Ensuring Long-Term Liquidity: Rebalancing to Support Nature Carbon Tonne

Ensuring Long-Term Liquidity: Rebalancing to Support Nature Carbon Tonne

The Toucan Protocol provides infrastructure for a global carbon market operating on open blockchains. Carbon credits from respected registries can be transferred via the Carbon Bridge onto the Toucan Meta Registry, where they are represented as TCO2 carbon tokens tagged with their relevant attributes.

To aggregate liquidity and provide a useful carbon building block for DeFi and ReFi developers, TCO2 tokens can be deposited into Toucan carbon pools — depositors receive carbon reference tokens like BCT in return. Each carbon reference token in existence is backed 1:1 with a TCO2 token held in the carbon pool. To be deposited in a carbon pool and pass the gating criteria, a TCO2 token must have specific attributes.

A new carbon pool

In the coming days, Toucan will release public details for our next core carbon reference token: the Nature Carbon Tonne, or NCT. We value transparency, and we are releasing this statement now to share activity that has been coordinated to prepare for a successful launch of the Nature Carbon Pool.

The gating criteria defining which TCO2 carbon tokens are eligible to be deposited in the Nature Carbon Pool were recently finalized. The pool design was the result of a multi-stakeholder process that included a diverse group of Web3 and carbon market experts.

Value at risk

The Base Carbon Pool contained a large number of TCO2 tokens with an attribute set eligible for the Nature Carbon Pool. NCT will launch at a higher price than BCT, and this excess market value held in the Base Carbon Pool had not been priced into BCT.

This value represented by the NCT-eligible TCO2 tokens backing BCT was open to capture because of how Toucan’s Carbon Pools work. Pool token holders can redeem their tokens (like BCT) and select an equivalent number of TCO2 tokens held in the pool — the reverse of the deposit function.

This redeem functionality has been available since launch in October 2021. This is a permissionless method available on the BCT pool contract, and Toucan has never taken any action to block its usage. In fact, it has been used by other parties since the Toucan launch, and anyone with BCT could have redeemed and recovered the nature-based TCO2 tokens held in the Base Carbon Pool.

The unsecured value available in the Base Carbon Pool is capital that could support a healthy on-chain carbon market, and therefore work for the planet. It was important to avoid this value being lost to profit-driven actors, who would likely dump the NCT price after launch to take profit. This sell pressure would cause volatility in NCT price, which would likely have a negative effect on the price of related tokens like BCT and Klima. The risk of destabilization, along with the opportunity to secure this value for the benefit of the ecosystem, resulted in the following actions being taken.

Over the past days, a mass balancing activity was performed, coordinated by the Toucan Core team. This involved the withdrawal of a large number of NCT-compatible TCO2 tokens from the Base Carbon Pool.

To carry out this mass balancing, Toucan communicated with trusted liquidity partners. BCT tokens were acquired and redeemed for the NCT-eligible TCO2 tokens held in the pool. These liquidity partners are value-aligned actors who will donate the extra rescued value to the Toucan non-profit. This will be used to provide long-term liquidity for the NCT DEX pair.

We will soon publish our roadmap to decentralization, where we will detail our plans to progressively decentralize and transfer control of the Toucan Protocol to a DAO we have been designing.

How is BCT affected?

Carbon pool tokens have similar properties to commodities. Commodity prices trend towards the lowest production cost of creating new units of the commodity. This is reflected by the fact that BCT has been trading at a similar level to the lowest-price compatible credits on the off-chain voluntary carbon market.

This is important to note because we are committed to the success of our ecosystem partners — especially Klima DAO. Klima holds BCT tokens in their treasury, not the underlying TCO2 tokens. The mass balancing procedure caused a reduction in the supply of BCT, but had no effect on the value of BCT in the Klima treasury or on the open market.

Strategic transparency

We were not able to share that this mass balancing activity was being performed with the Toucan community before it was completed. By publicizing that this value remained available to anyone, the arbitrageurs we were defending against would have been tipped off. Revealing this free value in the dark forest would have resulted in the rescue being front-run. This value would have been captured to further personal wealth, not used to support a well-functioning, liquid NCT market.

Due to the sensitivity of this action and the value at risk, our plans were not communicated outside the core team and a trusted set ecosystem stakeholders, with whom a thought-out and values-aligned approach was crafted.

Our commitment

Most importantly, the rescued value will be used to benefit the long term health of Toucan and the broader ReFi ecosystem:

  • The recovered TCO2 tokens will be deposited into the Nature Carbon Pool when it launches.
  • All the NCT tokens received will be supplied to a decentralized exchange as launch liquidity.
  • The extra value recovered will be donated to the Toucan nonprofit in LP tokens and remain as long-term liquidity.
  • These LP tokens will eventually be transferred into the control of the DAO.

Towards efficient carbon markets

The Toucan Protocol solves major problems with the voluntary carbon market, including inefficiencies that result from market fragmentation and poor price signals. Providing this liquidity to the DEX will help ensure that the NCT market is efficient, which will benefit the Klima and Toucan ecosystems, along with the broader Web3 carbon market.

Above all, it will benefit the Earth, as healthy on-chain carbon markets provide a credible path to scaling the world’s carbon markets and financing more climate-positive projects.

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The Toucan team will host a community AMA in our Discord server on Monday, 31 January at 11:30am PST // 2:30pm EST // 8:30pm CET — please bring any questions there.

Edit: You can find a recording of this community call here, and a transcript here.

Edit: A reference to the dialog conducted with a partner in relation to the mass balancing exercise was removed after publication.