Pocket Economics Brief
Pocket Network requires both developers and nodes to stake its native utility token, POKT, to participate in the network. Nodes earn rewards for fulfilling API requests for developers on a per request basis. POKT is permanently inflationary, but total supply will be capped through a burning mechanism put in place by the DAO, who controls the monetary policy. The final total supply of POKT will be dictated by the DAO.
Pocket Network uses a native cryptocurrency (POKT) to create a permissionless, two-sided market between node providers who run full nodes and developers that want to query data from a blockchain for their application/service. POKT is purchased and staked by both developers and node providers to participate in the network. Due to the unique incentives on each side of the market, staking differs between the parties.
Developers, requiring reliable infrastructure and relay amounts for their applications, stake POKT a single time for a guaranteed amount of relays per session for the life of the stake. The amount of POKT required to be staked is directly proportional to the number of relays required. Initially, one POKT allows for 1.67 relays each session (a session is 60 minutes long) but the number of relays per session allowed can be adjusted for price fluctuations of the POKT token through governance mechanisms.
While paying upfront for infrastructure appears to be burdensome at first glance, it has strong advantages. The use of a token eliminates recurring payments to centralized infrastructure providers, vastly reducing the cost of infrastructure over the lifecycle of an application. Instead, developers’ stakes are diluted over time through the inflation of the supply of POKT. Further, the upfront purchase of POKT can be viewed as a recoverable expense because the stake can be sold to another user if the service is no longer required.
Node Providers also stake POKT but do so on a per-node basis. The minimum stake required to run a single node is 15,000 POKT, but as with the developer stake, the minimum stake per node can be adjusted by governance mechanisms. In exchange for servicing relays for applications, nodes are compensated in POKT. Unlike most traditional block rewards, Pocket Network’s is dynamic; POKT rewards are directly proportional to the number of relays and transaction fees in a given block. At the network launch, Nodes receive .0089 POKT per relay fulfilled and proved. In addition, the block producer receives 1% of the entire block reward. All nodes in the network have an opportunity to produce a block, but their chances are proportional to their stake.
Because of the way that nodes are incentivized, the Pocket Network economic model is permanently inflationary, until network maturity. At network maturity, a burn rate will initiate for application stakes that will offset the creation of newly minted POKT, stabilizing the total supply of POKT. This economic model encourages early network participation and reduces coordination costs.
The optimal economic strategy for node operators is to replicate as many nodes as possible with the amount of POKT held. By spreading their stake across multiple nodes, node operators maximize their chances of being chosen in as many sessions as possible, providing them with the most opportunity to serve relays within the network. These incentives promote further decentralization, redundancy, and increases the number of nodes available for each blockchain network supported by Pocket Network.
Maintaining a balance between both sides of the market will be critical to the long-term success of the network. To maintain and secure the future of the protocol, Pocket Network will be run by the Pocket DAO. To accomplish its mission, the DAO receives 10% of block rewards to reinvest in the network. In addition to protocol upgrades, the DAO will dictate the economic policy, making every effort to create sustainable economics that caters to both sides of the market through built-in governance mechanisms. These governance mechanisms allow the DAO to maintain an equilibrium between the two sides of the market and ensure accessibility to new participants.
For more information on Pocket Network Economics, please see our economics paper.
APPENDIX: INFLATION OUTLOOK
Pocket Network economics are designed in such a way that the total number of POKT increases over time in proportion to the usage of the network. To control how quickly the number of POKT grows, several checks are put in place to reduce the overall rate of inflation. To demonstrate this concept, we’ve modeled out three scenarios ranging from aggressive growth (“High”) to slow growth (“Low”).
In our model, the mint rate is one of the primary drivers that keep the amount of POKT in check. In our model, the mint rate decreases by 10x from .01 to .001 and .0001 when total supply reaches 1B POKT and 2B POKT respectively. In reality, the mint rate decreases overtime at the discretion of the DAO. Decreasing the mint rate will reduce node margins which will impact the incentives to fulfill relays for applications. Because of this, the mint rate can only be reduced to a certain point.
Once the growth rate of relays begins to decrease because Pocket Network has saturated the broader decentralized infrastructure market, the DAO can also institute an Application Burn Rate (ABR) which burns developers’ stake at a rate that offsets future inflation. The ABR caps the total amount of POKT and ushers in network equilibrium. This is reflected in our model by a flattening in the growth in POKT. In all three scenarios, ABR is instituted at the same time but could happen earlier or later as the DAO sees fit.
CONNECT WITH POCKET:
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