Thread by @ToucanProtocol

@KlimaDAO might introduce inverse bonds. What are they, when could they come into effect, and how can they impact the #ReFi ecosystem and on-chain carbon market?

We'll dive into the good, the bad & the ugly 🧵

@KlimaDAO 1/
A bit of context: KlimaDAO is by far the largest holder of tokenized carbon, with +18m tonnes locked away in their treasury

Carbon gets sucked into KlimaDAOs treasury via bonds

But if inverse bonds for tokenized carbon are introduced, it won't stay in there... 👀

@KlimaDAO 2/
Inverse bonds are KlimaDAOs way to protect the value of its currency, $KLIMA

They could be launched if KLIMA trades below intrinsic value (IV)

A proposal for this was approved in Feb 2022

snapshot.org/#/klimadao.eth…

@KlimaDAO 3/
Inverse bonds can drive up KLIMAs value:
- KLIMA is sold in return for another asset at a discounted rate (aka bonding)
- bonded KLIMA is burned
- the currencies supply shrinks
- asset backing per KLIMA increases
- which should lead to an upward price movement

@KlimaDAO 4/
Note 3 things about inverse bonds:

- they will be enabled when the price of 1 KLIMA falls below 1 BCT
- KlimaCore repeatedly committed to protect the 1 KLIMA = 1 BCT peg through inverse bonds
- Klima team is working to prepare and test inverse bonds klimadao.medium.com/roots-of-resil…

@KlimaDAO 5/
The gap between the price of $BCT and $KLIMA is rapidly declining

KLIMAs supply inflates, and poor market conditions push the price far below its treasury value

We can't predict how prices will evolve, but the risk of 1 KLIMA trading at or below 1 BCT is growing

@KlimaDAO 6/
We also can't say for certain what will happen if KlimaDAO introduces inverse bonds

But we have done our best to model the expected impact, based on scenarios informed by Olympus inverse bonds forum.olympusdao.finance/d/1174-oip-94-…

@KlimaDAO 7/
Essentially, inverse bonding causes selling pressure

Leveraging inverse bonds will be different for different actors, but in general, it would look something like this:

1. Trade USDC for KLIMA
2. Inverse bond KLIMA to receive BCT
3. Sell BCT to receive USDC

@KlimaDAO 8/
Currently, ~48m$ (87%) of KlimaDAOs treasury is BCT & BCT liquidity

It is not clear which assets will be inverse bonded

4 scenarios:
Inverse bond
1️⃣ USDC from treasury
2️⃣ an even share of all tradable assets
3️⃣ only BCT
4️⃣ anything but BCT to avoid crashing the treasury

@KlimaDAO 9/
1️⃣ Inverse bond USDC from treasury

KlimaDAOs treasury holds ~4.3m$ USDC
Key benefits of inverse bonding USDC
- reduced or no selling pressure on treasury assets and KLIMA
- potential KLIMA price increase

USDC will likely be the first asset that'll be inverse-bonded

@KlimaDAO 10/
2️⃣ Inverse bond an even share of all tradable assets

This will have a wide-spread impact on all major carbon tokens on-chain, depending on the amount of assets sold

2.9m$ of carbon would be released in exchange for KLIMA. This could drive KLIMA up 29%

@KlimaDAO 11/
3️⃣ Inverse bond only BCT

BCT is the most liquid asset in the treasury

But there is a strong case to not inverse bond BCT - it holds so much of the treasuries value

Inverse bonding BCT would reduce the treasuries value by ~13m$, but could push KLIMA price up 53%

@KlimaDAO 12/
4️⃣ Inverse bond anything but BCT to avoid crashing the treasury

This would protect the treasury from downward pressure on BCT

But it would significantly impact $UBO and $MCO2, and take about 1.8m$ value out of the KlimaDAO treasury

@KlimaDAO 13/
A fundamental issue with inverse bonding carbon:
There is limited demand for on-chain carbon. Prices are short-term driven by buying & selling pressure

KlimaDAO as the biggest holder of tokenized carbon is most at risk if carbob prices crash

@KlimaDAO 14/
For this reason, the policy team are going to prioritize using USDC for inverse bonding
Inverse bonding other carbon assets will likely only be a last resort if all USDC is depleted, giving the community a long heads-up before there is any impact on carbon assets

@KlimaDAO 15/
The "black hole" narrative
Inverse bonding would permanently end the "Klima is a black-hole for carbon” narrative

The treasury wouldn't be a permanent carbon sink, and KlimaDAOs role is essentially that of a carbon trader

@KlimaDAO 16/
KlimaDAO has over time moved away from this initial thesis, and towards creating an economy for carbon markets

Any claims of making a positive impact solely from staking KLIMA would be highly questionable if inverse carbon bonds are introduced

@KlimaDAO 17/
Upshot: Toucan’s carbon pools are permissionless products anyone can build with. BCT was designed by KlimaDAO for Klima

And while inverse bonds could significantly impact on all on-chain carbon prices, we all are likely quite familiar with these short-term fluctuations

@KlimaDAO 18/
Lastly, big thank you to @0xKlimaurelius, @sy_zygy_ and @wagmianon from KlimaDAO for their feedback on our article!

blog.toucan.earth/how-klima-inve…

To engage further in this discussion, we invite you to join our or KlimaDAOs discord or leave comments in our governance forums!