Klima DAO – Crypto & Combating Climate Change?

There is a lot of discussion around crypto currency and it’s negative impact on climate change. There are numerous articles out there pointing to the high energy cost of Proof-of-Work or that a crypto transaction is 330,000x more energy consuming than a credit card transaction. (Let’s ignore the errors in these articles for the time being). What if there was a protocol that was advertising itself as helping to fight climate change through crypto? Enter Klima DAO.

Klima DAO launched late 2021 on the Polygon Network. Klima was one of the Olympus DAO forks during ‘ponzu’ season, with a focus on stopping climate change. It aspired to do this through collecting carbon offsets and becoming the bank & market place of the future ‘crypto-carbon economy’.

Klima describes itself as a black hole for carbon credits. But how has Klima DAO done since its launch?

Klima DAO – Backed By Carbon Offsets

Klima DAO is attempting to help put a market together to properly value carbon offsets. Users are able to participate in the market with the $KLIMA token, a fungible ERC-20 token backed by 1 ton of carbon offsets each. The hope is for the DAO to be the reserve bank of the future ‘crypto-carbon economy’.

The DAO identifies the following problems with the traditional carbon market and offers a way they can solve them:

• Illiquidity – the carbon market is fragmented and illiquid due to its many varieties of carbon credits with various middle men and brokers
• Opacity – Trades are typically done behind closed doors limiting price discovery and transparency
• Inefficient – There is friction in the current system

Klima DAO has 2 main goals. First, to be the future market place that allows for liquid, transparent, and efficient transactions of carbon offsets. Second, to lock carbon offsets in the Treasury and drive the price of them up in the real world. Driving up the price of carbon offsets would, in theory, make it more expensive for companies to purchase offsets to allow continued release of ‘greenhouse gasses’. Then it would be more economically beneficial for companies to find ‘greener’ ways of operating, in theory.

What is a Carbon Market???

Great question.

Carbon markets are trying to reduce greenhouse gas (“carbon”) emissions by having a limited amount of tradable ‘units’. These carbon markets are proposed in some of the recent international climate treaties, like the Paris Agreement.

A carbon credit is a ‘quasi-permit’ that represents 1 ton of carbon dioxide removed from the atmosphere. Additionally, companies can purchase a carbon credit to ‘make-up’ for emissions from the operation of its factories, vehicles, travel, etc.

A carbon credit gets created by an approved entity and given to firms that show a reduction in current emissions. Typically these are agricultural or forestry practies.

If carbon market gets implemented, regulators would set a cap on how many tons of emissions each sector can release. In order for a high polluting company to keep producing while staying under the cap, a company would need to purchase credits in the open market. Any company that is under the cap, can sell its additional credits. This would, in theory, add additional costs to high emission producers and be a source of profit for low emission producers.

Currently the carbon markets are almost entirely voluntary, but is on track to be nearly $7 Billion.

Klima DAO Tokenomics

So far, lots of buzzwords. How does it all actually work?

Each $KLIMA token is backed by one Base Carbon Tonne (BCT). Each time a $KLIMA token is minted, one BCT needs to be locked in the Klima DAO treasury. BCT is the reserve asset of Klima DAO, ie – not going to be in any of the carbon market regulations.

BCT represents a basket of tokenized carbon tons from recognized carbon offset creators. The offsets are brought on chain through the one-way Toucan Carbon Bridge to make an on-chain credit. Each Toucan credit, TCO2, is a unique carbon offset with its own project name, serial number, type, vintage year, and verification standard. A BCT is minted after a TCO2 is locked in the Base Carbon Pool.

Klima claims that each BCT provides intrinsic value to the token, since TCO2 is a tradeable item. Additionally, Klima makes note that BCT is not a stable asset. Therefore, unlike other Olympus forks that held stable assets in the treasury, there is a risk of the value of the treasury decreasing over time.

There are key mechanisms in the Klima ecosystem, which will be familar to anyone with experience in Olympus forks like Wonderland DAO.

1. Bonding – Trade an LP share to the protocol for $KLIMA at a discounted price
2. Staking – stake $KLIMA and receive $sKLIMA that grows at an APR
3. Protocol Owned Liquidity (POL) – $KLIMA is minted directly by the Klima DAO meaning that the protocol provides the majority of the liquidity allowing for fees to remain in the protocol.

Klima DAO Governance

The Klima DAO follows many of the governance protocols you are likely familiar with.

Summary – Klima DAO & Carbon Credit Offsets

On one hand, Klima DAO has been able to successfully remove what appears to be a meaningful amount of carbon credits from the marketplace. This fulfills its stated goal of being a black hole for carbon credits as it still holds every TCO2 it has received.

However, for the time being, Klima DAO appears to have a hard road ahead to get back to growth and profitability.