CRISP-M and CRISP-C: Collateralized Basket Tokens (ERC-20)
Last updated
Last updated
CRISP-M, CRISP-C and all other CRISP Scored Pools are Collateralized Basket Tokens. CRISP-[X] is the way Solid World calls its tokens which function as the liquidity entry point for CRISP-scored carbon projects.
A collateralized basket is a collection of individual, specific (but similar, as dictated by Solid World) assets that are bundled together and mediated through the creation and destruction of 'collateralized basket tokens' (CBT). As a result, this CBT carries the right to remove assets from the Basket based on a mathematical equation explained below.
Because there is necessarily a larger market cap of CBT than any individual forward clip within the collateralized Basket - the commodity tokens can more easily be bought and sold on exchanges (both decentralized and centralized). This approach can create deep, liquid markets and has been successfully demonstrated as a practical solution to bootstrapping a market.
The forward clips represented by the ERC-1155 tokens (as described in the last chapter) are not necessarily liquid on their own - a problem endemic to the Voluntary Carbon Market (VCM) in general but amplified in forward offtake markets. Solid World solution to this is inspired by Toucan's approach to pooling on-chain certified carbon credits. However, the forward markets introduce additional complexities, which inform how Solid World approaches the design of commodity pools for forward carbon agreements.
In Solid World's protocol - Forward Clips (ERC-1155 token referred to as FC in this section) can be traded for Collateralized Basket Tokens (ERC-20 token referred to as CBT in this section) of the appropriate band.
Understanding the Foward Clip to Collateralized Basket Token conversion ratio
CBTs are designed to approximate the value of that band of forward tons nearing certification. Each CBT is backed by at least one ton from an underlying FC. Each FC reflects one ton of forward-contracted carbon from a project-vintage that will be delivered around an agreed-upon timeframe. These CBTs can be exchanged for FCs with a multiplier determined by the Basic Value (BV). BV is calculated as:
where D is a time appreciation rate determined by a free-market mechanism described below. N is the amount of time the project is from the delivery event. The depositor of FCs to CBTs is entitled to the amount of SATs exchanged multiplied by Basic Value, less the amount Solid World takes as an infrastructure fee. Within this system, the following equation for circulating CBT tokens is enforced.
As it should be apparent, a proportion of CBTs is left unminted. This proportion is referred to as the Forward Value (FV). FV can be calculated as follows:
Over time, the FV will be realized through regularly re-pricing the underlying FCs (since N, as defined in the BV equation, is monotonically decreasing) and minting new CBTs to reflect the increased value of the commodity pool. These new CBTs are then used as incentives, as described in the chapter about Liquidity and Rewards.
It should be noted that at any given moment, the sum of Forward Value and Basic Value is 1, guaranteeing that there are never more CBTs in circulation than the number of FCs in the appropriate collateralized Basket. Additionally, there are never more CBTs in circulation than the sum of all Basic Values of FCs in the corresponding Basket.
Continuous auction mechanism
There is a need to find an appropriate on-offer time appreciation rate () without direct involvement from third parties. If Solid World was actively involved in deciding what parameters should be applied to every Forward Clip coming into the system, it would be arbitrary, centralized and potentially problematic.
In order to open the discovery of this parameter up to the free market - we have developed a custom continous dutch-auction style mechanism to decide this number. On a high level - if there is a lot of demand for liquidity (ie Suppliers are bringing in new supply and selling it), the offered rates gradually grow, and the throughput at those rates grows as well to capitalize on the opportunity. If there are periods of low demand for liquidity, offered rates will go lower. If this happens, throughput will also decrease, limiting the amount of negative effects that the rates instead of the price would internalize.
The math behind this is explained in its own subchapter for those interested. It can be found here: Continous Auction Specification
At any moment, Market Participants may remove FCs from any commodity pool by paying a number of CBTs based on the associated Basic Value plus a redemption fee. At the decommodification event - the BV is burned, and the redemption fee is sent to Solid World treasury. In return for the payment, the associated FC ownership is transferred from the protocol's Collateralized Basket to the Market Participant.
Every week - all FCs' Basic Values are recalculated. As time has progressed, the distance from the delivery date (N) has decreased - the Basic Value has increased. Collateralized Baskets that contain these FCs can therefore mint associated CBTs in the same amount as the underlying asset's BV has increased.
This gain in value is used to pay Liquidity Rewards rewards to the Liquidity Providers. In short - Liquidity Providers earn the value represented by the underlying assets in the commodity pool nearing their delivery date. This provides the protocol with a sustainable way to incentivize liquidity by having the FCs come with their incentives as determined by the current time appreciation rate on offer (D).
The VCM has a significant spread when it comes to pricing carbon offsets. On one end - there are credits originating from renewable energy projects that may trade for as low as 2$/t CO2e due to inherent low additionality. On the other end, we have projects like Climeworks, which uses Iceland's supply of geothermal energy to bind carbon directly from the air and shunt it deep underground to store it for thousands of years. These credits have production costs higher than 300$/t CO2e.
Considering this - it should be clear that not all forward clips could reasonably be contained within one Basket - as the disparity in price would only make it attractive to the cheapest forwards the Basket would accept. Because of this, Solid World plans to - over some time - deploy multiple pools with narrowly defined acceptance criteria - a practice we refer to as narrow-banding. Though this will potentially make each Basket less liquid - it will provide a clear price signal of what that band of credits is valued at and retain the ability to attract more similar credits into the pool.
