As old as the on-chain carbon market itself, KlimaDAO was one of the original players that vaulted the market to where it is today.
In technical terms, KlimaDAO is a decentralized autonomous organization (DAO) that uses a crypto-economic primitive called protocol-owned liquidity (PoL) backed by tokenized carbon offsets to create a liquid, secure on-chain carbon market.
In plain language, it’s a platform that allows people to participate in the growth of carbon markets and improve their efficiency. 📈
How Does KlimaDAO Work?
To understand KlimaDAO and why it’s such a unique and necessary piece of infrastructure in the carbon markets, there needs to be an overview of some of the basics of financial markets.
In traditional financial markets, people trade commodities (like stocks) without much issue or friction due to massive market makers.
Instead of doing complicated legwork to match two people on opposite sides of a trade, like one person who wants to buy Tesla stock and another who wants to sell the exact amount they want to buy, trading relies on market makers.
Essentially, an institution owns a massive basket of assets, and rather than transferring stock ownership to someone, they own it all themselves and match orders together.
Currently, the off-chain carbon markets have many inefficiencies and conflicts of interest that prevent them from scaling. Above all, two issues stand out above the rest as crucial problems that, if solved, would be a linchpin for the growth in carbon markets that the world needs.
- First, despite their small size, carbon markets operate with fragmented liquidity, making them highly inefficient. 📉
Since the liquidity is spread around so much, there are high risks of market failures in each pool. Not only is this a security risk, but it also prevents large flows of capital from flowing through any place in the market, preventing it from scaling.
- Secondly, the carbon markets are controlled by centralized market makers. 🏦
Unlike an automated market maker, which matches orders with code, centralized market makers can match orders at their discretion, a power that has frequently been abused.
A good market finds a balance between an overly powerful centralized market maker with excellent liquidity and efficiency and an inefficient, fragmented liquidity system with more of a distributed power structure.
Centralized markets have security and efficiency since they own their liquidity but fail by allowing a small group of institutions to control the entire market. Decentralized markets improve power distribution but lose security since they rent their liquidity rather than own it.
To fix both sides of the carbon markets’ structural issues, there would need to be a decentralized market that somehow owns its own liquidity, which is precisely what KlimaDAO is. ⬇️
KlimaDAO uses a system of staking and bonding to own its own liquidity. ⚖️
Staking allows users to exchange assets for KLIMA, KlimaDAO’s native token, and then lock them up in the protocol to act as an inflation hedge when the supply of KLIMA grows from absorbing more carbon tokens. Bonding involves purchasing KLIMA at a discounted price using other assets and then waiting for a short period to receive their KLIMA.
Essentially, KlimaDAO operates by purchasing liquidity using its token.
Unlike other PoL systems, KLIMA can only be acquired by exchanging carbon tokens, meaning that every KLIMA is backed by a tonne of carbon offsets. Even in a worst-case scenario, each token would still be worth what 1 tonne of carbon offsets are worth.
Instead of being backed by nothing, KlimaDAO is hard-backed by the price of carbon, an asset class that is expected to grow exponentially in value as society vigorously attempts to fight its way out of the climate crisis.
That fact allows KlimaDAO to become exactly what the market needs. 🤝
Operating without fragmented liquidity gives KlimaDAO the efficiency and security guarantees of centralized market makers. At the same time, it does not have any harmful properties typical of centralized systems. At the same time, since the protocol is an automated market maker governed via DAO instead of a standard market maker, it doesn’t have the controlling power that typical market makers have.
Strong protocol dynamics, early entrance into the market, and an active community gave KlimaDAO a massive advantage in its niche of the carbon markets. As the carbon markets migrate to the blockchain, KlimaDAO finds itself in a great place to capitalize on and help propel the growth and adoption of carbon offsets.
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