Recent literature on KlimaDAO and the Digital Carbon Market

As the nascent Web3 space matures, technology which claims to improve consumer experience and enhance market efficiencies will become increasingly evaluated. In time, research, analysis and project demonstrations will lead to a greater understanding of different technologies' utility, and help define what further work can be done to leverage benefits for markets and civil society.

Over the course of 2022, KlimaDAO and the Digital Carbon Market on Polygon have demonstrated their utility with increased adoption of their technology stack, with consumers of carbon credits electing to offset their personal carbon footprints via the KlimaDAO platform, and organizations building products and features on top of KlimaDAO infrastructure, enabling their users to make climate impact.

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Innovations include Confluence Analytics, which enables sustainability-focused investing while automatically offsetting the carbon footprint of your investment portfolio; the Sushi decentralized exchange, where transactions are automatically offset for opt-in users; and Carbonlink, which has built a carbon subscription service on KlimaDAO rails. Driven by these developments, over 500,000 digital carbon credits have been offset within the Digital Carbon Market on Polygon.

While Web3, carbon markets and ReFi in general are relatively immature markets, KlimaDAO and the Digital Carbon Market have seen growing interest from organizations and academics, as it represents a novel interface between burgeoning blockchain-enabled markets and the climate finance space.

In this article, we introduce the research and key aspects of its conclusions:

Blockchain solutions for carbon markets are nearing maturity

Authors: Adam Sipthorpe, Sabine Brink, Tyler Van Leeuwen, Iain Staffell. Published by Cell Press in One Earth Volume 5, Issue 7, July 2022.

Understanding KlimaDAO Use and Value: Insights from an Empirical Analysis

University of Alcalá, Madrid. Authors: Miguel-Angel Sicilia, Elena García-Barriocanal, Salvador Sánchez-Alonso, Marçal Mora-Cantallops, and Juan-José de Lucio. Published by Springer Nature, January 2023.

#Web3for2030: How can Web3 help achieve the Sustainable Development Goals

UNDP Regional Bureau for Asia and the Pacific, New York. Authors: Rowan Yeoman, Kate Sutton. Published by United Nations Development Programme, November 2022.

Governance of ReFi Ecosystem and the Integrity of Voluntary Carbon Markets as a Common Resourc

Royal Melbourne Institute of Technology, Melbourne. Authors: Carlos Andres Diaz-Valdivia, Marta Poblet. Published at Social Science Research Network, November 2022.

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Maturity level analysis of KlimaDAO’s technology - One Earth journal, published by Cell Press

In Volume 5, Issue 7 of the One Earth journal, authors Adam Sipthorpe et al. published Blockchain solutions for carbon markets are nearing maturity. The paper investigates the role of blockchain technology in carbon markets as a whole and examines the Technology Readiness Level (TRL) for 39 different organizations working in blockchain climate solutions, including KlimaDAO.

Carbon markets could hasten climate change mitigation [...], but they face problems around trust, transparency, and uptake. Blockchain offers a foundational technology upon which new carbon markets can be built which address these shortcomings.

One of the major issues the authors have identified is that “this sector is still nascent, fragmented, and clouded by technology hype [...]”. Sipthorpe et al. therefore applied a mixed-methods analysis consisting of a literature review, interviews, and quantitative assessments to their research. The research had the objective of separating the “technology hype” from actual, competitive systems proven in an operational environment.

The results of the authors’ TRL analysis show that “the market is immature, with more than half of the solutions currently in the lowest three levels: at initial proof-of-concept stage or below.” However, they do recognize KlimaDAO’s unique position in the current carbon market environment"

A single project has reached the criteria for TRL 9, KlimaDAO

The paper identifies several key barriers which slow down other projects, specifically around TRL 4, 6, and 8, which are presented as problems of scalability, system integration, and regulatory concern, respectively. According to the authors, only KlimaDAO and bridging partner Toucan Protocol have left these obstacles behind and their “blockchain technology is fully implemented into the system and working competitively to other projects at full capacity”.

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KlimaDAO’s perspective: From late 2021 to early 2022, KlimaDAO demonstrated a rapid go-to-market, as the launch of the protocol’s bonding mechanism incentivized the bridging of over 25 million carbon credits onto the Polygon blockchain.

This was an unprecedented development – increased demand for carbon credits drove the Platts Renewable Energy Current Year assessment up by 63%, from $2.3/mtCO2e on August 9th to $7.20/mtCO2e on November 22nd. Carbon credit volumes grew correspondingly, as KlimaDAO’s liquidity pools facilitated over $5 billion of trading volume – 5x the entire off-chain market. On the 25th of May, Verra became the first major carbon registry to issue a freeze on the tokenization of carbon credits.

Subsequently, the KlimaDAO protocol paused bonding, and as such, KlimaDAO is not currently generating significant revenues to fulfill the requirements of TRL 9. We are expecting to onboard new carbon tonnes into the treasury throughout 2023 and resume bonding, while continuing to facilitate the adoption of our carbon offsetting tooling – soon, KlimaDAO will fulfill TRL 9 again.

KlimaDAO’s use-cases and digital carbon markets - University of Alcalá, published by Springer Nature

In the paper Understanding KlimaDAO Use and Value: Insights from an Empirical Analysis, authors Miguel-Angel Sicilia et al. examine the current state of carbon markets and their challenges before exploring if and how KlimaDAO in its current shape can aid in alleviating said challenges.

The authors recognize that building a carbon market on top of existing DeFi primitives might help KlimaDAO and, consequently, the wider Voluntary Carbon Market (VCM) in addressing recurring concerns, such as illiquidity, opacity, and inefficiency.

While granting that this technology is still nascent and “[…] the systemic effects of integrating tokenized carbon assets into DeFi are still yet to be explored as protocols as KlimaDAO mature”, some clear advantages over current methods employed in the VCM already emerge in the eyes of the authors. For instance, pooling carbon credits of various types helps solve problems of illiquidity and opacity:

The fact that these pools can be created by anyone and they are transparent in gating criteria and composition clearly fulfills the objective of increased transparency.

While conceding that the current amount of tokenized credits consists of only roughly 3% of Verra’s total available credits, the authors recognize the potential of a digital carbon market:

The amount of tokenized carbon units to date when compared to off-chain availability is small [...], but given that the protocols involved are relatively recent, it shows potential as a substantial future on-chain market.

KlimaDAO’s perspective: KlimaDAO is aligned with the authors’ position on the advantages of building on an open and permissionless system. Digital carbon offers unique benefits ​in terms of fractionalized offsetting, automated offsetting, transparency and traceability, liquidity provisioning, and accessibility. As we have previously outlined, there is a clear path to scaling climate impact by increasing the throughput of the blockchain-based Digital Carbon Market, and KlimaDAO is committed to achieving this.

Carbon-backed currencies and their impact on climate change - UNDP, published by United Nations Development Programme

#Web3for2030, authored by Rowan Yeoman and Kate Sutton, investigates the role of Web3 in achieving global Sustainable Development Goals as defined in the United Nations’ 2030 Agenda for Sustainable Development. The report states that “new technology is morally agnostic, it won’t improve society on its own”. This subsequently leads to questions posed by the authors, such as:

• “How can we leverage the tools Web3 is making available to create positive impact?”
  

• “How can the tools of Web3 support progress on the Sustainable Development Goals (SDGs)?”

While their report is not strictly limited to KlimaDAO, the authors cite the DAO under Goal 13: Climate Action through New Climate Financing and Systems Design. KlimaDAO and its mechanisms, such as tokens which represent “carbon sequestration or other kinds of ecological value”, could play a role in a new, nascent “economic system to incentivise positive environmental action”.

Carbon-backed currencies, like KLIMA […], have the potential to provide the economic incentive mechanisms needed to make a real impact on climate change through carbon positive transactions.

At the same time, the authors identify some key challenges that are ongoing not only for KlimaDAO, but DAOs and Web3 as a whole—such as risks of exclusion, underlying systems, privacy, security, and energy usage.

Despite the pullback which hit cryptocurrency markets and the broader economy starting in late 2021, the paper remains optimistic towards the utility of Web3 and its potential positive impacts:

Even with this pullback, innovation in Web3 continues at a rapid pace and [...] it seems inevitable that these technologies will become part of our daily lives and more importantly, become the enabling context for larger change in our society.

KlimaDAO’s perspective: KlimaDAO is positioned to support the achievement of the environmental SDGs by building the infrastructure and tooling to accelerate climate finance through the Digital Carbon Market. The DCM is built on a modular and energy-efficient technology stack (explored in more detail here); KlimaDAO has had its code audited by independent auditors, and DAO governance is open for everyone to participate in. With this in mind, several of the challenges outlined by the authors are addressed.

Solving coordination failures with open ReFi protocols - RMIT, published by SSRN

In Governance of ReFi Ecosystem and the Integrity of Voluntary Carbon Markets as a Common Resource, the authors investigate how projects operating in regenerative finance can help to mitigate climate change – our biggest challenge in managing 'common pool resources' like our climate.

The Voluntary Carbon Market is recognized as a vital tool in helping corporations reach their climate commitments, albeit with shortcomings such as “inefficiencies (e.g. fragmentation, illiquidity, multiplicity of standards), flawed practices (e.g. expired carbon credits in circulation, fraudulent schemes, double-accounting) and the effectiveness of the offset projects mechanisms […]”.

The paper recognizes the work of “community-driven decentralized autonomous organizations (DAOs)” in building systems to address these inherent challenges – bringing attention to over 180 projects that are active in the ReFi space. The potential for technologies inherent in the KlimaDAO protocol, such as tokenization, to help lessen the negative impact of coordination failure is acknowledged:

The tokenization of physical assets or rights (i.e. renewable generation/storage units or forestry land) and the automation of operations (i.e. exchanges) via smart contracts provides participants with new affordances to enable secured coordination.

The paper considers Elinor Ostrom’s 8 Principles for Managing A Commons to be an important criterion in evaluating solutions to address climate change, and it examines KlimaDAO’s governance process – considering it to be “Ostrom-compliant with regard to some principles […]”.

Diaz Valdivia and Poblet Balcell find that the ReFi space and, by extension, KlimaDAO, already deliver on important aspects:

The findings show [the] ReFi ecosystem as a low-transaction-cost environment that enables open source prototypes of peer-production for carbon accounting and trading.

KlimaDAO’s perspective: KlimaDAO’s governance process, while only just over a year since launch, is relatively open and transparent. KlimaDAO is continuing to develop its governance framework with the aim to increase community participation, striving towards progressive decentralization. KlimaDAO aims to become more inclusive over time, in order to build an open Digital Carbon Market, as an effective way to manage the shared resource that is our climate.

At the bleeding edge of climate and Web3

Web3 is widely seen as one of the transformative technologies of the decade, while the climate sector is poised for the inflow of billions of dollars of funding in order to foster innovation. The very process of innovation is unfolding in real time, and KlimaDAO is operating at the nexus of these two trends.

Digital carbon and ReFi are still novel concepts, and through continued third-party analysis and project development, existing projects stand to enable growth within ReFi and the DCM and climate finance space at large. Research, analysis and development can also lay the groundwork for future projects to enter the space with novel approaches based on the progress of others.

If you are a professional or academic working in this area and are conducting and scoping research into KlimaDAO, the DCM and ReFi, do not hesitate to reach out to us via this form, or join our Discord. We hope that we help point you in the direction of data and insights that can facilitate the development of your thesis.

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