For me as a non-crypto, non-defi, non-technical person, it has always been tough to keep up with the commonly used terminology and modus operandi of the financial / operating model part of the DAO. It has taken me an embarrassingly long time to figure out what I have figured out so far (which isn’t all that much) of the drivers of the DAO.
This is an attempt to depict the way I currently understand it by using simple accounting principles and financial statements. This would be useful for those of you, who, like me, find it easier to deal with double-entry accounting than code :)
Let’s get started.
Below is Klima’s balance sheet on the 26th March 2022. Or, at least, something that resembles a balance sheet since doing a proper one is not super meaningful I think.
In accounting, a balance sheet is a static view of a company’s assets, liabilities and owners’ capital.
Hint for the eagle eyes among you: yes, the total assets and total capital DON’T balance, but that is ok (more on that later).
In short, you will recognize many of these elements. I took all of this from Dune (here and here).
Balance sheet items
On the left, we have our treasury assets (CC), followed by the LP tokens owned by the DAO and, finally, the DAO wallet. The sum of these three gives us our total assets.
On the other side, to match those, we have the circulating KLIMA, the KLIMA currently vesting (as a result of bonding) and one extra section called Minting Potential.
This last one is important. It represents the “reserves” in carbon terms, which are available for minting KLIMA based on the current APY and up to 1:1 carbon backing. These results are the direct result of the $ premium of KLIMA vs carbon (represented by the bonding ratio of Klima vs the different carbon assets). This premium has historically been massive, allowing the DAO to build out this huge growth potential and pay the very high APY in the initial months.
What needs to balance?
You can observe that the Total CC line number in terms of tons matches on both sides, which is important because1 KLIMA = 1 ton and the CC (called RFV before) is hence the upper limit for minting new KLIMA.
Finally, we have the same DAO wallet item because what is cash on one side of the balance sheet is something like “retained earnings” on the other. Note that there is ~$3.2m in this wallet, which is excess reserves held in USDC aimed at strengthening the liquidity pools in the future.
And what doesn’t…
Here comes the major discrepancy: at the bottom of this right section, we have the total issued KLIMA and the market capitalization. For the accountants among you: we actually can make the two sides match, but we have to account for the daily (or even epoch) changes in bonding prices. I just don’t see what value this would add at this stage (shout if I’m wrong please).
Helping us with a few metrics.
By keeping it in this imperfect form, we can more easily compare the Market Cap to the Book Value of assets. For example, we can easily see that:
Market Cap / CC = 2.06x
Market Cap / TTC = 1.06x
Market Cap / LPs = 2.18x
Market Cap / Total Assets = 1.00x
Another note: we have accumulated ~$10.5m in trading fees across all LPs, which are included within the LP balance sheet values and can’t easily be taken out. From a treasury perspective, the accumulation of fees is viewed more as an increasing mark-to-market of the LPs.
So if you want another simple metric, Market Cap / Total Acc. Fees = 8.3x
The Profit and Loss Account
The balance sheet is a static view, however, so we need to also understand the flow of funds. I will use a simple calculation, which looks like a Profit & Loss Statement. It is for one day — 27 March 2022.
The comments should be self explanatory, but the bottom line is that we can imagine the revenues and costs of the DAO in broad carbon & KLIMA terms and attribute them to the respective balance sheet items in order to get to next day’s static view.
Resulting in a new balance sheet
The balance sheet for the next day looks like this:
We now need to allocate the numbers from our improvised PnL to the improvised balance sheet.
Asset side change
The Gross Revenues is the number that is added to the CC (distributed across BCT, MCO2 etc.), leading to an increase in CC and TTC in carbon terms (and also in $ terms, since the price of KLIMA went up on that day).
The “Mint for DAO” is the DAO wallet revenue and goes on both sides into the DAO wallet item (increases the number of KLIMA in this wallet).
Capital side change
If you sum up the three items from the PnL that have a “cost” label, you’d get the daily change in “Total issued KLIMA”.
Another important number to keep track of is the change in minting potential, which is driven by the relative change in CC and issued KLIMA for the day. In this case, there is an increase of 7915, which means that the growth potential has been extended a bit by this day’s operations. A reduction in this number, for example in case the “gross profit” was negative, means that the potential for new KLIMA issuance can be reached earlier given the current APY would suggest. In balance sheet terms, you can think of this as a “liability” (not a great description) towards stakers and also a gauge for potential expansion of the DAO.
And updated daily metrics…
The market cap has also changed on the day, which gives us the new daily metrics, which have increased by ~8%:
Market Cap / CC = 2.22x
Market Cap / TTC = 1.14x
Market Cap / LPs = 2.35x
Market Cap / Total Assets = 1.07x
Market Cap / Total Acc. Fees = 9.3x
Spotlight: Backing Ratio
An important metric that we can derive from the PnL and BS is the backing ratio (CC / Issued Supply). This ratio is a function of the relative movement in CC and KLIMA issued. In our case, even though the “gross profit” is positive, meaning there was an extension of the carbon backing, the backing ratio of CC/Issued KLIMA fell from 3.19x to 3.17x. This is because the change in CC was less in % terms vs. the change in KLIMA issued. This allows us to track what the DAO needs to achieve on a daily basis in order to keep and expand the backing ratio.
Using the PnL example from above, the DAO would need to have received 2.5x more carbon on that day in order for the backing ratio to be on par with the previous day.
Such is the nature of the operations. The reason is that the ratio depends on the relative development of issued KLIMA and the CC, which are quite different nominally so any % change needs to account for that. In practical terms, this would mean that instead of a blended bonding ratio of ca 3.8, we’d need to bond at a blended bonding ratio of ~10, which would require a significantly higher $ price of KLIMA vs BCT and MCO2.
Many DAO operations can actually be represented via book keeping operations: trading, bonding, offsetting, vesting pKLIMA etc.
Why is all of this important?
Because we now have individual building blocks (trading, bonding, offsetting etc.) and products — Klima Infinity, which is a combination of such building blocks — purchasing, bonding, selling, offsetting so we need to understand how these mechanics affect the DAO’s operations and metrics.
Below is a short summary of Klima Infinity’s building blocks with their respective mechanics. I have indicated which actions affect the balance sheet and how (this is not all of them, just the main ones).
When looking at the products from this perspective, Klima can always make sure that these are aligned with the treasury management, product strategy and KPIs.
I hope the above sheds light on the mechanics of the DAO from a slightly different perspective and helps to further the understanding of these fascinating new organizational structures.