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

I think we need to address the mercenary capital issue.

Mercenary capital is not newcomers. It is not the people with superficial knowledge about the protocol.

Mercenary capital is the trading firms with one and only purpose, to mine the lights out of a network and dump the rewards as fast as they can to move to another farm.

I am not going to name names but anyone with a minimal DeFi experience knows who I am talking about.

Michael is absolutely right and I agree with his proposal.

5 Likes

Hey, thanks for your response. I am not surprised being called out on this. Yes, I drew a line. That was very intentional. Your own response exacerbates this us vs them mentality, so let me clear some things up.

Let’s play out a scenario:

We have been on an exponential growth curve in relays over the last 7 months after a relatively flat year. We continue to be laser focused on this. We’re nearly at 1B POKT in circulation. When we hit 1B relays and if rewards stay is as is, we’ll have 2B POKT in circulation within 100 days. Even if growth slows, when we hit 2B relays we’d be adding another billion of POKT in circulation every 50 days assuming all stays the same.

Exponential numbers can get large, fast. The train can quickly go off the tracks here, creating a real supply shock, hurting all of the new people who come in then, and those who have been participants in the past. All the same well reasoned arguments in this thread apply to future scenarios as today.

I would like to avoid reaching this kind of an environment. I do not think that we should cut rewards over night, but as my proposal indicates, slowly laddering down over the course of 6 months. This allows us to continue focusing on growth, attracting new, sovereign node runners, and allowing us to continue growing relays in a highly competitive market.


To be clear, mercenary capital has a place, and is not necessarily bad. The question I’m trying to answer is whether it’s what we should be optimizing for. My view is as we continue growing relays, and we do not do something about it now, it will be increasingly important to new entrants.

I wouldn’t consider anyone taking the time to post here mercenary capital. FWIW, when I got into bitcoin in 2013, I was just as wrapped up in the euphoria of number go up as most others. I wrote this blog post during literal peak prices in 2014, and the price crashing over the next 18 months didn’t make a difference for me. I discovered what bitcoin was really about throughout my education process and stayed for the many reasons we believe this technology is important today. That is the nature of this space and that’s completely fine.

With the numbers I’m proposing we should continue to see steady growth in nodes we are seeing today. Are most people coming in mercenary capital today? Probably not.

Will it continue to increase given no restraint on rewards and inflation? I think so.

It all boils down to reflexive up, reflexive down. Having a stronger foundation of node runners allows for the protocol to sustain any future shocks. We want steady growth, not euphoric rewards all of the time. Reading through the responses in this thread is why I gave it a name in the first place:

This is the distinction I’m trying to make. The filter is for time horizon. This is not insiders vs outsiders. The entire discussion is happening in public, and myself and the team are eternally grateful for the interest and the new entrants in the community.

As others have said in this thread, Pocket should be stable and predictable for node runners, with relatively consistent rewards. This was the entire premise behind the original WAGMI proposal. This has been difficult given our recent growth, and will be continue to be difficult to manage as we continue to drive as many relays to Pocket as possible.

We should not cut rewards over night for new participants in the network. This proposal allows for a steady change in rewards which can be communicated to all participants in the network. Future purchasers would know what they are getting into as well.

We are still a drop in the bucket in an RPC market with trillions of relays today. We’re trying to optimize for a future with yes, eventually quadrillions of relays, and this is a sensible approach to protect ourselves for that future.

In all seriousness, I do appreciate the call out, and I hope I’ve made myself more clear.

12 Likes

I’ve just come out of the v1.0 Spec Reveal call blown away, and it’s completely shifted my perspective on a few things.

  1. Strong, intelligent inflation controls will be more important than ever with the shift to QoS based rewards meaning a more consistent stream of rewards than we’ve seen currently.

  2. Every time I think I have a good understanding of the scale of the vision of this team, I’m surprised again as it is revealed to be bigger.

@adam , @o_rourke , I can see why this bears addressing sooner rather than later, given the pending change of rewards schema in v1.0, which I agree is critical to the global growth of the protocol.

My biggest remaining concern is simply timing. A number of folks are leveraged on various types of debt based on infrastructure build outs around Pokt. In September and October, as rewards were rising, some folks made pretty significant bets on their credit cards that 50-60K of hardware was a safe investment given the return, and these are all long term Pokt support folks. Staging the step down in manageable, predictable chunks over time helps address that concern, so given that:

I conditionally support this proposal.

8 Likes

I like the vision. we don’t have a crystal ball, but we need a clear vision and serious execution, then we will see how it evolves.

2 Likes

This is real-world talk.

1 Like

I still think it makes sense to tie any step down in rewards directly to relay targets. That way we can literally keep rewards stable from a daily average perspective while gradually stepping down inflation. You could even program this to be done in real time. If it truly is a sliding scale with those two variables at play, relays vs rewards, then link them in an algorithm, and you can modulate the target to be pegged to a certain level of inflation, depending on what the DAO votes. Relays go up, rewards go down, so that keeps average daily rewards stable (and inflation stable) then you can vote to move the pegged inflation level higher or lower, like a 3-way dimmer switch.

2 Likes

Thank you Ser. Everyday my conviction in this ecosystem grows stronger.

After seeing the debate on the forum, I’m going to modify this proposal to incorporate some of the points raised. Please stay tuned. It may turn out that my modifications are so starkly different from this proposal that I may release it as a totally new proposal.

That said, I think it’s important to take a step back from the proposal and understand that people on this forum, generally speaking, have the best in mind for the protocol. If you’re feeling underrepresented in your voice, please go get a DAO vote. It takes an investment of time, but is well worthwhile and you will learn a few things along the way. The DAO is not a spooky cabal, it’s made up of node runners, applications, and stakeholders that is open to new membership that decide the fate of proposals, just like this.

Spreading rumors about the DAO is FUD mongering. Choosing not to get a DAO vote is a failure of initiative.

5 Likes

What about tying rewards to node runner stake. Let us define BPR as the amount of Base POKT Per Relay. This can be any number, currently 0.01. You stake 100k POKT for a minimum of 1 years, you get 1BPR per relay. Reward people who are in it for the long run. You stake 50k, you get 0.7BPR . You stake 15K, you get 0.4BPR.

The numbers are just examples, they’d need to be well thought out. If the demand for relays grows, a 100k node runner can choose to split into two 50k nodes and make more money by relaying more requests but at a lower reward level . If the POKT supply is constrained, this should naturally push node runners towards more relays for lower rewards as demand grows , which means higher efficiency for the network and for its customers, and less inflation. Conversely , if relay demand goes down, node runners can roll up to a higher stake level to serve fewer requests for higher rewards. As opposed to just dumping their excess POKT.

And then just let the node runner market decide where they want to be based on relay demand.

Once again, I would like to dispel this :point_down: notion while I’m here.

Debate around inflation has been going on for far longer than just this proposal. See PUP-11: WAGMI Inflation - please take a look a the dates.

Both are proposals authored by yours truly. This is an alternative take to the WAGMI proposal that provides for some different mechanisms than WAGMI does. Both are worth hearing out for their pros and cons. The timing has more to do with traction and relays than price.

We’ve left WAGMI up for a considerable time so ample debate could happen. I would say on average voting happens within 15 days of a proposal being posted. We’re well beyond that for WAGMI. I asked for additional time to craft up alternative proposals (to something I suggested). If I wasn’t looking for better answers, like this one, then why would I counter proposal a proposal with signficant support?

We operate differently than most protocols. Pocket Network is very parameterized which makes it reliant on proposals, like this, to govern the economics. I’ve authored models that have assumed a “tenthening” of token incentives at the 1B token supply mark, but it was nothing but a model with assumptions.

The plan was always to reduce rewards this way - through a proposal the DAO could get behind. Why prescribe an inflationary plan on an uncapped token when you don’t know how the growth will transpire? Hard coding, while considered, doesn’t leave much room for dynamic adjustment.

3 Likes

Great to see the Pocket team engaging with the community on the inflation proposals. I’ve entered in December and have convinced several friends of joining as well. I’m the founder of a new NFT platform, which aims to accelerate mainstream adoption of NFTs, and we are in the process of creating our own DAO. I came across POKT when I started looking at using it for my business and was taken aback at the use case as well as the investment upside.

I didn’t get in for a quick trade, as felt the overall backdrop to crypto markets would be choppy over the near-term, but felt strongly that the best place to park capital is in infrastructure plays. I intend to hold Pokt for the long-term even with lower rewards.

In a previous life, I lived and breathed inflation as a former bond trader, and appreciate the need to control inflation, and how it can get out of hand. I like the suggestion made above to tie any step down in rewards directly to target relays.

Node growth has gone parabolic in the last month in particular, and many of these newcomers have staked with an 81-day lock in Poktpool (60 days + 21 day hold) with the view that current rewards will last for at least those 81 days (most are not aware that inflation proposals have been discussed for quite some time). I think it would only be fair for the dropdown in rewards to not begin until 81 days after the proposal is passed. This way, anyone that is entering has staked with the full picture and can exit if they aren’t happy with the new rewards structure. So something like keeping rewards the same for 81 days (instead of the 30 you had proposed), and then bringing them down gradually over a 6 month period.

There have been some conjectures above on the price dropping due to inflation in a down market. POKT went from $1 to $3 when the crypto market was pretty much flat in December. In my view, this was owing to POKT only trading on OTC. It wasn’t until POKT was listed on Huobi and Gate.io that it started becoming much more correlated to the crypto market. This added liquidity came during weaker market conditions, and many sold the token given the huge outperformance vs the broader crypto market in December.

While I definitely dislike a pay to vote system, I think it would be important to gauge the broader community on whether they intend to continue staking or unstake prior to passing the final proposal. This can be done with a simple 1 question survey of a sample of stakers. The team will have a view on what % of the community would unstake, and perhaps they wouldn’t want those involved that are only in it for the rewards. However, if the actual % that would unstake is much higher than what the team and the DAO would have assumed, this may be a useful input into the downsloping of rewards. If for example, 30-50% answering said they would unstake, this would precipitate an unnecessary price pressure on POKT in an already weak market.

So in conclusion, I would suggest 1) keeping rewards the same until 81 days after the proposal; 2) do a broad sample survey of stakers, to better inform the DAO, and then have the DAO use that as a further input to vote on the final proposal; and 3) tie any step down in rewards directly to target relays.

2 Likes

Since speaking with my people about this, and honestly I myself was already planning 3 years (2.5 minimum) I can say that we are interested in this time lock mechanism.

We are more than happy to be the spearhead of this schema! Can this be worked into the proposal made by our fearless leader last night?

I feel that the ability to retain a slightly higher reward rate would spur possibly 50% more or less node runners to go ahead and do a time lock, which in turn would absolutely support the token price by creating a scarcity in supply flowing out of nodes.

Maybe something along these lines:

down over 6 months from 90% 10% DAO
To nodes at 41% 20%DAO

How about for tokens locked
5 years 70%
4 years 62%
3 years 56%
2 years. 50%
1 year 45%

So I propose that as @o_rourke 's plan is proposed and possibly enacted that this deflationary lock of tokens in the node side be written in to the prop. Or should be separate prop?

1 Like

Time lock is a great idea. But if you’re locking your tokens for 1 year, a 4% difference in rewards not that material. Think for time locking, there should be a notable uptick in rewards. Something like

5 years 90%
4 years 85%
3 years 80%
2 years 75%
1 year 70%

1 Like

Linking reward drop to relay rise appears to fit neatly with the numbers cited by O’Rourke and to resolve the problem they highlight. Or is there a downside?

Time lock seems to be another way of achieving the same effect as linking a drop in rewards to a rise in relays. In other words, if rewards drop in tandem with an increase in relays, would a time-lock add any benefit in terms of resolving inflation?

this is an incredible idea. Please you should open a new proposal separate to this infla convo so we can discuss this proposal but I think an amazing idea for the community.

thank you!

1 Like

I like the idea of tying rewards the stake size as opposed to stake time, as explained above, for a few reason:

  • It achieves the same result by allowing node runners to reinvest their earnings for higher rewards over time. While also providing them the flexibility to not do so, if they so wish. Or to jump in with a high stake for high rewards immediately - though I think we still need at least a year stake lock in for the highest reward level.

  • It allows flexibility both during times of growing demand and times of falling demand.

  • Currently there is no mechanism to drive competition among node runners. There is no market-driven pressure for node runners to lower prices, to get better, to get more efficient - everyone gets the same regardless. But if folks are willing to run nodes for lower rewards, especially as relay demand and POKT price increase, why not let them, as opposed to fixating the same rewards for everyone.

1 Like

i have a question regarding the part of burning the DAO holdings of pokt:

  1. those pokt are outside circulation so how will this effects the market/price? what does the DAO have to prove? i am obviously not getting something here…lol. the DAO is the voice of the people who are active and take the time to vote, but it is still pocket, we all have a goal in mind to do what is best for the project itself and the community, what am i missing :grinning_face_with_smiling_eyes:

  2. pocket network will need those pokts for LP on erc20 no? owning the LP is the best approach for pokt since LP is the thing that put the most strain on every project i know. paying 100% APY for a pool of 30m-50mil is a heavy expense that at the end pocket network own nothing. furthermore the revenue from the fees generated will flow back to the treasury.

and yes by exiting to the market we have connected to an ocean, many elements and forces that comes into play :slight_smile:

1 Like

That was a poor suggestion on my part. Reducing total supply does not have the same impact as reducing circulating supply.

Tl;dr: the first five paragraphs are just informational, not super related to the solution. Beyond that are my thoughts on how we should manage the incentives of the protocol at this stage.

What a community. Not to be too sappy, but this is the first DAO/project I’ve been an active participant in and it is so cool. This is great, together we can get to the right answer for Pocket Network and the world! WAGMI

One proclamation from me: there will be no death spiral as long there is demand for relays. The more service nodes that leave, the higher the return will be for new service nodes. The tech and system the team created here is not surviving on high market prices so it won’t die on low ones. Default alive.

My discussion below addresses managing through the growth phase that likely benefits from different incentives than the mature ecosystem will. In PUP-11 I am going to put another post addressing longer run economic concerns about the ecosystem, but the convo is wildly different at a more steady state than the current phase imo.

But first a definitional matter: in this ecosystem, inflation means POKT price should go down and deflation means POKT price should go up, all else equal (ceteris paribus for those more textbook or Latin inclined). My brain had those backwards for a bit because when I think of inflationary typically I think of prices going up, but the units matter obviously. So higher inflation here should really mean a lower POKT price. Moving on to a related point…

Reminder: POKT is a commodity token, not a value accrual security. The price is both an input and an output to the system. The monpol of the DAO should focus on tweaking incentives to balance supply and demand of the network. I don’t think we know what the optimal price for POKT is, but we can assess the impact of the incentive system we create. If supply growth > demand growth, we may need to change some incentives.

ok, the meat.

On managing the incentives of the current growth phase: the high inflation is meant to be an incentive to service node operators. We need service nodes to service application demand, so we have to build up and probably overpay for the supply side before demand comes online. Think of Uber giving crazy bonusses to drivers who sign on if they complete x number of rides. High CAC, for what I believe to be a very big LTV. These statistics on throughput usage are quite informative:

we are probably at a place where we can reduce the incentive to suppliers (nodes). There is one key assumption I am making here which is that we need to make sure the reward for running a node is greater than the cost. But currently the costs of around $200/month are well paid for with the current relays even if we cut infla in half it gives price enough room to fall 85%. I certainly don’t want that to happen but just saying it seems like we have a good margin of safety. There will be losers in this change. I will be one of them given recent entry to the protocol. It is not personal or intentional. Cut your losses or stick around long-term.

Another important point is that the current incentive system is not aligned with demand growth. So even when demand is falling, supply is increasing. That, folks, is how you get a death spiral. We can address this in PUP-11. I want to emphasize that a higher inflation rate disincentivizes demand. It seems we are at a point where we want to shift the pendulum form attracting supply to attracting demand.

I think these are very real concerns from the Pocket Network CEO:

  1. We are well provisioned
  2. It is expensive for apps and the DAO
  3. Attracts mercenary capital which increases volatility of the commodity

Demand fixes a lot of problems

Could be the most important point. We should focus some resources on increasing market share and usage of Pocket Network. As the number of daily relays increases we can reduce the inflation rate, therein keeping payout the same while making the economy less expensive.

In sum, I agree that it is a good time to reduce the cost of the network and attract more demand.
The risks to manage are:

  1. a drastic decrease in service
  2. rewards falling below cost+risk prem of being a service node

we can adjust if we get close to those issues, but the proposals put forth so far still sound very attractive in APY terms and the cost/benefit of running a node is still highly profitable. It seems now is a good time given the state of the ecosystem, we have some breathing room.

Last thing: I would strongly pushback on increasing the DAO allocation. Maybe I am thinking about this wrong but that doesn’t fix the inflation issue (unless it goes into a burn wallet but that’s burning not allocating to the DAO) and doesn’t keep incentives for suppliers high. So if we were ok with the inflation rate but wanted to reduce the incentive then the DAO allocation would make sense. I think we want to reduce the inflation rate though so just re-allocating rewards doesn’t make sense to me as a solution.

The solution earlier of reallocating rewards from suppliers to a DAO wallet that incentivizes demand through grants is super interesting.

2 Likes

I would support combining this plan with the 81 day “cooldown” period suggested by @metabridge if we had 45 day windows instead of 30 day windows AND if we operated on some type of curve, where rewards would drop incrementally each day instead of falling off a cliff each month. I would also like to see the numbers adjusted so we’re not talking about POKT/day but rather ratio of POKT/relay, and for the floor to be set at .005.

This should give plenty of time for folks already in to adjust their situation to meet new expectations as well as give a bit more time than 6 months to reduce rewards by half. By reducing according to a daily curve we should be able to limit new supply by around the same amount during the decrease window while doing it a bit more gently.

I’m supporting this in no small part because of the promise that in v1.0 we’ll be able to effectively run more relays per network node, thus necessitating a smaller network of nodes to run capacity. Though we may be overprovisioned for current Dapp demand, I have yet to be convinced that we’re ready to accept a huge influx of relays to the network. Lower POKT supply means less tokens available to stake to new nodes, which will constrain the growth of the network when demand spikes exponentially.

I would feel much more comfortable seeing numbers from @michaelaorourke and the POKT team supporting this thesis, otherwise it feels arbitrary and doesn’t take into account the potential for a future scenario where there is not enough POKT in existence to support scaling the network to meet demand. This, in my mind, is the only significant risk in reducing inflation.

I would also feel more comfortable if, rather than focusing on the dials and levers of inflation, the team were focused on onboarding new projects to the network. Currently we have a single project/chain driving most of the traffic. We need greater variety to credibly reduce inflation so we can withstand the prospect of one of the projects on our network blowing up.

Side note: The onboarding of Harmony proves the point on demand scaling exponentially while supply scaling linearly. We went immediately parabolic when the project onboarded, while token supply and node count took some time to catch up to the same ratio of nodes/relays as had existed prior to onboarding the project. By reducing the inflation rate by 50%, that same catch up would have taken twice as long.

The counterargument that the network is overprovisioned, while valid, ignores the fact that the network MUST be overprovisioned to service spikes in demand. My understanding is that Harmony is currently only sending 5% of their traffic our way. Would we still be overprovisioned if they were sending 100%?

4 Likes