An Open Letter to the Pocket Community on Economics

Ecosystem Economics
21

I agree with @steve and think he gets to the heart of the matter ----->50k nodes is a surplus and the marketplace will eat into that surplus if the economics continue to become unprofitable.

I also agree with @adam that encouraging applications to stake gets to the heart of the model —> completing the economic flywheel is the cleanest solution we all want.

Re: nodes becoming unprofitable - We should remind ourselves that it is a permissionless protocol and that no one at Pocket Network prescribed 50k nodes. Node count went from 15k to 50k YTD because that is where the market was heading.

The permissionless part goes both ways too. Several thousand nodes may unstake and that is marketplace feedback. Yes, those unstaked POKT will be supply-side sell pressure, but it is part of the marketplace feedback.

Those who stick around will innovate, compete, and endure different cost structures. They will weather ensuing price action will benefit from more rewards. They will also benefit from demand-side buy pressure as new sinks (portal monetization, Application Burn Rate, etc) come online.

Re: Encouraging Applications to stake -
Any robust solution should be focused on this as the centerpiece. I see innovation in creating new portals, DAO-led buy backs, or different payment structures as the key to the economic flywheel.

This is why this forum post is special - it outlines ways (and alpha) in how we can all contribute to application burn rate. It may take a while for the protocol team to design, code, test, and implement this into the core product. In the interim, all proposals to start introducing app-based sinks will get a serious look.

Full disclaimer - I am not 100% there yet with the options of a weighted staked, increasing the minimum stake, or a buy back, although I see pros in all options. I am keen to support a supply-side solution, but (based on my commentary above) am inclined to more market or demand-side solutions.

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22

How many relays per day would the network be able to comfortably support with 15,000 well-equipped nodes, with today’s software version? What about when v1 comes out?

23

It is good to see the active approach to stabilize Pocket. To me, the combination of declining rewards from WAGMI + declining price + increasing node running costs create a massive risk to the network of an overhead supply of tokens that will be sold creating massive downward pressure on the price. If it pops back to $0.50 for example, you have a ton of people who will look to sell to recoup some of their losses or gains if they bought in now. I believe in what Pocket is doing, but its not a charity, and very few people or institutions will continue to put money in something that loses money. So to me, whatever changes are made have to be carefully done to create long term price support through attractive net return.

That immediately strikes the idea of " 3. Decrease of rewards in proportion to the decrease in network cost" That should not even be a consideration at this time and could be catastrophic to Pocket. Just the suggestion of this is highly concerning. Rewards may not mean much to someone who is part of the Pocket team and has millions of pocket and their personal rewards aren’t necessary, but for all of the Pocket holders who’s investment in Pocket tokens is meaningful to them and are at a loss right now, then this idea sends the completely wrong message and is quite tone deaf. Even the idea of WAGMI has a major flaw in that it is static with an arbitrary 100% token reward target that doesn’t take into account the huge variability of rewards amongst different providers, nor does it take into account price. Thus if WAGMI or at least the new proposal, adjusted the reward rate each quarter taking into account price and reward variability, then node runners will gain confidence. I compare my individual nodes vs nodes held in a pool, and the individual node rewards are rarely at the network average. Unfortunately this has created a gravitation towards joining pools or favoring only the largest holders, which really doesn’t broaden the ecosystem. It creates more risk by concentrating it to a few large institutions. Increasing the required number of Pokt to stake a node will only further exacerbate the gravitation towards pools and institutions. The 100% reward view is the key to the problem and should be the focus of correction. Why cap it if you can control inflation through other mechanisms? Everything good about pocket is in jeopardy if the price continues to decline, as it creates less confidence from everyone who has lost significant money and that creates a massive pricing ceiling to break through (massive resistance level if you study charts). I would try to seek a balanced system that rewards you the longer you run a node than how many nodes you run or how many pocket are in the node. That only serves the richest and largest holders, or the pools which seems counter towards decentralization.

  1. Agree with Wagmi in general but it should be more flexible. I would propose that Inflation isn’t as disruptive as price pressure. I would revise this immediately to have a higher reward rate when the price is below $0.50 and that would help establish a pricing floor. Then at least no one is operating a node at a loss or such a small gain that putting your money under the mattress or virtually any other asset is a more attractive option.
  2. 50K nodes are unnecessary now, but whatever mechanisms are in place should be accomodative to growth of network demand. If Pocket can go to 1 Billion relays per day this quick, 50K nodes may be needed sooner and thus the reward/structure should attract enough supply of nodes as demand is needed
  3. Agree with @iaa12 Create liquidity (in process with wrapped POKT)
  4. Get wPOKT onto CEX/DEX so it’s much easier to buy/sell (In process)
  5. Start to charge App users (In process). This should be done as soon as possible.
  6. Implement weighted staking
  7. Have Pocket buy up some supply here at these low levels, sending the same message to the community that a company buying its depressed stock does, it says Pocket is dramatically undervalued.
  8. seek a balanced system that rewards you the longer you run a node than how many nodes you run or how many pocket are in the node
24

I’ve been following the economic posts related to POKT for some time and I’d like to weigh in on a couple of big picture ideas I have had:

  1. Minimum Stake I think the minimum stake at ~15.2K POKT is fine. What I would propose is allowing node runners to voluntarily increase their stakes in order to improve relay competitiveness across the network-- perhaps without limitation. This creates incentives for node runners to reinvest in their existing stakes and not buy more nodes. I think setting arbitrary minimum limits will create disincentives and a lot of disruption.

  2. Provisioned Capacity No question that the network is hugely over-provisioned now. This has a significant dilutive effect on token valuation as earnings (specifically post-WAGMI) are being spread across too many nodes. I would propose putting a formulaic capacity limit on the growth of further nodes. For example, the network will only add new nodes when it reaches X% capacity (e.g., 30-40%) which both supports marketing available capacity to Apps while controlling node inflation. Further, I think this would give the DAO an opportunity to auction new nodes-- much like the FCC does with bandwidth. When more capacity is needed, notify the market that X number of nodes are going to be activated and let the market compete for those nodes in both POKT price and stake. As to the concerns relative to centralization, I believe a significant number of active nodes are already running across a handful of back-end hosting firms (i.e., Digital Ocean). That being said, I do think node runners not running their own nodes should probably have some form of requirement to ensure their own decentralization across their active nodes when/if they reach a certain threshold of total network capacity (e.g., 0.5%).

  3. Hard Treasury Assets I felt as though the comments made in an adjacent thread relative to the Treasury accumulating hard assets was well placed. Metals, Treasuries, land, et al are solid. As was noted, this would give investors-- and the community at large-- a sense of value underpinning the network economy. I was surprised to see the comment made regarding the community “shot down” the concept previously. Perhaps some education relative to the basic economics of this concept would be warranted and the concept repurposed accordingly.

  4. Patience POKT has certainly overachieved its initial goals. I would stress that the community relax and be patient regarding maturation. We had ~35K new nodes join the network in 5 months. Many of which bought in at >$1.50/POKT. Given the general downturn in the Crypto and equities markets, people are panic selling into a thinly traded market. Further, I feel like the WAGMI implementation was done hastily and should have been elongated to watch the market’s reaction. Net net, we all need to relax if we’re long on POKT. Markets take care of themselves.

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25

I am inclined to go this route, however
@adbegando is there any way to do this while staying permissionless?

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26

@RichCL @adbegando Other than not being permissionless, which is a big concern, I have another issue with this regarding the implementation. If a set amount of nodes can be added at any point, how will we decide who is entitled to join the network. Will existing node runners who use their compounding POKT to open new nodes be prioritized over newcomers? How will these determinations be made? It is also a lagging policy since relay volume can change rapidly. I think other measures that are being discussed address the overprovision issue in a simpler and more direct manner.

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27

Adam, thanks for the write up and everyone else for their thoughts. Price of anything is measured by the value that buyers put in it. Today, the main buying motivation of POKT is for running nodes. This is bound to hit diminishing returns, and we are approaching there fast. Regardless of any parameter change, and the time that might buy for us, diminishing returns will be the eventuality if the sole goal of buying POKT is running nodes.

To prevent that:

  1. I think we need to increase the demand for POKT. The service we provide is valuable. So, we should start charging for it. Nothing that I know of works well with pay-once-get-a-lifetime-pass model. Take a look here: AAirpass - Wikipedia. “The program was launched at a time when the airline was struggling financially and in need of a quick infusion of cash.” … “The program has been called “a huge disaster” for the company.”
  2. I think we need to increase the accessibility of POKT and its liquidity in the shape of wPOKT. More exchange support, more utilities, easier to handle, become part of global ecosystem… No downsides that I can see.
  3. And yes, we need to lower the node running costs. But let’s not forget that the staked address and the HW resource it works on are different entities. Needing to stake more on each address is an artificial way of reducing those HW costs while at the same time increasing the barrier to entry. IMHO, a better way would be actually reducing the cost. I see two ways:
    – We don’t really care about the number of servicer addresses. If anything, staked (and therefore out of circulation) POKT reduces the sell pressure. What we care is the HW expense for running them. Making each node more efficient in terms of resource consumption (less RAM, less CPU, less storage) makes everyone more profitable, reduces sell pressure, and reduces app costs if we ever decide charging them recurrently… Holy grail is allowing each process/node to run multiple servicers. Imagine you can put all 5 (or 10, or more!) of your staked addresses in only one HW node. This eliminates any concerns about over provisioning. This is practically the same as increasing the min stake, but without any downsides. I know there are some prototype implementations out there. Perhaps our trusted developers can perfect those prototypes and make it publicly available in a well-supported fashion.
    – Relaxing our perf goals. Cherry Picker today is brutal. To meet the network average, one needs to be at one of the top buckets and offer <200ms response times. Such SLA doesn’t exist for centralized providers. This creates a costly rabbit race. If we want to be cost efficient, the perf/rewards gradient should be smoother, where the mid point is where the centralized providers are (or maybe even below). Considering that centralized providers are tightly integrated horizontally and vertically, we cannot beat them at cost and perf both at the same time. Decentralized, High Perf, Low Cost, pick 2 out of 3. I am not saying to provide a subpar service, but providing on par service where nodes don’t compete so brutally.
  4. On top of #3, I am in favor of stake weighting. 15,000 min POKT was an arbitrary number. Let’s not replace it with another arbitrary number because, in my experience, arbitrary numbers rarely work well. We should let the free market to decide how much to stake. Give people freedom to stake as much as they want (and be rewarded accordingly).
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28

its valid concern but seems like no one from team is even taking time to discuss about it or about solving it. They are just living in their own theoretical bubble.

29

Thanks for the write up. It’s helpful to see some ideas partially fleshed out. I have a couple follow up questions that relate to this.

How many Dao voters are there and can you enlighten me on why the POKT token doesn’t confer any governance rights at all? I think that’s a big misstep that is boxing out an entire group of network participants (ie investors & potential sinks you’re looking for) that just want to hodl and vote on governance parameters (and perhaps a DAO treasury). Also, it looks like you don’t need to own POKT to earn a DAO vote. Is that correct? If so, why?

Back to your post…As a node runner, I’m in favor of higher minimum stakes. Ideally as high as possible without impacting the quality of service relative to other RPC providers. Right now our ~$10 million USD in monthly overhead costs as a network makes us about 50-100x more expensive monthly to run relative to other projects in the space. Take Cosmos for example (not an apples to apples comparison but just work with it) - at 130 full BP nodes the network requires about $150k (likely less) in monthly overhead. Pocket is 66x more expensive to run than Cosmos. As a POKT holder ask yourself, why? And if you did this same analysis for the top 200 coins you’d see how out of whack the current dynamics are.

With the current design, node growth =/= protocol value growth and at a certain point, it’s actually value destructive. We’re there. But thankfully we have some believers, else it would be even uglier.

30

Hey all, Adam has just published a proposal that encapsulates some of our policy ideas targeted at consolidating the node count and correspondingly lowering inflation

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31

Some high level thoughts here.

I would be cautious about dialing back inflation too much because the one external cost that is/will continue to be difficult to navigate is the cost of running data nodes to support new chains.

Tri-force’s goal is (if i remember correctly*) support 100 chains by the end of the year, although we can optimize pokt node costs, we can’t (yet) dramatically cut the costs of scaling horizontally quickly.

I would caution against the framing economic talks as a goal to get the node count to what the network can handle today. I’m not sure that is the case tbh so a couple questions.

How did we get to 15,000 as the ideal node count?
How much excess capacity does that grant us?
Does it account for hyper growth in support for new chains?

Excess capacity is one of the value propositions of pocket, although its too high now, the incentives should maintain a healthy dose of redundancy in the network if we want long term value to continue to grow.

In addition the primary driver of growth has been the scaling horizontally so we want node runners incentivized to assume those risks. This means potentially weeks/months with less than NA rewards.

I believe stake-weighting is a good middle ground mechanism to help alleviate some of the rewards per node problems while keeping the little guys in mind.

I would caution against a too large update to min stake as a stop gap, because it could result in a mass unstake where you were expecting the market to restake, instead it just dumps to oblivion and even the most loyal node runners hurting and some institution coming in to “save the day” by centralizing.

More thoughts later but great discussion

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32

How do you suggest that such NRs ensure their own decentralization? Use a variety of back-end hosting firms?

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First off, I think that everyone needs to separate their ideals from the realities of running a billion dollar business. Yes, I think that folks who exceed some factor of control (as I suggested 0.5% of total network capacity) must prove their decentralization across multiple hosting domains to ensure that we have the risk management protocols in place to ensure a centralization risk. I also think the the last WAGMI -29% rewards reduction puts all node runners in a monthly loss position which is poison to the entire POKT concept. We’ve got to get apps paying for relays as a function of value and create an economy of supply and demand that finds equilibrium. I get that we probably want some negative incentives to reduce the number of node runners, but screwing folks who came into the network after Nov 2021 is not the way to build scale. It’s poison. We need to look at the whole WAGMI concept and align it with what @rtwhitt suggests in his earlier post. You all have got to listen what experienced finance and economics folks advise on strategy. As I stated earlier, POKT is a real deal juggernaut but we are at the cusp of blowing this whole thing up by wanting to cling to ideals rather than conforming to financial and economics basic controls.

—AB

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