Thank you for your response @slobodan. The discussion post acknowledges that technical and functional changes are required by Mento for this structure to work. However, we believe that these changes are necessary in order for Mento to fulfill Celo’s vision of “natural-capital-backed means-of-payment currencies” outlined in the whitepaper here (p13). That said, we recognize and appreciate that increasing the reserve’s natural capital allocation to 40% (as mentioned by Celo co-founder @sep here, Climate Collective’s founding charter here, and Celo Foundation’s 2022 update here), and future initiatives of this kind will ultimately need the community’s support.
In response to your questions, the proposed structure does not require cUSD to fund the Centrifuge pool - technically any form of currency can be used and converted, including CELO. That said, we believe it to be an inevitable step for the Mento reserve to eventually accept semi-liquid natural capital assets as collateral, and hence see the integration with Centrifuge as an important milestone that will add significant long-term value to the protocol. With that in mind, we are highly supportive of any initiatives focused on introducing CDPs for semi-liquid assets on Mento.
As an intermediate step, however, there are at least, two possible solutions to this problem:
- Allocating a portion of the ETH/BTC holdings to the cUSD required to fund the DROP token. The 1:1 USDC/DAI ratio can be maintained by issuing the DROP on Celo, minting new cUSD against that DROP, and then liquidating the appropriate amount of ETH/BTC.
- Allocating a portion of CELO in the Community Fund to the cUSD required to fund the DROP token. This would similarly maintain the 1:1 USDC/DAI collateralization ratio but would require careful thought and coordination to minimize potential market impact on CELO. Interestingly, this setup would have a multiplier effect on the TVL on Celo as the locking of CELO to create cUSD as well as the cUSD to DROP tokens potentially resulting in an increase of 2x in TVL. Structuring with periodic drawdowns instead of a single drawdown would be a feasible option. That said, this would have the same net pressure on CELO regardless of duration.
While we recognize that the DROP token in Flowcarbon’s Centrifuge pool is less liquid than tokenized carbon such as cMCO2, the token earns a fixed APY and junior first-loss capital (30% of the pool) may help protect from dowside. This suggests that the senior return may only be impacted where the overall carbon market drops by more than 30% - not taking into account additional protection built into the contractual terms of the emission reduction purchase agreements (ERPAs) signed with the project developers.
As a result, even if the carbon markets face similar headwinds as cMCO2 experienced in the past (see “The Reserve as a Liquidity Provider in the Voluntary Carbon Market” here), the potential loss to the Celo reserve may be significantly mitigated. Hence, while the DROP token is less liquid, it is also far less volatile and arguably more impactful as capital from the pool goes directly to financing new carbon projects, vs. buying tokens that represent already-issued carbon credits. Furthermore, there is little to no exposure to “Impermanent Loss” associated with liquidity pool tokens, which is a significant risk acknowledged with spot carbon credits in the referenced forum post.
Staying true to Celo’s initial objective of introducing natural capital-backed assets to Mento and broadening the range of available climate investments products* on Celo, we are supportive of a long-term roadmap focused on introducing CDPs for semi-liquid assets on Mento. However, we recognize that this will take time and therefore propose an immediate path forward of allocating a portion of Mento’s existing ETH/BTC holdings, or an equivalent amount of CELO from the Community fund, to allow for the reserve to hold the DROP token, as outlined above.
We welcome feedback from Mento and the broader Celo ecosystem on which solution is preferable.
*Just a friendly reminder that the info and opinions in this forum post are meant for informational purposes only within the community. Please don’t take this post as legal advice or an official legal opinion. We want to let you know that the DROP and TIN tokens are securities under U.S. law, and we are fully committed to doing this the right way and following U.S. laws at all times.