POKT Report

10 min readJan 27, 2022

The Opportunity:

Blockchains are meant to validate transactions and store state, leaving the reading of the chain up to anyone who wishes to do the work. As an application, you often need to read from the chain to know who has what or did what. For example, how does a wallet check how many tokens you have? The two avenues to getting that answer have historically been: A) you run a full node of the blockchain so you can query it or B) use a third-party data provider to run nodes they can query and report back to you with the data for a, typically monthly, fee. As we move toward a multichain world, it is unrealistic to expect applications that wish to interact with various chains to run nodes for every blockchain. In fact, it is already a big business to use option B) and outsource this process to cloud providers (Infura, Alchemy, and Bison Trails, which Coinbase acquired in Jan 2021). This creates a single point of failure in the decentralized process for many protocols, which have been affected by outages (DINO: Decentralized in Name Only).

The Solution:

The Pocket Network is a decentralized web3 infrastructure protocol on a unique Proof-of-Stake blockchain. Pocket Network has created the POKT token and an incentive system that creates decentralized nodes which applications can access to query for data. The goal of the tokenomics is to be cheaper for applications and rewarding for nodes, achieving both decentralization for security and stability (no outages or central points of failure) as well as a cheaper product. The DAO onboards new chains to the network as well as manages the monetary policy to manage the balance of incentivizing nodes while managing costs for applications.

The Process:

In order to access the network, applications must actively have tokens staked, but there is no minimum. The maximum number of daily relays (a relay is an RPC request) you receive is fixed at the time of staking your POKT based on how many POKT you stake. This will allow applications to plan in advance, turning a variable, monthly expense into an upfront investment. The associated cost is depreciation, which manifests itself in dilution via inflation.

In order to run a service node that executes the relays, you must also stake POKT at a minimum determined by the DAO (currently 15k). Service nodes are rewarded on a per relay basis in newly minted POKT (currently 0.0089 POKT). This is how service nodes are paid, and how applications pay. Validator nodes confirm that the work has been done honestly by the service nodes and appends the block to the chain, receiving a small reward in the form of newly minted POKT as well (currently .0001 POKT). Each hour begins a new session and the protocol pseudo-randomly assigns different nodes to service an application and new nodes to be validator nodes (validator nodes have a higher minimum for POKT staked).

Current State:

The Network has seen great success in the last few months, largely driven by the increased usage in Defi Kingdoms on the Harmony Shard 0 blockchain given the frequency with which wallet applications interact with the chain in the game. The network served 2.5 billion relays in the last 7 days. Further, the incentives offered to service nodes has led staked POKT to recently outnumber unstaked POKT in the network. Some charts from c0d3r.org below as of Tuesday night January 25, 2022.

Upgrades and Governance:

The Pocket Network is run by PocketDAO. An interesting and unique part of the project is that the POKT token does not have governance rights or ownership in the DAO. The founders created POKT Arcade and other incentives to earn DAO ownership by contributing to the protocol either as a Node Runner, App Developer, Shepherd, Contributor, or Governor. The DAO collects 10% of the reward per Relay (currently 0.001 POKT).

The community and DAO is very active as the network is in a hypergrowth phase. Currently, the most relevant upgrade discussion is around the inflation rate of the token. It was envisioned in the original version of the protocol that after the billionth POKT token was minted the inflation rate (.01 POKT per relay) would be reduced. This was not hard coded into the protocol, just a suggestion. Therefore, the community is actively discussing what inflationary policy would be best for the protocol now and in the future.

The Risks:

Pocket Network has hyper-inflationary economics which thus far have attracted many new owners to buy and stake tokens in order to earn newly minted POKT. If Relays on the network slow or the increase in nodes outpaces the increase in relays dramatically, those rewards will fall. A lower yield/reward will likely lead many nodes to unstake and sell tokens. One could argue that this is part of the life cycle of the POKT economy. At this early stage, it is likely that there are enough believers in the technology and backers of the project that the number of nodes would not fall below a level that would impact service. Longer term, the death spiral is certainly a risk.

Growth on the network has been very heavily skewed to one blockchain, Harmony. If Pocket is not successful in drawing more interest to its infrastructure solution for new applications and cannot win market share from incumbents, it will likely not sustain recent growth levels. It should be noted that the team is currently working to onboard Algorand and Evmos, more in the Catalysts section below.

The risk of having a single point of failure may not outweigh the benefit of having great service for applications. The incumbents offer more than just an API integration, they have large teams and custom solutions that POKT, as a decentralized protocol, does not currently offer.

The DAO is working to balance a very difficult equation, attempting to keep application infrastructure costs in line or cheaper than existing solutions while incentivizing decentralized service nodes to allocate capital and energy to the project. It is an untested and unproven business and pricing model which may not work at scale.

There is no consumer reports from devs on what tools they like best or find most convenient. The biggest risk is likely that the Pocket Network is not easy to use for applications or developers and therefore, despite decentralization and better cost structure, will not be adopted. A survey of Harmony and xDai devs about their experience using POKT could be informative.

Adoption has stalled. As mentioned above, the team is bringing on two new major chains. But it is quite concerning that there has been no increase in app tokens staked in two months (imagine below from c0d3r).

Upside Perspective:

The TAM is extremely big. For context: in October of 2020, Infura serviced over 2 billion Ethereum calls in a single day. This is just one provider, over a year ago, on one blockchain. There is plenty of room if the team can execute and gain market share in this large, growing market.

As a Service Node, using the current tokenomics (0.0089 reward per Relay) and average daily relays per node (~11k), the payback time for a node is roughly 5 months. That’s an APY over 200% assuming no compounding, no price appreciation, and no change in daily relays or number of nodes. The upside case would be growing adoption of the network as the team onboards more chains with similar tokenomics for service nodes. Long term, this is what most are playing for. The team does take the token price into account, based on historical governance conversations, so it’s possible they trade off rewards for price appreciation.

Upcoming Catalysts:

POKT is currently not on any major CEXs and has only just been released to a few DEXs, most trading is still OTC. Moving to a well-know CEX should increase liquidity and interest in the project.

POKT is in the process of onboarding Algorand and Evmos, which are large and growing communities. This should increase usage and demand for applications in the network.

In order to increase its market share in the Ethereum network, Pocket Network will be releasing wPOKT, an ERC-20 token that can be bought and staked on the Ethereum blockchain. Through smart contracts, these stakes will allow applications and nodes to access the Pocket Network. Given the increased usage of L2s and large DeFi usage on Etheruem, this will hopefully increase demand for the token and usage of the network as well.

Quick info from Cryp2gem

PROJECT: Pocket Network
TICKER: POKT
WEB PAGE: pokt.network
FIELD OF INTEREST: API PROTOCOL
SHORT DESCRIPTION: Pocket Network is a decentralized relay infrastructure designed to connect any app, to any blockchain, from any device.
GOAL: »We aim to make things simple for the node operators as well as developers by offering JavaScript SDKs to be implemented in any Web Application, along with making it simple to set up Pocket Core CLI which a node operator can use to manage and deploy a Pocket Node. We also believe in making it easier for the application developer, so we offer integration services that we can embed Pocket in any service you provide.«
MAINNET: live since July 2020
CONSENSUS MECHANISM: Proof-of-Stake (PoS) protocol using the Tendermint consensus
DEV ACTIVITY: Github
PRODUCTS: Mainnet live since July 28, 2020
COMPETITORS: All API providers and node infrastructure solutions could be considered as a direct blockchain-based competitor of Pocket Network — Infura, Alchemy, Coinbase Cloud, Etherscan, Ankr, CovalentHQ, The Graph, API3
CEO: Michael P O’Rourke, CEO, Self-taught iOS and Solidity developer

TOKEN METRICS:
Current Price: $1.3

Current Supply: 850 million POKT

Current Market Cap: $1.1 billion

Current Inflation Rate: ~2.6mm POKT per day
Total Supply: the amount is currently unlimited

Pocket Network in 10 steps

1. Blockchains are a ledger of data — historical transactions, and which wallets own how many tokens

2. There are many different blockchains — Bitcoin is one, Ethereum is one, Solana is one, etc — that have different purposes/strengths. Some optimize for speed, some for security, decentralization, composability, etc

3. Applications are being built that need to get information from blockchains. Think of a wallet that wants to tell you how many tokens you own. It will need to get that data from the blockchains. How does it do that?

4. Enter Pocket Network. POKT is an application blockchain — an app with its own blockchain (like many) — that allows other applications to get information from blockchains.

5. It works by the Applications interacting with decentralized Nodes. Nodes are the magic here, instead of a centralized company getting the request and using their software to get the data from a blockchain and give it to the app, Nodes are decentralized, open-source software (anyone can run it as long as they are in the network).

6. To become a Node, one has to acquire the minimum number of POKT tokens (currently 15k), stake them (lock them in the network), and operate the node. This allows you to run the software and be part of the random selection for who gets to service the application request.

7. When your node is selected, if it runs properly and does the work of getting and returning the information requested, you are paid .0089 POKT tokens per Relay. You remain the dedicated node for that App for about an hour, what the protocol calls one Session. In a session, an app can ask for thousands of relays.

8. The Apps don’t pay per relay, they simply have to have POKT staked and get 1.67 Relays per POKT staked. So if they want more data, they have to buy and stake more POKT. The “price” they pay is inflation/dilution. Because each relay mints 0.01 new POKT tokens to pay to the Nodes as reward, mentioned earlier.

9. The rewards are split 89% to the node (0.0089 POKT), 10% to the DAO (0.001), and 1% to the Validator Node, who validates the work was done properly and creates a new block on the chain (.00001).

10. These rewards will change over time, as the DAO actively manages the monetary policy of the protocol.

Remaining questions:

- Usage equation. How many relays could there be requested? TAM * market share, but have to understand how much info is retrieved in one relay. Comparable to relays from other providers?

- History. Why is Harmony such a whale in the ecosystem?

- Adoption/demand. Why aren’t other blockchains, which have a lot of developer action/growth, adopting POKT? What kind of adoption rate is a reasonable expectation?

- Any market share change in Eth chains from infura to POKT? Biggest L2/sharding opportunity, are we there?

- How has RPC experience been for Harmony devs?

- How much personal attention do apps need from their infru provider? Is this a value add that POKT can offer?

Resources

New acronym: DINO. Decentralized In Name Only (credit: @NigelDollentes)

Economics Overview

https://pocket-network-assets.s3-us-west-2.amazonaws.com/pdfs/Pocket-Network-Economic-Paper-v1.0.2.pdf

Economics for Apps

https://medium.com/pocket-network/pocket-economics-for-app-developers-487a6ce290c2

Economics for Nodes

https://medium.com/pocket-network/pocket-economics-for-node-runners-4f812cc0c18d

Economic Brief