PUP-12: Inflation Stop-Gap Proposal: Double Trouble

Right on. I’m going to become a Shepard and full time abilities will begin to show. I will volunteer to do conventions and trade shows. I’m free for the next 2 months. Seriously, anything I can do to help, please call on me. I’ve been a web entrepreneur since 1999. Glad to do anything that keeps pocket growing fast and balances things out. I love to travel. Let’s talk about it.

I’m sure I can build the dApp side at DevCons as well as build the brand simultaneously! This is so exciting!
Where do we begin? @JackALaing

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Every time I have some concerns, Adam, you’re quick to dispel them with solid answers. I appreciate your well reasoned approach.

This was fundamentally the major concern I had, as noted in my previous responses.

I support the inclusion of an increased DAO allocation as part of this proposal.

I very much support a staged approach to this, especially since as one of the partners in a fractional staking pool, services such as ours are likely to be heavily impacted by this proposal given the fickle nature of retail.

Additionally, derivatives such as collateralized staking have already sprung up, and an immediate implementation of a reduction of this size will fundamentally alter terms schedules that are live today. In short, I don’t think this proposal has a complete view of the impact it will have in the marketplace, and the immediate impact it will have on a number of large noderunners.

Given those considerations, I would be inclined to vote in support of this proposal.

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This dramatic change in rewards would stomp out independent node runners IMO. Chain nodes are becoming increasingly more expensive to run (Harmony has doubled in storage size in a matter of months) and from my napkin math, 80% barely covers the growing expenses of node running over the course of a year with the cloud… unless you have a lot of POKT nodes.

Ultimately, the cost of trying to run your own nodes will not be worth the time and resources, sending even more folks to the huge node providers. Not to mention the rug pull effect it would have on node runners that are just gotten started in the last few month. I think that kind of dramatic changes would be a stain on our project. In all of POKT’s economic models there were curves… I’ve never considered an economic model with immediate drops of 70%.

We’ve marketed this phase as our “Growth phase”, so I suggest we have a model that can begin to tapper the growth phase, not cancel it over-night. This could be a great marketing event as well, encouraging folks to jump in with node running while this growth lasts for the next 10 months, or something of that nature.

One real fact is that right now we don’t have ways for apps to practically stake POKT for relays, so there’s no reason for apps to purchase POKT right now. Node running is the only economic incentive to buy POKT. Cutting the rewards to where your essentially forced to use a large node provider, or be an independent whale, will take away some of the natural fire that is in our community IMO.

TLDR: The huge node services can easily absorb this dramatic of a reward change as their margins are astronomical, while this could essentially illuminate the small (but growing) community of independent node runners if enacted with this kind of drop-off.

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hi,

The entire calculation is based on the current state of the POKT network.
Are you not thinking of further expansion? The network grew at a fast rate in the recent months.
Do you have projections for the amount of dApps that are going to be joining POKT (increasing the daily relay count) in 2022 and following years?

Other than Harmony, the number relays coming from other chains towards POKT is insignificant.

The upcoming wPOKT is meant to help POKT tap into the ether blockchain.
Lets assume POKT is servicing ~250Mil relays a day. It seems that POKT is getting just the tip of the amount of daily relays passing on ether (Infura is said to handle billions of txns on ether per day).
Aren’t you expecting a significant increase in this number with the rise in usage of ether based dApps (and possibly/hopefully other chains)?

It seems like a drastic move (regardless the timeframe) to be doing a 70% decrease in node rewards.
Why not aim to a smaller target that will match the potential increase in daily relays (which seems like a big unknown right now).

The current RelaysToTokensMultiplier is attracting stakers who are node runners, who are taking a higher risk. Without an increase in the daily relays the current situation will lead to a decrease in POKT rewards and may create a negative effect on the entire project.

Stating PUP-11/12 have nothing to do with market conditions is fine - but the numbers suggested in the PUP itself do have a strong correlation to the market conditions. Reducing to 80% ROI in POKT greatly differs if POKT price is 1$ or 4$ - and as was mentioned earlier, price movements can be unpredictable and uncorrelated to the inflation so how can you set the reduction while the price is as volatile as it is now? I would expect this volatility to decrease when POKT gets near a stable state (which adds another big unknown into the equation - when?)

I fully agree with the (urgent) need to address inflation - but I also think that at the current state of this project, the community needs to be investing its time in increasing the demand and usage by dApps from different networks as it seems the market share of POKT vs. its competition is very small.

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Well, I’m pretty sure that a sudden slashing of rewards would pretty much kill node runner and staker enthusiasm, precipitate a massive exodus from the community, and welcome a downward death spiral in token price benefiting absolutely no one. Furthermore, a sudden increase in DAO appropriations in the wake of this would be viewed with a jaundiced eye by the recently disenfranchised node runners. This project was really looking great and WAGMI sounded like such a well measured and responsible path to fiscal responsibility. Why oh why the sudden turn in strategy and new trajectory headed for a cliff in the popular opinion of your community members? Markets do not like sudden and irrevocable change and they react dramatically and frequently irreparably.

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Sushi USDC/WETH pool has ~55% APR at the moment. No 21 day lock-up, no node hassle, ultra-liquid easy to sell token, deep pool, benchmark pool collateral, already integrated into the DeFi ecosystem. On the other hand, some degree of IL.

So, I would target something like 100-120% APR as the final point of our bonding curve.

Other chains can adopt us as their default RPC and that will give a boost to the APR but the community doesn’t have this kind of information, therefore it is another risk to assume.

Yes, I would definitely support something like “4 month long reduction of RelaysToTokensMultiplier starting March, 1, adjusted every month, and targeting 100% APR.”

That would also give the BD team time to on-board more relays from chains and some extra fuel for the marketing team.

UPD: probably, it would be even better if the reduction isn’t linear and becomes steeper to the end. This way we can market it as something like “look, if you stake today you will have 2-3 months of almost stable huge APR but after that we will predictably and fairly rug it to still higher than average value so your tokens become more valuable.” This will allow us to get maximum attention on the span of the next 2-3 months, during the LBP and the liquidity bootstrapping phase. Also, it will quell some immediate concerns about inflation.

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There would be an intense emotional backlash amongst the general retail investor community which would come from implementing PUP12.

WAGMI has been vetted and generally well received by the reasonable masses… as shown above by he staking trends, there has been huge enthusiasm by small investors to scoop up what the whales have dumped on us; however… (be it real or imagined) an aggressive move like PUP12 will be seen as a power and money grab by the masses of retail investors who judge and vote in black and white.

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hey,
in general the idea of lowering inflation is a given one, with that a gradual change is a must in order not to break the "“machine”, furthermore there are several aspect connected to it that must be taken under consideration:

  1. if the increase in node count is on the rise and liquid pokt is not rising dramatically this means growth of the network is healthy and thanks to that inflation, this gives us the ability to supply any demand of relays and dapps.

  2. by doing such a drastic change we will be hurting 15-20% of our node operator who entered when pocket was between 1.8-3$.

  3. if we wish to stop or slow down the growth of the network ( node count) this is the way to go :slight_smile: .

  4. how many nodes do we aim to achieve within 6 months, how many in 12 months? assuming the requirement is the same of locked pokt ? do we aim to have 100k nodes within a year? if so the math of 15,350 x 100,000= 1,535,000000 pokt, that is assuming we leave the number of pockt per node at 15,350k ±, add to this a certain amount of pokt in the liquid market like the same ratio today or any other ratio we aim to achieve, but if 40% is liquid and 60% staked ths mean another 1 bil ± should be in circulating, + daps, hence the need for inflation at this point.

  5. what is the capacity the network is working now? how many more relays can the network provide before it can not because of slowed growth? this growth in relays should be combined with the growth of nodes to balance between the two is important.

  6. for investor and hodlers we have staking via poktpool, i believe that investors and hodlers will love this compounding feature and will give answer to this sector of the market that we just entered to.

  7. if w wish to reduce inflation we can do it gradually on a monthly basis, i do not have the number because i need more data as mentioned above.

  8. we can start charging and burning that revenue from dapps yet we must stay competitive in this stage to capture more of the market share.

  9. in your proposal you wrote 100% for 15 months? or 100% APY? it is unclear so let’s stick with APR as this is the standard of conversation :slight_smile: clarity .

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This proposal deterred me from buying the dip yesterday. Also bothers me how you talk about the current ATH when POKT literally just went parabolic on listing and funding with amazing rewards…now as soon as more retail wants to get involved you propose slashing rewards by over 70%? Insanity, so much room to grow and build…before a GRADUAL deflationary approach. More nodes the better.

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Hello,

I’m a current fractional staker of POKT on Poktpool, so I’m representative of the retail investor. What initially brought my attention to the Pocket Network were the promises of high APR of staking rewards, and what really convinced me to invest was the high IQ and levelheadedness of the community after researching more into it.

Yes, we must eventually control inflation but - as others have commented before me - if we do this in an abrupt fashion, it will turn off the most recent investors and node operators as well as future ones, which may compromise the network as a whole.

What I suggest is maybe a combination of the WAGMI proposal and this one, where the 0.01 value of the mint rate curve starts at about where we currently are in relays per day (~ 250 mil) coupled with a lower end cutoff at the proposed value of 0.003162.

So as the relays per day increase, the RelaysToTokensMultiplier approaches the value of 0.003162 and never goes below it. From then on, we can see how the market behaves to this and ajdust accordingly.

This way, we insure a gradual and healthy amount of inflation control without scaring off new backers of the project.

EDIT: Just realized that the 0.003162 parameter is based on 300 mil relays per day so we can’t use that as a fixed number. The solution would be to then adjust the lower end of the curve so that the minimum APY is roughly what equates to 100%.

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To follow up on this, looking at it from a retail investor’s perspective, if POKT manages to establish itself as THE passive income crypto with a good APY over other projects, sound sustainability and inflation control and continued network growth, we’ll have very solid buying pressure, as there’ll a percentage allocated to POKT on nearly every crypto investor’s portfolio.

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We really need to work on your timing Adam on when you submit these types of proposals. :joy: While I agreed this shouldn’t be tied to current market conditions, but it’ll still drive the wrong initial idea of why it was submitted.

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I also do think some form of inflation control has to be done but not this way.
Team can always control amount of inflation using ‘Relays’ meaning team can delay adding new chains to control inflation. Let’s say we get double or triple number of node runners right at this moment. That naturally makes average reward by 1/3. DAO still gets 10%. More marketing and making awareness in crypto world is key solution not manipulation on economy in this magnitude. Let market chose it’s own destiny.

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I really agree with the first item on your list.

At this stage, all that matters is growth in relays and growth in nodes to support the relays. Projections for where each of those need to be or are going is what should drive any inflation response considerations.

I suggest the community be very careful about setting a precedent of making changes too quickly. As often happens, this will miss unintended consequences, that results in needing to make further changes to correct those, and on and on, etc.

For example, if this change hasn’t been thought through enough, and it drives people to unstake, or the lower inflation results in not enough node growth to support the desired dApp/relay growth, then I see a scenario where the next change to rectify that is to reduce the pokt/node.

In summary, POKT is web3 infrastructure, and while the team has been working hard on this for years, the infrastructure is still in its very early stages. The focus should be on how to grow the infrastructure. So any inflation mechanism proposal needs to map out the expected/targeted relays over time, matching that to the pokt supply, and % staked to support the targeted relay growth levels. If this analysis is shown, and the inflation proposal is built off of that, then I think it will be wholeheartedly supported by the community, and not have adverse or unintended reactions.

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I second, that. The DAO burning tokens is a great way to address situations of long term inflation control, while (primary DAO GOAL) continue to grow the initial network quickly. To make this any impactful, The reward need to continue to stay relevant for its early network supporters. Considering POKT network is still at its initial “s” first vertical leg run-up. When the network affect takes place, then DAO may consider staking some POKT for project expansion. Until then, short term use the 69 million POKT to burn. Short term anti “death” spiral strategy for long term network growth.

The question is, do the people who want to vote can vote? The process to obtain a vote isn’t quite easy otherwise i’d imagine you’d have one now given your presence in the community.

There are many other processes in place to fix this, such as removing bright id, automating some of the verification through discord, adding more paths, using coordinape, etc (PIP 8, RFP-2) . I’ve seen proposals pass with 1 to 4 votes, people aren’t participating, and i highly doubt it’s because they don’t want to. It’s a long process to get a DAO vote and that needs to be focused on especially with the huge influx of community members joining.

We are extremely early in our stages and with the CEX listings, we need to give more time for new app runners, sheperds, and node runners to retrieve their vote. Before that happens, I do not see why there needs to be a modification to the DAO allocation. That just gives more money to the DAO while not accurately representing the community as it grows. We can afford the .5% dilution until we have a better system for obtaining votes, then this can re-visited. I don’t see the urgent need to increase DAO allocation right now.

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Clearly inflation needs to be addressed, this path is unsustainable. Whether it’s done now, or when there’s 2 billion tokens, or when there’s 5 billion tokens, the arguments will be the same, the apprehension from node runners will be the same. I think it’s better that it gets addressed sooner rather than later. I like PUP11, but I think a reduction over the course of a few months to 0.003162 as a stopgap would be welcome.

Burning the DAO’s tokens is a red herring that does not solve the issue at hand. These tokens are locked up in the DAO treasury, not included in the circulating supply, and do not have any impact on sell pressure in the market. All you would achieve is crippling the DAO’s ability to fund projects that benefit the ecosystem, without actually changing anything about the inflation problem.

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I think that’s a fair stance for now and I wish that the proposal had not included changes to the DAOAllocation as a secondary action. People are getting hung up on this but the main purpose of this proposal was to reduce inflation, not to increase the DAO’s revenue.

I have taken the time to review both PUP-11 and PUP-12 again in succession. Here are the key themes that spring to mind while reading both debates, followed by some monetary policy recommendations. Note that these views are my own and not the views of Pocket Network, Inc., the Pocket Network Foundation, or the DAO.

This proposal isn’t reactionary; it doesn’t contradict WAGMI (at the current relay count)

PUP-11 was designed to target a fixed APY (WAGMI) that persists at different relay counts. The intention was that the WAGMI curve framework would be approved first, followed by a separate proposal that would set the target APY. Adam is now workshopping a refined inflation framework based on the feedback in that proposal, yet inflation continues and relays are expected to continue growing, so he suggested PUP-12 as a stopgap while he works on this.

The example WAGMI curve provided in PUP-11 was such that, at the current relay count of 260M, the inflation rate would be less than 0.005. This is approximately the rate that Adam is proposing here in PUP-12. I see no inconsistencies.

With these facts about Adam’s consistency in mind, I would suggest that it is not Adam who is being emotional or reactionary to market conditions, but rather those who are accusing him of such. However, I do not think that emotional reactions should be dismissed, they perhaps reveal factors that haven’t been reflected yet in any of the inflation proposals…

Price is a factor in inflation

While we might like to treat POKT as an isolated system, infrastructure costs are paid in $USD, which means the price of POKT is a factor in inflation.

POKT’s price dropped significantly in the last couple of weeks, more so than the wider market even though some have pointed to a correlation with BTC. In fact, from looking at CoinGecko a few days ago, POKT was the 4th largest dip among the top-300 coins.

I personally attributed this to high inflation, with a hypothesis that in bull markets high inflation will accelerate buy pressure, while in bear markets it will do the opposite (accelerate sell pressure), since those who chased POKT’s APY now have a glut of liquid tokens, not yet staked, that they can sell to hedge the market by reducing the size of the bags that they’re holding. A cycle of “feast and famine” as @miner so aptly put it in the other proposal thread.

On reflection, this may not be entirely the case, though I do believe it is one of the factors. Unfortunately, due to the timing of this wider market crash, we have a counterfactual to contend with. It is possible that POKT sold faster than most other top-300 coins simply because it had just had a significant run-up in the month prior, or because the listings generated their own mini hype-correction cycle, and then these factors combined with the wider market crash to generate a correction of greater magnitude. It’s also possible that my original hypothesis was correct, that our current inflation dynamics lead to accelerated sell-offs during market downturns, but we won’t know this until another one happens without the prior conditions I mentioned.

Another cause that I hadn’t considered, but I have noticed as a theme in people’s responses to this proposal, is the fact that infrastructure costs are paid in $USD and Pocket nodes don’t get cheaper when POKT gets cheaper. In fact, they’re more expensive now than they’ve ever been, with 4-8 vCPUs now being the recommended minimum adopted by most large providers. Now that POKT is almost half the price that it was last week, node runners, who are paying $USD to bare-metal/cloud providers, and stakers, many of whom are paying the node runners $USD to cover these infra costs, are now seeing less return on their investment in $USD terms.

This may be another factor in the hedging behavior that I hypothesized; rather than hedging the crypto market, they’re hedging the fixed monthly costs of their infra. Selling more POKT while it’s high can lower the average cost of infra relative to selling on a just-in-time basis. This is rational behavior.

If this is the case, then perhaps our inflation framework should account for the price of POKT too. Rather than targeting an APY (e.g. 100%) relative to the 15k POKT stake, perhaps it should target the APY based on the effective $USD cost of the 15k POKT stake PLUS one year of estimated infra costs.

We should avoid a supply shock

Due to app purchasing of POKT not being activated yet through the Portal, all of our buy pressure right now is coming from nodes and, whether we like it or not, many of these probably fall under the category of speculative investors chasing high APY, “mercenary capital” who are not in it for the long-term vision of POKT but instead for the short-term incentives brought on by our high APY. I don’t think it’s a coincidence that POKT’s repricing occurred around the time of our relay growth; more relays = more APY = more stakers.

Given this, I agree that any changes made to inflation should be gradual and predictable. Mercenary capital is likely to cause a supply shock if a drastic change is implemented. We already have reports of Poktpool participants asking to withdraw their funds and this proposal hasn’t even been put to a vote. If we rock the boat too much, we may simultaneously amplify sell pressure while diminishing buy pressure.

To address this in the long run, I think we should aim to close the supply-demand loop in our economy, activating the natural source of buy pressure from apps using the Portal to coincide with any inflation reductions on the horizon so that any drop-off in mercenary buy pressure can be replaced by app buy pressure, and apps can, in turn, swallow up mercenary sell pressure. This means ending the current free-for-all model in the Portal, activating payments above a free tier which can be set at a slight discount to centralized alternatives, and using the Portal revenue to buy back POKT from the markets. This, in my view, would be an effective substitute for app stake burns.

Recommendations

  • Rescind PUP-12. It was intended as a simple stop-gap but it seems to introduce more uncertainty to market participants than a predictable WAGMI schedule.
  • Revisit PUP-11 (WAGMI) and edit with the following refinements:
    • Inflation to reduce to the target level over the next 4 months, with the first reduction in 30 days (as suggested by Adam)
    • Adam’s refinements from the other model he was working on, where relevant,
    • An adjustment to factor in the price of POKT, i.e. APR should be relative to node stake PLUS annual node operational costs
  • If WAGMI passes, submit a separate proposal to agree upon a fixed WAGMI rate that the Foundation would target by adjusting the RelaysToTokensMultiplier. 100% APY was Lex’s suggestion. I would suggest we calibrate it with reference to substitute APY sources in crypto, excluding those that are clearly outliers on the upper end of the spectrum.
  • The core team maintaining the Portal should work to activate monetization (above a free tier threshold) then close the loop through a buyback program. This would be a temporary measure to replicate app stake burns until we activate them (most likely in v1).
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