PEP-5: Allocate POKT from the DAO Treasury to Launch/Support the wPOKT Program

Attributes

  • Author(s): @adam
  • Recipient(s): Pocket Network Inc and the LBP smart contract (including farmers who participate in yield farming), AMM
  • Category: Imbursement / Distribution
  • Asking Amount:
    • Up to 10,025,000 POKT from the Foundation/DAO Treasury in total
      • 4,875,000 POKT for the LBP
      • Up to 5,000,000 POKT for AMM liquidity (exact number determined upon conclusion of the LBP)
      • 50,000 POKT to be distributed as farming rewards for the Genesis Pool
      • 100,000 POKT to reimburse Pocket Network, Inc.

Summary

A development team consisting of Pocket Network Inc and Raid Guild is starting to work on an implementation of the specification introduced here and detailed in the wPOKT Green Paper. To perform an effective LBP (distribution mechanism) and provide rewards for farmers, it is important to allocate a sufficient amount of POKT that accounts for the demands of farmers and buyers. We are therefore proposing that the DAO allocate 4.875M POKT for the liquidity event as well as 30K POKT for farming rewards, as well as compensating development time in the form of a 100K POKT reimbursement.

While Pocket Network, Inc. will bear all of the resource costs and other hard costs associated with the launch, the DAO is well-positioned to provide the POKT for distribution and to help cover a portion of the development costs.

Motivation

As Pocket Network relies on the growth of relays to grow the ecosystem, it requires a way to scale its application outreach without drastically scaling the size of its team. Due to the prevalence and wide adoption of farming programs, we propose creating a mutually beneficial farming program powered by wPOKT rewards. This program is designed to incentivize users to stake on behalf of applications providing “free” infrastructure to applications, in turn, encouraging widespread adoption of Pocket Network by Web3 Apps. Additionally, wPOKT will provide a second on/off ramp for node operators in addition to the existing OTC.

Budget

  • 4,875,000 POKT from DAO Treasury for the LBP distribution event
  • 50,000 POKT from DAO Treasury to be distributed as farming rewards
  • 100,000 POKT to reimburse Pocket Network, Inc.
  • Up to 5,000,000 POKT for AMM liquidity (exact number determined upon conclusion of the LBP). Example scenarios (many factors will determine the exact amount of POKT required):
    • Scenario 1: 70/30 final weight with final price of $1 - est. additional required: 1.9M POKT
    • Scenario 2: 70/30 final weight with final price of $.25 - est. additional required: 3.4M POKT

Rationale

Given these large numbers, we need to address the elephant in the room: this amounts to up to ~20% of the current DAO treasury. I’ll leave comments for specific line items below, but in the aggregate, wPOKT serves two major functions: an on/off ramp for new users and a way to supercharge developer adoption of Pocket Network. Whatsmore, much of the POKT allocated here could be recovered, upon a DAO vote, in the long run. These funds are not sunk costs and are instead performing a necessary function to bootstrap the Ethereum-Pocket ecosystem in the form of liquidity in the AMM. Upon this DAO vote, the DAO could pull the funds of the asset pair, in the form of wPOKT and a stablecoin or ETH. That said, there is a risk of loss of principal due to impermanent loss while in use in the AMM. @JackALaing was quick to point out that losses due to this project and distributed rewards could quickly be recovered if the program can drive 15M+ relays/day, since the DAO gets 10% of all block rewards (which are proportional to relays).

Breaking it down:

  • 4,875,000 POKT, or .75% of the initial supply, will be distributed to farmers in LBP. Any unsold amounts of wPOKT and all tokens received in exchange for wPOKT will be provided as liquidity to an AMM pool. This will provide enough wPOKT for farmers and any other use cases of wPOKT for the foreseeable future. This is recoverable less impermanent losses.
  • Up to 5,000,000 POKT for AMM liquidity. Because Uniswap pools are 50/50 weighted, the DAO will need to furnish additional POKT as liquidity for trading assuming the LBP ends at a wPOKT weight less than 50%. This amount will be determined by the following equation: (final proceeds of LBP / price of POKT) - remaining POKT - basically, the value of the trading pair minus any of the remaining wPOKT from the LBP. This is recoverable less impermanent losses.
  • The 50,000 POKT for farming rewards in Genesis Pool, based on our modeling will support just over 15M relays/day. The duration of this initial pool is 6 months. Any new pools will require an additional proposal.
  • 100,000 POKT is to reimbursing PNI for hard and resource costs incurred as a part of the launch, development, and marketing of the farming/bridge program.

Dissenting Opinions

  • TBD

Deliverable(s)

  • wPOKT marketing launch
  • wPOKT LBP
  • wPOKT AMM Pool
  • wPOKT farming landing page, associated documentation, and farming app
  • Creation and maintenance of Genesis Pool

Contributor(s)

Copyright

Copyright and related rights waived via CC0.

1 Like

5M POKT at current price is $1M. I believe this won’t be anywhere near enough liquidity to support the initial surge of demand. Precisely because the DAO can recover funds quickly (especially if PUP-4 passes with the discussed solution of increasing DAO allocation) I propose a larger allocation to the AMM.

I would say allocate as many funds to wPOKT liquidity as the DAO can bear - this will
a) lessen the severity of early demand price swings that have severely burned other projects that launched with limited liquidity
b) expand the timeframe before the DAO has to take corrective action to keep app staking affordable
b - corollary) increase organic demand going into app staking, increasing node workload, increasing inflation rewards the DAO collects and thus the speed at which the invested funds are recovered

I would also STRONGLY recommend to adapt a (nonlinear) bonding curve AMM model (see Nexus Mutual NXM for example) for wPOKT instead of dumping liquidity on uniswap. Similar to Nexus which measures protocol success by amount of covers underwritten, POKT has “tokens locked for app staking” as a singular, oracle-able KPI.
With a BC-AMM, price will increase more if people aren’t staking and just farming/speculating, and reduce as more POKT is locked for staking, driving organic protocol growth and relay demand, reducing the impact degen chads have on POKT distribution AND basically do the DAO’s corrective price action in an automated fashion.

In that case the 5M initial liquidity might even be enough, a small allocation would simply limit the growth speed of the network compared to a larger liquidity allocation.

Instead of creating a custom AMM bonded with staked POKT, an alternative could be a 1INCH pool with a very high price-impact fee that would
a) disincentivise speculative big buying/selling (thus keeping the community OTC in business)
b) be turnkey and continually adjustable through an already built governance system

3 Likes

Given the solution was discussed and outlined in the green paper, it seems like this PEP really just focuses on sizing up the impact the DAO is targeting. If that is the case…

TLDR - there is no exact answer as to sizing it perfectly unless we have existing data points on what impact any allocation would have. The proposal then becomes more about addressing all the relevant issues of how we allocate and bootstrap the wPOKT program comprehensively. If you skip to the bottom, I think this amount is sufficient should it check all the right boxes.


To do a deep dive on the topic and have complete precision as to set an allocation, we’d need to know:

  1. what is the exact demand for staking on the Pocket Network with a newly available token for new markets
  2. what the probability is for getting additional DAO support later on (to either a POKT specific LBP or general AMM) in case 5m POKT isn’t enough
  3. that we could forecast what the actual impermanent loss would be

These may not be knowable right now, but we could answer them after this initial launch. Re: #1 the launch acquires those first data points in a sort of price discovery mechanism, re: #2 any decision here doesn’t explicitly preclude us from asking the DAO for additional support later on so I don’t think the probability is 0%, and re: #3 impermanent loss is still largely misunderstood given that, like @JackALaing suggested, it could be recouped with block rewards, and it is also a proxy for more enthusiasm in ETH which actually adds to the flywheel that creates more interest in the Pocket Network.

Furthermore, @Garandor adds some great points re:

I would also STRONGLY recommend to adapt a (nonlinear) bonding curve AMM model (see Nexus Mutual NXM for example) for wPOKT instead of dumping liquidity on uniswap.

In that case the 5M initial liquidity might even be enough, a small allocation would simply limit the growth speed of the network compared to a larger liquidity allocation.

and

Instead of creating a custom AMM bonded with staked POKT, an alternative could be a 1INCH pool with a very high price-impact fee that would
a) disincentivise speculative big buying/selling (thus keeping the community OTC in business)

As far as the AMM dynamics and allocation size pointed out above, it looks like they are properly addressed:

  • if the DAO wants a bonding curve, it should be covered in both Uniswap and 1 inch AMM code so we should be covered from that angle
  • the proposed token reward system on the AMPL Geyser V1 6 smart contract would actually achieve a similar goal of incentivizing long-term holding, so additional curve changes may not be needed
  • going from 20% to >20% allocation of the treasury is certainly possible whereas it is more complicated/controversial to go the opposite direction
  • 1inch could be a fine farming program to use as it has the optionality to support 1 month pools. If the DAO is left wanting more liquidity, the DAO can extend with additional pools and we incrementally move into larger programs

Given the insights above and the stated motivation, it seems like the 10M POKT ought test out what this bootstrapping can do for the Pocket Network. Some of the stated boxes to check would be:

drive measurable growth in relays from the funded Apps
create a normalized set of data points on price-discovery method where POKT would fit into the wider Ethereum-Pocket ecosystem (without relying on OTC)
gain exposure (organic marketing) of being visible on a large exchange
test whether we can recover any of the impermanent loss through additional block rewards the DAO gets rewarded with
create operational lessons as to how a LBP just for POKT is used for a distribution event and an LP on an AMM is used for ongoing liquidity

There is no perfect allocation that ensures any a priori knowledge so it really about whether the proposed amount is sufficient. It stands to reason that 10m POKT is a manageable amount to initially test out support of a wPOKT program and measure against metrics for each of the check boxes above. The beauty to starting at 20% is that the DAO can adjust along the way depending on the measured outcomes.

2 Likes

You bring up a good point. I suggest we add a timeline to the funds recovery. Our legal team has advised us to avoid any recovering of funds for the near to medium term. Something like 1-year minimum as an LP would make sense to me.

The question that remains in my mind is: what is the right number? Something that @RichCL also brings up. I don’t know if there’s a right answer here without having access to the data we will gather by doing this. I posit that more is better, but there are likely diminishing returns at some point. 20% of the DAO is a significant amount and we shouldn’t overlook opportunity cost.

NXM has an interesting model, but their token economics (and price) are completely tied to their bonding curve due to the necessity of driving capital to cover their MCR. While in theory, this is an interesting idea, for a project like ours, this would take a serious overhaul to the economics currently in place. For POKT, we don’t try to manipulate the price, instead, we adjust protocol parameters to adapt to the market price. That said, we should explore this in the future. I’m of the opinion that something like this is infeasible for this particular project.

I’ve done some digging on other swapping platforms/bonding curves and our concern about moving away from Uniswap is the lack of serious volume outside the top DEXs. I think we want to make sure that we are a) where volume trading is happening b) where people trust the platform enough to be LPs. I think we may need to lean on the community to perform some of the LP role as the DAO can’t do everything. We’ve received some interest already from community members to play this role which I think leaning into is going to be important. I’ll look into 1Inch with more of a fine-tooth comb.

The hope of the LBP is a) to absorb the high initial demand b) perform price discovery. This should soften any major blows to the Uniswap AMM so that we don’t need an excessive amount of the DAO’s treasury for liquidity. One final thing to think about is that the AMM will be balanced at the final price of the LBP. I tried to illustrate this through my examples, but it was probably insufficient. In a scenario where the final price was $1, we’d have an estimated 3.3M USDC (or other stablecoin) which we’d match with an additional 1.9M POKT for a total of ~$6.6M of liquidity. While not an infinite amount, it’d probably cover us until LPs stepped in. In even higher scenarios, the amount of liquidity is even higher. I’m more concerned about the downside scenarios where liquidity would be stretched because the LBP would yield fewer “proceeds” to be used for liquidity.

2 Likes

As an early supporter of Pocket for last 2 years, I would like to voice 1 realistic concern (for the first time) from a small node operator perspective. Been lurking but decided to sign-up finally. While wPOKT is extremely beneficial for the ecosystem in the long-term, it needs careful launch plans in order to not undermine small POKT (native token) node runners with tight budget for the short to medium term.

Concerns: WPOKT-POKT price disparity as pointed out in the risk section of the green paper is a real issue for node runners.

Once the wPOKT goes live, the TG OTC buy-side activity will essentially dry up, making it difficult for small budget node runners to cover their operating expenditure in a timely manner and forcing them to sell POKT at a hefty discount against the wPOKT’s price. While on the supply side, the sell pressure will only increase with growing rewards/nodes per entity/relays.

Simply assuming there will be enough ‘arbitrage activity’ similar to CEX (or DEX) arbitrage is fundamentally different to our case. The exchange arbs take place in a liquid and open market, meaning arbitrageurs are exposed to minutes (or hours) of inventory risk (aka. the underlying asset price fluctuation risk). In our case, the said ‘arbitragers’ bears large inventory risks for as long as 1-3+ months until the bridge opens up (along with the illiquidity & unpredictability of the demand side), thus for this additional risk, they will require a discount against the liquid wPOKT price. The wPOKT and POKT price gap will only reduce nearer to the wPOKT-POKT bridge launch date.

To draw a tangible example, if wPOKT price moves rapidly, e.g. 5-10x, no buyer of POKT will pay a market price as they know that they can’t exit the position in TG OTC in a timely manner at market prices, so naturally, this makes POKT to trade at a discount (given the risk profile) and makes POKT a fundamentally inferior asset by design until the bridge opens up to the public.

Most buy-side demand would prefer to own the wPOKT with more flexibility and liquidity (if all are equal), unless the POKT earns significantly higher yield to compensate for this disadvantage. Moreover, it also has additional 21 days of unstaking period so if the wPOKT and POKT yields are similar, the former would be a better asset by design. Whilst my point is not to talk about short term trading, the product launch sequence puts genuine node runners who needs to meet expenses at a large disadvantage.

Along with above, other factors such as (1) the PUP-4 proposal to reduce validator node reward (2) potential for the LBP/AMM program for wPOKT to yield better returns than POKT node runners, (3) potential for starting price of wPOKT potentially being lower than the current OTC prices are additional concerns/disadvantages to holding POKT when compared to wPOKT. All in all, the current design parameters and timeline seem to favour wPOKT and makes smaller node runners wonder with the concluding question 'why should i hold POKT instead of wPOKT?

Proposed Solution:

  1. Request the core team to enable wPOKT-POKT bridge (public v) in line with the wPOKT launch date. Alternatively, the DAO takes care of the arbitrage portion until the public bridge opens up. If this is indeed deemed as a risk-free or/and low risk free arbitrage exercise, there should be no reason as to why the DAO would be hesitant to become an arbitrager making the two prices aligned. One way or another, POKT price disadvantage needs to be covered off.

  2. Parameter for wPOKT yields to be in line with POKT returns (or lower to compensate for illiquidity, which, in turn, will help reduce the price disparity).

  3. Parameters for wPOKT starting price respect the current market value of POKT and do not put new entrants via OTC at disadvantage by giving wPOKT large discounts.

If these are not going to be met, the DAO should give exact details about the parameters of wPOKT (starting price, yields, bridge opening timeline, etc) and give 21+ day period from this date for those who don’t agree (or will go insolvent) to unstake and sell POKT positions to join the wPOKT program instead. Thank you

1 Like

This assumes that none of the current buy-side activity is in it to run nodes, just to own POKT, which I don’t believe is true. There will always be people looking to run more nodes, because it is a long-term investment in a sustainable business (for node operators) vs a short-term incentive program in wPOKT farming.

This would honestly be a good thing relative to the current situation, because the supply-side of the OTC is a lot drier than the buy-side right now.

Per my above point (dry sell side), we’re not getting any indication that many node operators are selling POKT to cover operating expenses, since mainnet launch in June.

This assumes that the bridge and the OTC are the only sources of liquidity. Following PEP-4, a committee is currently pursuing CEX listings for POKT.

I believe this is already the case.

We are allocating 50,000 POKT to wPOKT yield for the first pool, which will last 6 months. This will support an additional 15M relays/day, or a total of ~20M relays/day based on current relay counts. For ~183 days (6 months), this is a total of ~3.66B relays over the 6 month period, which based on service node rewards (89% of 0.01 POKT/relay), is 32.57M POKT, or 651X the yield of wPOKT farmers. You might then ask why people would bother with wPOKT when the yields are higher in POKT; that’s where the convenience and liquidity of wPOKT comes in.

Also, it’s worth considering competition in this equation. The same liquidity that makes it easier to exit out of wPOKT also makes it easier to enter into wPOKT. This means individual yields are much more likely to be competed down on the wPOKT side than the POKT side.

All that said, while I don’t think the situation would be as dire as you imply, I do still generally support launching the bridge at the same time if it can be done.

@EarlyPoktSupporter thanks for chiming in.

As a small node runner myself, I have the same concerns. We’ve kept this in mind from the beginning and will continue to monitor the situation, making changes if things become untenable.

We are assuming there will be some price inconsistency between the two tokens, as to be expected when there is arbitrage friction. While we expect some deviation if there is a large opportunity to profit, arbitragers will take that risk, in my opinion. That said, it would be ideal to launch the bridge soon after the wPOKT launch to avoid any extreme price discrepancy, pending technical bandwidth.

To Jack’s point, we are currently trying to compare a mature(ing) POKT ecosystem to a nascent wPOKT ecosystem. POKT rewards have largely been competed down to a sustainable level. While wPOKT yields will start high, we expect yields to be competed down rapidly due to the ease of entering/exiting the program.

This is a technical bandwidth limitation. There is the potential option of delaying launch until the bridge is complete or nearly complete. On the DAO arbitrating point, that’s a possibility we’ve discussed and I think it should be taken seriously.

Yields are determined according to the amount of wPOKT staked in the Geyser smart contract. It’s an open market policy - something that we can’t control except on a macro scale. To illustrate this point, the 50K rewards over 6 months is designed to support about 400K staked in the genesis pool - any more than 400K staked and the yields drop well below the POKT yields. Less than 400K staked has the effect of raising yields.

The LBP is designed to perform price discovery for both wPOKT, and by extension, POKT. The LBP price discovery will determine the price of wPOKT - it will be completely out of our hands except for the starting price of the LBP which will be higher than the price on the OTC on the launch date.

Check out my model for wPOKT yields: wPOKT Model - Final - Causal - it will hopefully clarify some of the limits of farming. I think what this demonstrates is that the scope of the proposed farming project is much smaller than the scope of POKT (by design). We designed it to be a boon for node runners of all sizes - and it will be if farmers attract apps in the way that we believe it can.

Happy to continue the conversation - you bring up some valid concerns.

@EarlyPoktSupporter thanks for outlining the case so well - it definitely illustrated a lot for me.

Question regarding:

Alternatively, the DAO takes care of the arbitrage portion until the public bridge opens up. If this is indeed deemed as a risk-free or/and low risk free arbitrage exercise, there should be no reason as to why the DAO would be hesitant to become an arbitrager making the two prices aligned.

Would you think that there is a need for an official stance that the DAO step in and become an arbitrager? Based on my understanding, both long-term POKT holders and the DAO would already be naturally incentivized to do arbitrage so long as there is the Bridge launch date is on the product roadmap. Ideally the shorter the gap between the public bridge and the launch date the better for all parties, but the longer the gap the larger the premium for an arbitrager profit from (and fill the liquidity gap in the interim period you mentioned).

So for the proposed solution #1 - is a codified version of the DAO’s activity to perform arbitrage be what a small node operator should be looking for, or is there anything else the DAO can do to reassure node operators that the POKT prices wouldn’t fluctuate too much for an operating budget?

Also for proposed solutions #2 & 3, I definitely have to understand the model more, but I think the the yields are something that the market will have time to determine. It stands to reason it would fluctuate greatly for a couple of months (which will bring lots of new eyeballs to the project) until it reaches equilibrium and all the serious liquidity providers settle in for good.

The points that @JackALaing and @adam make about the CEXs listing process and potentially delaying launch date seem like viable options. That being said, in a fast growing ecosystem, I am not sure you can line up all the projects perfectly given they all require serious people power and are sometimes sequential projects. If anything, I think even the prospect of the CEX listing process, will help allay some of these concerns, but I am not sure of the perfect sequence of these projects.

This proposal is now up for voting and will close in 7 days.

https://gov.pokt.network/#/pokt-network/proposal/QmdBBTPyGdhs2jt8A1TwfRnVd3EF6DumQnPcXAowaLg3RM

This proposal passed with 5 Approvals and 0 Rejections, so I’ll now close the topic.

https://gov.pokt.network/#/pokt-network/proposal/QmdBBTPyGdhs2jt8A1TwfRnVd3EF6DumQnPcXAowaLg3RM