Why Klima Protocol Uses Incentives

Carbon markets have a coordination problem. Buyers, suppliers, brokers, registries, and standards bodies all participate in the same market, but the value generated by that participation tends to flow toward the intermediaries that sit between them rather than toward the people doing the underlying work. Project developers carry the cost and risk of generating credits. Buyers carry the cost of finding the right credits at the right price. The brokers, OTC desks, and procurement specialists in the middle capture margin from the friction between those two sides. The market functions, but it functions in a way that rewards intermediation more reliably than it rewards participation.

Klima Protocol is built around a different premise. The protocol's job is to coordinate carbon supply and retirement demand under transparent rules, with execution rates and capacities set by the people participating in the system rather than by discretionary intermediaries. To do that, the protocol needs two things to be true at all times: there has to be sufficient liquidity in the right places for participants to enter and exit the system without friction, and there has to be a credible signal from participants about which carbon classes the protocol should be sourcing, at what rates, and at what volumes.

Incentives are how the protocol obtains both. But, they are not the point of the protocol. They are a means to an end, the end being a carbon market that is organised around participation rather than intermediation. This piece walks through the two layers of incentives Klima uses, how each is calculated and distributed, and why we think this design is the right tool for the job.

The market-structure problem incentives are solving

Before getting to mechanics, it is worth being precise about what the protocol actually needs from its participants. There are two distinct functions that have to be performed continuously for Klima to operate as carbon market infrastructure.

The first is liquidity. The protocol mediates all carbon activity through two tokens, kVCM and K2. kVCM is the unit of account for carbon intake and retirement, and K2 is the secondary token used to modulate capacity. For carbon suppliers to deliver credits and exit to dollars, and for carbon buyers to acquire credits and retire them, both tokens need deep, continuous markets against USDC and against each other. Without that depth, suppliers cannot reliably translate their credits into dollar terms, buyers cannot reliably retire credits at predictable prices, and the whole system stalls.

The second is governance over execution. Carbon is not a uniform commodity. Different carbon classes (renewables, nature-based, engineered removals, and so on) have different supply dynamics, different demand profiles, different price expectations, and different quality considerations. Someone has to decide, on an ongoing basis, which classes the protocol should hold in inventory, at what relative weights, and how much capacity each class should have to absorb new supply or new retirement demand without execution terms swinging around. In the traditional market, those decisions are made by procurement teams and broker relationships behind closed doors. In Klima, they are made by the participants who have committed tokens to the system.

Both of these functions produce a public good for the protocol. Incentives exist to direct the protocol's emissions toward the participants who perform them, in proportion to the commitment they make.

Layer one: liquidity incentives

The first layer of incentives is directed toward liquidity providers in the protocol's two core pools, kVCM/USDC and kVCM/K2. These pools sit on Aerodrome's DEX infrastructure on Base and are supplied by third parties, not by the protocol itself. A participant who provides liquidity deposits a paired position into one of the pools, optionally locks the resulting LP position with the protocol for a duration of their choosing, and becomes eligible for a share of the kVCM and K2 incentives the protocol emits.

The size of an individual position's incentive eligibility is determined by two factors: the position's relative share of the pool, and the duration of the lock. The rates and distributions are variable, based on Klima's algorithms, with the prevailing rates and current distributions published at klimalabs.com , and the underlying formulas are set out in the whitepaper for anyone who wants to work through them in detail. The point for this piece is the structural one: the protocol does not rely on its own balance sheet, on a designated set of market makers, or on OTC intermediaries to make markets in its tokens. Liquidity is supplied by participants, and the protocol's emissions are directed toward those participants under predefined rules.

This matters for two reasons. The first is that it makes the protocol scalable in a way that balance-sheet-dependent designs are not. The protocol does not need to raise capital to deepen its markets; it asks participants to commit theirs, and emissions are directed accordingly. The second is that it keeps the operation of the liquidity layer inside the participant base rather than in the hands of a privileged set of intermediaries. Anyone with USDC and a willingness to lock can become part of the liquidity layer of an onchain carbon market, on the same terms as anyone else.

Layer two: token lock incentives

The second layer of incentives is more distinctive, and it is the one that does the most to differentiate Klima from anything else in the space. It directs emissions toward participants who commit tokens to govern how the protocol sources and prices carbon.

Participants who hold kVCM can time-lock it. Time-locked kVCM is allocated by the holder across the protocol's carbon classes, and those allocations, aggregated across all participants, inform the protocol's execution rate for each class. In other words, the relative weights that participants give to different carbon classes through their kVCM allocations determine how the protocol issues kVCM when suppliers deliver credits, and how it burns kVCM when buyers retire them. Time-locked kVCM is eligible for a base accrual of new kVCM and a share of K2 incentives.

Participants who hold K2 can user-lock it for a minimum of 24 hours and allocate it across carbon classes to express a view on capacity. Higher K2 allocation to a class increases the protocol's ability to absorb new intake or retirement activity in that class without execution terms swinging materially. User-locked K2 is eligible for a share of kVCM incentives and K2 incentives.

Together, these locked positions are what we call allocations. They are the mechanism through which the protocol resolves the subjectivity that runs through every carbon market: which classes matter, at what relative weights, in what volumes. Rather than answering those questions through a procurement committee or a broker relationship, the protocol answers them through the aggregated preferences of participants who have committed tokens by locking them. The longer the lock, the more weight the allocation carries in the protocol's parameter setting.

The precise formulas are also in the whitepaper, and the live distribution data is at klimalabs.com. The structural point is what matters here: the participants who govern how the market behaves are the same participants whose locked positions are eligible for the protocol's emissions, with eligibility determined by predefined rules rather than discretionary allocation.

It is worth being explicit about what these allocations are not. Holding or locking protocol tokens does not represent ownership of protocol-handled carbon, profit participation, or direct exposure to carbon price movements. The kVCM and K2 tokens exist to coordinate participation in carbon market infrastructure. Incentives are issued programmatically under the rules described in the whitepaper, and participation in either layer is governed by those rules rather than by any expectation of return generated by the efforts of the protocol or any third party.

Why this design fits the problem

This is where the contrast with the traditional market becomes useful, not as a critique but as a way of describing what is structurally different about the Klima approach.

The traditional voluntary carbon market is organised around intermediation. The entities that capture the largest share of the value tend to be the ones that sit between the participants who actually generate it. A project developer who creates a high-quality credit and a buyer who wants to retire it both produce real economic activity. The intermediaries that connect them capture margin in proportion to how much friction they can monetise: information asymmetry, fragmentation across registries, slow settlement, bespoke contracting. Reducing that friction is in the interest of suppliers and buyers, but it is not in the interest of intermediaries, which is part of why the friction has been so persistent.

Klima's incentive design inverts that relationship. The participants who reduce friction (by providing liquidity that lets suppliers and buyers transact at predictable terms, and by allocating tokens to govern how the protocol sources and prices carbon) are the same participants whose positions are eligible for the protocol's emissions. The protocol itself does not extract margin. There is no treasury optimising for its own returns, no market-maker monopoly, no procurement desk making decisions on behalf of users. Emissions are directed toward participation, and participation determines how the system behaves.

This is what we mean when we describe Klima as collaborative rather than extractive infrastructure. It is not a claim about intent or virtue. It is a claim about market design. The protocol is structured so that participating in the operation of the market and being eligible for the protocol's emissions are coupled by the same rules, applied to every participant on the same terms, verifiable on chain.

That structure also explains why the second layer of incentives, the allocations layer, is the more interesting one. Liquidity incentives address a familiar problem in a familiar way: the system needs depth, and emissions are directed toward the participants who provide it. Allocation incentives are doing something carbon markets have not had a credible mechanism for before, which is letting the people closest to the market shape its behaviour in real time, with their commitment serving as the credibility filter. A participant who locks kVCM for a long duration and allocates it to a particular carbon class is making an observable commitment under the protocol's rules. Their preferences carry weight in the system because of that commitment, and their position is eligible for the protocol's emissions because of that commitment. The two are coupled by design.

What good looks like

If the protocol works as designed, the visible signal of success is not high incentive rates. It is a market in which suppliers can deliver credits at predictable terms, buyers can retire credits at predictable prices, and allocation decisions reflect the considered preferences of participants with locked positions in the system. Incentives are the mechanism that bootstraps that state and sustains it as the market grows. They are not the point.

This is also why we think incentives are the right tool for this particular problem, rather than a mechanism imported from elsewhere for its own sake. Carbon markets need liquidity and they need legitimate price formation. Both are public goods that participants can supply if the protocol's emissions are directed toward them under transparent rules. The alternative, which is to have those goods supplied by intermediaries that capture margin in return, is what the traditional market already does, and it is precisely the structure Klima exists to offer an alternative to.

Participation in either incentive layer is open to anyone willing to operate within the protocol's rules. Liquidity providers can supply the kVCM/USDC or kVCM/K2 pools and lock their LP positions. Token holders can time-lock kVCM or user-lock K2 and allocate across carbon classes.

Current rates and distributions are published at klimalabs.com , and the full mechanism is described in the Klima Protocol whitepaper.