Authors:
- Pablo Frigerio
- Nicolas | @Giskard1984
- Ramiro | @RawthiL
The intention of this thread is to discuss a possible modeling of the Pocket Network’s economy in terms of the macroeconomic theory.
We encourage the community to read the full document, making emphasis on the sections 3 and 6. Below we will include some excerpts of the presented document that summarize the intentions and main conclusions.
Please note that the document was written on 2023-04-26, before the app burn rate was activated. Since that date some numbers changed, i.e. exchange rates, relay to token multiplier values and total relays, however the main contribution of the document remains valid.
Introduction
The Pocket Network strives to become the backbone of the Web3 ecosystem by providing unstoppable and high-quality access to any blockchain. As such, it must itself be a sovereign crypto network. A fundamental piece of a sovereign ecosystem is understanding the economic variables that influence it. While the crypto world is full of coins that have no intrinsic use apart from speculation or storing value (such as Bitcoin), the $POKT token, Pocket Network’s native cryptocurrency, represents a different kind of token.
Designed as a utility coin, the $POKT token grants its holder access to the Pocket Network, and consequently, unrestricted access to the blockchain data provided by it. It is not the only utility token out there. Ethereum can be seen as another, providing the holder access to operate smart contracts on its network. However, it’s essential not to conflate Ethereum and Pocket, given their differing use cases and economic processes, which we will elucidate in the document.
The purpose of the presented document is to outline the economic processes taking place within the Pocket Network. Drawing from the macroeconomic framework of a sovereign state, we describe how production, exchange rates, and interest within the Pocket Network economy are interconnected. The product of this analysis is an abstract economic model applicable to the current state of the network and adaptable to future changes.
We believe that establishing the macroeconomic foundations of the Pocket Network is crucial
to:
- Standardize the language used in economic discussions, e.g., network profit, network cost, etc.
- Establish a robust foundation for creating more detailed microeconomic models, such as those for service providers, validators, and portal ROI.
- Define appropriate interaction and compensation mechanisms for new network actors, such as the “fishermen/watchers” in V1.
- Create a practical, standard model to weigh and propose changes to economic variables, such as relay cost and network cost.
- Introduce the concept of interest rate into the ecosystem.
- Equip the Decentralized Autonomous Organization (DAO) with tools to observe and. manage the economy of the Pocket Network.
Conclusions
The document presents a plausible modeling of the Pocket Network economy, which surely is perfectible. It’s mainly intended to show how the Pocket Network’s tokenomics can be modeled by means of macroeconomic theory. It should not be regarded as a definitive model and the presented results are only rough approximations of the real mechanics that drive the Pocket Network ecosystem.
We believe that this modeling has the power to order how we approach the Pocket economy, simplify economic variable tracking, provide common ground to analyze economic proposals and use macroeconomic theory to support and propose new ideas. Nevertheless implementing such a model requires planning. We believe that it is important to:
- Define a set of variables to be used in the model and track them over time. The model will need to feed from historical data to approximate its functions correctly.
- Track the volumes across all known exchanges to have a better estimate of sell pressure. This will improve the balance of trade calculations which appears to be one of the most sensible points of the system.
- Refine the proposed functions to match observed behavior. We only propose a simplified view of many functions (such as Consumption, Investment, etc.), these will probably won’t match observations and will be required to be re-engineered over time.
- The economy is not a factual science, it changes with society, for this reason the model should be reviewed regularly and updated for changes in sentiment around the ecosystem.
Experiment Results
The document proposes a series of experiments that are simple illustrations of the model’s descriptive power. However if we accept the underlying modeling of all equations proposed in section 4, we can draw some conclusions.
It is also important to note that sociological effects are difficult to model, i.e. the exponential growth that can provide phenomena like “Fear Of Missing Out” (FOMO) or “Fear Uncertainty and Doubt” (FUD) will be difficult to take into account and play a central role in emerging ecosystems. So once more we remind that the model is accurate on variations near the observed equilibrium.
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While the ABR does have a direct impact on the POKT price, its growth is not aligned with the network profit feature:
This is concluded from our analysis of running the scenarios proposed in the PNF ABR activation document, where they use the network profit feature. This does not mean that ABR won’t affect the price. We expect that it would have a great impact on the price as the sentiment over the Pocket Networks future improves and Pocket starts to climb on the charts like the Web3Index and Token Terminal. However we must be aware that the network profit can be positive without necessarily meaning that the POKT price skyrocketed. -
RTTM has no direct effect on the POKT price:
The RTTM is the only parameter that we have been controlling so far, and that many proposals pretend to control. The reason for this is that we have not model (or observed) a direct relation between scarcity and price as we think that it is purely sociological or speculative, which are difficult to model without proper data. This could be a weakness of our modeling and we should discuss how and if such a mechanism can be included. -
The most important feature that drives the price is the Network cost:
This is not something ignored in the community, and almost all economic proposals have a common objective to drive the network cost down. However it is difficult to act on this variable because it is not something that we can control.
Observed Network State and Main Conclusions
The current state of the Pocket Network’s economy is dire, necessitating prompt action for short-to-mid-term remediation. The initiation of ABR is indeed a step in the right direction, but additional measures are essential. Our analysis identified the following major issues:
- The trade balance is entirely lopsided. Currently the imbalance is 998 K POKT (or 41.1 K USD) by day. This immense selling pressure must be counterbalanced by capital inflow into the system through the capital account. Assuming the estimates provided by PNF, this represents the first and most critical challenge for the network.
- The network’s costs currently surpass emissions, which presently approximate 523 K POKT. Despite operating at a loss, numerous Pocket Network operators continue to run, and there haven’t been significant departures from the network. Consequently, we question whether focusing solely on emissions will restore our economy’s equilibrium. Additional strategies are needed to address this issue, including greater R&D aimed at more streamlined and efficient clients, scaling the demand side, and increasing ABR to increase the price.
- Our calculations indicate that the revenue from running a node (avg. earn, trailing one year from 2023-04-26) is 26.8% and adjusted for POKT devaluation, the revenue is negative. This is even worst considering the risk of investing in the Pocket Network and the reality that investments typically yield a risk-free return of 5%. The initial fervor and attractive revenue of the Pocket Network have faded, and investors seem hesitant to enter the ecosystem. This reluctance is driving the price down as selling pressure from the operators persists.
- We require more tools to attract capital and stabilize the POKT exchange rate. This could be achieved by tapping into futures markets, expanding to larger exchanges, and supporting wrapped tokens. While establishing a robust futures market takes time, it could provide us with a proxy for the interest rate, thereby preventing capital from exiting the ecosystem.
Solving these problems is no simple task, and it is not our intention to provide immediate
solutions. Rather, we aim to guide efforts in the right direction. Transforming the current
economic climate will take time, and our approach should be two-pronged:
- A technical perspective to ensure each decision is informed by thorough fact-checking and rigor.
- A social perspective to guarantee the changes we make within the ecosystem reach both our community and the broader public. Economics is a social science, thus building confidence and a historical narrative is crucial for any plan’s success. Economic decisions shouldn’t be based solely on the current state of affairs but should take into account future expectations. In other words, managing market expectations is vital for a thriving economy.
Establishing a company with an innovative product is challenging in and of itself. However, creating a balanced economic ecosystem is an even more formidable task…