Klima DAO: Taking Carbon Offsets on Chain
Klima DAO could change the way companies use carbon and create a cleaner world for all of us
Hi friends, welcome back! Today’s post is about Klima DAO, a protocol modeled after OlympusDAO’s OHM model. If you haven’t read my post about OlympusDAO, it might provide helpful context as we dive into Klima DAO. It’s also important to note that Klima is built on Polygon, one of the most popular and successful Ethereum Layer 2 solutions in existence today.
Klima is exciting because it sits at the intersection of crypto, finance, and green-tech. If successful, it will have a huge impact on both our digital and physical worlds!
Carbon Credits on Chain?
Klima DAO is like Olympus but for the carbon markets. If you’re not familiar with carbon credit markets, here’s a quick summary:
As companies make goods to sell, they generate some pollution and excess carbon dioxide that they typically release into the atmosphere. Some states, like California, have come up with Cap-and-Trade programs whereby companies in certain industries (like electric power generation) are given some free “carbon credits.” These credits represent amounts of carbon dioxide that the company is able to emit. Companies can purchase additional carbon credits through quarterly auctions from the state or they can buy carbon credits from other companies that don’t use all their free credits.
Other companies, like Stripe, use carbon offset programs to remove carbon from the atmosphere. In this context, an offset credit could represent planting 100 trees (which remove carbon dioxide from the atmosphere through photosynthesis) or other sustainable projects.
Carbon credits are kind of like any other asset; they’re providing some value to the holder (the ability to emit greenhouse gases) and can be freely bought or sold. Until recently, these carbon credits have only existed off-chain.
One clever protocol, Toucan, has built a way for people to tokenize carbon credits, wrapping them in a standard ERC-20 token that can be used with other DeFi protocols. I’m going to skip over how Toucan works on the back end, but just know that they produce a token called TCO2, which represents a carbon offset credit from the Verra registry, a verifier of carbon credits.
However, not all carbon credits are created equally! Each of these TCO2 tokens has different attributes based on the underlying carbon credit. Some carbon offsets trade at different levels based on the date they were created and the type of project they represent (soil carbon vs large-scale renewables projects, for example). This has a lot of repercussions for the offset’s liquidity and price discovery. Toucan’s docs have a great analogy about how TCO2 works (emphasis mine):
The unique attributes tied to a carbon project results in offsets being traded and sold like differentiated products (e.g. wine) rather than like commodities (e.g. corn or rice). Subsequently, the majority of offsets transactions happen over-the-counter (OTC) and behind closed doors, meaning offset prices remain unknown to the broader market. This makes it hard for end customers to know whether or not they are paying a fair price and which percentage of the money lands in the hands of the initial project developer.
This thin liquidity and price discovery also present huge problems when trying to tokenize the offset and plug it into existing DeFi protocols. To address that issue, Toucan created a Carbon Pool in conjunction with Klima DAO.
This Carbon Pool (the first that Toucan has created), is called the Base Carbon Tonne (BCT). This Carbon Pool takes lots of TCO2 tokens - each with their own attributes - and bundles similar tokens together, issuing depositors a BCT token. Each BCT token represents the removal or mitigation of 1 ton of carbon from the atmosphere.
This Carbon Pool creates a certain level of commoditization of the carbon offsets by smoothing out all the individual differences between TCO2 tokens. The result is a token, BCT, with much better liquidity and price discovery.
Now, onto Klima DAO and how they’re using BCT tokens.
Klima’s goal boils down to one idea: there’s a bunch of carbon assets out there on the market today, which are freely tradeable by companies. Klima is going to build up their treasury to be full of these carbon assets, thus reducing the supply of offsets on the open market. As we know from basic supply and demand dynamics, the lower the supply, the higher the price for one carbon credit.
Essentially, Klima DAO will make it more costly for greenhouse-gas emitting companies to purchase carbon credits.
Klima DAO Treasury
Similar to OlympusDAO, Klima hopes to have a huge treasury. Instead of a basket full of DeFi assets, though, Klima is using BCT as their primary treasury asset. Like Olympus, Klima will issue native tokens (KLIMA) in exchange for BCTs, ensuring that each KLIMA is backed by at least 1 BCT in the treasury. (In Olympus’s model, they ensure that 1 OHM will always be backed by 1 DAI). The fact that each KLIMA is backed by 1 BCT effectively links the intrinsic value of 1 KLIMA to the price of carbon removal.
That said, KLIMA, like OHM, is freely tradable on DeFi markets, which means that people can speculate on the token. Prices for KLIMA can, and will, diverge from the intrinsic value held in the treasury because people expect the price of carbon to increase.
Today, Klima’s treasury contains just under 10 MILLION BCTs! That’s the equivalent to the annual emissions of over 2 million passenger vehicles.
How does the protocol plan to grow and sustain itself? The same way that OlympusDAO and other Olympus forks do!
Just like OlympusDAO, Klima also features a bonding mechanism. Users can come to Klima and purchase discounted KLIMA with their BCT tokens. They’re also able to get discounted KLIMA tokens by trading their Liquidity Provider tokens for the Sushiswap BCT/USDC and BCT/KLIMA pools.
Klima also features a staking mechanism, which is how owners of the KLIMA token are rewarded for being early adopters of the protocol. Staking incentivizes KLIMA holders to hold in the long run, which also means betting on the future price of carbon (since the intrinsic value of the treasury is tied to the price of carbon).
As you can see on the dashboard below, the APY for staking KLIMA is extremely high - today, it’s 38,593%, which is pretty much unheard of in other parts of finance. How can Klima offer such lucrative staking rewards to its token holders? The same way that Olympus is able to offer 7,000%+ APYs to its stakers: there’s a gap between the intrinsic value of the native token (in this case, KLIMA), and what it’s being traded for (BCT).
That is, KLIMA trades at a premium to BCT. The cost to create 1 KLIMA is 1 just BCT, so Klima DAO can use this premium to issue more KLIMA tokens, rewarding stakers (essentially, they’re diluting the token by creating more KLIMA). Also, because Klima bonds for LP tokens, they also earn trading fees from their Protocol Owned Liquidity. To date, they’ve made around $6.4 million in fees just by owning their liquidity.
We’re still in the very early phases of the protocol. As such, the DAO’s primary objective is not to track the price of carbon, but rather to grow its user base and provide a way for carbon credits to plug into DeFi. Over time, the protocol will stabilize, APYs will come down, and the price of KLIMA should more closely track the price of carbon credits in the open market.
Klima DAO’s Team & Governance
I also want to highlight Klima’s team and governance. Though it’s a fairly sophisticated product, it was built by a decentralized, pseudo-anonymous team. In true DAO fashion, it has no formal leadership. Instead, it’s governed by the community (on its forum) and KLIMA token holders. Given that we’re only in the early innings of DAOs and web3, it’s quite remarkable what’s being built within the ecosystem.
Klima - like OlympusDAO and its many forks - is a very ambitious project. Klima’s “money lego” for carbon allows anyone to easily gain exposure to the price of carbon and could also be used in other DeFi protocols. If Klima is successful, it will also increase the price of carbon, making it more attractive for companies providing carbon-offset services to enter the market (and making it more expensive for polluters to emit carbon), which could result in a cleaner, more sustainable world.