Game Theory (Olympus Inspired)
At a high level, Klimates have 3 possible actions to interact with the protocol:
- 1.Stake
- 2.Bond
- 3.Sell
Klimates will most likely buy when there is supply or value expansions, and sell when there is supply and value contraction. When there is a neutral value/supply growth, Klimates are more inclined to bond.
Staking is most beneficial for the protocol. They lock supply up and minimize selling pressure, causing value appreciation on the token. This allows the protocol to greatly accrue more assets in the treasury with the least expansion. They also benefit the most, as they obtain rewards when staked.
Bonders are the next best actors. They trade in assets for the protocol, allowing the protocol to function. However, for these assets, they exert selling pressure when selling bonds. They get some rewards due to the difference they make from the bond and market value.
Lastly, sellers are the most evil actors, as they reduce confidence in the protocol, provide selling pressure, and get the least rewards from the 3.
By pairing these players together, you get a Nash table outlining the outcomes and the overall benefit to the protocol:
(Tree,Tree)
As you can see, the best strategies are all cooperatives. If both players stake, it is the most beneficial for the protocol. Bonding and staking yield significant benefits, and everyone bonding benefits the protocol. We can see that conflicting actors, (equal stakers/sellers) yield a neutral result. We only see a negative sum outcome when everyone sells. Unlike other protocols where you never want to be the last person holding, and you're competing against others to maximize your value, in Klima (Olympus) the maximal value is obtained when everyone cooperates.
Note that this is oversimplified greatly. These dynamics are greatly dependent on the premium, market conditions, and a myriad of other factors. The numbers are simply there to demonstrate the overall idea.
This system enables KlimaDAO to build out a long-term sustainable protocol that incentivises the growth of the on-chain carbon market, and underpins the growth of this new carbon-backed economic paradigm. Ultimately, this is achieved through information sharing and aligning incentives between all participants.
We believe that this incentive structure, and the wide-scale co-ordination it enables, can be a game-changer in the fight against climate change, enabling DeFi participants to move the dial on climate action. To learn more, you can read our thought piece published in Bankless.