Thread by @andybash12

1/21 My first ever thread and it's about the recent $KLIMA price action (so called spiral of death)...A small brain's understanding of what's happening (ELI5)

TLDR: #KLIMAINFINITY would fix 2 missing pieces which'll generate demand and grow @KlimaDAO

2/21 The price of KLIMA is determined by the demand for it and the demand is determined by 1) its value (treasury) and 2) its utility. If either or both of them are below expectations, then the market demand drops and hence the price

3/21 The $KLIMA treasury is backed primarily by $BCT and recently by $MCO2 with NCT, Flow and C3 Carbon credits in the pipeline. As the demand for $BCT dropped, its price dropped and the $KLIMA treasury value also dropped.

4/21 This caused the market cap of KLIMA to drop, The premium market cap which KLIMA had during launch (X multiplier of treasury) diminished and now it's market cap is lower than treasury.

5/21 But why is $BCT price dropping? Isn't the KLIMA protocol supposed to suck in all BCTs and cause the $BCT price to go up? It should, but $BCT faces the same issue of demand. Let's look at how it is expected to work and how it works at present.

6/21 BCT exists on-chain and it's equivalent Carbon Offset exists off-chain. The demand for BCT is primarily from 1) Corporates and 2) Traders / middlemen

7/21 When the on-chain BCT price is above the off-chain carbon offset price, the suppliers of carbon offsets use the @ToucanProtocol bridge and bring it on-chain to take advantage of the higher price on-chain (more profitable to sell on-chain).

8/21 When the on-chain BCT price is below the off-chain price, then the corporations would be glad to buy BCT on-chain for cheaper price and burn them as a part of their "Net Zero" or CSR pledge.

9/21 The above 2 mechanisms 1) Brings the on-chain and off-chain prices to be equal over time and 2) Ensures sufficient supply on-chain.

10/21 When this works smoothly, then the on-chain and off-chain BCT price is maintained and with KLIMA sucking BCTs into it's treasury thru bonds, there's a supply squeeze on-chain, causing BCT prices to go-up on-chain and causing off-chain prices to increase.. +ve feedback loop

11/21 The key component in the 2 step process is the ability for Corporations to buy BCT on-chain and retire them. This is the 1st missing piece of the puzzle.

12/21 Presently, when the on-chain demand for BCT drops, the price drops, but no-one is able to take advantage of the same. Only those who want to buy BCT and HODL do it. The main customers are corporations, who cannot buy and retire them.

13/21 To add to this, one cannot take advantage of the arbitrage opportunities either because Toucan is a one-way bridge and you can't move BCT from on-chain to off-chain and sell them there at higher prices. If it was a 2 way, then the arbitrage opportunity would stabilize price

14/21 The same logic applies to all carbon offsets on-chain which are and will be in KLIMAs treasury. This was about how the carbon offsets in treasury affect the KLIMA price.

The second factor is the utility of KLIMA itself.

15/21 At present KLIMA is just held and staked / bonded by the 63k retail investors. The team is still in the process of building partnerships to add utility and hence demand for KLIMA.

This is the 2nd missing piece.

16/21 But the goal has always been institutional investors who'll have KLIMA on their books as a hedge against climate change. It gives them good publicity, it gives them solid returns (APY).

17/21 I know I'm speculating here, but I believe that #KLIMAINFINITY, to be launched in 2 days, would cater to both these missing pieces. 1) Thru an AMM, KLIMAINFINITY would enable corporations to buy and retire carbon offsets & 2) It'll allow corporations to buy and stake $KLIMA

18/21 KLIMA DAO would probably also earn some fees for this service to retire carbon offsets.

Let's now look at a positive scenario and let me put in some numbers.

19/21 The $BCT which is now at $4 and probably available at a discount than off-chain, is bought by corporations and retired thru KLIMA INFINITY. This causes the $BCT price to move up and once it's above off-chain price, more people start using Toucan to bring in supply on-chain

20/21 As $BCT price goes up, the treasury value keeps going up... The same applies for MCO2, TCO2, NCT, C3 and FLOW

Treasury value and KLIMA utility increases -> KLIMA price increases -> bonding capacity increases -> Treasury grows -> Back to step 1

21/21 Another reason why corporations would prefer to retire carbon on-chain is because of the transparency that blockchain provides and this is critical in our flight against climate change.