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Liquidity and the Role of Bundles
Liquidity is at the heart of any efficient market. It is critical for a couple of key reasons. First, it guarantees that buyers and sellers can trade easily. This reduces market volatility and overall risk for the market participants. Second, and arguably most importantly, it creates a transparent price signal for the underlying commodity. The current carbon market is disjointed; prices vary across registering body, country, project type, and vintage. Add on excessive and opaque broker fees and the situation becomes even worse. The lack of liquidity and efficient price signal in the carbon market today has discouraged organizations looking to reduce their carbon footprint from participating and made it difficult for project developers to secure funding.
The tokenization process for batches of carbon credits brings them on-chain, but this alone does not solve the liquidity problem. It is likely that different GCO2 tokens will trade at different prices and GCO2-specific liquidity will be shallow or non-existent. This is where bundles come in. The sole purpose of the development of bundle tokens is to introduce liquidity to the market. Holders will be able to exchange their GCO2 tokens for bundle tokens as long as the GCO2 tokens meet the acceptance criteria of the bundle. The bundle tokens are backed one-to-one by an underlying GCO2 token and represent a claim on the aggregated collection of GCO2 tokens. Through the aggregation of multiple GCO2s, liquidity will be introduced to the market and an on-chain price of carbon will emerge.
Bundle tokens will retain all the functionality of the underlying GCO2 tokens but the increased liquidity will allow them to be traded on DeFi exchanges.
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