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:
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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.
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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).
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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