Bootstrap liquidity for KLIMA/NCT pair using NCT in the treasury and KLIMA minted from the liquidity bolstering budget. Approve KLIMA/NCT LP bonding.
Recall the horizontal development strategy outlined in KIP-8: to achieve KlimaDAO’s goal of building a highly liquid and efficient on-chain carbon ecosystem, the KLIMA token should be the key liquidity pair for all on-chain carbon.
Multiple projects launching soon plan to integrate NCT, signalling potential activity growth around NCT in the near term. Therefore it makes sense for us to consolidate NCT onto our liquidity rails by bootstrapping a modest pool of KLIMA/NCT liquidity, and in the future opening up KLIMA/NCT LP bonds as needed to grow the pool in line with observed NCT activity.
As we scale our portfolio of KI partners, there is also demand for NCT to be used for retirement. The current swap route via KLIMA>USDC>NCT is not ideal for our community because of the extra fees and slippage incurred when retiring NCT with KLIMA as the input token. Deploying KLIMA/NCT liquidity owned by the protocol will improve the user experience for KI partners and Klimates utilizing NCT for their retirement needs, as well as ensuring NCT activity contributes to the growth of the KlimaDAO ecosystem. This is aligned with our broader goal of building on-chain carbon liquidity rails as a self-sustaining public good.
The primary concern raised during discussion of the previous RFC from Toucan proposing NCT bonds was the manner in which the mass rebalancing of tonnage from the BCT pool to NCT took place, and the resulting presence of large amounts of rented liquidity provided by the partners who helped Toucan acquire the BCT required for the mass rebalancing.
Since Toucan’s initial RFC, the excess value which was extracted during the mass rebalancing event has been distributed to the appropriate stakeholders - including a significant portion to the KlimaDAO treasury in the form of NCT - based on a good faith allocation developed by KlimaDAO in partnership with Toucan and other stakeholders.
In addition, the borrowed liquidity has since been pulled, with the bulk of the remaining liquidity NCT/USDC LP held by a multisig, earmarked as permanent liquidity according to the distribution posted on Toucan’s governance forum. Shortly after NCT launched, there was about $12mn worth of liquidity in the NCT/USDC pool. Now, there is only about $1mn and 77% of that is controlled by this multisig managed by Toucan.
As a result, the concern that rented liquidity could be pulled, leaving the KlimaDAO treasury holding the NCT bag, has been substantially mitigated: the rented liquidity has already been pulled, creating a favorable environment for protocol-owned liquidity to enter.
Bootstrapping the Pool
Initially, this proposal would allocate 70k NCT from the treasury reserves to be paired with 38k KLIMA minted from the liquidity bolstering budget to bootstrap the KLIMA/NCT liquidity pool with about $300k worth of liquidity. In order to mint this KLIMA from the liquidity bolstering budget, we propose allocating an equal number of BCT tokens from the treasury reserves.*
Bootstrapping this pool is aligned with our pursuit of improving UX as it would lower slippage and transaction fees for modest size swaps from KLIMA to NCT compared to the current routing.
The Policy Team will evaluate NCT adoption over the coming months and open bonding for KLIMA/NCT LP to grow the pool when appropriate.
- Note: Previous liquidity bootstrapping activities have utilized BCT acquired from dissolving BCT/USDC LP tokens held by the treasury. In this case, the amount of BCT required is quite small, so it’s not worth the manual toil and time required to dissolve LP via the multisig. Final dissolution of the treasury’s BCT/USDC LP will be proposed in a future KIP.
Propose migration of existing NCT/USDC pool
Separate from this KIP, the KlimaDAO Policy Team has also approached Toucan to propose migration of the permanent NCT/USDC liquidity to KLIMA/NCT in order to minimize fragmentation and align incentives. The current plan is to submit an RFC to the Toucan governance forum once the KLIMA/NCT pool has been bootstrapped. Assuming Toucan engages with the RFC, any terms requiring KlimaDAO governance approval associated with the migration would be addressed in a subsequent proposal.
This proposal would slightly lower the runway because the treasury NCT deployed into the KLIMA/NCT pool would no longer count as reserves, and the treasury BCT allocated to mint KLIMA from the liquidity bolstering budget will reduce excess reserves as well. As a rough estimate, this operation will reduce excess reserves by about 100k tonnes (approximately 1%) - at the 20% AKR target passed in KIP-27, this will equate to around a 20 day reduction from the 2000 day runway expected.
Assuming this KIP passes and Toucan agrees to migrate the existing NCT/USDC permanent liquidity, any existing integrations using the NCT/USDC liquidity pool should be reconfigured to use the (USDC>)KLIMA>NCT route.
Allocate 70k tonnes of NCT from the treasury reserves to be paired with about 38k KLIMA minted from the liquidity bolstering budget to bootstrap a KLIMA/NCT pool on Sushiswap Legacy (in line with existing pools) with approximately $300k worth of liquidity. Allocate approximately 38k BCT from the treasury reserves for use in minting the KLIMA from the liquidity bolstering budget.
Approve bonding for KLIMA/NCT LP tokens.
Current NCT/USDC Sushiswap Legacy Pool
Strategic liquidity bolstering budget approved in KIP-18
Original NCT bond RFC from Toucan
NCT Mass Rebalancing Excess Value Distribution
Permanent NCT liquidity multisig
Horizontal development strategy in KIP-8
The informal forum poll begins now and will end on 29/08/2022 18:00 UTC. Assuming in favor, this vote will go to Snapshot.