RFC Fund Allocation

Title: Fund Allocation
Status: Proposed
Author: Robdog
Contributors: Johnx25bd

Summary

In this RFC, we propose an allocation of the funds secured by the BCT-NCT mass-balance exercise. We propose that a portion of funds be allocated towards nature-based TCO2 depositors, another part as long-term NCT-USDC liquidity that uses LP rewards to burn floor carbon in the NCT and BCT pools, as well as a bounty to Toucan for coordinating the rescue operation. We hope the funds will be distributed as LP tokens, and held long-term as liquidity by the recipients so that the value continues to serve the broader ecosystem. Ultimately, this RFC invites the community to explore these and other ideas for the allocation of the funds, with the objective to serve as a foundation upon which community led RFCs are developed.

Background

Mass balance and secured funds

When the Base Carbon Tonne (BCT) was launched, there were a large number of nature-based carbon credits deposited into the pool. Toucan is launching its new pool, Nature Carbon Tonne (NCT), exclusively for nature-based credits, and this pool will trade at a significant premium to BCT. As such, an opportunity emerged for actors to redeem these nature-based TCO2 tokens, deposit them in NCT and sell them on the market, thus actualizing a significant profit.

Prompted by actors in the market acting on this opportunity, Toucan coordinated a rescue of the remaining nature-based TCO2s from the BCT pool. These TCO2s will be deposited in the NCT pool, and the resulting NCT is planned to be used to supply liquidity on the NCT automated market maker. The LP tokens and any excess NCT received will be moved to a multisig controlled by five stakeholders.

The number of nature-based TCO2s secured amounts to 1,294,581, which results in between 2.3-2.7m$ of excess value, based on 5.86-6.20$ average cost basis and the current NCT price of 8$ (the cost basis is being finalized and we intend to calculate excess value based on the market price of NCT). Toucan has committed to let the community decide how to allocate all of the excess value.

Origin of nature-based credits

The 2012+ nature-based TCO2s that were secured were primarily deposited by Klima DAO, Moss, Regen Network and its community, with the following division based on available data:

Klima DAO: 463,825 (24.2%)
Regen Network: 271,794 (14.2%)
Moss: 600,595 (31.3%)
Others: 583,520 (30.4%)

The suggested allocation of funds

Though Toucan would like to leave this process to the community to develop proposals for the use of funds, we have over the last weeks received a lot of feedback from the affected stakeholders and can as such provide some color on where in our view the capital should be allocated. The purpose here is to help seed ideas for other RFCs to build out more detailed proposals.

Nature-based TCO2 depositors

We agree with Klima’s statement that the actors who deposited the original nature-based TCO2s, and especially those that held onto their BCT, deserve a portion of the fund allocation. There is an open question as to how we should weigh those participants that deposited nature-based TCO2s and sold on the market/bonded to Klima, potentially for a profit, as opposed to the actors that held on to their BCT and are sitting on a loss. We believe the latter group has a better claim to rescued funds, but includes a much smaller group of participants.

We invite the community to develop an RFC, exploring these tradeoffs, digging into the on-chain data of how many participants would qualify, and proposing what portion of the funds should be allocated to this purpose.

NCT Liquidity and BCT quality improvement

This RFC also proposes that a portion of the funds be held as LP tokens in the ecosystem multisig, to act as a public good. We propose that all LP fees be used to burn the lowest quality BCT or NCT tokens. This would serve a three purposes:

  1. Ensuring liquidity and market function
  2. Raising the BCT and NCT floor and pool quality
  3. Burning a lot of carbon credits for the planet

We believe this proposal is highly aligned with all stakeholders in the ecosystem, especially the planet, and invite the community to develop this idea into an independent RFC, proposing how such an operation would be executed and what portion of the funds should be allocated to this purpose.

Rescue bounty

As was suggested by the Klima statement, Toucan acted as the coordinator of the rescue of these funds, and as such we suggest a portion of it be allocated to Toucan. The opportunity for us to decide what to do with these funds would not exist if Toucan did not act swiftly, spending significant efforts to coordinate and align with liquidity partners to perform the rescue, as well as set up this governance process. We invite the community to include such an allocation in future RFCs.

Suggested division of funds

We invite the community to explore and determine what a fair allocation of these funds looks like. This RFC includes a rough starting point for consideration, including a 45% allocation to nature-based TCO2 depositors, 45% to NCT liquidity that burns carbon with fees and a 10% rescue bounty to Toucan.

Hodl the LP tokens

Because the majority of secured funds are held as LP positions for the NCT AMM pools, we propose that the allocated funds be primarily distributed in the form of LP tokens, and encourage the recipients of such funds, especially major actors in the ReFi ecosystem, to commit to holding the LP tokens, as to not dump on the pool.

Conclusion

Together we have the opportunity to design a fair, impactful use of the value secured from the BCT pool. We would love community input on these ideas, and would love for other creative suggestions to be surfaced. By building in the open, we can find the best path forward together. :pray:

3 Likes

Klima’s position is that the NCTs should be returned to the original entities who completed the bridging. In the case of KlimaDAO, these credits were sourced using funds raised during our initial LBP and helped contribute to the initial BCT liquidity during our launch. We agree that Toucan deserves a portion of the NCT extracted from the BCT pool as a bounty for rescuing the value.

These NCTs could be utilized to expand liquidity for KLIMA-NCT and/or set the stage for naked NCT bonds.

5 Likes

Thanks to Robdog and Johnx25bd for providing full context and steps forward. The clarity is much appreciated.

Nature-based TCO2 depositors

We agree with Klima’s statement that the actors who deposited the original nature-based TCO2s, and especially those that held onto their BCT, deserve a portion of the fund allocation. There is an open question as to how we should weigh those participants that deposited nature-based TCO2s and sold on the market/bonded to Klima, potentially for a profit, as opposed to the actors that held on to their BCT and are sitting on a loss. We believe the latter group has a better claim to rescued funds, but includes a much smaller group of participants.

I personally am in agreement with this process of participants who bridged nature-based carbon credits having claim to the nature-based TCO2s/NCTs.

Participants who had specifically chosen to bridge more expensive nature-based carbon credits and held on to them should have their claims verified. Perhaps it can be done by:

  • providing the Verra certificates of purchase of those nature based tons
  • showing the portion of BCTs that were not moved and remained in their wallets

I believe that these 2 properties can be transparent and key towards supporting those who had specifically purchased nature based carbon credits and bridged them.

3 Likes

I’m in favour of crediting those who bridged nature based credits and are still holding their BCT (at a significant loss). If it is not possible to find out this information or it is too laborous or difficult then I just propose a simple solution. Decide a date. Probably a good date would be the date Toucan started their rescue operation because then the arbitrageurs were not any more among BCT holders. Take data of BCT holders on that date and distribute the value among those holders. Of course Toucan should have their 10 % share.

Like Dan said above, if the people who bridged the credits should be rewarded, it is important that the claims will be verified. Also it should be verified that they have not moved their BCTs and BCTs remain in their wallets.

The burning of old credits is a good idea, but I wonder why you propose burning NCT. I thought NCTs are of good quality compared to BCT so no burning needed for NCT.

5 Likes

Just wanted to say that I really appreciate all the perspectives raised here from @Dionysus @dan and @Alanos86 and thank you for engaging on these topics.

If someone wants to dig through the on-chain data to see what wallets are eligible and have held this would be super useful to explore and how we want to deal with cutoffs etc.

Good point, yes I agree for BCT it would generate more value from a quality perspective. Even for NCT improving floor quality might be useful in addition to the perspective of burning carbon credits. Would be good to understand what people think/prefer about this.

2 Likes

I echo Dionysus position but would add that I believe more of the value should be going directly to those that originally bridged the original NCT TCO2s to do as they see fit, since the value should be theirs.

My original position was 90% going to originators, 10% to Toucan as a bounty but given the proposal above, I am open to:

80% - Nature-based TCO2 depositors
10% - Long-term carbon burning liquidity
10% - Toucan rescue bounty

5 Likes

As a regular retail member of the Klima DAO community, I wish to assure you that the premise of bonding to klima is not that we do not own that bonded asset’s risks and rewards still, and the constant price drop in klima to fund BCT demand will show you this fact. The language is strange here and seems to imply investors, i.e. owners, do not exist to you.

There may be a reason for this, but I assure you, we feel we are stakeholders. To us, we have conviction that klima is historical tipping point infrastructure and its integrity as an organization that is not taken advantage of is literally more important to many of us than our reward. The decision being explained away is a terrible precedent, but there is no worse precedent than the language used repeatedly by Toucan to imply Klima DAO tokenholders are not themselves the owners of the protocol.

This cannot work for refi if you believe in the value of offsets versus taxes, or in the voluntary carbon market. I believe an allocation to protocol treasuries and tokenholders on the proportional basis of BCT held at time of the mass-balancing will be most fair. I invite others of the 63,000 owners of Klima DAO to chime in with their viewpoint.

This breakdown makes sense to me. It affirms all the stakeholders here:

  • original bridgers of nature based carbon credit tons
  • toucan for rescuing
  • retirements for earth (and floor quality)

If there is a formal procedure for verifications of bridgers would love to contribute to how we may be able to do that in as transparent a way as possible and also in a way that won’t dox.

1 Like

@rajasmasala thanks so much for adding your perspective here.

Given that the flock here at Toucan were in fact the first Klimates and first Klima holders, I assure you we are aligned with the interests of the Klima DAO community and token holders.

We all have a vested interest in the success of the ReFi ecosystem.

The proposal above was a reflection of conversations we had with many stakeholders. This post is an invitation for alternative proposals about the use of rescued funds.

In both @rob and @Sy_Zygy’s proposals a significant amount of value would be returned to the Klima DAO treasury and therefore token holders—it’s just that we’re targeting the behavior of depositing nature-based TCO2s into BCT as the attribution factor, rather than just direct or indirect (sKlima) holders of BCT.

Hopefully this clarifies that we are not ignoring Klima DAO token holders—rather are focusing on the depositors of nature-based credits—of which Klima is a major contributor (as the first pie chart shows above—24.2%).

May I also emphasize the scenarios that were likely to unfold if Toucan’s liquidity providers did not step in to rescue this value:

  1. All the nature-based credits would have been redeemed from the BCT pool
  2. They would have deposited into NCT
  3. NCT price would have dropped dramatically
  4. BCT price would have correspondingly been affected
  5. Klima DAO holders would never have a chance of the TCO2s being returned to the treasury

Hopefully you can see how this alternative scenario was much worse for all parties. Toucan’s liquidity partners stepped in to rescue the value and this forum is a space for the community to propose allocations of funds.

We’d like to encourage a broader range of proposals from the community to ensure that the use of funds reflects the diverse ReFi community’s best interests.

1 Like

Thanks @Dionysus for this.

When you “Klima’s position” are you referring to the Klima DAO community, Klima core, or something else?

I only ask as @Sy_Zygy has put forth a detailed proposal about the use of funds and want to make sure I understand which parts of the Klima DAO community have alignment.

1 Like

@dan thank you for this! Glad we’re beginning to build consensus here.

We’d be very grateful if you were able to propose a formal procedure for verification as you described.

1 Like

@Dionysus @Sy_Zygy @rob @john_ellison Could you please dive deeper into why you feel bridgers are entitled to arb value and not holders? I’m really lost on this point. I would get the fact that bridgers are entitled to arb if they put it into LP which they kept holding or held the naked BCT - but if the bridger cashed out either via selling to the pool or bonding to KLIMA - they kindof already got paid for their trouble, no?

Would it make more sense to distribute arb value to BCT holders based on holding size? Why are both Toucan and Klima aligned on returning value to bridgers instead of holders at operation date?

3 Likes

I second this - I am sure there are reasons, and I would personally love to hear why NCT bridgers rather than BCT and associated LP holders are viewed as the affected parties. It may make a great deal of sense especially given the pioneering nature of this market, and if the role they performed and must be compensated for is clearly laid out (perhaps repetitively so, sorry if that’s the case) an allocation to them on that basis may seem more transparent. I deeply appreciate the effort Toucan is making to clarify the fairness of the allocation.

Hello @Rez and @rajasmasala, in regards to prioritizing bridgers: These are the parties that purchased and bridged higher-value NCT credits in the first place and then deposited them to BCT, meaning they originally invested capital that should be returned to them, out of the value that was secured. Nature-based credits were not priced into BCT at launch, and the BCT price is tending and has always tended to go towards the lower valued credits in the pool, rather than the higher (nature-based) ones. So having higher-valued credits in the BCT pool isn’t changing much of the bottom line for a BCT holder - unless of course someone has the intention to redeem them for arbitrage purposes.
Someone else from Toucan can most likely expand on this further, but as many of us are taking some time off right now, I wanted to chime in.

I’m thinking about the statement that nature based credits were not priced in and BCT always tends towards lower valued credits. BCT has traded between 4 and 8 $/BCT and in the beginning it rather seemed that it is going toward higher valued credits because it rose to 8 $ at one point. After Toucan’s operation BCT declined from 5-6 $ to 4$ so one could say that market actually priced in extraction of nature based credits. So difficult to say wether or not the nature based credits were priced in because there are powerful other factors like crypto sentiment and even FED and US monetary policy.

I’m in favour of @Rez 's questions and thinking above. I’m wondering why original bridgers if they sold, should be priorised. They made their decision but the holders of BCT at the time of arb, whether they knew it or not, they owned the asset that was made less valuable during those days by extracting nature credits. So they should be compensated as I proposed earlier.

1 Like

I’m a bit conflicted by this argument. On one hand, it is true that BCT never launched at a price credit in the NCT pool represents now, on the other hand, that’s acting a lot on hypotheticals about “intentions” rather than concrete market claims. as well as ignoring price for nature-based credits at the time of Klima/BCT launch was also effectively crap and legacy credits often traded at very low price ranges(any carbon trader, and that former head of Nori who loves to badmouth them, can show you the historical price, and your team also has access). I feel this is a bit disingenuous to use market prices now and say at the time people who bridged were purely in it “for refi” rather than making an arbitrage play.

Those who bought from the bridges took on the ongoing market risk, and now the reward for that risk is taken away from them while bridges that both bridged AND held are rightly rewarded. Now that this rationale has been explained to me, I feel I must raise the point that this resolution proposed by Klima and Toucan alike will make the on-chain market not look like a market at all. Logistically it may be difficult to return value to a “snapshot” period of those who held BCTs at the varying times of operations, but market integrity-wise, I must say it is the best option.

1 Like

To be fair, the whole process of coming to consensus on how to distributed arbitraged value is not market-like at all. It’s very unlike of arbitrageurs to open up RFCs.

I think it would be as simple as providing proof of:

  • purchase of verra credits (off-chain; aka the Emission Reduction Purchase Agreement document)
  • providing the account address that has the BCTs that the verra registered credits went into
  • showing the specific amount of BCTs that have not moved since the credits were purchased

Proof can be provided to the Toucan team, the bridgers that were involved, and the person who purchased. Perhaps a counterparty can be present when proof is presented to all the individuals involved as well to make sure there is no funny business going on.

The main goals for having the entities involved (as well as the counterparty to check/balance) is to ensure there is balance in all ensuring there is no funny business going on–without releasing all the documents that contain personal identifiable information like a home address released publicly.

I think this can be a potential formal way. What do you think?

Thanks @Rez for asking the analysis and asking the right questions, as always :slight_smile:

To me it is an open question what group deserves the credits. There are participants, that deposited nature-based TCO2s with the intent of making BCT higher quality, thinking that they had a claim to those TCO2s with their BCT, and now realize those credits are out of the pool. I really think we should compensate that group and suspect this is what motivated Klima’s statement too. At the same time, there are actors who deposited nature-based TCO2s and profited at the time and exited to USDC, I am not sure it necessarily makes sense to reward that group in the same way.

But yes, there is a reasonable argument to be made that BCT holders deserve allocation instead. Ultimately, there are many parties that feel a claim on these funds, and have an interest in seeing them returned to themselves, I would imagine there needs to somehow be a compromise or a resolution that everyone is satisfied with.

2 Likes

I’m curious why you don’t consider establishing a green fund to help promoting or encouraging more people to enter this ecosystem? Undoubtedly, the related stakeholders listed deserve the credits, but I suggest that a certain percentage can be allocated to the construction of refi ecosystem, or this part of the funds can be used to do a one-time or long-term green public project. For example, to donate them to gitcoin as matching funds, then to support more green projects. On the one hand, this can let more people know about refi, on the other hand, it can also help the whole alliance to grow. I don’t know if I explain clearly or not, in conclusion, hope more individuals can join us to make our earth greener.