT locked in treasury.

I like the direction to prioritize Klima/USDC pair. But are there other ways to play with what we have before going to pklima? My understanding of that pklima is it is important for rainy days. Does putting in a lp now really maximize its value to the DAO?

CRUciblEOHMistX33

Dunnsy i like how your thinking but IMO using 1/480th of the community pKlima for something like this is exactly what it's designed for..... it's .2% of the allotted pKlima pool. but i do like this type of thought and is something the team should look into once we have the klima/usdc lp more established

MarcusAurelius

Dunnsy the DAO pKLIMA allocation is quite massive (480m, so we're allocating less than 1% of the total). You're correct that it's a "strategic reserve" - but right now we have no other intended uses for it beyond bolstering liquidity, so we might as well put some small amount of it to work (or at least have the option to do so).

We're very hesitant to pull any KLIMA/Carbon liquidity, since carbon asset liquidity is our primary public good as a DAO. The BCT/USDC pool is a special case because it's redundant with the USDC=>KLIMA=>BCT route.

MarcusAurelius

In my opinion, this is an important example of delegating bounded authority to DAO contributors to minimize voter fatigue and enable agile responses by the policy team to changing market conditions, within clearly defined constraints.

I am in favor.

optima

MarcusAurelius In my opinion, this is a great opinion.

Dunnsy

MarcusAurelius and Crucible. Those points make a lot of sense. I didn’t realize that there was that much DAO pklima. So this isn’t really much of an impact in that respect.

With regards to Klima/carbon pairs, ultimately we want liquidity to match the demand for each market to maximize efficiency. I like the idea of withdrawing liquidity when volume is low, and adding to it via bonds when it is high. Agree that it is a touchy subject, where we don’t want to be seen as not supporting liquidity for carbon.

I’ll flip my vote, as I am certainly in favour of this KIP (would be proposing 100% of BCT/USDC myself kek)

nottrunner

This is a no-brainer. Its a small amount of inflation for the benefit of having deeper liquidity.

I'm also in favor of further empowering the policy team with the tools they need to be nimble.

_NN_

I'm for it!

Sirob

Increasing liquidity is naturally good. Help me understand the table please: when the (up to) 1m KLIMA is minted, we'll go from ca 4mn to 5mn issued. The USDC/BCT pool disbanding goes into treasury apart from 100k BCT and ca 1.7mn USDC. The USDC goes into the KLIMA/USDC pool. What happens with the 100k BCT? How do we prevent the 25% (based on 1mn) dilution in issued KLIMA?
Thanks

optima

Sirob Yeah, so the 100k BCT technically goes back in the treasury, but can't be counted towards our reserves or runway as it has already been paired with the pKLIMA. So we'll go from _4mn to 4.1mn circulating KLIMA after this liquidity exercise, and the rest of the mints will be measured out over future weeks.

We plan on balancing dilution primarily by reducing future KLIMA/USDC bond capacity. The 1mn pKLIMA will be redeemed over the span of many months, so we can allay future mints to counteract this inflation we pull forward and put to use today.

Sirob

optima This is a trade off decision. I don't have a particularly strong opinion, but would be interested to understand the pros and cons of:

Current proposal: dilute everyone by the newly minted KLIMA, but keep the USDC from the LP for costs etc
and
Use the freed up USDC to buy BCT or MOSS and pair in the treasury to limit the dilution

Thanks for your thoughts.

optima

Sirob Definitely swimming in a sea of trade-offs.

With pKLIMA minting & USDC used for LP, mainly
Pros:

Capital efficient - treasury obtains KLIMA at 1BCT ea.
KLIMA not staked, no APY loss for stakers
Key liquidity rail bolstered

Cons:

Reduction of KLIMA premium in BCT (dilution)

Great point with USDC as potential dilution moderation. USDC can definitely be used to moderate the dilution from pKLIMA mints, if we were to purchase BCT or MOSS OTC.

We will have the $1,467,902 after this liquidity exercise - so BCT/MOSS OTC buys are certainly on the table and would be great for reserves. It's mainly a question of timing and opportunity cost imo. USDC buying BCT or moss would be good for reserves, runway, and other QOL metrics - but we can also perform these acts any time. So main cons are losing the stockpile of liquid capital, and the opportunity cost of potentially using that USDC for liquidity or exchange listings.

FluctusLux

Why not disband the entire bct/usdc pool instead of another 25%? If the goal is for klima to become the de-facto currency for purchasing carbon offsets on-chain, I don’t see any reason to hold usdc liquidity pools of carbon offsets. Better yet, why not revise this proposal to give the DAO better control of the liquidity pools of carbon offsets that the protocol controls? This way, we don’t have to keep repeating the same conversation. For the unlock of pKLIMA, I think this part is worth discussing over each time.

optima

FluctusLux Yeah, 100% agree we have excess capital in BCT/USDC and that the pool doesn't align with our long-term vision of KLIMA as currency.

Disbanding any of our liquidity pools, our public infrastructure, is delicate... BCT/USDC is an exception to the rule, imo.
It's a pretty stark case in favor of disbanding BCT/USDC today, but I certainly wouldn't want to set a precedent that we're comfortable chopping up our public infrastructure so decisively.

Any KLIMA/CARBON pair is going to be diamond handed by Policy for eternity, so those pools won't be disbanded in the future. So yeah, I agree there's a great pool of capital to redirect in BCT/USDC - but we want to be measured when making any major shifts in our liquidity composition.

IBuyShitCoins

FOR this proposal. The more klima/bct and klima/usdc liquidity we can build vs bct/usdc liquidity the better. We can capture carbon arb trades twice this way and this activity is more neutral to klima's price than the current liquidity setup. I agree with @FluctusLux that completely disbanding the bct-usdc pool should be done eventually, but I also respect the policy team wanting to take these activities slow to avoid causing a market panic. 2 rounds of 25% removal is a great start, lets see how the market responds.

As far as greater policy control.... that might be a good post to put up in the discord or forum and see how people respond. I would be for more autonomy.

khyezr

IBuyShitCoins @FluctusLux
I think maintaining a rather modest pool of BCT/USDC is important for Klima Infinity partners who are looking to meet their short-term offsetting goals by buying and offsetting BCT directly using USDC. If we remove this pool entirely, they will be forced to go with USDC>KLIMA>BCT with higher fees instead.