Recommendation for Buyback of POKT to replicate App-Stake burns until the Maturity Phase

I support the recommendations of Jack Laing of POKT Network in instituting a buyback of POKT from the marketplace that will be supportive of POKT’s price and of the network as a whole until the App-Stake Burn is implemented in the Maturity Phase. Why?

  1. POKT’s price has considerably
    underperformed almost all other altcoins in this market downturn by a significant margin. See POKT vs. Altcoin Futures

The price decline has been dramatic, persistent and threatens the growth of the network in my opinion. Jack Laing presciently warned about our current situation in comments he submitted in “PUP-12: Inflation Stop-Gap Proposal: Double Trouble.” He wrote:

This shift to long-term sustainability revolves around burning POKT to ensure the POKT supply is stable doesn’t lose its value as a form of consideration to Service Nodes.

In addition, to ensure the continued sustainability of POKT, to retain reasonable margins for Service Nodes, and to eliminate unnecessary overinflation of POKT, the Pocket DAO may activate an Application Burn Rate (ABR) at the Maturity Phase. This means that any POKT minting is balanced out by Application stake being burned at the same rate.

However, there are many drawbacks to excessive inflation, such as sell pressure which may reduce activity on the network, network underutilization and unnecessary hardware costs, and a general perception of long-term unsustainability

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.

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.

I will add that Jack voiced these concerns when POKT’s price was 200%+ higher than where it is now. Node costs meanwhile have either remained fixed, or gone 50% higher (in the case of C0D3R’s premium nodes).

In fact, in POKT’s Monetary Policy it is written: This shift to long-term sustainability revolves around burning POKT to ensure the POKT supply is stable and doesn’t lose its value as a form of consideration to Service Nodes

Also in the Monetary Policy it is written: In addition, to ensure the continued sustainability of POKT, to retain reasonable margins for Service Nodes, and to eliminate unnecessary overinflation of POKT, the Pocket DAO may activate an Application Burn Rate (ABR) at the Maturity Phase.

I would argue that POKT is in danger of “losing its value as a form of consideration to service nodes,” and is no longer retaining “reasonable margins for service nodes,” now that node provider costs as of today can consume 30%-50% of the node provider rewards.

I believe that POKT’s monthly relays, new chain additions and number of nodes is proof-positive to potential clients that the network is “here to stay.” In addition, POKT offers many more attributes to prospective clients vs. a centralized node provider that enables POKT to begin charging for its service; above and beyond a “free tier” level.

As Jack Laing accurately predicted and recommended regarding this:

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.

The general bear markets (in equities and blockchain), coupled with the persistent decline in POKT’s price and reduced rewards via WAGMI implementation may cause a cascade effect of node providers unstaking and leaving the network in the near future. This will cause a further significant drop in price and reduce the size of our network (which is one of our marketing points), as well as undermine the confidence of potential node participants. A price decline will feed into a negative feedback loop where selling begets more selling. All of this will occur while node providers incur fixed costs which consume an ever-increasing share of their returns since rewards are paid in POKT.

Recommendations

  1. The POKT team works to create a tiered payment system for customers, ending the “free for all” model currently in place. As Jack recommended: “…activating payments above a free tier which can be set at a slight discount to centralized alternatives.”
  2. Payments from customers are used to purchase POKT from the general marketplace.
  3. Purchases made from the marketplace are executed on various exchanges (MEXC, OKCoin, Huobi, etc.) at random times so as not to be front-run. I do not recommend purchasing POKT via OTC providers since it is not supportive of the price.
  4. The purchased POKT can be frozen and held by the POKT team for future sales (at some point in the maturity phase as a cash reserve), granted to the DAO, used to give grants to developers, or any other ideas that are supportive of the POKT network as a whole.
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I won’t say exactly how much a Pokt Node costs, but at scale, I would say it’s far less depending on how you run your infra and the scale that you run at. Let’s not use c0d3r as an example unless we also know the margins at which each nodes return for them. It can definitely be less than 30% though.

I don’t see this as a bad thing aside from the sell pressure of mass unstake. Our network is over provisioned, sacrificing quality for quantity. In fact, we have so much room to improve in terms of quality. Many of the centralized block chain as a service provider run caching layers on top of their chain nodes to serve more API requests and reduce their computation workload. We haven’t done any of that. Pocket nodes are going to become cheaper and more scalable thanks to V1, and later down the road, ecosystem development can introduce various software on top of chain nodes to reduce the cost.

At current rates, nodes are still attractive to run as long as you are making the right investments. Many node runners are taking advantage of the bootstrapping phrase and high APR which leads to them paying a premium price by using a cloud provider, node provider like c0d3r, etc. This isn’t a bad strategy but probably not sustainable, long term. 400% APR anything is not sustainable. The ones who have been making capital investments in bare metal hardware will still be able to continue to serve relays even as WAGMI continues to drop the rewards and price fluctuations occur unless the pokt price goes to the cents.

I’m all for testing our economic model and seeing how much customers are willing to pay for a decentralized, scalable and resilient network though. So thanks for bringing up this conversation.

A couple questions for you/anyone:

  • In last 24 hrs, we minted ~2.7M POKT which results in 168M app relays a day. So in about 6 days, we’d have enough pokt minted to power the entire network. Without a proper burn, how will charging customers fix this problem? Feels like a very short term fix. Will the revenue from the Portal be able to keep up with this amount of pokt?
  • Should we be expecting relays to drop once customers have to pay? What if price doesn’t follow?

We definitely need to pursue this path; however, its worth noting that any purchase of POKT as an application will have a neglible impact on price. If we do 1B relays a day, that is 1000 $225 a month infura subscriptions ($225k monthly). That is approximately 4 hours of inflation.

To increase price, it is more productive to work on optimizing the network and the client to be less wasteful, by allowing one to stake more than 15k pocket or abstracting the servicer from the full node. Both of which would lead to a 50-80+% decrease in infrastrcture cost. The network costs $3-6m a month to run, and this is lost buy pressure. This change would have a demonstrative impact on price and is more important to focus on now.

Also, the majority of POKT’s relays come from being behind main RPCs. These aren’t specific applications and I would imagine if its difficult to get them to use POKT, it would be extremely difficult to get them to pay for it. The foundation is better off focusing on improving the quality of service and trying to get PNI to optimize the client then they are on getting people to pay.

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No need to burn, just stop minting more tokens. As the price goes up, node operators will sell their rewards to the market place, that then app users can purchase for more relays. When at the point there are not enough tokens for the increase in relays, mint more tokens.

@Florida, thanks for starting this conversation. It’s one that needs to happen. I want to avoid speaking to the price of the token but I will speak in general terms of economics and supply/demand. It’s bad form for me to talk about price.

It’s my personal opinion that the way to manage things is to a) reduce the cost of the network without hurting the node staking economics b) reduce the inflation accordingly c) activate the demand side of the market. There are a few different levers for doing so including increasing the minimum stake per node, incentivizing validation over servicing, or some combination of the two. There are probably other levers to pull that I’m not thinking of at the moment.

The challenge here is that there are cons to every single approach and no one proposal is going to get through without much compromise. The important thing is that we are willing to make near term sacrifices for the long-term benefit of the project.

While this is a good start to the debate, I’d recommend putting in a proposal to this effect @Florida to get the ball rolling (please use the template).

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A project not speaking about token price, is like a business not talking about bringing shareholder value.
any project who is happy to see it’s token price go to zero is doomed.

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Thanks @Florida for the initiative here.

@adam sums up some of the trade offs and highlights the approach we have to take to have a good outcome for all.

As far as c) activating the demand side - this may not be as much of a governance issue.

To activate the demand side, there are several product features that unlock this part of the economic flywheel. During InfraCon there will be a couple of talks that highlight this. For anyone who is interested in unlocking buy-side pressure, make sure to catch recordings of InfraCon talks on the topic.

I love the forum for the governance, economics and great discussion we have. In this case though, the product will speak for itself and have more App users buying & staking POKT. This doesn’t solve the whole issue, but it alleviates some of the pressure.

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The supply side has been bootstrapped, overly so. There is no benefit in continuing to mint POKT at current rates and spinning up more nodes. We’re just diluting our own bags and wasting money on infrastructure costs. I think WAGMI should be adjusted to 10% target inflation, or about 10 million POKT per month, or about $60/month/node at 45,000 nodes and current POKT pricing. Stack 3-4 nodes on the same physical server with docker or kubernetes or whatever, you’re still making decent money, the relay traffic does not justify separate piece of hardware per node right now anyway. Folks like C0D3R are just gonna have to figure it out and make their product competitive, we can’t sacrifice the whole network for them. If there’s mass unstake so be it, if some don’t mind selling their bag at 5 cents or whatever the price crashes to, others won’t mind buying it - speaking of buyback…

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Sittuation is extremely serious.
We need an strong signal for the market.

For me is not more profitable anymore, i guess i represent many people here.

Now, i need to unstake, not to sell, jist to avoid costs than can cause me debt.

You are not taking serious this sittuation.

We need all the tools inmediatly in the actual sittuation.

1.- burn some tokens from treasury.
2.- buyback programm if we have usd to do it.
3.- fix rewards to a % must be considered
5-7% month.
4.- some burning process inmediatly.
5.- some way to get buyers for token and other case use.
6.- maybe we can burn tokens to create wpokt with some farming system to finance.
7.- we need to launch wpokt with some target price higher.
8.- do a high marketing campaign about changes.

We need to get in a phase that look a growth no more than 5% month. We can let everything so free.

Bes regards

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There have been a great many conversations around this topic (and the greater ecosystem), and I broadly agree that all options should be on the table for discussion. As @adam and @RichCL have both mentioned, there are a number of levers possible to help mitigate some of the existing issues, and @JackALaing has commented elsewhere that monetization for the portal is already in progress. Clearly, there is an understanding and agreement that item 1 is necessary and immediate.

My own comments below Jack’s in the proposal quoted here strongly agreed, and thus, I strongly agree with the spirit of this proposal. But in the current landscape, I also strongly agree with @addison :

A 75% reduction in infra costs would go along way to relieve the sell pressure you reference here:

A combination of your proposal with supporting proposals around infrastructure optimization to reduce total network fees is something I can get behind.

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agreed. Any lower and we’ll see node operators close down their servers and unstake due to no longer profitable.

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This is useful feedback. 2 follow-up questions -

  1. What price level of POKT would have to happen for you to close down your server and unstake?

Data points like those @iaa12 are super useful and these inputs help us all do the same math.

  1. If a # of nodes unstaked for these reasons, does that benefit the node runners who stick around?

Seems like it may increase their income.

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same here. I’ve been using one of the recommended 3rd party providers and its not sustainable. Also, very weak liquidity