Protocol overview

See how the Klima Protocol uses an onchain carbon inventory and dual-token system to generate carbon pricing signals, facilitate credit intake and retirement, and distribute protocol incentives.

For the mathematical specification of the Klima Protocol, see the white paper. For the technical specification, see the code on GitHub.

Participation in the Klima Protocol does not confer ownership, profit rights, redemption rights, or claims on protocol-held carbon. Carbon credits handled by the protocol may only be accessed through irreversible retirement.

Introduction

The Klima Protocol prioritises liquidity, transparency, and coordinated participation across the carbon markets, addressing the fragmentation and opacity common in today’s OTC-dominated environment.

To enable coordination and align participation over time, the protocol distributes protocol incentives according to predefined, transparent rules to participants who:

• Provide liquidity: supporting efficient execution for carbon suppliers and retirement users; or

• Contribute governance signals: indicating preferences across different carbon classes.

User signals inform protocol parameters governing pricing, eligibility, and intake limits for supported carbon classes.

Carbon suppliers may supply eligible credits to the protocol when the quoted execution price meets their preferences.

Carbon credits handled by the protocol are made available exclusively for retirement. The protocol does not facilitate secondary trading of unretired carbon credits.

Incoming supply and retirement demand shape the protocol’s carbon inventory: a live, onchain reflection of market activity that determines which credits are available for retirement at any point in time.

In practice:

• The Klima Protocol operates as an always-on, rules-based counterparty for both supply-side and demand-side carbon market participants.

• The composition of the carbon inventory is shaped via token-based signalling, not discretionary management.

• Liquidity providers supply the liquidity required for the protocol to:

  • support carbon retirement execution; and

  • enable participants to acquire or dispose of kVCM as needed for protocol interaction.

The state of the carbon inventory and applicable pricing parameters are visible onchain at all times, allowing participants to observe protocol conditions and adjust signalling accordingly.

The Klima Protocol is open infrastructure. Carbon market participants may interact directly with the protocol, integrate its functionality into applications, or build new systems on top of it.

The sections below explain the protocol’s components step by step: its carbon inventory model, governance and liquidity layers, incentive system, and the kVCM and K2 tokens.

Carbon inventory

Carbon credits are inherently heterogeneous (e.g. geography, registry, methodology, technology, vintage), making comparison and pricing difficult without standardisation.

The Klima Protocol applies carbon classes as its standardisation mechanism.

When an eligible carbon credit is supplied to the protocol, it is assigned to a carbon class. Each carbon class represents a grouped set of credits sharing defined characteristics such as technology type, methodology, certification standard, geography, or vintage.

Carbon classes are dynamic. They may evolve, expand, or be deprecated over time based on protocol parameters and market activity.

Within the protocol, credits belonging to the same carbon class are priced identically. When a buyer retires carbon via the protocol, the quoted price per tonne reflects the applicable carbon class parameters at that time. Ensuring that carbon classes remain appropriately priced is achieved through the protocol’s governance layer.

For the sake of clarity, the following sections do not differentiate between carbon projects but only between carbon classes.

Governance layer

A central feature of the Klima Protocol is its dynamic governance framework, which combines observable market activity with participant-provided signals to inform execution parameters in real time.

This dynamic pricing is achieved by three design choices.

1. A standardised unit of account

The protocol uses its native kVCM token as the unit of account for all protocol-facilitated carbon activity:

• Carbon execution parameters are expressed in kVCM terms.

• Carbon suppliers receive newly-minted kVCM when eligible credits are supplied to the protocol.

• Carbon retirement requires the destruction (“burning”) of kVCM corresponding to the retired credit, resulting in a retirement certificate.

2. Supply and retirement dynamics

Pricing parameters for each carbon class are influenced by the quantity of credits currently present in the protocol’s carbon inventory.

Carbon classes with lower available inventory relative to retirement demand are associated with higher amount of kVCM being required to execute transactions, while classes with greater inventory depth are associated with lower amounts. This anchors execution to observable supply and retirement activity.

3. Participant signalling

Holders of kVCM may lock tokens for defined periods to generate governance signals through "allocations".

Allocating kVCM to a specific carbon class increases the relative price associated with that class. Signal strength is proportional to the quantity of allocated tokens.

This mechanism ensures that participant influence scales with demonstrated commitment to governance, without conferring ownership, profit rights, or claims on protocol-held carbon.

Liquidity layer

For the protocol to function reliably, participants must be able to acquire or dispose of kVCM without excessive slippage.

This is achieved through a decentralised liquidity layer, primarily involving kVCM↔USDC conversion.

Liquidity providers deposit kVCM and USDC into decentralised liquidity pools and make this liquidity available for protocol interaction. In exchange, liquidity providers receive a share of conversion fees generated by pool usage.

This liquidity is available continuously, enabling the protocol to support carbon supply, retirement execution, and governance participation at all times.

The Klima Protocol does not rely on any centralised entity to perform governance, provide liquidity, or source carbon. All such functions are performed by participants interacting with open, onchain systems.

Incentive system

To encourage sustained participation in governance signalling and liquidity provision, the protocol distributes native token incentives according to transparent, predefined rules.

When participants lock tokens for governance signalling or liquidity provision, those tokens become unavailable for transfer for a defined period.

Incentive distribution follows two principles:

1. Amount and duration

The total quantity of incentives distributed over time is influenced by the amount of tokens locked and the duration of locking. Longer and larger commitments typically receive proportionally greater incentive allocation, according to protocol rules.¹

_{¹ The quantity of incentives as a function of commitment time is given in Section 3.1.1 of the Klima Protocol white paper.}

2. Relative participation

Incentive allocation between governance signalling and liquidity provision adjusts over time based on the proportion of tokens locked in each function. This balances participation across protocol layers to maintain system functionality.

K2 token

While kVCM governs carbon pricing, the K2 token provides an additional mechanism to signal system capacity and stability.

Participants may lock K2 tokens with short commitment to allocate them to a carbon class.

Allocating K2 reduces the difference between intake and retirement terms for a given class. As a consequence, the protocol has the capacity to execute either more purchases or more retirements from that carbon class before its relative price significantly changes.

This allows participants to collectively signal preference for higher or lower protocol capacity across different carbon classes without introducing discretionary control or profit entitlements.

Aerodrome liquidity pools

The protocol’s liquidity layer is implemented using infrastructure provided by Aerodrome, the primary decentralised exchange on the Base network.

Participants providing liquidity deposit pairs of tokens (USDC, kVCM, or K2) into Aerodrome pools and receive liquidity provider tokens (“LP tokens”) representing their positions.

Liquidity providers receive a share of conversion fees generated by pool usage. Liquidity provider positions may optionally be locked within the Klima Protocol, making them eligible for protocol incentives according to predefined rules.

Due to its dual-token design, the protocol primarily relies on:

• A kVCM↔USDC pool supporting general protocol interaction; and

• A kVCM↔K2 pool supporting governance-related signalling activity.