Supply Expansion

The dynamics of KLIMA's supply expansion are designed to ensure the token's resilience and its harmonious growth alongside the Carbon Market (CM). Central to this approach is KIP-44, the proposal to align the Annual KLIMA Rate (AKR) with the growth rate of the CM, encapsulated by the straightforward equation:

$$AKR = CMgrowth$$

The Significance of Supply Expansion

Market Stability and Liquidity

Aligning KLIMA's expansion with CM growth ensures market stability by preventing excessive volatility. If KLIMA were to expand too rapidly compared to the CM, it could lead to inflationary pressures, diminishing the token's purchasing power and undermining its role as a store of value. Conversely, if KLIMA's supply grows too slowly, it could lead to deflationary pressures, potentially making transactions within the CM less attractive due to increased cost of entry. By matching the growth rates, KLIMA maintains a balanced supply, contributing to a stable and liquid market where participants can trade efficiently.

Reflecting Real-World Value

The alignment also ensures that the supply of KLIMA accurately reflects the real-world value of the underlying carbon assets within the CM. As the market for carbon credits expands, indicating an increase in the value and volume of carbon offsetting projects, KLIMA's supply expansion in tandem signifies that the token remains a faithful representation of this growing market. This correlation is essential for KLIMA's credibility and utility that embodies the value of environmental assets.

Supporting Market Depth

As the CM grows, so does the need for a currency that can support an increasing volume of transactions and a broader range of financial activities. The dynamic adjustment of the AKR ensures that KLIMA can meet these needs, providing the market depth necessary for a growing, robust and efficient carbon market.

Implementing the Dynamic Framework

KLIMA’s dynamic framework for adjusting the AKR introduces a methodical and responsive mechanism for supply management. By setting initial conditions and parameters for AKR adjustments—such as a minimum AKR, a threshold for adjustment based on CM supply growth divergence, and a gradual implementation period—KLIMA introduces a level of stability and predictability to its supply dynamics. Read more here.

This framework functions as a "market thermostat," fine-tuning KLIMA's supply in response to the temperature of the CM. Such a mechanism ensures that supply adjustments are both deliberate and gradual, mitigating potential market shocks and allowing participants to adapt to changes in supply with confidence.