Carbon Loophole
Is it worth it to pre-retire carbon before selling carbon to the protocol?
Selling Carbon at a Premium
When a users plans to sell carbon to the protocol, it is often very lucrative to retire almost all the carbon that’s already in the portfolio beforehand.
Let’s look at an example where the initial kVCM supply is
A user wants to sell
Normal Sale
Selling the carbon directly causes a relative change
From Equation (19), we can compute the amount of kVCM
tokens minted from the sale as
With a token price of $
Pre-Retirement
Before selling, the user decides to retire
From Equation (22), we can compute the amount of kVCM
tokens burnt for the retirement as
With a token price of $
Boosted Sale
The user executes the sale after the retirement, which means at the time of
the sale there are
We compute the amount of minted kVCM tokens as
With a token price of $
Pre-Retirement + Boosted Sale
How to Prevent this Scenario?
The protocol works in phases. There is always a phase between a retirement and a consecutive sale where users are aware of the current supply and are able to modify their allocations for that class.
Users can defend themselves by dropping their kVCM allocations between the retirement and the consecutive sale: this which will correct the price before the attacker is able to extract value.