Discussion: Increase the Reserve’s Natural Capital allocation for upcoming assets

Hi all,

The Climate Collective would like to build on ideas proposed in the Mento team’s recent post, which outlines how the Reserve could serve as a Liquidity Provider (LP) in the on-chain carbon markets. We will provide further context on the specific natural capital assets and potential liquidity structures, and will keep the community updated as more ReFi projects plan to deploy assets on Celo.

[Regulated] Real World Assets

Before diving into the carbon-based assets, we would like to highlight the suite of tokens from Untangled Finance, a real world asset financing protocol that has completed a security audit with the Verilog team and are actively planning to launch on Celo in early Q3 2022. Similar to Goldfinch/Centrifuge, Untangled’s Senior & Junior Obligation Tranche tokens (SOT and JOT respectively) are Reg-D securities that require KYC-verification, since they represent debt ownership of off-chain assets including packaged home solar loans, supply chain finance, and green assets such as refinancing of renewable energy projects. The asset pools are structured such that anyone supplying stablecoins can receive passive fixed income represented by Liquidity Pool Token (LPU). Based on guidance from mentors at Celo Camp and other legal experts, the protocol is structured such that the LPU, Liquidity Pool Bond (LPB), and Untangled Governance Token (UTL) tokens can trade freely on DEXs. Though these initial asset pools originate from existing TradFi institutions, Untangled’s sister-application Binkabi will source and underwrite more web3-native financing opportunities for the protocol to incorporate.

@muntangled from Untangled has written an excellent thread outlining considerations around real world reserve assets here. These asset pools represent a novel opportunity for “fixed income” style-investment with a ‘Coupon’ (APR %) on stable asset deposits. If approved by the community, SOT and JOT could be the first KYC/regulated asset in the Reserve, and thus the onboarding process would differ significantly from cMCO2 and other existing reserve assets. @slobodan outlined a proposed onboarding process including regulatory considerations in this post, and we expect to pilot this process with Untangled in Q4 2022.

Liquidity Structures for Tokenized Carbon Offsets

Two of the leading players in the tokenized carbon space, Toucan Protocol and Flow Carbon, have both announced their plans to launch on Celo - and expect to be live on mainnet tentatively by the end of Q3 2022. Flow Carbon has posted an introduction to their Goddess Nature Token (GNT) asset in this post, and Toucan Protocol will soon publish a similar thread with content repurposed from their existing articles and documentation around Nature Carbon Tonne (NCT). In terms of timelines, we expect Toucan Protocol to launch on Celo earlier than Flow Carbon.

NCT & GNT are minted through different tokenization approaches, both of which may be subject to change based on recent announcements from Verra, but on a high level are backed by similar registry-certified nature-based carbon offsets. We therefore expect close correlation between NCT and GNT in terms of relative price movement - and based on historical data have observed a similar correlation between NCT and Moss’ cMCO2 as the Mento team pointed out in the previous post:

According to Sushiswap Analytics data, NCT decreased over the last three months by roughly 51% from $7 to $3.4, which is largely in line with the price decrease that we observed for cMCO2 at 54%.

With 3 distinct assets (cMCO2, NCT, GNT) backed by different baskets of registry-certified, nature-based carbon offsets, we see an opportunity to structure liquidity in an efficient manner to capitalize on the price correlation, arbitrage opportunities, and investment that comes with an index-fund approach. After the launch of Uniswap on Celo, we will have 4 available DEXs with the differentiating characteristics outlined below:

  • Uniswap v3: supports concentrated liquidity positions within a given price range
  • Ubeswap: supports limit orders on-chain and integrates with Moola Market’s interest-bearing mcUSD token
  • Symmetric: Balancer v2 fork with support for multi-asset pools
  • Sushiswap: cross-chain DEX utilizing Uniswap v2 architecture

Given the staggered timelines for each tokens’ availability on Celo - cMCO2 is already live followed by NCT then GNT - we envision starting with standard 2-token liquidity pools across Uniswap and Ubeswap, followed by a carbon-index on Symmetric with all 3 assets. We anticipate that the 2-token pairs will be used heavily by active market makers and protocols that programmatically offset carbon, while the index will allow us to funnel capital from a wide range of sources into a basket of on-chain offsets that simultaneously deepens the liquidity between each trading pair (ie. GNT-NCT, NCT-cMCO2, cMCO2-GNT). This enables arbitrage opportunities between DEXs, as well as within Symmetric to rebalance the multi-asset pool to its target allocations. In the future, additional carbon assets could be added to this index so long as they are correlated with the other assets - other forms of natural capital such as Untangled or Kolektivo may not be suitable to add within the same index. We will publish our thoughts about criteria for index inclusion along with quantitative models of multi-asset LP in the coming weeks, but as mentioned above will utilize 2-token asset pairs until all 3 carbon tokens are live on Celo.

In anticipation of these token launches, the Climate Collective would like to do a “temperature check” with the community about converting existing cMCO2 holdings to LP positions; and increasing the allocation of natural capital assets in the Reserve from 0.5% up to 2.72% under the guidelines of CGP62 target weights:

Current State (post CGP62)

Token Vault Allocation % Price ($) Value ($)
CELO Primary 50 0.84 92,020,003.00
Stables (DAI, USDC) Primary 41.82 1 87,539,982.00
BTC Secondary 4.01 (49% of Secondary) 19,432 8,373,025.00
ETH Secondary 4.01 (49% of Secondary) 1,058.00 8,373,025.00
cMCO2 Secondary 0.16 (2% of Secondary) 4.53 439,655.00

Target State (using current market prices)

Token Vault Allocation % Price ($) Value ($)
CELO Primary 50 0.84 92,020,003.00
Stables (DAI, USDC) Primary 41.82 1 87,539,982.00
BTC Secondary 2.72 (33% of Secondary) 19,432 5,689,176.00
ETH Secondary 2.72 (33% of Secondary) 1,058.00 5,689,176.00
cMCO2, NCT, GNT LP Secondary 2.72 (33% of Secondary) 4.85 / 3.22 / TBD 5,689,176.00

The suggested allocation of natural capital positions would be subject to the ‘liquidity matching’ policy outlined by the Mento team:

[…] contribute X% to available liquidity but limit overall exposure to Y%. For example, let’s assume X=25% and Y=3%. This would limit the Reserve’s total exposure to 3% (around 6M USD at current Reserve levels) but would make the actual exposure contingent on existing liquidity.

This ensures that if for instance, CELO doubled in price before other natcap tokens have the requisite liquidity on the Celo blockchain, the Reserve would not necessarily rebalance to fill the entire 2.72% allotment.

We believe the Reserve is well positioned to reallocate a portion of BTC and ETH holdings as @markbarendt pointed out in his comment:

Part of my underlying thought here is that if the stable coins are formally backed 1:1 by a fully segregated pool of assets that are ‘acceptable to regulatory bodies’ then: the rest of the reserve’s assets become technically ‘irrelevant’ to the stable coins except for mechanical uses like CELO being used back and forth in the minting process.

If we reach that formal status, then IMO we are very close to being able to say that essentially all the BTC and ETH in the reserve could be re-deployed into whatever other projects suited Celo’s best interest.

Increasing the natural capital asset allocation in this manner is a big step towards sustainable expansion through LP positions, as well as other ‘mechanical’ uses in the minting process of Mento stable assets.

We welcome community feedback for this “temperature check” and will publish updates as more natural capital assets plan to deploy on Celo.