# Economics

## TL;DR

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.

## Overview

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. The number of relays allowed per session 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 and stickiness that help grow network adoption. The use of a token eliminates recurring payments to legacy infrastructure providers, vastly reducing the cost of infrastructure over the lifecycle of an application - bringing your cost-basis closer to zero the longer the service is used. 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 helping to recover any costs associated with the network’s use. Instead of recurring payments, developers’ stakes are diluted over time through the inflation of the supply of POKT.

Node Providers also stake POKT but do so on a per-node basis. 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. A node receives a certain amount of POKT per relay fulfilled and proved, minus certain percentages for both the block producer and the DAO.

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 inflationary during the Growth Phase, where the monetary policy is intentionally designed to encourage adoption. At network maturity, the Maturity Phase, 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.

At launch, 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 increase 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 a certain percentage 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.

# Token Economics

## The Purpose of POKT

POKT is not a transactional cryptocurrency. The Pocket Network blockchain is not meant to have sub-5-second block times, provide 10,000 transactions per second, facilitate direct payments (generally speaking), or act as a smart contract platform. The majority of the transactions occurring will be staking by Applications and Service Nodes, Proof-of-Relay batches by Service Nodes, and block reward payments to Service Nodes for facilitating Relay requests, which all POKT holders will pay for via inflation.

This is in contrast to most layer 1 chains, which will eventually need to rely predominantly on transaction fees. At network maturity, Pocket will become a simple fee market with the demand side (Applications) burning POKT and the supply side (Service Nodes) receiving newly minted POKT via the block reward inflation mechanism. This allows for the transfer of value without using direct fees and incurring further costs of coordination.

By building a set of crypto-economic mechanisms to ensure the validation of Proofs-of-Relays, Pocket’s architecture can provide blockchain infrastructure at an order-of-magnitude lower cost than other options by virtue of being a permissionless, non-rent-seeking, and open marketplace for anyone to participate. Pocket Network uses these validated Proofs-of-Relays to reward Service Nodes through inflation.

Both Applications and Service Nodes must stake POKT to access or provide work to Pocket Network. For Applications utilizing the Pocket network, POKT represents an ongoing right to an allocation of the network’s throughput, whereas, for Service Nodes, POKT represents a right to provide ongoing work on the network and the future inflation rewards for performing that work.

## Useful Proofs of Work

Pocket uses Proof-of-Stake (PoS) to secure the state machine and falls under the umbrella of generalized mining or “useful proofs of work.” Submitting proofs of work mints POKT in proportion to the amount of work completed increasing the overall supply of POKT. How this affects the overall supply is determined by the monetary policy.

Our current monetary policy is broken down into two phases: the Growth Phase and the Maturity Phase. During the Growth Phase, applications stake just once to access the protocol (assuming they don’t change their throughput) attracting new applications to use the service due to the low cost of service - only paying through their initial stake and through inflation. At network maturity (the Maturity Phase), Pocket will become a simple fee market with the demand side (Applications) stakes are burned in proportion to the amount of POKT minted by the supply side (Nodes) - eliminating the growth in total supply of POKT. This allows for the transfer of value without using direct fees and incurring further costs of coordination.

## Transactions

Leader-elected nodes are rewarded for facilitating P2P transfers of POKT on the Pocket blockchain via a transaction fee. This is required for the security of the network in order to prevent spam or “dust” attacks. A transaction fee is paid by the individual or entity making a transaction, 99% of which is burned, and the remaining 1% is awarded to the leader-elected node for including transactions in the relevant block. The 1% fee provides an incentive for block producers to include transactions in the next block.

## Token Staking

There are two distinct types of stake functions within Pocket: StakeApp() and StakeNode(). Both stake functions use the POKT cryptocurrency.

### Application Staking

Applications pay for the service in advance by staking POKT. When they invoke the StakeApp() function, the minimum staking period is 21 days. By incurring the minimum unstaking period, Applications forego the potential of using their resources, POKT in this case, for other alternatives as an opportunity cost. Additionally, Applications pay through dilution, where each time a Relay is serviced and validated by the network, a specific sum of POKT is awarded to the relevant Service Nodes in the next block reward.

The protocol limits the number of Relays an Application may access based on the number of POKT staked in relation to the Protocol Throttling Formula (as defined below). Once an Application stakes POKT, the Maximum Relays (MaxRelays) it can use is locked in perpetuity unless the Application re-stakes that POKT or their stake is burned.

### Node Staking

Like with applications, when nodes invoke the StakeNode() function, the minimum staking period is 21 days. The minimum stake at launch required to become a Service Node is 15,000 POKT. This node stake keeps nodes honest and incentivized to provide high quality service. Additionally, a node sufficient stake allows nodes to participate in PoS consensus as a Validator Node. Per the changes in R.C.0.6.0, not all nodes are validators, but all validators are service nodes. To become a Validator Node, you must be in the top 1,000 node stakes (subject to change on DAO parameter vote) on the network. Validator Nodes can claim the block reward for submitting the block which is equal to the value of the ProposerPercentage parameter.

## POKT Denominations

LevelDenominationLevel
10^24EPOKTExaPOKT
10^21PPOKTPetaPOKT
10^18TPOKTTeraPOKT
10^15GPOKTGigaPOKT
10^12MPOKTMegaPOKT
10^9KPOKTKiloPOKT
10^6POKTPOKT
10^3mPOKTMiliPOKT
10^0uPOKTMicro or ‘you’POKT
Upper Bound = 9,223,372,036,854,775,807,000,000 STAKED uPOKT


# App Economics

Pocket Network is a developer-driven protocol, with demand from applications driving the rewards the service nodes earn. Applications use Pocket Network to retrieve data and write state to and for their blockchain applications. Each relay that is created by an application results in the creation of newly-minted POKT as a reward for the service nodes facilitating such relays. Applications stake just once to access the protocol (assuming they don’t change their throughput), using the native cryptocurrency POKT.

Once an application stakes POKT, its maximum relay count is locked in perpetuity unless the application re-stakes that POKT or their stake is burned.

## Calculating Throughput

When applications stake POKT, their rate for the number of relays they may access (MaxRelays) is locked in for the entire length of the stake. Due to the oracle problem, the protocol cannot infer external factors that might influence the market price of POKT, or therefore account for these factors. This introduces a risk to the demand side of the protocol, where fluctuations in the market price of POKT may affect the price applications must pay for relays.

We aim to allow the market to find a USD Relay Target for POKT, to ensure the real price borne by applications is within a relatively stable and acceptable range. This USD per Relay target is not an on-chain variable, but a publicly agreed price that the DAO will target with its monetary policy.

Relays per staked POKT for a given session is calculated by:

$$\text{Relays per Staked POKT} = \frac{\text{POKT price in USD (30 day avg)}}{\text{USD Relay Target}\times\text{Sessions per day}\times\text{Avg days per month}\times\text{ReturnOnInvestmentTarget}}$$

For example, given a POKT price of $0.12, a USD Relay Target of$0.00000361 per relay, and a ReturnOnInvestmentTarget of 24 months:

$$\text{Relays per Staked POKT} = \frac{\text{\0.12}}{\text{\0.00000361}\times\text{24}\times\text{30.42}\times\text{24 months}} \approx \text{1.90}$$

Another related value of importance is BaseThroughput. This is not an on-chain value, but instead a calculation of the total application stake, the total amount of relays your application receives after staking.

The BaseThroughput for a given session is calculated as the product of the Relays per Staked POKT (defined above) and the total amount of POKT staked:

$$\text{BaseThroughput} = \text{Relays per Staked POKT}\times\text{Total Staked POKT}$$

This value is constant for the life of the application stake, so regardless of whether the price of POKT or any other input value changes, the BaseThroughput will remain the same. You can think of this as the value that’s locked in for the duration of the stake.

From all this, you can compute the amount of staked POKT required based on the daily average relays you expect your application to use.

$$\text{Required Staked POKT} = \frac{\text{Daily Average Relays Required}}{\text{Relays per Staked POKT} \times \text{Sessions per day}}$$

For example, consider an application with a need for 1,200,000 relays per day. That corresponds to a per session relay count—or BaseThroughput—of 50,000 relays.

Given a value of Relays per Staked POKT of 1.9 (so a BaseRelaysPerPOKT value of 190), the amount of POKT that would be required to be staked is:

$$\text{Required Staked POKT} = \frac{\text{1,200,000 relays per day}}{\text{1.9} \times \text{24}} \approx \text{26,316 POKT}$$

And recall that even if the price of POKT or any other values change, your initial stake of this amount would guarantee that daily average relay count of 1,200,000 for the duration of the application stake.

# Node Economics

## Overview

Pocket uses Proof-of-Stake (PoS) to secure the state machine and falls under the umbrella of generalized mining or useful proofs of work, where inflation is directly tied to work validated by the network.

Service Nodes batch all requests received in a session to one Pocket blockchain transaction, a “Proof-of-Relay” that applications can validate client-side and other nodes can validate in block production, removing the need for applications to pay constant transaction fees for this work. Once those Proofs-of-Relays are validated by the network, a new block is confirmed, then POKT is minted and issued to the relevant Service Nodes as a reward for their work.

Service Nodes are pseudo-randomly assigned to a Session. New Sessions get created every 4 blocks with a new, pseudo-random set of Service Nodes.

Nodes have a better chance of being picked to service relays based on their service quality. Furthermore, nodes that stake more POKT, while not improving their chances of receiving relays, will get a greater reward when serving a relay, compared to a node with less POKT staked. (See the section on Stake-Weighted Servicer Rewards for details.)

## Node Staking

Like with applications, when nodes invoke the StakeNode() function, the minimum staking period is 21 days. The minimum stake at launch required to become a Service Node is 15,000 POKT. This node stake keeps nodes honest and incentivized to provide high quality service. Additionally, a node with sufficient stake allows nodes to participate in PoS consensus as a Validator Node. Per the changes in RC-0.7.0, not all nodes are Validator Nodes, but all Validators are Service Nodes. To become a Validator Node, you must be in the top 1,000 node stakes on the network (as determined by the MaxValidators parameter). Validator Nodes can claim a block reward percentage for submitting the block equal to the value of the ProposerPercentage parameter.

## Distribution of Service Nodes

While Pocket Network will depend on professional infrastructure providers to provide the bulk of the infrastructure for applications, due to the low marginal cost of running a full Service Node, we expect there to be a long tail of individuals running Service Nodes. There are two primary objectives that the network will focus on to avoid any stagnation in the number of Service Nodes in the network:

• Continuing to lower the barrier to entry for non-technical users to run full nodes by providing clear documentation as well as technical support in the bootstrapping days of the network
• Ensuring that the minimum stake to become a Service Node within Pocket is kept low enough to maximize the number of nodes within the network

Additional efforts to prevent stagnation include supporting distribution channels such as local mining pools through data centers, run-your-own node distribution partners and the Pocket DAO’s R&D efforts.

Incentivizing the long tail of individuals running Service Nodes and keeping barriers to entry low is important to keep large node providers honest, and to minimize the odds of having an entire set of Service Nodes in a Session owned by one entity, which could lead to collusion attempts.

## Cost to Nodes

### Upfront costs

There are two initial costs to becoming a Service Node:

• Minimum Node Stake
• Hardware (if chosen)

### Hardware

Pocket Network is neutral to the hardware utilized by Service Nodes, meaning that hardware can be a physical server that is run in a home or a local data center, or computing power can be purchased through popular cloud providers. The specs required for a Service Node’s hardware is dependent on the blockchain(s) that a Service Node chooses to support. For example, if a Service Node were to choose to support Ethereum, the server would need to have at least 1TB of storage (as of writing) to support an archival node for Ethereum.

### Stake

The minimum stake at launch required to become a Service Node is 15,000 POKT. This minimum stake also allows Service Nodes to participate in PoS consensus. If a Service Node stake falls below the minimum amount through serving incorrect data or incorrect block validation, 20% of the minimum stake for that Service Node will be slashed and jailed. If a Service Node submits a fraudulent Relay batch, 100% of their stake will be slashed. The initial amount of POKT needed to stake as a Service Node is not dynamic, but can be raised or lowered by the Pocket DAO to ensure a stable barrier to entry.

Once the initial costs of a Service Node are covered, the only additional cost is electricity and bandwidth for providing the computing power to complete Relays. Marginal costs for Service Nodes are extremely low and increase linearly as work increases.

### Recurring costs

• Cloud providers
• Electricity
• Bandwidth
• Data center

Outside of the fixed costs associated with running a node, Service Node operators will also incur costs like electricity, data center fees, and bandwidth costs for physical hardware. Alternatively, if they opt for a cloud-hosted service, they’ll be paying an all-in fee for hosting. Again, these marginal fees are low, but will play a factor in node profitability and total node counts.

## Economic Security

The initial amount of POKT needed to stake as a Service Node is not dynamic, but can be raised or lowered by the Pocket DAO to ensure a stable barrier to entry.

### Jailing and Slashing

• Jailing a node removes them from both protocol service and consensus.
• Slashing a node burns a percentage of the staked tokens.

A node is jailed and subsequently slashed for not signing (or incorrectly signing) block proposals. More often than not, this is the reason why nodes are jailed.

### Jailing Penalties

A Pocket Validator Node can be jailed for 1 of 2 reasons:

1. Fails to produce min_signed_per_window amount of blocks over a signed_blocks_window. When jailed because of this reason, a Pocket Validator Node is Slashed a slash_fraction_downtime% of their Stake.
2. For Double Signing a Block. When jailed because of this reason, a Pocket Validator Node is slashed a slash_fraction_double_sign% of their Stake.

When a Pocket Validator Node becomes Jailed, it remains in the Staked list of Pocket Validator Nodes, however it becomes ineligible to become for Block Production or participating in Sessions. In order to become Unjailed again, and after waiting downtime_jail_duration nano-seconds, a Node Unjail transaction must be sent to the Pocket Network, and upon approval, the Pocket Validator Node will become Unjailed again.

### Double Sign Penalties

0.0001% percentage of the validator’s stake that will be slashed upon reporting of double vote Evidence type from Tendermint, where a double vote on a block is/can be a submission for two differing states, transactions, apphashes, etc. and result in a forked network.

### Relay Challenges

In order to participate in the network economic incentive mechanism, the Validator must first Claim and then Prove the completed work.

### Burning for Bad Fraud Proofs (Replay Attack)

If a Service Node submits a fraudulent Relay batch by attempting a replay attack, the validator’s stake will be slashed by the factor specified in the ReplayAttackBurnMultiplier parameter.

### Economic Incentives

For providing infrastructure access to applications, Validators are rewarded proportional to the work they provide. Pocket Core attempts to send a Claim and subsequent Proof transaction automatically after the proof_waiting_period elapses. If both transactions are successful, Tokens are minted to the address of the Validator.

## Optimal Deployment Strategy

The considerations on how to stake your nodes have changed from when Pocket Mainnet was launched.

Initially, there was no incentive to stake more than the minimum amount of POKT. A node with 60,000 POKT staked would earn the same amount of rewards as a node with 15,000 POKT staked (assuming latency and all other aspects of service quality were the same).

Therefore, if a node runner wished to earn more rewards, and had fully optimized their node, they would spin up more nodes. Infrastructure costs scaled linearly with POKT rewards earned.

However, too many nodes can cause network slowdowns and inefficiencies. As of 2022, there were over 40,000 nodes running on the network, more than enough to service the number of relays being requested.

Thus, the community decided that there was a need to reduce the number of nodes on the network, but without negatively affecting existing node runners. This led to PIP-22: Stake-Weighted Servicer Rewards.

### Stake-Weighted Servicer Rewards

Stake-Weighted Servicer Rewards incentivizes node runners to stake more POKT on their nodes by giving out a proportionally higher reward for the same service.

For example, this could mean that a node runner who staked twice as much POKT might receive twice the rewards for the same amount of relays serviced. (The details of the multiplier are on-chain parameters controlled by the DAO, and are subject to change.)

These rewards multipliers are determined by organizing nodes of various stake amounts into one of a few “bins” (or “tranches”). Roughly, the higher the stake, the higher the bin number, and the greater the rewards. All nodes that are in the same bin will have the same reward multiplier, regardless of the specific amount of POKT staked.

There are four on-chain parameters that determine how the reward multipliers are calculated:

While the names may seem cumbersome, they do come together in a fairly straightforward way, as described below.

### ServicerStakeFloorMultiplier (“The Width”)

This parameter denotes the size (or width) of the bins. The value here denotes the amount of POKT can vary among nodes to still be considered in the same bin.

When this feature was first implemented, the value was equal to 15,000 POKT, meaning that a node could stake anywhere from (for example) 15,000 POKT to 29,999 POKT and still receive the same reward multiplier.

### ServicerStakeWeightCeiling (“The Ceiling”)

This parameter denotes the minimum value of the top bin. Any amount staked higher than this value will not incur any greater reward.

When this feature was first implemented, the value was equal to 60,000 POKT, meaning that a node that staked 60,000 or more POKT would always receive the largest multiplier of rewards.

The number of bins isn’t a parameter, but can be inferred from the values of ServicerStakeFloorMultiplier, ServicerStakeWeightCeiling, and StakeMinimum as per the following:

$$\text{Number of bins} = \frac{(\text{ServicerStakeWeightCeiling} - \text{StakeMinimum})}{\text{ServicerStakeFloorMultiplier}} + 1$$

Given the initial conditions supplied above, there are 4 bins.

$$\text{Number of bins} = \frac{(\text{60000} - \text{15000})}{\text{15000}} + 1 = 4$$

The amounts of staked POKT for each bin can be determined from this as well.

Bin NumberMinimumMaximum
115,00029,999
230,00044,999
345,00059,999
460,000[No maximum]

### ServicerStakeFloorMultiplierExponent (“The Exponent”)

The next two parameters determine not the bins, but the multipliers that are applied to those bins to get the final reward multiplier.

This parameter determines how the rewards scale per each bin.

Assuming all else equal, with an exponent of 1 (the initial value when this feature was implemented) the bins would scale linearly:

Bin NumberBin with ExponentReward multiplier
1$1^1$1x
2$2^1$2x
3$3^1$3x
4$4^1$4x

Given the other initial conditions listed above, a node that has 30,000 POKT staked (Bin 2) would earn twice as many rewards for the same number of relays as a node that only has 15,000 POKT staked (Bin 1).

An exponent value of greater than 1 will incentivize node consolidation, as node runners will earn more by staking their POKT on fewer nodes. Similarly, an exponent value of less than 1 will disincentivize consolidation, because of the reduction in rewards.

### ServicerStakeWeightMultiplier (“The Multiplier”)

This final parameter exists to offset the inflation caused by Stake-Weighted Servicer Rewards.

With increased rewards for the same amount of POKT staked, the new system of consolidated nodes would encourage inflation. This is an unintended side-effect, so the ServicerStakeWeightMultiplier was added in to offset the inflation, so that the amount of POKT created would be the same regardless of whether Stake-Weighted Servicer Rewards had gone into effect or not.

For example, if the way nodes are positioned in bins leads to an emission rate of 1.8 times of what would have been before, then this parameter would be set to 1.8 which would offset the rewards generated by exactly this amount.

This is the parameter most likely to be changed frequently, since it affects inflation most directly.

### Calculating the reward multiplier

We can now calculate the reward multiplier for a single relay on a node, given its amount of staked POKT:

$$\text{Reward Amount} = \text{RelaysToTokensMultiplier}\times\text{Reward Multiplier}$$ $$\text{Reward Multiplier} = \frac{\text{Bin Number} ^ \text{ServicerStakeFloorMultiplierExponent}}{\text{ServicerStakeWeightMultiplier}}$$

where:

$$\text{Number of bins} = \frac{(\text{ServicerStakeWeightCeiling} - \text{StakeMinimum})}{\text{ServicerStakeFloorMultiplier}} + 1$$

and the minimums of each Bin N ( $\text{Bin } N_\text{min})$ are defined as:

$$\text{Bin } N_\text{min} = \text{StakeMinimum} + [(N - 1) \times \text{ServicerStakeFloorMultiplier}]$$

so the node’s Bin Number is $N$ when the following is true:

$$\text{Bin } N_\text{min} <= \text{Amount of POKT staked} < \text{Bin }(N+1)_\text{min}$$

### Examples of reward multipliers

The following may be helpful in illustrating how the reward multiplier is calculated, and so will focus on the differences between the bins.

We will also assume for all these examples that the StakeMinimum is 15,000 POKT, as it has always been.

• ServicerStakeFloorMultiplier = 15,000 POKT
• ServicerStakeWeightCeiling = 60,000 POKT
• ServicerStakeFloorMultiplierExponent = 1
• ServicerStakeWeightMultiplier = 1
$$\text{Reward multiplier} = \frac{\text{(Bin Position)}^1}{1}$$
BinStaked POKTReward Multiplier
115,000 - 29,999$1^1 / 1 = 1\text{x}$
230,000 - 44,999$2^1 / 1 = 2\text{x}$
345,000 - 59,999$3^1 / 1 = 3\text{x}$
460,000+$4^1 / 1 = 4\text{x}$

If we change the multiplier to 1.5:

• ServicerStakeFloorMultiplier = 15,000 POKT
• ServicerStakeWeightCeiling = 60,000 POKT
• ServicerStakeFloorMultiplierExponent = 1
• ServicerStakeWeightMultiplier = 1.5
$$\text{Reward multiplier} = \frac{\text{(Bin Position)}^1}{1.5}$$
BinStaked POKTReward Multiplier
115,000 - 29,999$1^1 / 1.5 = 0.67\text{x}$
230,000 - 44,999$2^1 / 1.5 = 1.33\text{x}$
345,000 - 59,999$3^1 / 1.5 = 2\text{x}$
460,000+$4^1 / 1.5 = 2.67\text{x}$

If we set the multiplier to 1.5 and change the exponent to 0.5:

• ServicerStakeFloorMultiplier = 15,000 POKT
• ServicerStakeWeightCeiling = 60,000 POKT
• ServicerStakeFloorMultiplierExponent = 0.5
• ServicerStakeWeightMultiplier = 1.5
$$\text{Reward multiplier} = \frac{\text{(Bin Position)}^{0.5}}{1.5}$$
BinStaked POKTReward Multiplier
115,000 - 29,999$1^{0.5} / 1.5 = 0.67\text{x}$
230,000 - 44,999$2^{0.5} / 1.5 = 0.94\text{x}$
345,000 - 59,999$3^{0.5} / 1.5 = 1.15\text{x}$
460,000+$4^{0.5} / 1.5 = 1.33\text{x}$

# Monetary Policy

Pocket’s staking and inflation mechanisms enable a more efficient resource allocation structure by limiting the number of transactions (and thus block validation costs) to one-time staking transactions. All nodes are able to focus primarily on servicing and validating Relay requests by Applications, with minimal energy spent on block validation. By being eventually consistent and tying rewards directly to inflation, Service Nodes are in effect receiving micropayments for work validated by two parties without the need for constant on-chain fee payments.

## Allocation of Minted POKT

For each Relay served and validated by the protocol, POKT is added to the next block reward according to the mint rate. The following is a breakdown of each participant’s share of the block reward given no parameter changes.

ParticipantParameter NameCurrent Allocation
Service NodesN/A85%
Block ProducerProposerPercentage5%
DAODAOAllocation10%

As part of the Proof-of-Stake consensus, each Service Node has a weighted chance of being selected to be the block producer for any given block based on the total amount staked for that given node. The block producer receives a portion of the entire block reward, as does the Pocket DAO, which provides continuous and sustainable funding for supporting the continued adoption and utility of Pocket Network.

## Monetary Phases

As the Pocket Network develops, we envision the POKT monetary policy evolving through three stages: Bootstrapping, Growth, and Maturity. The following sections will discuss each of these phases. Note that some of these ideas are forward-thinking and so are subject to change.

### Bootstrapping Phase

During the bootstrapping phase of the network, it is important to build a strong foundation for the service, securing as many individual entities running nodes as possible. We do this by creating an environment where it is simple and inexpensive for initial Applications to access the network, and significantly profitable for Service Nodes to provide infrastructure.

Application usage and traction dictate the initial rewards that the Service Node pool will receive. By decreasing the barrier to entry for Applications (freemium access, low cost), the demand for Relays should be high during the Bootstrapping Phase, providing the initial pool of Service Nodes with ample opportunities to earn the high rate of POKT awarded for Relays serviced in the bootstrapping phase of the network.

As inflation and revenue increase per Service Node, the potential for competition increases, as rational, profit-seeking agents discover the protocol. This creates the flywheel to spur the network effects of Service Nodes purchasing and using POKT to participate until an equilibrium is found.

As the Protocol Throttling Formula adjusts to market demands, Applications being able to purchase more Relays results in more revenue for Service Nodes, further increasing the incentive for existing Service Nodes to re-stake their earned POKT. Increased participation in Pocket Network from Applications and Service Nodes ultimately benefits all parties by providing new revenue opportunities for Service Nodes and improving the service and resilience of the network for Applications. Due to Pocket Network being a permissionless Proof-of-Stake protocol and Service Nodes having an extremely low marginal cost of operation, the barriers to entry are significantly lower compared to Proof-of-Work mining based protocols. Pocket’s economic primitives incentivize a diverse set of entities and individuals such as data centers, existing infrastructure providers and hobbyists to participate as node operators within the network.

### Growth Phase

The growth phase is the period from launch which will see the greatest increase in the overall ParticipationRate of the protocol. When Applications stake during the growth phase, they earn more MaxRelays as the network grows (assuming they un-stake and re-stake), and don’t pay for anything else until the network has matured and the Application Burn is activated.

One result of this is inflation. It is a priority of the DAO to manage inflation in a manner that encourages sustainable growth of the Pocket ecosystem, protects rewards against a potential decrease in relays, and sensibly updates rewards as Pocket Network grows.

If both sides of the marketplace (Applications and Service Nodes) grow, there will be continuous demand for Relays resulting in Service Nodes spinning up new Pocket nodes to increase the number of Relays they can service.

Early Applications will receive more infrastructure throughput as the network grows providing an incentive to early adopters of the network. When both the percentage of POKT staked and Service Node margins begin reaching their equilibrium, the protocol will have entered its maturity phase.

See the section below on inflation for more details.

### Maturity Phase

While the Growth Phase is inflationary, designed to incentivize active participation and supply-side staking for the security of the network, the Maturity Phase is designed to ensure the long-term sustainability of Pocket. The Maturity Phase is defined as the point in which Pocket Network has crossed equilibrium and the growth in inflation begins outpacing growth in the total staked supply of POKT.

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 this phase, Pocket becomes similar to traditional Software as a Service pricing models, where Applications must “top up” their stakes periodically to avoid going below their needed Relay limit.

This should result in a decline in the ParticipationRate and Service Node margins due to an imbalance from more supply than demand for POKT.

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.

Once activated, the ABR results in a shift from Applications paying through dilution, to Application POKT being burned on a block by block basis to balance the minting of POKT as inflation awards to Service Nodes.

The effect of this is a logarithmic decay until the minimum App stake of 1 POKT is reached. Unless an Application increases the number of POKT they have staked, their holdings will fall under their desired amount causing applications to “top up” their stakes turning the network into a self-sustaining SaaS-like infrastructure protocol.

The rate of Application burn is determined by using indicators such as the decay in the growth of Application and Service Node stake over time.

## POKT Inflation

As the number of Nodes grows in the Pocket ecosystem, if we assume a constant per-relay payout, it follows that the total amount of POKT generated by the nodes will increase. While POKT was designed to be permanently inflationary, the high rate of inflation which this situation causes has strong repercussions for the network itself.

There are plenty of benefits to inflation, such as attractive rewards for new and existing participants, near term buying pressure from new node runners, and the ability to bootstrap new chains more easily. And excitement in the marketplace driven by node rewards can lead to increased adoption.

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.

With this in mind, the DAO has voted on implementing and ongoing adjustment to the value of the rewards per relay (in parameter form, known as RelaysToTokensMultiplier).

### Inflation management

At the beginning of 2022, the DAO instituted an inflation management framework called the Weighted Annual Gross Max Inflation rate (WAGMI).

A WAGMI target of 100% was implemented on Feb 28, 2022, which corresponds to a per-node reward of 0.008461 POKT/relay. It was originally set to 0.01 POKT/relay.

WAGMI targets were stepped down to 50% over the following five months as follows:

The per-node reward (also known by its parameter value RelaysToTokensMultiplier is calculated using:

• The 30-day trailing average of daily relays at the time of each adjustment
• The total supply at the time of the proposal passing (“Total Supply Baseline”):
$$\text{Mint rate} = \frac{\text{Total Supply Baseline} \times \text{Inflation rate}}{\text{30-day trailing average of daily relays} \times \text{365 days}}$$

The timestamp of the proposal was Feb 24, 2022, 6:37 GMT (block height: 51909), and the Total Supply Baseline was 945,014,989 POKT.

### Further inflation management

Following the successful step-down to 50%, a new proposal, PUP-22, known as FREN (Further Reduction of Emission Numbers), determined additional alterations to the amount of POKT issued.

The proposal extends the reduction of the emission rate over an additional five months, starting with an immediate reduction of target emission to 1,000,000 POKT/day (down from approximately 1,300,000) with a goal of 690,000 POKT/day by the end of 2022 through periodic reductions in the RelaysToTokensMultiplier. This corresponds to an effective inflation rate of 26.8%, decreasing to 18.5%. The first of these reductions went into effect on September 1, 2022.

# Pricing & Economics FAQ

## What is POKT?

POKT is the native utility token that powers the economics of the protocol. Pocket Network requires both developers and nodes to stake POKT to participate in the network. Nodes earn POKT for fulfilling API requests for apps on a per request basis.

## How much does it cost to send a relay?

This is determined by the BaseRelaysPerPOKT parameter.

## How much can I earn by running a node?

Pocket is quite a unique blockchain network, because there are two ways for nodes to earn POKT:

1. Servicing: processing requests to/from blockchains on behalf of apps
2. Validating: confirming blocks, which contain proofs of the above relays done

Each time a block is validated, POKT is minted according to the RelaysToTokensMultiplier parameter which means, for every relay processed by a node, this amount of POKT is minted.

This mint is then divided according to the following percentages:

So what does this mean in practice?

Check out these charts to view the profitability of nodes over the lifetime of the network.

## What is the minimum staking amount for a node?

The minimum staking amount for nodes is determined by the StakeMinimum parameter.

However, as a best practice, we recommend staking an extra 7% to 10% buffer of POKT above the minimum stake per node. This is to account for any unforeseen slashing events due to node misconfiguration, bad behavior, natural disaster, or potential accidents.

## What determines my odds of being selected to validate a block?

The following formula:

round down (node stake / avg node stake) = # of tickets in the hat for block producer

## Is there an advantage to staking all of my POKT on one node?

Yes, up to a point.

As of version 0.9.0, PIP-22 introduced Stake-Weighted Servicer Rewards. This implementation seeks to reduce the infrastructure costs for node runners by allowing for rewards to be generated roughly proportional to the total amount of POKT staked.

For example, if a node runner has four nodes with 15,000 POKT staked in each, the node runner could instead run one single node with 60,000 POKT and generate four times the previously-generated rewards for each relay served. Thus the node runner can reduce infrastructure costs by 75% while still generating the same rewards.

There is a limit to this benefit though, as determined by the DAO, beyond which, any additional POKT staked will not incur any benefit. This is managed by the ServicerStakeWeightCeiling parameter.

## What is the supply of POKT?

### Genesis & Circulating Supply

The initial supply of POKT is 650M, which is divided according to the following genesis distribution:

The vast majority of these tokens are non-transferable and subject to use restrictions by the holders, starting from mainnet launch. __

• Private Sale 1/2: one-year lockup and use restriction from the date of purchase. Those whose year had already expired pre-mainnet also agreed to an additional lockup according to the following schedule: 50% of tokens unlocked after 6 months, 100% of tokens unlocked after 12 months.
• Founder Vesting: the founders agreed to restart a 3 year vesting schedule upon mainnet launch, with 10% of their allocations immediately vesting upon mainnet launch and subject to a 1-year lockup and use restriction. __
• Pocket Network, Inc. (PNI):
• Token Sale Pool: fully unlocked at launch and available for direct sale to users of the network. __
• Employee/Contractor Pool: already-vested tokens subject to a 1-year lockup and use restriction, with varying vesting agreements per contractor on average of 3-4 years.
• PNI Reserves: subject to 4 years of vesting and non-transferable for five unbonding periods (105 days total) following mainnet launch. __
• Foundation/DAO:
• Foundation Reserves: subject to 4 years of vesting and non-transferable for five unbonding periods (105 days total) following mainnet launch. __
• DAO Funds: fully unlocked at launch and distributed according to DAO grants.
• All other genesis addresses (e.g. incentivized testnet participants): non-transferable for five unbonding periods (105 days total) following mainnet launch.

This all results in the following circulating supply schedule:

### Fully Diluted Supply

While the initial total supply of POKT is 650M, Pocket Network uses minting to compensate nodes for performing work on the network. For this reason, POKT is permanently inflationary proportional to usage of the network, i.e. proportional to the number of relays being processed by nodes, but the total supply will be capped through a burning mechanism put in place by the DAO (more on this below).

The Growth Phase of the network is characterized by relatively high rewards and an increase in the POKT supply designed to subsidize the bootstrapping of the network from a node and application perspective.

Once the growth rate of relays begins to decrease because Pocket Network has saturated the broader decentralized infrastructure market, Pocket Network will enter the Maturity Phase. It’s at this point that the DAO can choose to institute the Application Burn Rate (ABR) which burns developers’ stake at a rate that offsets future inflation - capping the total supply of POKT. The ABR caps the total amount of POKT and ushers in network equilibrium where mint and burn rate is equal. 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.

You can read more about these topics in the section on Monetary Policy.