Pre-Proposal: Relay Driven Inflation (RDI)

Proposals Pre-Proposals
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Another important argument for RDI proposal is an expected delay of V1 release on testnet:

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POKT emissions policies roughly fall into one of the four boxes shown below. The original POKT policy was fixed $POKT per relay (10k uPOKT/relay). The original “tenthing” proposal would have continued this policy albeit at a reduced rate of 1k uPOKT/relay. Instead, the final WAGMI proposal pivoted to a fixed emissions schedule, denominated in $POKT. (FREN and SER chose to continue following the WAGMI construct in progressive manner, and thus are not system pivots.)

denomination
Emission policy POKT USD
fixed emission rate per relay original policy RDI
fixed emissions WAGMI/FREN/SER

RDI proposes a three-fold pivot away from the current status quo. (1) a large step down in emissions level (2) a return to fixed emission rate per relay rather than fixed emissions and (3) an abandonment of denominating the supply-side tokenomics in $POKT in favor of denominating it in USD.

The first two leads to interesting debates. The first balances the positive and negative consequences of forcing out a potentially significant number of nude runners from the network. Namely, potentially reduced token sell pressure to cover infra costs on the one hand versus loss of IP talent, loss of decentralization, loss of competition and QoS hits on the other hand. The second is also a worthy debate. A “necessary evil” of WAGMI/FREN/SER has been the decoupling of rewards from relay count. That decoupling was necessary during the hyper-growth of free relays in order to rein in run-away inflation, but can be reconsidered as we gain in assurance that relay growth going forward will be from paid relays (meaning relays paid for at market or near-market rates, not at heavily subsidized rates).

Setting aside further comment and debate on these first two factors, this post focuses on the third factor - namely the dollarization of the supply side. This has the potential to lead to unintended catastrophic consequences for the project and should be reconsidered.

The POKT token is on precarious grounds, as it is, due to the dollarization of the demand side. The only thing giving value to the token is the promise that in the future there will be a coupling, via app burn, between the demand side, denominated in dollars, and the supply side, denominated in POKT.

This arrangement is somewhat akin to the Bretton-Wood agreement – the US staying on the gold standard being analogous to the supply side maintaining a peg between 1 $POKT and a fixed number of relays. European currencies de-pegging from gold and relying on relations with the US to stabilize their currencies being analogous to the demand-side depegging the price it charges clients for relays from $POKT and relying on its relationship with the supply side to maintain stability.

Now, suppose the supply side is also dollarized (that is, $POKT is depegged from how may relays it represents), the raison d’etre of the POKT token has now completely been eliminated and there is nothing preventing hyperinflation from occurring and for the token price falling to zero, since the token becomes completely irrelevant. This simply cannot take place in the current system, imperfect as it may be.

Let’s illustrate this with an example. Suppose Q1 report shows $120k/mo in $POKT buy pressure from converting demand-side revenue to POKT (probably way over-optimistic), and suppose 15M (and falling) $POKT sell pressure from node providers. This represents the current system. The current price is more or less a projection into the future that investors have made that the days of $600k/mo protocol-level revenue are coming in the next year ago. Now suppose a series of bad news is released that shakes marketplace confidence. Say an 8-month delay to V1 is announced coupled with disappointing Q2 and Q3 sales results. Investor confidence plummets and the token price plummets as well – but never below the balance between $120k/mo buy pressure vs 15M $POKT sell pressure. So no matter what happens to the speculative side of the token price, the token price should not fall below the intrinisic value of $0.008 (and rising). This is paired with the assurance that inflation will never exceed 12% (and falling).

Contrast this to the RDI proposal. Now the $120k/mo in $POKT buy pressure is balanced by ~$200k/mo in node-provider sell pressure (making the same assumption as above that network size will grow or shrink until some 80% of rewards must be sold to cover infra costs). (The initial cutting of emissions by 3x may be beneficial to price compared to the status quo, but that is outside the scope of this post which is strictly on the dollarization of the supply side, not on the initial slashing.) Now suppose the same string of bad news takes place and all speculative demand for the token is lost for a season. We are then left with $120k/mo of buy pressure vs $200k/mo of sell pressure with no mechanism to establish equilibrium. Whether price falls to 0.01 or 0.001 or 0.0001, the sell pressure will remain higher than the buy pressure and the token will become hyperinflationary in a bid to keep up with the dollar-denominated RelayPricingIndex.

The destabilization of $POKT price that happens by decoupling from token from having any intrinsic value cuts both directions. A string of good news (v1 ahead of schedule, sales ahead of schedule) could cause positive price moves to self-reinforce, causing price to move much higher than it would in the current system. While that may be welcome to speculators, prudent risk management would never accept that potential outcome at the risk of allowing a mechanism that could just as easily do the opposite and drive hyperinflation and zero token value.

Bottom line: I suggest whatever the authors wish to propose in terms of cutting emissions, they keep emission levels denominated in $POKT and not in USD.

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RDI increasing inflation because of a price dump is a valid concern also raised by Ramiro. I have responded to him already but will list out my thoughts again.

No Inflation policy is perfect, and pros and cons must be weighed. Your analysis leaves out a very important part of the equation which is the impact on node operators.

There is unfortunately going to be a disaster at lower price whichever inflation policy you come up with.
Like for instance, SER at lower price will not generate enough income to keep node operators interested in
running the nodes because they are not paying their bills in POKT.

This will degrade our ability to support the existing relays let alone expand, which btw we rely on for buy backs. It does not help that SER continues to emit less and less POKT. So how are we going to get out of this situation? This seems like a cycle we will find it very hard if not impossible to escape. Price Dump → Node Operators quit → under provisioned → Relays Decrease → Buybacks Decrease → Price Dump…

If RDI is implemented, and we feel that token price has plummeted due to any reason, we should cut our free relays or increase the price per relay to reach an equilibrium state and avoid hyperinflation.

It comes down to POKT team and all of us to keep increasing the paid relays to support this system. We are not a country, we have no power to tax, take debt or wage war and our inflation should not mimic that model. Increasing income is the only way. Let me be very clear, neither RDI nor SER can become a substitute for that.

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It’s good to see the last sentence above because emissions is just one parameter in a wider system of supply and demand factors. The PNF thesis set out the multiple dimensions on which we need to pursue change to drive sustainable Protocol Revenue and I hope everyone joins the community call tomorrow when the PNF directors talk about the ecosystem thesis.

One thing that feels underdeveloped in RDI is the demand side of the hypothesis. Extrapolating out from infura’s price is a simple heuristic but I’d prefer to actually understand current reality and future forecast from the demand drivers: PNI. My understanding is their updated report with financials is due imminently.

I also see a second order consequence that is not discussed at all which is that cutting emissions proportionally cuts the DAO take. The DAO take is reinvested into many ecosystem participants, not just node runners. So adoption of RDI at the rates described is also a vote for 60% less funds to bootstrap new gateway providers or demand generators or 60% less funds to help out protocol devs if they ask for more support.

How do the proposers think about these two items?

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Agreed. Hence my overall take-away which is since increasing paid relays is the only thing that is going to help at this point no matter the supply side policy, lets concentrate on that while leaving supply side as is rather than concentrating on increasing paid relays in conjunction with a major overhaul of of supply-side operations.

But back to my argument against de-pegging $POKT from number of relays, why not consider modifying your proposal to the much simpler RTTM=167 (the initial value you are proposing, assuming $POKT price of $0;04 and daily relay count of 1.2B) and be done with it. You still get the drastic upfront cut and you still get the reward growth as relays grow. But it avoids all the pitfalls mentioned in my previous post. Node providers then enjoy the benefit as relays grow and price improves and feel the sting (with potential further cutbacks needed) as price drops, rather than being completely insulated from $POKT price as in your current version of RDI.

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There is no magical way to drive the price up, and it is not a problem of emissions (entirely), so drastically reducing emissions wont fix the price.

You are expecting that after a hard reduction of the emissions many node runners will capitulate and bring the network costs down. Thus reducing sell pressure and drive the price up. That should be true either with RDI or just by reducing the RTTM. The only difference is that if the price goes down (a little), RDI would be able to compensate emissions and a fixed RTTM not. According to you, a fixed RTTM would translate in lower rewards (in u$d), making even more node runners leave the system, taking us to a dangerous situation where the production falls (and the death spiral that you mention begins).

(This death spiral.)

Under RDI, with a low POKT price:

  • Reducing the number of relays due to cutting free relays, will translate into emitting less than 240 K u$d, triggering the death spiral (but no hyperinflation). Our demand side is elastic, not our supply side, reducing relays will not reduce sell pressure. If you argue that the reduction of supply side will only be reducing capacity that we have for free relays, then this argument can also be used in a fixed RTTM scenario.
  • The ability to increase the cost of the relays is limited, if we charge more than others providers we will start to lose paid relays in favor of other services. If POKT falls 25% will we be able to increase the relay costs 25% without loosing paid relays? Also, this mechanism is not outlined in this proposal and can be true for a reduced RTTM scenario too.

RDI is simply too risky:

  1. We bet on rapid reduction of the network cost:
    If we underestimate the treasure of the node runners they could keep a high sell pressure for months before reducing their infrastructure. Without reduced sell pressure, the price will continue to go down.

  2. We bet on small reduction of the POKT price:
    If we tie the relay price to USD and emit POKT accordingly, we can create an hyper inflationary situation if sell pressure does not decreases rapidly (see my previous response). RDI creates a positive feedback loop with price, in a weak economy as POKT big dumps in the system (like node runners capitulating) can modify the POKT price, triggering more emissions and diverging rapidly.

  3. We bet that the network cost is 240K u$d, no more, no less:
    If we the calculated network cost of 240 K u$d wrong we could face the same problems that you point in SER, where low emissions affect the quality of the network and reduces relay count (death spiral). What if the network cost is 400 K u$d and we are low on the relay count to be profitable? This proposal will trigger the death spiral that you mention, but with a bounded emission to u$d, not even the POKT price going up will save the network as the emissions will be reduced as the price goes up.

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Although I appreciate the effort and sincerity of this proposal, I’m not in favor of the proposed action. I’m largely in agreement with the viewpoints expressed by @RawthiL and @msa6867 and I would like to add a couple of points.

1.) From my point of view, the network is not “over-provisioned”. All sane node operators run what they consider to be the correct amount of infrastructure for their environment. Price changes (downward recently) have changed the definition of what “correct” means, and incentivize further cost cutting and consolidation but providers adjust or fail. That’s how markets work.

2.) From my point of view. The current price reflects the current relationship between buyers and sellers. Any attempt to peg production to price will fail.

If we want to cut inflation more or faster or slower or less, we have much simpler methods already at hand.

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