I would like to comment on a few misinterpretations in your text on the proposed CGP:
Before responding here, I want to point out that my response was to this proposal as written, interpreting the text and nothing but the text. My assumption in responding to this proposal is this is the proposal that is intended to be proposed. Please let me know if that’s not the case.
Currently, as discussed in the community call on this topic, only Moss replied to that RFP, so we are not proposing a monopoly of one token, and it is certainly not an inside deal.
This proposal actually does propose a monopoly of one token – according to its text. Now how did this monopoly come to be, and why is it problematic?
The curation process applied to arrive at this monopoly was “people who applied to the RFP.” The principle issue here – one I deeply contend – is that an RFP is not a suitable methodology for selecting reserve assets. RFPs are fundamentally reactive: they ask current market participants who are aware of the RFP to provide some sort of current solution to a problem, but if the problem is not well scoped, the solutions will not suffice.
(1) I don’t think your problem is well scoped, which is why I highlight the differences between ecosystem assets (ownership tokens) and ecological state assets – these are fundamentally two different types of tokens that behave in different ways. This RFP seems to be dealing with the latter, and I’ll be the first to admit that I am heavily biased against ecological state tokens of global scope (more on this later).
(2) A proactive approach that is contingent on some collateral asset protocol is going to get you higher quality collateral than an RFP. I briefly discuss what such a protocol would look like at the end of this post. But in general: reaching out to groups like Nori or Klima DAO and thoroughly researching this issue makes much more sense than believing that they will run over to Celo’s ecosystem to be added as collateral. From a purely PR perspective, Celo simply doesn’t have that level of industry clout (vs. something like DAI).
In relation to (1), you say:
The reserve should be open to add more of these types of assets (tokenized carbon credit, also token with higher liquidity), and this addition would be just a start to add more nature backed assets.
… and it’s not clear what you mean here. Assets that are “nature backed” suggest you are talking about the ownership of natural capital, but this is not what carbon credits are – they are ecological state tokens that demonstrate a prior change of state. By using them as collateral, you are increasing demand for them according to the reserve’s money demand, but I don’t believe you are efficiently solving your stated problem, which is “protecting our natural world” – you are in effect subsidizing a receipt that grants some right to pollute, which we don’t want to do in the first place. Regardless of whether or not this introduces substantial risk to the reserve, it does not incentivize future proofs-of-state change; or to the extent that it does it’s a secondary effect of being selected as collateral.
The more obvious mechanism here is to simply (a) directly pay those groups sequestering carbon or (b) create a mechanism that does incentivize future proofs-of-state change. (I discuss this at length in the Kolektivo whitepaper and suggest that parametric insurance would be such a suitable mechanism). There’s a real tendency to overengineer things in this space, so solutions like (a) tend to be overlooked. Finally, if we agree that simply increasing the cost of carbon credits in the open market is the primary objective, then why bother with collateralizing them and introducing risk to the reserve? Simply (c) purchase them outright and retire them.
We spent 12 months banging our heads against the wall looking for a way around this core issue with collateralizing ecological state tokens (a token, again, which exists to be burned). We couldn’t find it in the global liquidity environment, but we think it’s feasible in a localized liquidity environment with clear relationship between the reported proofs-of-state change and community currency users. I again discuss this in the aforementioned whitepaper.
you proposed that the reserve should look at an asset that tokenizes a carbon credit INDEX, to not rely on a single carbon credit issuance. This is a great point, I fully agree and this is exactly what this token is doing: if you take a look into the CGP the respective constituents of the token, i.e. the underlying projects, are all linked in the CGP.
Yes, but you missed the entirety of my argument, which was to apply the principle of subsidiarity in a blockchain-native environment. This is why I propose an N-dimensional bonded surface (e.g. Balancer) and not an index built on social trust and audits: it enables decentralized governance to occur for LP-token holders at the appropriate governance level of recursion.
I am not proposing to purchase 40% of the outstanding liquidity in an OTC deal, I am proposing to purchase additional carbon credits directly from the issuer.
I either don’t understand you here, or you’re saying the same thing twice. If you are buying $500k of tokens OTC from the issuer, you are still buying tokens equal 40% of the outstanding liquidity on the secondary market today. Maybe you can clarify this point again.
It just assumes that since this token is collateralized by a different asset class
This might be a language issue here, but I believe the token is not collateralized: it is wrapped and represents a carbon credit (right to pollute).
It just assumes that since this token is collateralized by a different asset class, the correlation of the token with the other reserve assets is lower, relative to the other assets. While this is an assumption, the asset would add to diversification of the overall risk as long as the assets are not perfectly correlated, and they are not, you showed that in your graph. Even if that assumption would not always hold in future, as markets can sometimes be messy, the 0.5% allocation would not add substantial downside risk, with the upside that, next to the positive impact on the environment, it could add diversification benefits in some market environments.
If you’re assuming this is true, this is a problem: it should not be an assumption. You should be proactively calculating the correlations for each “natural capital asset” available and high quality on the market today and reaching out to those ones that maximize your diversification strategy. Simply accepting the first accept – in our case MCO2 – to apply to the reserve seems like a rather non-rigorous means of accomplishing what you’re describing above re: diversification.
next to the positive impact on the environment
This seems like a stretch. The opportunity cost of spending $500k on these tokens (which are receipts representing a right to pollute) and adding them as a form of very risky collateral vs. simply paying $500k directly to sequestration efforts is questionable (either through donation or purchasing and retiring credits). Given that we work in a Web3 environment, this $500k could even be spent on capital formation for those project groups that engage in proofs-of-impact by investing in their tokenization and institutional formation as DAOs. I imagine this sort of creative investment strategy will become popular for “green investing” in the future.
Some final responses:
Certainly it is much harder to estimate a historical correlation for MCO2 with these assets based on the available history.
This in itself should be a red flag for adding any form of collateral to the reserve. if what is needed and prioritized is that which “diversifies price risk,” then this needs to be quantitatively expressed with clear thresholds as to what and what isn’t appropriate. From my perspective, simply because an asset only makes up .5% of the reserve doesn’t mean it shouldn’t be subjected to a standard, baseline level of scrutiny. But more than this: it seems to me a good reserve asset standard would lay out…
- What correlation values are acceptable (relative to the other collateral in the reserve, and those collaterals relative to each other)
- The liquidity depth of each asset
- The % of all liquidity outstanding held by the reserve (this again is my biggest issue with this token)
- For wrapped assets: the match between the asset and its wrapped counterpart. If wrapped credits are trading higher than their legacy counterparts, something is extremely wrong (which I believe happened with MCO2…)
- The trust assumptions latent in each asset. You are making, for instance, many social trust assumptions about this token that are not present with any other token in the reserve (perhaps excluding DAI – but it is far more politically decentralized than this token).
- Public, relevant simulations data. You guys do a great job in the stability paper. For adding new assets doesn’t it make sense to do the same?