I'd like to draw attention to a problem with C3's tokenomics and governance system.
I see this as a major problem that threatens the viability of C3 and the changes that I propose will be difficult. I am asking you to think about what C3 is trying to achieve at a fundamental level and how the design of its token governance can best support this mission.
I want to you to ask: do we want to create a vibrant onchain carbon market, with a culture of carbon merchants; or an onchain system of carbon property, with a culture of carbon barons extracting rent?
What is the background?
C3 uses one voting pool to crowd govern incentives for four categories of activity: bridging, market-making, time-locking carbon and time-locking KLIMA tokens.
Each of these four activities has different value propositions for C3 and different risk models for participants. Bridging and market-making are fundamentally required to grow C3 and are high-risk. Time-locking carbon and time-locking KLIMA is not fundamentally required and is lower risk.
NOTE #1: Bridging rewards are not yet enabled due to Verra's embargo. For the purpose of discussion I pretend they are.
NOTE #2: veTokenomics has a feature where rewards are boosted based on the relative amount of time-locked veC3 held by participants. Therefore every activity has an additional implied contribution to C3 of "seeking maximum reward boost via holding veC3". This is expected to contribute to the value of the C3 token and amount locked as veC3.
What is the problem?
The single voting pool functions as an arena where these activities are pitched into battle. High-risk market makers and bridgers must compete with lower-risk actors locking carbon and KLIMA for their cut of C3 tokens.
This creates a variety of negative dynamics:
1. Profit and/or influence seeking capital will tilt incentives towards lower-risk non-fundamental activity.
If we accept that self-interested capital is attracted to high reward for minimum risk, we should expect voting weight to tilt towards rewarding lower risk, less productive work; and consequently, high-risk productive work to be rewarded less and become disincentivised.
This can be seen today with the tilt towards rewarding locked UBO over for providing liquidity for UBO-KLIMA:
- 45% weekly rewards are paying for illiquidity by locking UBO (lower risk, not fundamental).
- 5% weekly rewards are paying for market making at risk of impermanent loss and accepting KLIMA dilution (higher risk, fundamental).
45% of veC3 voters are tilting C3 into paying for carbon to be locked off-market and out of circulation. This runs directly against facilitating an onchain carbon market. But it is lower risk than providing liquidity, so from pure self-interest is rational.
If this UBO was paired with KLIMA and provided as liquidity, it would expand the liquidity pool and it could be bought and retired. It would facilitate the onchain market and the ultimate function of C3.
Side note: there are two issues here: (1) the vote tilt, which relates to the subject of this RFC, and (2) the question of whether single-sided locking should be rewarded at all, as it is paying for the carbon to be illiquid, which in my mind is contrary to C3's over-riding goal of facilitating a liquid carbon market. I want to keep this RFC focused on the voting mechanism and will open a separate RFC about reward single-sided locking.
2. KLIMA holders must vote against growth of C3 to get their share of C3.
Sharing C3 with KLIMA holders reflects the C3-Klima alliance and is a good thing. The problem is that votes cast for this are inherently also votes cast against growing the carbon market by bridging and market making.
KLIMA holders are put in a strange position, where to act in their self-interest and in the way in theory the system expects them to - to vote for more C3 for KLIMA holders - is to vote against bridging and market making, which is work fundamentally required for C3 and the Klima project itself to succeed.
3. Votes for market making are votes against bridging and vice versa.
These are both fundamentally required activities that should be incentivised and it is strange for them to compete in the voting pool. For example: with LPs that are dominant in their liquidity pool, voting for their market making to be rewarded is also voting against bridging that could lead to their position being diluted. And on the flip side: anyone bridging needs market makers to exist for to realise profit.
4. Other possible problems?
There are no doubt other issues created by the single voting pool, some of which may even suggest that veTokenomics is simply not appropriate for C3.
For example: it is not clear to me how a new carbon derivative can be introduced without the backers buying enough C3 to tilt rewards towards to incentivise liquidity for their product. New carbon derivatives are needed by C3. It seems to be against the best interests of C3 to require an injection of capital into the C3 token and voting pool to do something that is good for the system.
What can be done?
C3 should return to the simpler model used by Curve and Frax. These are examples of successful veTokenomics and the source of the code forked for C3.
Curve and Frax both use a single pool to govern a single category of activity: market making.
One pool, one activity, one value and risk model.
Sub-categories of market making are put in competition (e.g. which liquidity pool on Curve). Whoever wins, the end result is the same: liquidity is provided and the market is made.
C3 should divide its single voting pool into separate pools for each category of activity.
What would this look like?
The existing single vote pool will be split into three voting pools:
- Bridging
- Market making
- Locking off market*
The same veC3 can vote across the pools.
A separate one single-sided staking mechanism will distribute C3 to wsKLIMA stakers.
This will unavoidably be disruptive and a major coordination and communication undertaking that will be ongoing. It will break expectations and people will be upset (e.g. people who locked and forgot, who arrive 8 months later, upset their rewards stopped).
The C3 team may be able to reduce disruption (e.g. it may be possible to detach the existing gauges, with votes intact, and add to new voting pools or operate standalone, to avoid the need for people to unlock and redeploy.)
Note: * As mentioned previously, IMHO we should go further and totally stop rewards for locking off-market, as it is anti-liquidity, but I think this should be discussed separately and I will create a separate RFC.
LMFAO too complicated, is there a simpler solution?
As above: a governance vote to agree division of reward based on relative value, etc.
The existing pool is kept but non-market making gauges are removed. Bridging, locking carbon and locking Klima are removed. Market making gauges remain as the only votable options.
The removed behaviour types are rewarded via separate staking mechanisms which distribute pro-rata boost adjusted amounts, not influenced by competitive pool voting (e.g. 5% total reward might go to locking carbon, amounts locked and veCRV boosts adjust how this is divided).
- Vote weight pool to govern market making LP rewards (i.e. like Curve and Frax)
- Pro-rata boost adjusted reward per ton bridged.
- Pro-rata boost adjusted reward per unit of locked carbon off market.
- Pro-rata boost adjusted reward per unit of locked wsKlima.
What do we gain?
Our end goal is a vibrant onchain carbon market.
To get there, we need to reward making this market happen.
Today market makers are forced to vote against bridging for their work to be rewarded and bridgers are forced to vote against market making. Making these changes will remove this negative dynamic while keeping the competitive benefits of veTokenomics.
KLIMA holders are forced to vote against making the carbon market happen to get their distribution of C3. We want KLIMA holders to receive their maximum distribution of C3 and to use it to govern the carbon market.
We want to be carbon merchants... right?