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Understanding Carbon
Tokenomics and Mechanisms
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Primer on KLIMA
Klima aims to become a decentralized, Algorithmic based, reserve currency. On a high level, the token has 4 axioms:
- 1.Every KLIMA token has a Intrinsic Value (IV) backing the token. While there can be more assets backing the token, there is a minimum value associated with the token. Hence, there is a price floor, but no price ceiling of the protocol. As of today, the Intrinsic value is 1 carbon tonne. In other words, every KLIMA token is backed by 1 Carbon Tonne.
- 2.The KLIMA token can only be minted or burned by the protocol. The protocol serves as the "decentralized, central bank" of the token, with the ability to expand and contract supply.
- 3.When KLIMA is trading above the IV, the protocol expands supply, and sells KLIMA to the market. Because the protocol can create more supply, as long there is the IV backing the token, it generates excess reserves from the spread between IV and market price.
- 4.When KLIMA is trading below IV, the protocol buys and burns KLIMA, contracting supply. Because it buys the token under the intrinsic value, the protocol bolsters reserves per KLIMA from the spread.
From these market operations, we can see that the protocol gives the user certainty that KLIMA will not trade under the intrinsic value in the long term. This provides a sense of security and confidence for the users that the protocol will step in as the last buyer of resort, because the protocol can and will buy KLIMA below the IV, even if the supply is reduced to 0. In fact, an event like this would be very advantageous for those who didn't sell, as their % supply grows and grows.
Whenever the protocol generates excess reserves, the protocol can utilize this in many ways. Today, the protocol distributes excess reserves to stakers via rebase rewards, and to the DAO from fees on bonding. All the rewards are paid in KLIMA, backed by carbon assets. This incentivizes users to keep their KLIMA staked, reducing selling pressure placed on the token. This greatly reduces the pressure for price appreciation for the users, and shifts the emphasis to supply accumulation in order to generate a return.
While the end goal for KLIMA is to have a stable value dictated by the market, independent of the actual price of carbon tonnes, the focus right now is on growth and treasury accumulation. A great currency requires a large and robust treasury from which to derive value. It also needs a large supply in order to facilitate great volume and develop an unit of account. This simply cannot be done on day one. Additionally, a great currency is nothing without adoption; if no one uses KLIMA, it's not a good currency. However, the greatest currency is not typically a growth asset, as the very stability that makes for a great currency limits the growth of its value. By distributing tokens via staking, it allows for this value creation for early users while also promoting adoption and supply expansion.
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