KIP-23: New Framework for Supply Expansion

Summary

Introduce a new framework for reward rate that takes into account growth metrics specific to KlimaDAO and the on-chain carbon ecosystem. Reduce emissions in the face of current macro market conditions.

Motivation

While most OHM forks are able to sustain rapid supply expansion through reward rate based solely on treasury intake from bonding, KlimaDAO is unique in that its treasury intake is limited by the supply of eligible carbon credits on chain. As such, it is necessary to consider further measurements when determining an appropriate reward rate.

This dilemma presented itself during KIP-14: Resilience Mode, in which the reward rate was lowered 1000% AKR, under the supply stage’s floor of 2000% AKR set by KIP-3: Introduce Policy Framework due to the observation that over the three months between those KIPs, the ReFi space was not growing as rapidly as expected, with carbon bridging stagnated.

Implementation

The policy team proposes to replace the current model with a dynamic one that regulates KLIMA supply expansion based on market conditions. The new framework functions as a market thermostat, where for a given state, the AKR is dependent on:

• The ratio of KLIMA supply over eligible on-chain carbon supply, and
• The 90-day moving average growth rate of the eligible on-chain carbon supply relative to the growth of KLIMA supply.

That is, optimal KLIMA supply expansion should be in line with the growth of the on-chain carbon offset market.

Call the reward rate determined primarily as a function of the total KLIMA supply and target runway the baseline rate (B). Fix a value for an expected growth rate (GE), a lower growth rate (GL), and a higher growth rate (GH). If the growth rate goes below GL, then the reward rate should be decreased from B. If the growth rate goes above GH, then the reward rate should be increased from B. The magnitude of the increase or decrease is in proportion to the ratio.

Framework

Initial conditions:

• Stage: 5M-10M supply
• Baseline (B): 300% constant, 100% if inverse bonds are enabled.
• Expected growth of on-chain carbon supply (GE): 0.20%
• Higher growth of on-chain carbon supply (GH): 0.35%
• Lower growth of on-chain carbon supply (GL): 0.10%

Note that the current 90-day moving average growth rate of the on-chain carbon supply is approximately 0.14%. In increasing / decreasing AKR based on the growth rate, it is better to be conservative on the upside and reactive on the downside to ensure long-term sustainability.

Estimated runway

At 300% we are looking at an estimated runway of ~245 days and at 100% it is ~489 days.

It is worth noting that further reduction to 100% upon activation of inverse bonds would be a short term solution to avoid fighting the supply contraction from inverse bonding. Runway would decrease again should AKR return to the baseline 300% after inverse bonding is disabled.

Disclaimers

For the immediate future, the policy team will manually re-evaluate reward rates at regular monthly intervals based on the proposed framework, with potential to automate this process eventually. Policy still retains responsibility for correcting minor deviations from the proposed framework’s target AKR. However, all major adjustments to the AKR will still be put to a vote on the forum and Snapshot.

Since this framework is more complex than the simple OIP-18-inspired supply segmentation in KIP-3, the policy team will need time and experience to tune the parameters and determine if the framework is functioning as intended.

Eventually, if this framework proves successful, we hope to be able to automate adjustments to the reward rate via a thermostat-style controller, and turn over parameter adjustments to a gauge that KLIMA holders can vote on. This current KIP does not constitute a commitment to automate reward rate adjustments: a future KIP would be required to turn control of the reward rate over to such a system.

Lastly, the Policy Team does not commit to this being the final state of the reward rate framework. Time and data are needed in order to build confidence in this new framework, and future KIPs may be proposed as required to evolve the reward rate framework as the protocol matures.

Proposal

• Ratify the above framework as a guide for further reward rate changes moving forwards.
• Reduce AKR to 300%, or a 5-day reward rate of 1.9%, per the framework.
• Pre-approve a further reduction of the AKR target to 100% if inverse bonding is enabled.

Polling Period

Polling will open at 22:30 UTC on May 19th and conclude three days later at 22:30 UTC on May 22nd