This article is the first of our explainers on the mechanics of the Klima Protocol using real-time, publicly available data that is derived on-chain.
You can follow along with the article using the latest data on Dune – just click below to open the Klima Protocol Dashboard.
Context
During its launch in 2021, KlimaDAO set out to bootstrap its treasury with carbon credits, using tokenomics to incentivise engagement with the protocol from carbon market stakeholders.
This mechanism enabled the Klima Protocol to rapidly accumulate a treasury of over 20 million tonnes of Verra carbon credits. However, the initial Protocol mechanics were deemed to be unsuitable or unsustainable as long-term mechanisms for developing carbon credit markets on public blockchains, for reasons including:
A change in perception around the utility or value of significant portions of verified carbon credits – particularly older, mitigation type carbon credits – that were bonded with KlimaDAO’s treasury.
Major carbon registries “embargoed” tokenization, and more recently alluded to disallowing bonding – suggesting that more sophisticated tokenomic set-ups will not be welcomed in the carbon markets.
Macro headwinds in both crypto and carbon and an inflated supply of $KLIMA made the conditions for further bootstrapping of carbon under initial state unfeasible.
In 2022, KlimaDAO pivoted its priorities in response to market feedback, focusing on three key pillars:
Forward funding carbon project developers as a means to diversify on-chain credit supply, aligning with the market’s preference for robust, high-impact carbon.
Development of the technology rails that allow the distribution and consumption of tokenized carbon credits that are held on-chain.
Sustainable tokenomic mechanisms that align with the needs of KlimaDAO’s diverse stakeholder groups and users (including carbon market traders, project developers, the consumers of carbon credits, and those who govern the protocol).
Since then, KlimaDAO has taken a number of steps to implement against these priorities:
The development and spin-out of Carbonmark, a universal platform that allows the programmatic distribution and retirement of tokenized carbon credits to the market.
The launch of retirement bonds, and the closing down of AKR and bonds to align $KLIMA expansion and contraction with the growth of the on-chain carbon markets.
The deployment of over $1.5mn into forward carbon credit deals, that serve as a means to develop on-chain market liquidity, and serve as a revenue stream for the DAO in the future.
Through consistent execution of its roadmap, these developments are reflected in the holdings of the KlimaDAO treasury, which are now visualized on the updated Protocol Dashboard. The treasury consists of:
Tokenized carbon credits
Forward carbon credits – which will be issued over time
USDC – which is used to fuel a cycle of treasury growth
The Protocol Dashboard acts as the reference point for the market to understand KlimaDAO’s current state. In this article we look at its primary components to examine how these three types of assets are reflected through data.
KlimaDAO spot holdings overview
In this section we can see KlimaDAO holds a significant inventory of spot carbon credits – with almost 18 million carbon credits available for trading and consumption for operators within the VCM. The spot value of these carbon credits are estimated to be around $31mn based on on-chain pricing defined in AMMs; however, the off-chain value of this inventory may be different to this current pricing.
The majority of these carbon credits are within the $BCT pool. The KlimaDAO Protocol team will soon be submitting a KIP to break the $BCT pool down into a set of more heterogeneous carbon indexes.
KlimaDAO forward carbon pipeline overview
KlimaDAO’s forward carbon pipeline forms the cornerstone of the DAO’s ongoing strategy to develop the on-chain market. It enables the DAO to support early-stage carbon projects to scale-up, maximize their impact on the planet, and serves as a mechanism for the credits that these projects issue to be distributed to traders, buyers and consumers of the credits. To-date, $1,572,728 has been delivered to carbon projects across the globe:
Furthemore, with the passing of KIP-61(a), an additional $810,000 has been allocated to the 'Hygiene and Environmental Care for Tanks and Overhead Reservoirs' (HECTOR) project in rural India, with KlimaDAO set to act as the lead financier.
$KLIMA supply expansion and contraction
The implementation of a series of KIPs over the past months has led to KlimaDAO’s transition away from its initial state.
In particular, the ending of AKR per KIP-44, and implementation of retirement bonds per KIP-31 have moved KlimaDAO away from an inflationary economic system concerned with bootstrapping liquidity, to a system that is responsive to the market that is growing around it.
Fundamentally, as more on-chain carbon is consumed, and until more carbon is brought into the ecosystem, KlimaDAO will primarily function as a deflationary economic environment - to ensure $KLIMA’s own growth is aligned with that of the on-chain carbon market.
This state is already reflected in the Supply and Retirement section of the Protocol Dashboard, where it can be seen that $KLIMA's supply contraction has been gaining pace.
What this means for you – and for KlimaDAO
As the Klima protocol grows, its roadmap will be guided by the Green Ratio, which has established a top-level framework to codify how economic decision making happens at KlimaDAO.
Guided by the Green Ratio, KlimaDAO's treasury composition will evolve as its forward carbon portfolio yields credits, and as it establishes new liquidity pools to accelerate the flow of climate finance to the projects that most need it.
Keeping track of these developments, $KLIMA holders will be able to stay informed, equipped with the right context to participate in governance decisions.
Our next article will zero in on the Green Ratio – which is the next piece to be built onto the Protocol Dashboard. Watch this space!