Tackling the climate crisis via tokenized carbon offsets - an interview with a KlimaDAO community member
KlimaDAO is creating a decentralized and open market for carbon. Their token, KLIMA, is backed by carbon offsets. By increasing access and demand for carbon offsets, they aim to make pro-climate projects profitable and encouraging companies to adapt more quickly to the realities of climate change. Similar to OlympusDAO, KlimaDAO is fully decentralized - so I interviewed a community member that goes by “Marcus Aurelius” for this week’s interview.
The following has been edited for clarity and length.
What is KlimaDAO and how did it come together?
At KlimaDAO, we believe that the climate crisis is one of the most pressing existential threats to civilization and that the solution cannot lie solely with political institutions or governments. They move too slowly. There’s an existing market solution to climate change, called the voluntary carbon market, also known as carbon offsets. This market has been around for several decades, but it’s still fairly immature and operates in an old school manner. Its scale and impact are limited in that it’s primarily only accessible to large corporations and not to individuals or smaller organizations.
We think blockchain technology has a powerful role to play in modernizing the voluntary carbon market by reducing transaction fees, eliminating middlemen, and increasing transparency. KlimaDAO takes a lot of inspiration from Olympus DAO’s mechanics. We have a treasury that issues a reserve cryptocurrency called the KLIMA token. It’s backed by carbon offsets that have been tokenized and brought onto the blockchain. Similar to how each US dollar in circulation had to be backed by a certain amount of gold in the Federal Reserve’s treasury, in order to issue one KLIMA token, we must have at least one ton of tokenized carbon in our treasury.
Where do those tokenized carbon offsets live?
In the legacy world, there are entities called registries, which are trusted third parties that set standards and certify that projects meet those standards. You get these legacy offsets, which are basically entries in the database. There’s a process called bridging, by which you can bring an entry in a legacy centralized database on-chain as a token. We work with a few partners to do this.
How do you think about the relationship of the price of a KLIMA token to the backed asset?
The intrinsic value of one KLIMA is one ton of carbon offsets. It’s not a hard peg, so it’s not like a stablecoin. It’s more like the way the Fed would defend the value of the dollar under the gold standard: In the event that the dollar is worth less than one dollar’s worth of gold, they’d start buying up dollars to defend the intrinsic value.
KLIMA token’s value goes beyond the backing value, though. As a KLIMA holder, you get to participate in governance votes on topics like which carbon assets we accept into the treasury or what rewards we give out to stakers. You can also use the KLIMA token to swap for carbon credits, which you can consume in a process called retirement.
A lot of people want to understand how decentralized groups come together. How does governance work for KlimaDAO?
Starting out fully decentralized, where every aspect of the DAO functions through on-chain governance votes, is very risky. Early on a protocol’s life, there are things that need to change in reaction to market conditions or to the community response. We believe that every DAO should be on a journey to progressive decentralization, unless it’s a really straightforward protocol with very few moving pieces.
KlimaDAO was founded by a group of core team members that launched the initial protocol and created KLIMA token, which has governance rights over the protocol. We make a distinction between product-level decisions that need to be made on a relatively short time scale — which the core team has the autonomy to make decisions around — and protocol-level decisions that impact the underlying value of the KLIMA token or have a direct impact on token holders. Anything that impacts the treasury or the tokenomics of KLIMA is put to a vote, and we implement what the voters say we should do. But we think that distinction is important because otherwise it becomes really difficult to build good products. You can spend weeks arguing about what the logo should look like.
Have you seen any conflict among members? It seems like with many DAOs, there’s room for people with very different intentions.
We had a vocal minority of people that I’ll call decentralization maxis, who believed that DAOs shouldn’t have any level of centralization at any point in their life cycle. They were extremely opposed to the distinction between product-level decisions and protocol-level decisions. But it was put to a vote and approved by quite an overwhelming majority.
Early on, we had people come in who believed that you should be rewarded for what you’re doing, even if it’s hard to justify the value you’re delivering to the DAO. I think there’s certainly a lot of idealism about what a DAO can be, but when you’re six months or a year in, that idealism has to be shed, or it can end up being a real anchor around the neck of the DAO in terms of its ability to deliver on objectives.
The dream vs. reality of decentralizing everything has certainly seen its challenges in DAO’s I’ve talked to.
For me, it’s about identifying the appropriate level of decentralization for a given function. With treasury management, token holders are going to be impacted by those decisions, so of course they should be the ones who have a voice. Whereas with product, it’s a question of how decentralized you can actually make a product organization without ceasing to be able to deliver products.
How has the broader climate community reacted to your model?
There are two major groups within the climate space. On one hand, you have the activist contingents that are generally skeptical of any market-based solution and of blockchain technology. I think this is a naive reading of the situation because we’ve been waiting for governments to act for 30 years now and not much has happened, at least in the US. We’ve been trying to make arguments to that contingent, a key one being the role of social coordination and creating social pressure to mitigate your carbon emissions. I think that element appeals to some of the activists.
On the other side, we have legacy organizations in the voluntary carbon market. Within that, there’s a division between organizations that want fat margins, even if volumes are low — and feel threatened because their margins are being eroded by what we’re doing — and organizations that are willing to give up their margins if they can scale volumes by 10x or 100x.
Legacy organizations know that scaling isn’t possible with the current status quo. There are about a billion tons of offsets in the market, and according to the IPCC, we need on the order of 100 times that amount every year in order to have a meaningful impact on the climate crisis.
Obviously the markets haven’t been doing so well over the last few weeks. What effect does that have on KlimaDAO?
At the regulatory layer, I do worry about a kneejerk reaction to what happened with UST. The good news is that the stablecoin we pair our tokens with is USDC, which is one of the most regulated ones. What I would be worried about is the SEC coming after projects just because they’re crypto projects. On the social layer, the concern is that people will be scared away from crypto in general, though I think that’s more of a concern for retail.
I’m hopeful that if anything, this bear market presents an opportunity for projects that are trying to do everything above board. Hopefully it will clear out the less serious projects, and the ones left behind will be better positioned to show their value to users.
Hi, I’m Andrew Chang - I created the Web3 Roundup to share what I’m learning in this space. I’ve spent my career at the forefront of the technology industry in areas such as crypto/blockchain (Former COO @ Paxos, co-founding partner of Liberty City Ventures), video and adtech. I learn by meeting with founders, investors and other thought leaders and approach Web3 with the same enthusiasm – and skepticism – I had about crypto/blockchain technologies 10 years ago.