• Proposals
  • KIP-23: New Framework for Supply Expansion

Summary

Introduce a new framework for reward rate that takes into account growth metrics specific to KlimaDAO and the on-chain carbon ecosystem. Reduce emissions in the face of current macro market conditions.

Motivation

While most OHM forks are able to sustain rapid supply expansion through reward rate based solely on treasury intake from bonding, KlimaDAO is unique in that its treasury intake is limited by the supply of eligible carbon credits on chain. As such, it is necessary to consider further measurements when determining an appropriate reward rate.

This dilemma presented itself during KIP-14: Resilience Mode, in which the reward rate was lowered 1000% AKR, under the supply stage’s floor of 2000% AKR set by KIP-3: Introduce Policy Framework due to the observation that over the three months between those KIPs, the ReFi space was not growing as rapidly as expected, with carbon bridging stagnated.

Implementation

The policy team proposes to replace the current model with a dynamic one that regulates KLIMA supply expansion based on market conditions. The new framework functions as a market thermostat, where for a given state, the AKR is dependent on:

  • The ratio of KLIMA supply over eligible on-chain carbon supply, and
  • The 90-day moving average growth rate of the eligible on-chain carbon supply over KLIMA supply.

That is, optimal KLIMA supply expansion should be in line with the growth of the on-chain carbon offset market.

Call the reward rate determined strictly as a function of the total KLIMA supply and target runway the baseline rate (B). Fix a value for an expected growth rate (GE), a lower growth rate (GL), and a higher growth rate (GH). If the growth rate goes below GL, then the reward rate should be decreased from B. If the growth rate goes above GH, then the reward rate should be increased from B. The magnitude of the increase or decrease is in proportion to the ratio.

Growing Rapidly
Growing Slowly

Framework

Initial conditions:

  • Stage: 5M-10M supply
  • Baseline (B): 300% constant, 100% once either inverse bonds are introduced or regular bonds are shut off
  • Expected growth (GE): 0.20%
  • Higher growth (GH): 0.35%
  • Lower growth (GL): 0.10%

Note that the current 90-day moving average growth rate is approximately 0.14%. In increasing / decreasing AKR based on the growth rate, it is better to be conservative on the upside and reactive on the downside to ensure long-term sustainability.

Disclaimers

For the immediate future, the policy team will manually re-evaluate reward rates at regular monthly intervals based on the proposed framework, with potential to automate this process eventually. Policy still retains responsibility for correcting minor deviations from the proposed framework’s target AKR.

Since this framework is more complex than the simple OIP-18-inspired supply segmentation in KIP-3, the policy team will need time and experience to tune the parameters and determine if the framework is functioning as intended.

Eventually, if this framework proves successful, we hope to be able to automate adjustments to the reward rate via a thermostat-style controller, and turn over parameter adjustments to a gauge that KLIMA holders can vote on. This current KIP does not constitute a commitment to automate reward rate adjustments: a future KIP would be required to turn control of the reward rate over to such a system.

Lastly, the Policy Team does not commit to this being the final state of the reward rate framework. Time and data are needed in order to build confidence in this new framework, and future KIPs may be proposed as required to evolve the reward rate framework as the protocol matures.

Proposal
  • Ratify the above framework as a guide for further reward rate changes moving forwards.
  • Reduce AKR to 300%, or a 5-day reward rate of 1.9%, per the framework.
Polling Period

The informal forum poll begins now and will end on May 19th 18:00 UTC. Assuming in favor, this vote will go to Snapshot.

Vote

I find the thermostat concept very interesting. I am a bit suspicious of future voting to tweak parameters - I don't fully trust the wisdom of the (degen) crowds we have here.

I think the concept is good. But I don’t like the drop to 300% AKR. I’m voting against. Change it to 800% and you’ll get my vote.

    I'd like to see some examples of how this would play out. I know baseline is 300%, but I'd like to see some projections of what it would look like with todays rate of growth.

    This still feels vague to me.

    Example "projections" scenarios:
    IF <X> happens, lower the APK by <n> amount
    IF <Y> happens, raise the APK by <n> amount

      I think that giving flexibility to Policy to adjust AKR up or down based on the overall onchain carbon market is undoubtedly a great improvement. It also makes complete sense to adjust AKR down right now as a first step.

      Before I vote in favor, I have a few questions:

      1. From 300% AKR to "100% once either inverse bonds are introduced or regular bonds are shut off" - what is the justification here?
      2. "The magnitude of the increase or decrease is in proportion to the ratio." - could this be formalized or expanded upon?
      3. How would bonding capacities be adjusted in tandem?

        CryptoLife The honest truth is that is a complex system we're proposing and it's really hard to know what the "right" parameter values are, how market conditions will evolve, and how the community will react to this new framework. So any forecast made before we have more data would be veeeery speculative.

        As always, each specific change to the target AKR made within this framework will still be put to a KIP vote. The Policy Team also still retains the right reserved in KIP-9 to make minor adjustments to the reward rate if the AKR deviates from the current target by more than 10% for over a week.

        ShimonD The answer to your first question is related to your last question: the higher bond capacities are, the higher AKR needs to be to "keep up with" dilution. Conversely, if bond capacities are lower or we are actively reducing KLIMA supply via inverse bonds, a high AKR is working against us, requiring more inverse bonding capacity to achieve the same effect

        As for #2, we're just trying to say that if the current value is above or below expected by a large amount, we should adjust aggressively. If it's just by a small amount, we should either not adjust or only make a minor adjustment.

        There is also the consideration that lower-than-expected growth needs to be addressed more aggressively than higher-than-expected growth because of the inherent asymmetry: if the treasury runs out of carbon on-chain to back KLIMA, rewards would grind to a halt; if there is more carbon on-chain than the treasury can absorb, rewards can still be paid out, we just aren't maximizing the impact of the carbon market's growth on KLIMA supply.

          Car54 sadly the reality is that in current market conditions our reward runway of approximately 150 days is worrisomely low at the current 1000% AKR target

          Given the very low growth rate of the on-chain carbon market and the very low premium of KLIMA above intrinsic value, the only real option to substantially extend the reward runway is to significantly lower the target AKR.

          The sooner we make this adjustment, the longer we can extend the runway. And since rebase rewards are exponential it really does get much more severe every day. We must rip the band aid off as soon as possible to ensure long term success of the protocol.

          And remember: under this new framework, if the on-chain carbon market really takes off, we can always raise the AKR back up to capture that growth

            MarcusAurelius These general directions all make sense. I guess as I understand it, the short answer is that some of these parameters are not formally defined because the framework is new and may require adjustments. I'm also gathering from this that the inverse bond capacity, when/if introduced, might be large enough to justify a 66% AKR drop.

            This all sounds great, and I'm happy to err on the conservative side during these market conditions to ensure Klima's long term success.

            One last point. I think it would be good to explicitly add the following portion of your comment to @CryptoLife to the KIP: "each specific change to the target AKR made within this framework will still be put to a KIP vote". This way, we can ensure that the community will analyze and stamp the seal of approval on every proposed Policy move within this new framework.

            Totally on board. I'd even like to see the Baseline akr lower. There isn't an incredible need to expand supply rn. The protocol has plenty of carbon in its treasury. Value creation will come from organic demand for klima and underlying assets. Chop that akr!

            It is just sad that you guys are always making those huge steps, why not 800% or even 500%, but it's always huge steps, then huge price decline always after every kip where apy goes down. When is there a kip coming that will be in favour for all day 1 early investors. Do some buybacks or find some other thing to pump up the price at least. I only hear and see people being happy apy goes down, and everybody voting in favour, you probaly like losing money and never get breakeven or something. And the team always saying, price does not matter, well it does. Hey, come and invest in klima, yes our price did go down 99,8% but we are a solid project ( not saying that i don't like klima, but your are not their for your investors at all).

              I would like to know what effect equalising the runways for the DAO wallet and the rewards wallet would have on both runways. Archi mentioned in office hours that there is a healthy few years of runway on the core wallet.

                Euclid I am not familiar with the Core wallet specifics but policy largely tries to operate independent of such external factors to focus on near term/long term health. We will obviously manage reward rate for the reward distribution to last for years but reducing it too much too soon will hamper our ability to intake bonds without too much dilution.

                Rene I appreciate that the lowering of the APY is concerning, the hope with this new framework is that reductions are not necessarily permanent but change with supply and market conditions. APY could reach those heights again if the growth of tons on chain justifies it.

                Heck, why don’t we just set the interest rate to 0%… then we should be able to balance new buyers (nobody) with new carbon brought on chain.

                We’re rapidly losing interest with new investors when the rate drops every other week. (Yes, I know it doesn’t drop that often, but it feels like it).

                We haven’t even reached the 10M circulating supply yet.

                Yes, I know higher AKR just dilutes the supply and potentially lowers the price of Klima. I’m ok with that. I’m not selling anytime soon, so the current price is not important to me right now. However, collecting rewards is very important to me right now. The price will be important to me in 3-5 years. Until then, I’ll always vote for more rewards.

                  Wagmi Labs ink retweeted Zeus's tweet that compares PoW and PoR (proof of reserve s); https://twitter.com/WagmiLabsInk/status/1526211787456098305?t=BnE4p_fYg895NCcXt1kH0w&s=19.
                  I think this highlights brilliantly how Klimadao should work when there is not that much carbon flowing to treasure. No new carbon -> no more rewards. Who would ever bond more carbons if the protocol has already saturated it's tokenomics with rebase rewards and thous it's not that profitable for new comers to join in.. unless the APR is rised back to crazy high. I'm in favor for reducing rebase rewards. Once the in flow of carbon returns the rise the rewards back up.

                  As I understand it, the rationale of this KIP is to maintain the Klima share of the on-chain market, with Klima supply/treasury growing pari passu with on-chain credits. The problem is that it is just an objective, right? For it to suceed we need the treasury to grow at the same speed. Take the situation rn: we set the AKR to 1000% but the treasury is far away of growing 10x annualized, so we are basically paying the AKR with treasury reserves and decreasing Carbon Custodied per Klima. So my questions are:

                  i) Shouldn't the AKR also considers the treasury growth and not just the on-chain growth? ii) Or are we going to set bond capacity in line with AKR to make sure those tonnes enter to treasury, even if a high discount/dillution is required?

                    HI

                    absolutely support anything that will extend the projects runway. We should lower as much as need to be to give the project time to suceed

                    peace 🙂