Attributes
- Authors: Pocket Network Foundation (PNF)
- Parameter: RelaysToTokensMultiplier
- Current Value: variable according to Sustainable Emission Reduction (SER) schedule
- New Value: variable so as to maintain Target Daily Emission = 220k POKT per day
- Replaces: PUP-30: Sustainable Emission Reduction (SER)
Summary
To accelerate the road to becoming a deflationary protocol as outlined in The Road to Revenue, signaling to the world that POKT is on the path to economic sustainability, we should lower daily emissions to a target of 220k POKT per day (which equates to a ~5% annual emission rate today, then decreasing in % terms as the total supply increases). We will continue using the weekly adjustment mechanism from SER to ensure weâre accurately targeting this emissions rate; this proposal just replaces the Target Daily Emissions schedule from SER (currently 610k POKT, ending at 420k POKT in Feb â24) with a fixed Target Daily Emissions of 220k POKT today and in perpetuity until replaced by a future proposal.
Motivation
- Make Pocket more attractive to new builders, contributors and node operators by demonstrating that the Pocket Network community cares about the long-term economic sustainability of the protocol
- Strengthen the protocol revenue narratives (from burn and multi-gateway) for POKT that will be getting more spotlight with Messari reporting, Token Terminal updates, and PNFâs PR efforts
- Maintain sufficient emissions to sustain supply-side and prevent unwinding of two-sided market
Specification
220k POKT per day is derived from a reference Deflationary Threshold of 10B daily relays, based on the GatewayFeePerRelay of $0.00000085 per relay and a reference price for POKT of $0.038.
References:
- GatewayFeePerRelay = $0.00000085
- Reference Price of POKT = $0.038 (30d trailing avg)
- Reference Deflationary Threshold = 10B Daily Relays
Note: because the demand-side is priced in USD (out of necessity, being a commodity service whose competitors price in USD), fluctuations in the price of POKT will alter the Deflationary Threshold in practice if we do not have additional mechanisms to incorporate the USD price of POKT into emission controls. This will come in a later proposal (more on this in the Rationale section).
Calculations for Daily Emissions:
- POKT Per Relay = 0.0000223684 POKT
- POKT Burned Daily for 10B Daily Relays = 223,684 POKT
- Approximate Target Daily Emissions to be Deflationary at 10B Daily Relays = 220k POKT
Calculations for Annual Emission Rate:
- Approximate Target Daily Emission Annualized = 220k*365.256366 = 80,356,400.52
- Current Total Supply = 1,612,712,238.346057
- Annual Emission Rate = Daily Emission Annualized / Total Supply * 100 = ~5%
Rationale
Why care about protocol revenue and economic sustainability?
Pocket Network has always been a pure utility protocol. We are providing a picks and shovels infrastructure service to the crypto industry and embedded in our core strategy is the desire to become the blue-chip decentralized infrastructure protocol, with the ecosystemâs strategic goals including Pocket having $1B of annual protocol revenue, the most trusted infrastructure brand in crypto, and the institutional financial rails expected of a blue-chip token.
As shared in The Road to Revenue, the ecosystem strategy thesis, and a DNA update before that, protocol revenue should be the north star that guides all of us working on Pocket Network:
Protocol revenue is the right guiding metric for Pocket because it best represents value creation and capture from across the entire ecosystem. It is a shared metric for which we are all responsible. Itâs inherently focused on creating value for customers, and on closing the loop so that value flows back to ecosystem participants and to the POKT token. Revenue is the key building block for a sustainable network economy, which in turn is key to ensuring that Pocket is truly unstoppable⌠protocol revenue is what we will use as a network to track progress along our future path.
Furthermore, higher interest rates have prompted a clear swing in investor sentiment from qualitative factors - narratives, ideas, and so on - to quantitative factors - such as revenue, profit and defensibility. The market no longer rewards superficial measures such as growth for growthâs sake. Consequently, projects with growth-centric economics will struggle to attract new stakeholders due to a general flight towards the certainty and safety offered by fundamental value. If the industry is uncertain about Pocketâs stability, this affects all aspects of our networkâs adoption, including application developers, who will be less likely to adopt our infrastructure if theyâre uncertain about our longevity.
A corollary benefit to reducing emissions is that it offers the DAO the opportunity to be more creative with its treasury in the knowledge that the sturdier economic foundations provided by a more scarce POKT should make campaigns involving POKT in the future more successful. An example here would be additional POKT rewards to liquidity providers who support wPOKT, but there are likely to be many more examples.
Setting POKT clearly on the path to economic sustainability contributes to all of our ecosystem goals, reinforces the legitimacy of Pocketâs brand in the wider crypto industry, and maintains our attractiveness to prospective new stakeholders.
Why use 10B daily relays as a reference Deflationary Threshold?
Besides being a nice round number, 10B has also been identified as a theoretical limit to daily relays in v0, subject to upcoming protocol upgrades such as doubling the block size in RC-0.10.0. Using this Deflationary Threshold as a reference, therefore, implies that we will not try to become deflationary until v1 has launched next year, but that v1 could be deflationary from day one, which mirrors the journey Ethereum went through (becoming deflationary only after a major protocol scalability upgrade).
Having recently hit 2B daily relays during testing by a large client (per PNIâs reports) and with other large clients reportedly in the pipeline, 10B is an ambitious but realistic target for the next 9-12 months. We also anticipate relay growth to multiply with the proliferation of more gateways. It will also not take exponential growth beyond 10B for this strategy to begin paying off. At 10B daily relays, we would be a top 40 revenue-generating protocol, and with emissions remaining fixed at ~5%, further growth to 20-40B relays would make us a top 20 earnings protocol (where earnings, as defined by Token Terminal, equates to being deflationary).
Why not just set emissions so that weâre already at the Deflationary Threshold?
This would require setting Target Daily Emissions to approximately 26k POKT per day, or $30k per month. If we set emissions too low, we risk driving out too much of our supply-side, unwinding our two-sided market, and not having the capacity to meet growing demand.
Why keep the fixed emission rate model? Why not set mint equal to burn?
The fixed emission rate model introduced with WAGMI and continued in FREN/SER holds emissions to a constant rate, which is a necessary component of establishing a Deflationary Threshold. Without holding the emission rate constant, any growth in daily relays would equally impact emissions as burn, meaning weâd never become deflationary.
Some community members have proposed setting mint equal to burn, arguing that all emissions should be a direct reflection of payments by application developers (and/or gateways). This is a node-centric view of Pocketâs economics, abstracting away the protocol and assuming a direct relationship between the application developers and the nodes serving them. We would advocate instead for a protocol-centric view of Pocketâs economics, where the protocol is an intermediary collecting revenue from application developers on one side and paying node operators on the other. This provides us with more flexibility to scale the supply-side up or down independently of the demand-side, accounting for the context of serviceable demand, protocol limits, and economies of scale.
Is $250k per month sufficient incentive for the supply-side?
A daily mint of 220k POKT equates to approximately $254k per month (at the reference POKT price of $0.038), which is almost exactly the same as the cost for 1.3B daily relays per month using Infura (based on their pricing of $0.00000657 per relay or, alternately, Infuraâs $1k/mo Growth Plan of 5M requests/day scaled up 260X to 1.3B), despite the fact that Infuraâs pricing accounts for a reasonable margin to fund their customer support, sales, marketing, and engineering functions, as well as their non-node running infrastructure, on top of their node running costs.
All non-node running costs in Pocket are currently accounted for by PNI, PNF, and the DAO, and not Pocketâs node running community, which should give us the confidence that $3m+ per year in incentives is more than enough to incentivise a sufficiently resilient and performant community of node operators that have to pay very little in terms of customer acquisition costs relative to starting their own centralized offering (provided, of course, that they pay for their own POKT), even if the significantly reduced rewards may prompt some unstaking/consolidation.
Lastly on this point, it should be noted that in the long-run we should not be willing to settle for matching the cost of centralized providers like Infura. If the wholesale strategy being pioneered by PNI is to have any merit, and the addition of gateway intermediaries with their own operating costs is to be economically viable, the protocol itself should be spending less on the supply-side than the equivalent cost of Infura et al. We should work towards this either by holding supply-side spending constant (see USD-denominated emission controls discussed below) and growing the relays we serve or by cutting supply-side spending further.
Is ~5% a good emission rate?
Using the protocols listed on the Web3Index page as a guide, we can see that annual inflation for other leading Web3 infrastructure projects is as follows:
Ranking on Index | Name of Project | Annual inflation |
---|---|---|
1 | Storj [1] | 0.56% |
2 | Livepeer [2] | 9.86% |
3 | The Graph [3] | 3% |
4 | Akash | Unable to verify |
5 | Sia [4] | 5.96% |
6 | 11-14% (SER forecast - POKTscanâs live data) | |
7 | Helium [5] | 13.4% |
Sources:
[1] Storj: Storj (STORJ) Price, Chart, Value & Market Cap | CoinCodex - unable to verify elsewhere
[2] Livepeer: https://explorer.livepeer.org
[3] The Graph: Indexing - The Graph Docs
[4] Sia: SiaStats.info - Macroeconomics
[5] Helium: HIP/HIP-solana-parameters/token-emissions-as-of-solana-migration.pdf at 5c6363d663f984a9c90c30648ec89684c40f18ff ¡ helium/HIP ¡ GitHub
Although this information is difficult to reconcile as different protocols account for inflation in different ways - and websites such as stakingrewards.com include both inflation and transaction fees in their staking rewards calculations - we can say, with a reasonable degree of confidence that Pocketâs inflation has been much higher than almost all of its contemporaries since inception.
Reducing Pocketâs emissions to ~5% (assuming zero burn) results in an inflation rate that is 17% less than the median of 5.96% in the 5 examples above (other than Pocket) that we have numbers for, and 25% less than the average of 6.56%. However, as far as we can tell, all of the examples above are on inflation schedules that are reducing every year.
It should be noted that ~5% would be the emission rate (or % APY), not the inflation rate. Inflation will be a function of emissions minus burn and will thus decrease over time, notwithstanding the natural reduction in % as a result of emissions being fixed in absolute terms to 220k POKT per day, if burn continues to grow relative to emissions.
Why publish this proposal before the node economics survey results?
As has been discussed in various channels, PNF is preparing a survey to help demystify the unit economics of node running, to help inform future emissions policies.
While we hope the results will be informative, they will not be a panacea and should not be a blocker on positive progress. They will be a rough measure of the average operating costs of node operators today, not a reference for what the operating costs should be if we optimize the supply-side.
While we wait for the survey results, we can get the debate started on these proposed measures which have been considered carefully with reference to other data points, such as the benchmarks above for pricing and inflation rates of comparable projects.
Why no USD-denominated emission controls?
In The Road to Revenue, we advocated for introducing some USD controls to emissions, to adjust for the impact that price fluctuations would have on the Deflationary Threshold. These components were the most controversial parts of our post, with a few community members disagreeing on principle with the dollarization of Pocketâs economy. It is our view that it is necessary as a result of providing a commodity service that the competition prices in USD. We also feel that it is a natural conclusion of the protocol-centric view of Pocketâs economy (described above) that we would calibrate our supply-side spending in USD terms, given that not only are the demand-side fees priced in USD but also the individual node operator expenses such as hardware, salaries, etc.
Besides what is likely to be a heated ideological debate, such control mechanisms would also need to be explored more deeply before being proposed for implementation in production. Rather than delay by getting hung up on one component of the overall strategy proposed in The Road to Revenue, it was our view that we should make progress in a stepwise manner.
It should be noted that not doing this now means that the reference Deflationary Threshold of 10B daily relays used to calibrate the proposed emissions of 220k POKT per day is not a threshold that we would be able to signal, since it will fluctuate with the price of POKT. This proposal kickstarts POKTâs accelerated path to sustainability but would not be the final step. Once we have settled on a USD-denominated control mechanism, and built consensus on the desired USD supply-side expenditure, which will be informed by the survey results among other data points, we plan to follow-up with a proposal to fix emissions based on this USD target.
If overprovisioning is the issue, why not use other mechanisms to incentivize consolidation of nodes?
These have been done before (see PIP-22 and PUP-19) and could certainly be done again. Such changes will be more involved and more disruptive on a protocol level (e.g. forcing upstaking, or else unstaking, of nodes).
In any case, consolidation of nodes isnât a primary objective of this proposal. The main objective is to signal to the world that the Pocket Network community cares about the long-term economic sustainability of the protocol. Reducing the gap between minting and burning is the only way to do this.
How should we account for the impact on the DAO treasury?
As @msa6867 pointed out in the thread, this proposal will also reduce the rate of growth of the DAO treasury which may reduce the future spending power of the DAO (assuming no change in the value of POKT). This may warrant increasing the DAO Allocation (%) in the future, which would in turn reduce the Servicer Allocation (%), though we have opted not to factor in any DAO Allocation adjustments for now because to do so would require speculation about parameters and context we cannot predict (such as the value of POKT and whether the existing treasury will be sufficient to support contributions in the medium to long term, through mechanisms such as the ERA Budget).
Dissenting Opinions
Weâll put node operators out of business
The natural biggest concern about a proposal like this is that weâre going to cut emissions below some critical level that will lead to most node operators unstaking, pooling hardware (e.g. Community Chains), and ultimately centralizing the supply-side.
Weâd like to propose a reframing of this problem.
Building on our RPC trilemma thesis, a decentralized network should be able to deliver a service at a lower cost than any other centralized alternatives. How do we get there, you ask? As per Olshanksyâs writings on this, and PNFâs strategic thesis, we believe that the path to overcoming the RPC trilemma is through our community. A community that collaborates together to share costs and innovations and benefits from being able to use their infrastructure for more than just one use case should be much more cost-effective and nimble than any large centralized RPC player that has to run the full stack of sales, marketing, engineering, customer support, operations, and so on, in house. It is vital that Pocketâs community leans into the differences available to us all as a decentralized open source community, as this is ultimately where our competitive advantages as a community lie when compared to our centralized competitors.
To date, it seems we have implicitly assumed that node operators should be able to rely on Pocket as their sole source of revenue. No crypto network is an isolated ecosystem, we are all embedded within a broader ecosystem, and this is especially true for Pocket (arguably more than most) serving RPC data for 30+ unique ecosystems. Yet most other crypto networks embrace their inter-network relationships far more than we have.
Every node operator who is providing RPC data for a given blockchain is just a few more steps away from generating revenue as a validator for said blockchain. If more node operators were validators for the chains they already support, thus diversifying the income they derive from their nodes, this would massively benefit the ecosystem as it would enable costs to be driven down to the marginal cost of servicing a relay. To be clear, we are not saying âyouâre on your ownâ or âlook for revenue elsewhereâ but that there is significant underutilised value in the public good we are already providing to the 30+ networks we serve and untapped channels to capture this value more effectively, which would reduce the burden on Pocketâs economy to fund these activities all by itself.
This would also help to strengthen our ecosystemâs strategic relationship to the networks we serve by forming deeper relationships with their community members, promoting deeper cultural understanding of their ecosystems, accumulating governance power in their DAOs, and ultimately enhancing our understanding of their developers (our end users). For an example of a scenario where this would have helped us, see the repeated failed Gnosis Chain proposals (1, 2), where we were unable to garner enough quorum in their DAO to pay for the public endpoints weâve been providing.
If any node operators want to pursue this strategy, PNF would be more than happy to help them raise their profile within these 30+ communities so they can acquire delegations more easily.
Factoring in these 30+ revenue sources that are available to node operators, and the Infura benchmark we referenced above, should give us the confidence that $3m+ per year in incentives is more than enough to incentivise a sufficiently resilient and performant community of node operators. For those who may nevertheless need to unstake and sit on the bench, they are looking at a dilution rate of only ~5% per year and decreasing over time, a far more palatable rate than the 60% they would have faced a year ago.
Wonât we squeeze the long-tail of chains?
A related concern is that node operators would drop support for the long-tail of chains that bring in fewer rewards, especially those which are more expensive, but which may nevertheless be strategically valuable to Pocket in the long-term, including contributing to the narrative of Pocketâs ubiquitous multi-chain support.
One thing to note is that, as a function of lower traffic chains and newer scaling technologies, many long-tail chains are among the cheapest to operate. There are exceptions such as Polygon Archival and BSC Archival but exceptions should not rule our policy-making; we should set policies based on the average case and then figure out solutions to address the exceptions (e.g. Community Chains).
We should also never assume that the Supported Blockchains list is append-only. Exchanges typically delist tokens if their volume drops too low - we should not be afraid to adopt the same approach if long-tail chains fail to grow their relay counts and prove their ROI to us. Chains with potential for growth can be strategically supported at a loss but the DAO should be judicious about dropping chains that weigh us down.
Lastly on this point, the economic R&D workstream for v1 includes a topic on computation-differentiated rewards and fees, which should make the conversation with regards to how much we charge/reward relays on different chains much more nuanced in the future.
Edit to add:
As @msa highlighted in the thread, it would be helpful to provide more detail on how this proposal might impact the QoS of long-tail chains, which may see underprovisioning of nodes due to low rewards, and whether this might be unsustainable considering the DAO is paying out monthly for DAN altruist backups in the case of low QoS. He later answered his own question but Iâve provided more detail below based on the DAN reports that PNF has seen.
To provide more detail, DAN estimates average monthly costs of chain nodes as follows:
- Low Node (typical baremetal node for inexpensive chain): $190
- Special Node (chain which is unusually expensive): $1,000
Special Nodes currently include only Solana (0006), BSC Archival (0010), and Polygon Archival (000B). These currently only do 2M, 2M, and 4M daily relays respectively, so would be candidates for delisting when combining their unusual cost and their low traffic.
Letâs say 8 long-tail chains (as msa predicts) drop below the quality threshold that requires more use of DAN for those chains, that all of the most expensive chains are in this set, and weâre paying DAN for 4 altruists per chain for redundancyâs sake, weâre looking at max $15,800 per month paid out from the DAO treasury to DAN, or ~450k POKT per month at current prices.
Implementation
The implementation of this proposal is very straightforward. The FREN calculator, being used to calculate each weekly adjustment of the RelaysToTokensMultiplier parameter, would be updated to target a fixed daily emissions of 220k POKT rather than the targets outlined in the currently active SER schedule. The weekly adjustments would continue as usual.
Copyright
Copyright and related rights waived via CC0.