Thoughts: Klima DAO

While 99% of DAOs might not even exist yet, let’s take a look at one that does—and that’s solving an immediate problem.

Klima DAO (who you can also find on Medium) launched today, and is already one of the most exciting ventures to come out of the web3 boom of the last 12 months. In this piece, I’ll walk through Klima’s goals, my thoughts on that mission, and what I think their prognosis is going forward.

What is a DAO? How does Klima fit?

First, let’s define a DAO. Jay Drain Jr. does an excellent job of defining DAO’s DAOs among other web3 terms in his web3 starter pack (which is a must-read if you have any interest in web3 whatsoever).

DAOs (Decentralized Autonomous Organization) is a mechanism that enables online communities to form and coordinate economically. It is a new kind of digital and economic entity that runs as code and is owned and controlled by its members. DAOs make it possible for an online group with members from anywhere in the world to pool capital and hard-code rules — entirely in software — for how that capital will be managed and deployed. Those rules are then enforced by the underlying blockchain.

Essentially, DAOs are a way to equitably govern a process or service using a set of rules made by the collective. Currently (in what can be considered their infancy), most DAO communities congregate on Discord (link to Klima discord). In Klima’s case, the community has developed a carbon-backed digital currency and algorithmic climate protocol to help address the imminent threat of irreversible climate change.

The Mechanics: How it works—From Klima.

Klima Treasury: The treasury is the center of the black hole. Every KLIMA token is backed by 1 tonne of verified, tokenized carbon reduction or removal. These can remain locked in the treasury indefinitely, or be sold to balance the price of KLIMA.

Carbon Credits: KLIMA is a vacuum for carbon. The treasury only accepts certified, third-party verified emissions reductions from reputable carbon markets (sometimes called ‘carbon offsets’ or ‘carbon credits’). Each is tokenized in a transparent and traceable way to prevent double-spending or double-offsetting. These credits are sucked off the market and absorbed into the system through a Bonding mechanism. A note on bonding:

Bonding is how carbon enters the treasury, and new KLIMA is created. Anyone can buy KLIMA at a discount by bonding carbon units and LP shares over a set vesting period.

Staking: Carbon comes in, value comes out. Holders of KLIMA can earn compounding interest on their KLIMA by staking. Staking encourages long-term holding of KLIMA, and allows participants to benefit from the rising price of carbon. As the protocol generates a profit through Bond sales, this profit is allocated to everyone who has staked KLIMA. A note on staking:

Staking basically involves locking up a portion of your crypto for a set time, similar to a bank deposit, to help maintain a blockchain and earn more cryptos as a reward.

An Analysis + Prognosis

I’ll be opining on Klima using my evaluation frameworks for startups because, in many ways, DAOs are startups. Note that a separate piece on my evaluation framework will be published soon. Anyways, let’s jump in.

At a high level, I like to think about why people come, “connectors” that make them stay, and finally, why users pay for the product/service.

Why do users come?

I almost liken this to supply and demand in economics. In this case, demand is defined as the problem/pain point or initial conditions, while the supply is the solution or offering.

Problems

“Good” problems or pain points are usually characterized by a variety of things, but for the sake of this piece, we look for the problem that Klima is solving to be representative of at least several of the following:

• Size: “Good” problems are clear and popular; obvious if you will. While everyone might place a different weightage on a given problem, effective products or solutions address pain points that a large group of people has.
• Urgency: “Good” problems need to be fixed, and fixed now. This is a note from my time on the investor side—when the need for a solution to an urgent problem is high, the price rises along with it. From a VC point of view, you would want to invest in a venture that has the potential to turn massive revenue as a product of how in-demand or urgently needed the solution or product you’re evaluating is.
• Imperative: “Good” problems should, in some way, be regulated or addressed by some large-scale government or private policy. This is akin to the last point on urgency—when a problem is regulated and perceived as imperative, the value of a solution in that vertical rises significantly.

Klima fits the bill as far as “good” problems go. Climate change is a real problem—one that is faced by not only people in the U.S., but all 7.5 billion+ humans in the world. Similarly, it’s an urgent problem. Close to 300 major global corporations have made 0 emission pledges over the past 12–18 months. These pledges include major corporate greenhouse gas emitters that require transformative solutions to make net zero a reality, including BP, Iberdrola, Shell, Total, Maersk, Rio Tinto, Daimler, Nestle and Oneworld. Finally, the problem is imperative. The United Nations (UN) Secretary-General has labeled climate change ‘the defining issue of our time’. In response, the world has increasingly committed to ‘net zero’ greenhouse gas emissions. The 2015 Paris Agreement saw world leaders agree to limit a global temperature rise by the end of the century to well below 2°C, and to pursue efforts to limit the temperature increase even further to 1.5°C.

In short, the problem is clear and important. Klima checks the problem box!

Solutions

Again, a full piece with a detailed look into my evaluation process will be published soon. For the sake of this piece, we define “good” solutions as having, at the very least, some of the following characteristics:

• Intuitive: The solution can easily communicate the problem it is trying to solve. The problem being solved can be comprehended in a matter of minutes with specificity and the simplistic of manners. For this to happen, in most cases, the founders have generally experienced the problem themselves. For example, the founders of Uber experienced the difficulty of finding a taxi in San Francisco themselves, or the founders of Airbnb experienced the challenge of making cash as students while their apartment remained underutilized.
• Defensibility: What differentiates the solution? Is it novel? Does it more efficiently address the problem than competitors? How will economics change over time? What drives differentiation — price, service, brand?
• Viral Tendencies/Scalability: If the product has been launched, then its set of customers was diverse and outside the founders’ immediate network. Personally (especially for SaaS products), I’m particularly curious about the communities in which it was scaled. The more diverse and non-related the initial users are from the founders’ network, the more credible the traction of the MVP.

Evaluating the “goodness” of Klima as a solution is a little bit harder given it’s novel and currently non-traditional identity as a DAO. I’m inclined to say that Klima is a good solution. With a basic level of knowledge regarding web3 (hopefully the above information in this piece), the solution Klima proposes is, in fact, fairly intuitive. At the very least, it is clear that the goal is to incentivize a reduction in carbon emissions through a new altcoin. The defensibility is there, as well. DAOs are a new way to address regulated problems, and Klima is the first one to be tackling climate tech. It is novel and also a progressive way to deal with a key issue. Finally, scalability. The Klima discord is sitting at ~30,000 members as of the time of this article, having grown from 5,000 to 10,000 in a day, then 10,000 to 30,000 the next.

Competitive Advantages/Why do they stay?

A summarized version of why people stay (via my evaluation method) is as follows:

• Customer acquisition: Generally speaking, running campaigns on social media such as Facebook and showing CAC and LTV to investors as quantitative proof of how the startup is poised to scale, is generally an unsustainable acquisition channel and a weak argument for successful growth. If a startup is to become a viable business a few years down the line with +$100M in revenue, it will certainly attract several competitors and this advantage will dwindle fast, especially if the competition has deep pockets. I personally prefer to look for growth by word-of-mouth, organic, and viral channels of traction.
• Timing: In general, for the timing to be right, a startup needs to catalyze energy from early customers, early employees, angel and seed investors, and the media and other analysts that cover these frontier ideas, to gain social momentum for its mission.
• Network effects: Reasons that will make the startup more difficult to be defeated by competitors as it grows and scales. Investors will look for indicators that point to the fact that the startup will become more difficult to fail or be threatened as it scales. For example, Facebook is a company with strong network effects, while Uber — only its ride-sharing services as a standalone business — has weak network effects. NfX ventures have formulated a network effects map that outlines 14 types of network effects and their strengths, and entrepreneurs are advised to fully understand them when working on their ideas.

In Conclusion

It fits. Klima is addressing a major problem with an exciting and targeted solution while also maintaining an edge over competitors via the factors mentioned above. Look for Klima to grow in size alongside other DAOs in the web3 boom!

I’m still early in my own career as an investor, and I strive to learn more every day. If you’re working on a startup (or are an investor) yourself, please reach out and offer any feedback! How does it apply to your own business; e.g., How would you answer these questions? Are there edge cases where this framework breaks down or leaves something out? As always, please reach out at shri@live.unc.edu