Liquidity Design in Klima
The following section explains the role liquidity plays in the system, how users interact with it, and why the Protocol’s architecture is built this way.
User-Focused Liquidity Design
Liquidity provision is one of the core user journeys in Klima: a portion of Protocol incentives is allocated to liquidity providers, placing LPs alongside K2 and kVCM lockers as key contributors to system operation and governance.
This reflects a deliberate design choice: liquidity should be supplied by users, not external rent-seeking intermediaries. By structuring incentives around user-contributed liquidity, Klima supports a decentralised, aligned, and sustainable liquidity base for the ecosystem.
The Role of Liquidity
Liquidity providers ensure that other ecosystem participants can execute their core flows, as outlined in the examples below.
1. Project Developers (Sellers)
They want to: Sell carbon credits to the Protocol at the real-time bid price
How it works: They receive kVCM directly from the Protocol, in exchange for carbon
The role of liquidity: Swap received kVCM for USDC to exit the ecosystem*
2. Carbon Buyers (Retirements)
They want to: Purchase carbon retirements at the real-time purchase price
How they do it: Pay kVCM in return for a retirement
When they use liquidity: Acquire kVCM for USDC to pay for the retirement*
*Note: USDC <> kVCM liquidity pool routing may be handled automatically by third-parties to reduce friction for users who are unfamiliar with Web3 wallet management and custody.
3. Carbon Governance Participants (Depositors)
They want to: Influence Protocol carbon parameters
How it works: Deposit kVCM or K2 into the Protocol to steer carbon pricing and capacity
The role of liquidity: Enables users to acquire kVCM or K2 to allocate toward and vote on carbon classes
4. Governance Participants Exiting
They want to: Exit their principal position, or earned incentives.
How it works: Tokens are de-allocated and withdrawn from the Protocol
The role of liquidity: Swap kVCM or K2 for USDC to leave the ecosystem
If liquidity is insufficient, users experience higher slippage, unstable execution prices, and reduced ability to transact. Maintaining deep liquidity is therefore critical for the Protocol to perform its functions.
Liquidity Architecture
Klima uses kVCM as the unit of economic exchange across the ecosystem.
All carbon transactions with the Protocol are denominated and settled in kVCM, establishing a single, standardised pricing and liquidity layer for the market.
Why standardisation matters
Deep liquidity in kVCM pairs enables the Protocol to maintain an always-on, liquid market for carbon trades. This simplifies routing, improves execution consistency, and avoids the need for fragmented liquidity across multiple token pairs.
Capital-efficient market structure
The design, using kVCM as the primary liquidity token, allows the Protocol to operate capital-efficiently, without relying on:
order-book infrastructure
AMM-based carbon liquidity
large amounts of borrowed or rented external TVL
Resulting outcomes
Scalability: The Protocol can scale carbon markets without needing to raise or borrow significant external capital (i.e., dollars). This supports a more competitive ecosystem with reduced structural costs.
Value distribution: Lower operational overheads allow value to be distributed rather than internalised, creating a pathway for users to provide the liquidity that underpins the system. This ensures the Protocol can adhere to its core design principle: returning all value to users rather than extracting it.
Market Prices and USDC
The Protocol maintains alignment with USDC because USD is the dominant reference currency in carbon markets. This serves two purposes:
Users can interpret Protocol-level carbon pricing (quoted in kVCM) in familiar USDC terms
It reduces correlation between Protocol tokens and high-beta crypto assets
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