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 3 core aspects of Klima 2.0's incentive distribution mechanism: a portion of Protocol value is distributed to liquidity providers, placing LPs alongside K2 and kVCM allocators as key contributors to system operation and governance.

This reflects a deliberate design choice: liquidity should be supplied by users, not expensive external 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. Carbonmark will provide this service shortly after Klima's launch.}

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• How it works: Tokens are de-allocated and withdrawn from the Protocol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.

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Liquidity Architecture

Klima separates liquidity into two distinct layers.

Carbon liquidity is fully internalised. The Protocol holds the carbon inventory, sets reference prices using transparent user inputs and supply-and-demand parameters, and evaluates carbon classes on a like-for-like basis. Consolidating carbon liquidity within the Protocol removes fragmentation across external exchanges and improves the accuracy and consistency of carbon valuation.

Economic liquidity is routed through kVCM, the Protocol’s standardised unit of account. All economic transactions (including purchases, sales, retirements, and governance allocations) flow through kVCM liquidity pools. This unified quoting convention reduces execution costs, minimises reliance on external intermediaries, and allows users themselves to supply the liquidity that underpins the system.

Why Standardisation Through kVCM Matters

Deep liquidity in kVCM pairs enables the Protocol to maintain an always-on, liquid market for carbon transactions. Standardising all economic flows through a single token simplifies routing, improves execution consistency, and avoids the need for fragmented liquidity across multiple carbon-token pairs.

Capital-Efficient Market Structure

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 lower structural costs.

• Value distribution: Low operational overheads allow value to be distributed rather than internalised, enabling users to provide the liquidity that supports the system. This upholds the Protocol’s core design principle: returning all value to participants rather than extracting it.

Market Prices and USDC

The only external asset that the Protocol maintains alignment with is USDC.

USD is the dominant reference currency in carbon markets.

The pairing of kVCM and USDC serves two purposes:

• Users can interpret Protocol-level carbon pricing (quoted in kVCM) in familiar USD terms.

• It reduces correlation between Protocol tokens and high-beta assets.