Reserve $1.5M of the treasury’s USDC to fund payroll and extend development runway.
01. The DAO is significantly leaner since implementing KIP-19
The largest ongoing expense for the DAO (wallet address: 0x65a5076c0ba74e5f3e069995dc3dab9d197d995c) is the funding of payroll. This includes paying regular contributors, bounty hunters and other contractors across product, engineering, design, marketing, creative, partnerships, community, policy, operations and legal.
Figure 1 shows the USD-denominated payroll outflows and number of paid contributors (excluding Core Team) since inception of the DAO in October 2021. Following KIP-19, payroll in the month of April was ~$230K, which is a 38% decrease from February. Additionally, there were 54 paid contributors in April, which is 16% reduction in the same timeframe.
02. The timing of inflows and outflows presents two key sources of financial risk
Following the adoption of KIP-10, 30% of the value of assets bonded to the DAO treasury are minted as KLIMA and deposited into the DAO wallet. In the month of April, the DAO generated an average of $17.6K worth of KLIMA each day (for a total of $530K). But since contributors are paid KLIMA in values denominated in USD (which is a fixed amount), the price of KLIMA at time of payment is critical to understand.
To illustrate this point, we can consider the April pay run, which occurred on May 02, 2022 (hash: 0xdc35744270aebe5584ebe8364ad3ccbb00381a82462c06318072f15c4cb864f7). Throughout the month of April, the DAO wallet received 27,365 KLIMA from bonding inflows. At time of payment, the price/KLIMA was ~$11.32/KLIMA, despite an average price throughout April of ~$19.30. This means bonding inflows in April were only $310K, off a cost base of $230K (or 20.3K KLIMA), rather than $530K had the price remained constant throughout the month.
This example highlights the fact that we are still exposed to two key sources of financial risk. First is the risk that the KLIMA price drops just before a pay run (making payroll more expensive), and second is the risk that the amount of bonding inflows into the DAO wallet declines. While the DAO has influence over these factors, the bonding inflows and price are largely driven by the market we operate in.
03. A protracted bear market will continue putting pressure on our ability to fund payroll
Despite projected growth in the voluntary carbon market, the broader finance, cryptocurrency and technology sectors are all expected to decline in the short-medium term. In other words, it is looking more and more likely we will be entering a protracted bear market. Many will argue we are already in a bear market, and this can certainly be seen when considering the bonding inflows and price impact over time.
Figure 2 shows the value of the total KLIMA generated through bonding over a rolling-30 day period. The total amount of KLIMA is then multiplied by the price on each specific day to present the true USD-denominated value (thus accounting for price changes over time).
Figure 3 shows the compound weekly growth rate in KLIMA inflows generated through bonding. This says that for the past 6 weeks, the USD-denominated value of bonding inflows decreased by 13% week-on-week. If we are in fact already in a bear market, we should reasonably expect and prepare for continued periods of declining bonding inflows with respect to funding the DAO.
04. Our current state runway is approximately 4 months
Based on the assumption that bonding inflows continue to decline at the same rate as has been experienced over the past 42 days (i.e. - 13% week-on-week), the price of KLIMA stays constant at ~$5.50, and the current payroll bill remains constant at $230K, then we estimate the DAO (excluding Core Team) has approximately a 4-month runway.
Figure 4 shows the monthly balance of KLIMA in the DAO wallet (denominated in USD), net of monthly payroll expenses and bonding inflows, with the orange line showing the bonding inflows of $KLIMA (also denominated in USD).
Note, this runway calculation excludes members of the Core Team. Unlike other KlimaDAO contributors, Core members are not remunerated with KLIMA from the DAO wallet. The Core team has independent funding and a multiyear runway. If all contributors left or the DAO wallet ran dry, the Core team would carry on through even the most prolonged bear market.
05. We can make our DAO more resilient to market conditions through using USDC
As of 22 May 2022, the DAO wallet (address: 0x65A5076C0BA74e5f3e069995dc3DAB9D197d995c) holds 108K in KLIMA (~$628K) and ~$4.4M in USDC. The USDC component is owned by the treasury and comes from disbanding portions of the BCT/USDC liquidity pool from KIP-13 and KIP-18. The USDC does not contribute to the backing for KLIMA, so it is simply being held in the DAO wallet for the “cleanliness” of the DAO treasury. While the first preference is that the DAO pays its contributors solely in KLIMA, we are in a position where the runway can be extended substantially through paying in USDC.
The DAO should be resilient in the face of prolonged periods of suppressed bonding volume and negative price impact. It is important that during these periods, the DAO continues to build new products and develop the market for ReFi. As such, we propose adjusting our compensation structure to allow for the use of USDC, in addition to KLIMA.
The adjustment would be as follows:
(1) Reserve $1.5M of USDC from the treasury for the purposes of contributor allocations;
(2) Pay contributors their monthly allocations with a combination of USDC and KLIMA; and
(3) Enable the Core Team to decide the ratio between USDC and KLIMA (initially this would be a 50:50 split)
Under the assumptions that price remains constant at $5.50 and bonding inflows continue declining by 13% week-on-week (i.e. bear market scenario), an allocation plan comprising 50:50 split between KLIMA and USDC (up to $1.5M) would extend the runway to February 2023.
Under this option, we extend our runway while retaining optionality with the remainder of our USDC reserves. We will be actively monitoring market conditions and our financial position over the coming months, and may re-evaluate how we fund payroll at a future date. Options for future considerations may include drawing additional USDC reserves from the Treasury or using debt-based payroll financing (amongst other options).
With the additional runway provided by the USDC reserves, and a significantly leaner and more focused team, we believe we are in an extremely strong position to execute on our product and market development roadmap while weathering any storms that might be ahead of us.
The polling process begins now and will end at 12:00 UTC on 27/05/2022. After this, a Snapshot vote will be put up at 14:00 UTC on 27/05/2022.