Market Dynamics

Purchasers of tokenized carbon tonnes are responsible for "pricing in" carbon to the system. Holders of AIR have exposure to a new type of money, backed by these assets.

The market value of these tokenized offsets (e.g. BCT, MCO2) over time will be dictated by supply and demand of the underlying offsets composing the offset token; as demand for carbon offsetting at the macro-level increases, and the quality of carbon offset projects increases, the market value of carbon offsets will also increase. All extrinsic value (i.e. value of AIR - value of carbon assets) is new wealth created.

Player Goals

Stakers care primarily about their AIR balance.While price is important in valuing their AIR and indicating the market's perception of AIR DAO's utility and impact, it is not the main goal in the shorter-term. AIR is a long-term play, and maximizing holdings is the objective of stakers.

A smart staker cares about the long-term price exploration of tokenized carbon offsets, as well as the quality of the offsets that flow into the ecosystem.

Bonders care primarily about the On-chain Carbon Tonne supply and their AIR balance. Bonders purchase AIR at a discount to market price by relinquishing carbon assets or liquidity provider (LP) tokens to the treasury to be locked away indefinitely. Their impact on the carbon market and AIR returns from bonding are proportional to the amount bonded.

In the case where demand for bonds is low relative to capacity, purchasing carbon assets or providing liquidity and bonding for new AIR will be cheaper than purchasing AIR on the free market.

Bonding is a much more active strategy, as you must consider the trade-off between bonding carbon assets or LP at a specific discount vs. buying AIR directly and staking. Since bonds vest linearly over 5 days, calculations are typically necessary to quantify if the discount is worth it relative to simply staking AIR.

Underlying Dynamics

The initial state of BCT token is at intrinsic value, determined by the cost of the carbon in the pool.

The default state of the network and AIR is also at intrinsic value. After some long period of inactivity, price will always return to the intrinsic level. Contractions are conceivably only triggered by short-term liquidity crises. AIR holders have a guarantee that price will come back above intrinsic value eventually, so the only sellers below should be those who need a short term exit and are willing to take the extra loss.

Expansions can be triggered by an increase in staking or bonding.

An increase in the percentage of AIR staked will generally be preceded by purchases of AIR from the market. That increases the price of AIR, which allows the protocol to sell bonds at a higher premium and increases rewards (in AIR) for stakers. That should serve to bring in more stakers and continue the cycle as long as there is demand for the carbon offsets backing AIR.

Meanwhile, the rising price of AIR increases the bond discount, which causes more demand for bonds and leads to more assets being bonded into the treasury per AIR minted. An increase in LP bonded to the treasury from a rising AIR price will also generate additional liquidity, which improves the protocol's ability to facilitate large transactions. This positive price-liquidity feedback loop should serve to create sustainable expansionary periods. However, it works both ways. Falling demand reduces the premium on the AIR token which makes bonding less efficient.

This slowdown in the growth of bonds, particularly carbon asset reserve bonds, could lead to a reduction in staking rewards which could cause sell pressure and further reduce the token price. This is an unavoidable fact of systems like this; even the most established (i.e. Bitcoin) are no stranger to significant declines after periods of expansion. But we can work to mitigate busts. Firstly, the anticipated growth in demand for carbon offsets is expected to ensure that there is demand for AIR and the intrinsic value will trend upwards.

AIR holders have a guarantee that price will come back above intrinsic value.

In the case that demand stagnates, the protocol's reserves can step in to catch the market when velocity turns too far to the downside. It does so through forward guidance: the fact that the protocol will buy lowers risk the lower we go, which can mean we don't have to.

In the long-term steady state, AIR is expected to trade around intrinsic value (IV) of 1 tonne of tokenized carbon offsets. Contractions are conceivably only triggered by short-term liquidity crises. AIR holders have a guarantee from the treasury that price in carbon offset terms will come back above intrinsic value eventually (likely implemented via inverse bonding), so the only sellers below IV should be those who need a short term exit and are willing to take the extra loss.

Inverse Bonding With a Diversified Treasury

Since the treasury holds multiple types of tokenized carbon with differing market prices, but each AIR is backed by 1 tonne of carbon regardless of type, the treasury is incentivized to start buying back AIR via inverse bonds if AIR is trading below any of the individual carbon tonnes in the treasury.