Accusations of front running, misgovernance and market manipulation… all in the name of sustainability.
Shoutout to Mello for the market insights, position calculation and help editing.
Regenerative finance on the blockchain has been and continues to be a promising proposition- promoting increased visibility to the opaque voluntary carbon market.
However some recent events in the past few days have uncovered that there is still a long way to go in the way of governance and accountability.
The Backdrop
At the center of the recent events lies two nascent players in the space; Toucan and KLIMA. Before we begin it’s worth taking a look at how these two protocols operate to understand their relationship.
KLIMA DAO announced their arrival to the Regen scene in October 2021. The proposition was simple and compelling- retire your Verified Carbon Units (VCUs) to the KLIMA Treasury in exchange for KLIMA tokens. Overtime as supply of retirements flowed into KLIMA, carbon offsetters would be motivated to innovate and find alternatives for reducing their footprint.
Fueling all this was the Toucan Protocol. Their game changing bridging model allowed holders of Verified Carbon Units (VCUs) with a certain criteria (this is important later) to retire their credits for a NFT that could be exchanged for BCT tokens (Base Carbon Tonnes).
By Jan-26–2022, the total BCT supply minted was well over 17.8m! An enormous achievement by both protocols.
The Heist
Over the course of three months, the majority of BCTs were being used for the purpose of purchasing discounted Klima against the Klima Treasury. As a result the Klima protocol had amassed a substantial amount of BCTs (currently sitting at 15.3m or $75.8m).
Going back to retirement criteria, Toucan Protocol set a rule that all vintages of VCUs retired had to be later than 2008. This was to assure the quality of VCUs backing the BCT pool were of a certain standard.
Unbeknownst to the majority of the general public, was an embedded function in the smart contract to redeem the underlying VCUs backing the BCTs. Savvy Solidity detectives were able to identify this and began to slowly remove BCTs of a certain quality out of the pool.
Over the course of the last week in January, Toucan performed a massive market purchasing operation on the BCT LP. The goal? To extract out all the valuable VCUs with a vintage > 2012 in the Nature Category.
The activities were financed by ‘selected liquidity providers’. ~403K tonnes of high quality carbon was extracted from the pool.
This coincided with the launch of their new Natural Carbon Token (NCT) which would open at a considerably higher price (estimated $11/NCT vs $5/BCT). Almost in a blink of an eye ~$4.5mm of value was removed from the BCT pool.
Who was the loser in all this? BCTs are now backed on average by lesser quality Carbon assets. Who is the biggest holder… all roads lead to KLIMA.
Whilst the Toucan core team argues the extraction was to defend the original pool against arbitrageurs and the new NCTs would be permanently LPed as a ‘public good’ under a future Toucan DAO, the question remains on the control of the assets and fees in the interim (made more interesting by a publicized intent to raise private funding).
Toucan’s statement can be found — https://blog.toucan.earth/ensuring-long-term-liquidity/
Does the means justify the ends?
Liquidity Providers Addresses: https://polygonscan.com/address/0x1b8e77cd56d41ff886866fab4d14de7973a55d64 https://polygonscan.com/address/0x4b3ebae392e8b90a9b13068e90b27d9c41abc3c8 https://polygonscan.com/address/0x855627a0d999f2912327de000c1e92faa8e683bc https://polygonscan.com/address/0x92aC19A9519897bEaa7AAe88F4e9aD19aB0BdDf2 https://polygonscan.com/address/0xb7c3b8bc63b0333FC0cb6b852CcF90A0f1aCD8Cd https://polygonscan.com/address/0xc23Af35344B1DdC76Cde46C9cDe9233A347db352 https://polygonscan.com/address/0xc4fe1707d0867de63a9b5d99dec15653b14cc437 https://polygonscan.com/address/0xEe841f9cc6Eee6f0CbcB8A0f16770698bb09B484
Conclusion
This event is a case study on the importance of governance in the absence of legal corporate responsibility. It brings up some important questions:
- Should an entity that is self proclaimed as a non-profit and utility, be allowed to perform market altering actions?
- Should an entity setting the composition and rules of an asset be allowed to participate in the same market?
- Who decides who should received privileged information (the partner liquidity providers in this instance) over the public markets? What prevents these actors from using this information for their own personal gain?
The Klima community and BCT holders are understandably upset. What happens next sets a precedence for blockchain governance. Perhaps Toucan will take the path to returning some of the value to BCT holders.
I’ll leave you all with some of the thoughts from the participants of the recent Toucan AMA posted.
