Fool Me Once, Shame on You; Fool me Twice, Shame on Me

Emil_K99 · May 25, 2023, 11:06am

Fool Me Once, Shame on You; Fool me Twice, Shame on Me

Although there is a clear consensus in the community regarding the need for a reduction in inflation, my team and I are shocked at the lack of urgency that is being put forward. We would like to begin our proposal by giving some background and adding a new perspective to the conversations we have seen thus far.

Let’s step back for a second and consider the reasons for the hyperinflation in the bootstrapping phase to begin with. The building up of enthusiasm around the project, getting the word out there for incredible “50-100% Node APRs”. The morality of this strategy is questionable to begin with, but the community galvanized around its initial effectiveness. For over a year, the network has achieved all of its performance targets, beaten the all-important Infura benchmarks, and has developed an ability to serve far more relays than it currently does (in fact, by a magnitude of times).

The Illusion of Revenue - Minting of Air

Whenever we mint a token that is not related to the newly introduced burn mechanism, we are adding additional momentum to the downward price movement. In our opinion, the performance of the POKT token has become a barrier to the goals of marketing, sales and implementation of V1. Setting the inflation rate equal to the burn rate will have an extreme impact on the short-run. However, it represents the reality of the project and where we are at. The longer we keep up with this illusion of revenue the more that the token price will depreciate and ultimately damage the prospect of success and implementation. Node runners, of which we are a part of, should only earn the REAL intrinsic value of burned tokens. This creates a healthy economic system.

The Argument of Node Runner Going Out of Business - Further Delusion

Nobody is profitable running nodes, both directly and indirectly, no matter the scale at these prices. The costs of electricity, internet and wages remain fixed in fiat for most operations. The only profitable node runners right now would be groups that started their nodes within the last month. A huge part of this that is left unanswered is the CAPEX investment of buying the machinery and components needed to run a node + the minimum balance of POKT at 15,000 tokens. Many of us bought our first POKT nodes for a price of USD 30,000 or USD15,000; just to put things into perspective. Is the leadership and community telling us that those previous investments of stakeholders are less significant than the prospect of future investors? If you are using part of your token rewards to cover certain costs, don’t be fooled, you’re essentially financing your operational costs by diluting the CAPEX of the investors before you. And soon, the same thing will happen to you as it did to the others beforehand. We suggest this immediate alignment of burn rate to mint rate in order to stop the bleeding and ensure the long-term tokenomics are linked to real relay-growth income and not the continuation of illusions.

Misalignment of Incentives in the Community

One of Pocket Network’s ultimate goals lies in creating a cost efficient market place between supply and demand, where POKT is the native currency of exchange. The reality today is much different; a predominant amount of trade/payment is settled in USD. POKT’s underlying value will derive from its utility and while most crypto projects and their tokens are simply the object of speculation/narrative, Pocket Network is different.

POKT’s inflationary death spiral has had a detrimental effect on the margins of node runners. To the employees of PNI/PNF, how would you feel if your salary was entirely paid in POKT? Well you now understand what it feels like to be a Pocket node runner. There seems to be no sense of urgency in fixing inflation because, in reality, the token price makes no immediate difference to the decision makers. How would you feel if your salary decreased by 50% every second month?

Cryptocorn · May 25, 2023, 12:37pm

This post isn’t really structured as a proposal should be, it’s more of an emotional opinion piece.

If you’d like to write a proposal that would be suitable for voting on for your suggested goal- it would probably be a PUP, and would need to include things like the actual mechanics, timeline and other needed details, it’s probably best to see the proposal guidelines and reformat.

@zaatar and the GRIP team are also here to help you turn your thoughts into a workable proposal that could be voted on.

I suggest you move this to the pre-proposal stage and optionally work with GRIP if you’d like to move forward with this idea.

JackALaing · May 25, 2023, 12:55pm

I’ve moved this post to the pre-proposal category. It can be moved to the PUP category if/when it’s a formal proposal.

JackALaing · May 26, 2023, 4:22am

Thank you for sharing these feelings @Emil_K99. We know that node runners are hurting and it is important to hear more perspectives on this. You are also setting an example – it is important that more Pocket stakeholders voice their perspectives, coordinate together, and, most importantly, recognize their own agency to enact positive changes to solve the problems they face.

Overcoming the Bystander Effect

The beauty of DAOs is the equal agency they grant contributors to enact positive change. The combination of permissionless contribution and democratic governance structure in our DAO means that every Pocket stakeholder is equally capable of pioneering decisive actions. However, realizing the full potential of this requires full buy-in from everybody.

There is a very real bystander problem in our community - not enough agency, action, or follow-through.

If you’re living in a house and there’s a fire, do you complain at your housemates for not putting it out quickly enough or do you pick up a bucket and throw some water on?

“oh wow, glad that fire is in your bedroom and not mine”

a few moments later

“what?? the fire’s in my bedroom! how did you let this happen?!”

We’re all Pocket stakeholders living in the Pocket house. If we feel there is a fire, we should help put it out. However, when the house is virtual and contains thousands of residents, it’s easier to be passive due to the diffusion of responsibility. This is the bystander effect. It is natural but we should be mindful of it and hold ourselves accountable as DAO stakeholders (not point fingers at each other).

Pictured: “the DAO is too slow”, DAO stakeholders

We think Pocket’s community is made up of some of the brightest minds in the entire industry, something that every single person in this community should take some comfort in. Some of our best contributions have come from stakeholders with no affiliation to the (temporarily) core PNI & PNF teams.

But it’s also not uncommon to see these bright ideas manifest into Twitter threads and Telegram debates about the issues faced, rather than directing that mental energy towards the harder but more effectual work of rolling up our sleeves, coordinating people, building consensus, and following through on proposals that bring the change we want to see.

Our DAO has vast potential to be a more effective organization and PNF is working tirelessly to facilitate this. If you are reading this and you want to see Pocket achieve its full potential, I urge you to realize your agency, plug in to our DAO’s OS, and help us make it happen.

Using Data to Preserve Our Two-sided Market

While we need more decisive action, it is important that such actions are well-informed. To that end, I want to address the proposed actions and set them in context. In this case, setting mint equal to burn means minting ~$30k per month to nodes. In other words:

~800k POKT per month (vs ~610k POKT per day currently)
~$1.50 per month per node (vs $32.50 per month per node)
~0.5% inflation at current prices, less if the price goes up (vs ~12% inflation)

Adopting this strategy amounts to cutting off node revenue streams and telling everyone to sit tight and hold. That might make sense in a network where no work is being done but our entire ecosystem relies on nodes providing RPC service to DApps. I’ve seen community members scapegoat node runners and characterize them as a cabal with no incentive to do “the right thing”. This is unfair. The node runners are our supply-side. They’re the stakeholders who serve the RPC calls the DApps come to us for and providing this service incurs costs that must be covered somehow. How many node runners will be left to serve these RPC calls if we cut off their revenue? How many DApps will be left if the quality of RPC calls plummets due to an exodus of our supply-side? Such drastic measures flirt with the unwinding of the two-sided market we have worked for 3 years to bootstrap.

In light of these possibilities, we must be certain that such measures would not irreversibly shock the system. Have any of the proponents of a 1:1 mint:burn collected any data to prove that these actions would benefit our ecosystem? What about proof that there is a “clear consensus” these changes need to be made? This is the kind of follow-through I’m talking about above.

Pre-proposal & Survey

PNF can’t make the DAO drink but we can lead it to water. We recently published a roadmap to becoming a net-revenue-positive (aka deflationary) protocol. We have since helped coordinate decisive action to activate demand-side fees almost a year ahead of schedule (it was previously assumed that we would have to wait until v1). We also outlined a vision for how emission policies could be adapted to shorten the road to becoming deflationary. You will see in the post that we designated “economists” as the stakeholders to enact policy changes, however we have not been able to achieve the buy-in we anticipated from the usual economists who would iron out the details. As I said above, we haven’t reached our full agentic potential as a collective of contributors.

As a result, PNF is working on a pre-proposal to implement some of the ideas outlined in The Road to Revenue. We are conscious of the desire to act quickly so will likely break this up into steps, with easier steps first, to enable quicker actions while the details of more complex changes are worked out. The general idea is bringing inflation down further using the existing SER mechanism (e.g. to ~4%) and targeting an attainable deflationary threshold (e.g. 10B daily relays) that we can rally around as a compelling north star.

We also have a node economics survey coming soon, which seeks to gather the data we need to properly calibrate the inflation rate we can set to sustain a supply-side and avoid the unwinding of our two-sided market.

If you read The Road to Revenue and it resonated with you, if you want to help us with our pre-proposal and survey, please reach out. Conversely, if you disagreed with the vision in The Road to Revenue, and oppose any of the actions we propose, I hope you now realize you have the agency to propose an alternative.

Patrick727 · May 26, 2023, 2:56pm

Would be a 22x reduction in nodes on the network in order to maintain the same level of revenue per node.

That would put the network at 956 nodes.

This isn’t concrete but I highly doubt that would happen, given the concentrations of some people.

What if this was paired again with increasing the stake per node again?

What if there was a mechanism where the longer you staked (or the more you restaked), the higher % of rewards you got?

In general.

I do think inflation needs to continually be reduced. I do agree that ultimately you want burn/inflation tightly correlated. But not necessarily exclusively tied together.

Do we know forsure how much of the pokt being sold daily is from node runners?

TheDoc · May 27, 2023, 8:10pm

Instead of cutting the inflation rate and hurting the profitability of node runners even further, there is a way to reduce the whole network infrastructure cost by consolidating the existing nodes by raising the minimum staked amount from 15k to 30k. There are currently 8268 15k nodes staked in the network which would have to upstake to 30k or unstake nodes to consolidate to 30k nodes or higher. This way, network infrastructure costs could be reduced without hurting node runners profitability by reducing the coin emission.

Patrick727 · May 27, 2023, 9:26pm

Doing that alone would increase profitability, theoretically.

That means there is more margin to sell into… and value still moves out of the system through node profits.

I think the jist of this proposal is “we need number go up tech”

Breezytm · May 28, 2023, 4:46am

What we need to do IMHO are the following:

Stress test a single Pocket node to determine how many daily relay it can support without impacting performance. Based on the test result, it would be blatant how many nodes the network needs to service 1.2B daily relays plus an additional buffer to 2B.
Determine if we should retain or increase the MaximumChains parameter
Draft a new proposal to undo Weighted Stake but instead increase the minimum stake base on 1 & 2. I’m not too fond of earning more by staking more. I do not see the added value to the network.
Leave SER as is until we see the effect of 1,2 & 3
I know this one is controversial, but we could go as far as only sending paid traffic through the protocol so we mint fewer tokens. Free relays can go through the Altruist network. The problem is the majority of the traffic is free; however, it would give us a real sense of demand for the product while allowing us to grow organically.

spenc · May 29, 2023, 5:02am

@Emil_K99 I’d say inflation was a player in the death spiral, but it wasn’t the driving force. Similarly, less inflation won’t solely rectify the token price.

The main hiccup, in my opinion, is market making. We’re seeing 610K POKT becoming liquid every day against a lukewarm demand. So, how do we revive POKT’s value? Here are two suggestions:

Introduce a mechanism to gradually raise the average stake to $15k or 15000 POKT. Right now, we have 20700 nodes, 870M POKT staked, and 608M POKT liquid, averaging about $1600 per node. A new node costs $600 to stake and Lean Pocket reduced HW costs drastically, which ultimately means decreasing the token rarity.

Silly example: Let’s say the nodes agreed on a minimum $5000 stake. That would imply $103M worth of POKT staked, covering the entire token supply at a $0.07 price, eliminating all liquid POKT.

It may sound outlandish considering we can’t predict how many nodes would unstake or re-stake. But regardless of the outcome, the game theory principles apply. If half the nodes exited, the remaining would enjoy doubled rewards, drawing in new nodes.

If I remember correctly, V1 is expected to integrate IBC, hopefully introducing official ERC-20. This would offer DeFi incentives to liquidity providers, encouraging more people to stake POKT and earn rewards.

Both strategies aim at reducing liquid tokens, driving token rarity in the long-run. It might spark a “FOMO” spiral—people buying tokens to stake for a good ROI, pushing the price and ROI up, and so forth. However when we last saw this, the network had nearly 50k staked nodes at the onset of the death spiral.

RawthiL · May 29, 2023, 1:14pm

I don’t know how 1, 2 and 3 relate to network costs.
Pocket nodes are not a significant cost to the network - blockchain nodes are. Reducing the number of Pocket nodes will have no impact on sell pressure. Increasing the base stake will mostly create a redistribution of stake to consolidated nodes and pools.

Pocket nodes resist A LOT of traffic, it would be interesting to see which is the limiting factor, the blockchain node or the Pocket node. But besides that it will not be relevant to network costs (the subject of this pre-proposal).
Increasing the MaximumChains parameter is not being discussed here, but increasing it is the opposite of what we need since we need independent node runners - not more consolidated nodes (we address this here, in the fairness thread).
I agree with number 3, but for v1, let’s avoid unnecessary changes in v0 when we know that they won’t have an effect on network cost. When stake weighting was proposed, the Pocket nodes’ cost was an issue. But with leanpokt that’s no longer the case.
Sending only “paid” traffic will reduce burning drastically, the imbalance of minting > burning (signaled in this thread) will remain unaffected (EDIT: in fact, burning will be reduced and minting will remain the same due to SER, so it will result in: minting >> burning).
Also, there is a misconception that the only paid relays are those that are paid to PNI in FIAT. This is not true. The protocol charges for every relay. The free relays are being paid for by PNI, from their treasury. New gateways can offer free relays also if they want, but they will have to pay the protocol for them.