Pocket Network, an Investment Thesis
What is Pocket Network?
Pocket Network’s mission is to “coordinate open access to the world’s public data by empowering anyone to provide unstoppable infrastructure”.
In other words, it aims to be the decentralized alternative to the backend infrastructure that is needed for an application to interact with any blockchain. This is done by providing API endpoints for dapp developers to remotely tap into a blockchain, without having to either use centralized infrastructure, or set up their own node infrastructure from scratch.
Imagine you’re on a DEX, ready to trade in your farming exploits for ETH. As soon as you initiate a swap, a specific type of API request (RPC) is sent (relayed) from your wallet to a specific type of server (RPC Node, which acts as a gateway to read/write blockchain information). The node then processes the request and returns with the details right before you confirm your swap.
In this example, Pocket Network comes in as a provider of RPC Nodes. It is the communication layer (middleware) between dapps and blockchains. Therefore, the more Web3 adoption, the more valuable Pocket Network gets.
Due to the technical know-how and resources needed to maintain RPC nodes, the majority of applications utilize Node-as-a-Service providers (who abstract away the complexities, by way of API endpoints). The issue is that these are centralized entities. Eg: Infura, Moralis, Ankr, Alchemy, etc. This ironic turn of events undermines the core philosophy of blockchain — decentralization. In other words, if a “decentralized application” is heavily dependent on centralized infrastructure to work, the app is not really decentralized; thus, retaining all the risks of Web2 (such as central point of failure, censorship, deplatforming, data manipulation, access to sensitive data, etc.).
We saw this earlier this year when Metamask released a blog post stating, “MetaMask accesses the blockchain via Infura, which is unavailable to persons in certain jurisdictions due to specific comprehensive sanctions programs enacted by the U.S. government”
As network adoption continues, the resource cost required to maintain a professionally set up node infrastructure increases. And without any inherent incentives, this prices out the hobbyist node operator. Leading to an inverse relationship between blockchain traffic, and fully sovereign nodes.
Therefore, the majority of the remaining nodes end up being operated by centralized Node-as-a-Service providers. Bringing us back to the previously highlighted risk.
Focus on cross-chain compatibility
Node-as-a-Service providers are not incentivised to focus on cross-chain compatibility. For example, as Infura is Consensys owned, it remains an ethereum-centric service provider. This minimizes the design space for developers, as it generates additional friction (by having to interact with additional node providers) when making applications cross-chain.
Team & History
Michael O’Rourke, Founder and CEO
He is a crypto native. Having experienced Western Union fees firsthand (while remitting money back to his hometown in the Dominican Republic), Bitcoin immediately resonated with him when he came across it in 2013.
A self taught programmer (iOS development, then Solidity), he wrote his first smart contract in 2014/15. His first stint as a crypto entrepreneur was with a decentralized bandwidth project (like Helium), but pivoted after concluding that the technology was yet premature.
Pocket network was conceptualized during the ICO boom in 2017, after observing the incredible dependency on systems such as Infura.
Public mainnet was launched in July 2020, and the team has been very active in development at all ends. A brief glance at the project’s GitHub shows very active development, with commits almost on a daily basis. Additionally, the project blog provides us with weekly updates on the development status and network health. The overall project presence is one of transparency and accountability; ensuring that all updates are duly communicated and justified to the broader community.
Pocket Network raised $10M in venture capital, in Q4 of 2021; to invest in the supply and demand of the network, with a focus on the Asia Pacific region. Total funding = ~$20M
Investors = Arrington Capital, Republic Capital, RockTree Capital, C² Ventures, and more.
Pocket Network’s Solution
Pocket Network is a two sided marketplace that sits on top of a Proof-of-Stake blockchain, built by forking Cosmos’ tendermint consensus engine. The marketplace eliminates the middleman (Node-as-a-Service providers), connecting dapps and RPC node operators, peer-to-peer. Like any two-sided marketplace, it must solve for both supply (RPC nodes) and demand (dapps using Pocket in their tech stack).
Using the network’s native token (POKT), they incentivize individuals to run full nodes of other blockchains. Node operators stake POKT (as of writing, a minimum of 15,000 POKT with a 21 day unstaking period), for the right to service RPC calls. This ensures that node operators stay good actors, as they can otherwise face slashing penalties.
Dapps also stake POKT, as per the amount of throughput they wish to access (as opposed to paying a monthly subscription fee on centralized NaaS providers). The more traffic the dapp experiences, the higher the quantum of POKT they will have to lockup (As Pocket is in its early phase, they offer up to 1M daily relays, free of charge). Thus, for using the service, they pay the node operator by way of inflation. For every relay that is routed through a node, the node operator receives newly minted POKT.
In practice, when a dapp initiates a RPC, the request is routed to a pseudo randomly assigned group of 5 RPC Nodes (a session), who then service the request. Every hour, the session ends, and a new group of 5 RPC nodes are assigned to service the dapp. The geographic and operator distribution of nodes further ensures a near 100% uptime for dapp RPC calls.
The reward POKT earned is in proportion to the number of requests serviced. To actually claim the reward, nodes must produce a Zero Knowledge Range Proof (ZKRP) to prove they’ve done the work. This is where the “network layer” comes in. The network layer acts as a mediator between dapps and RPC nodes; it comprises all the rules, protocols and finality storage that serve as the backbone of the interactions between the two participants. So, once a ZKRP is provided, a block producer (part of the network layer) must validate the proof, only after which new POKT is minted, distributed to the respective node, and a new block is appended to the Pocket blockchain. All block producers are RPC nodes, but not all RPC nodes are block producers.
Interestingly, this model turns a recurring operating expense into an asset (albeit a volatile one, for now). If a dapp wishes to stop using Pocket’s services, it can simply unstake the POKT and sell it in the secondary market. Additionally, while this model might require higher upfront costs, it is more cost-efficient in the intermediate-long term. This is so as 1) the staked POKT appreciate in value as the network grows; 2) the cost per relay will approach zero over time; and 3) the decentralized supply side reduces the cost of providing the service (for example, Pocket doesn’t need to keep engineers on hand to ensure node uptime), passing on the cost savings to the consumer. Overall, Pocket claims to be 10x cheaper for developers than centralized NaaS providers.
POKT’s sole use-case is staking, which serves as 1) a recoverable fee to participate in the network, and 2) a medium of value transfer from dapps to node operators. Dapps stake POKT to get access to RPC nodes, node operators stake POKT to service RPC calls from dapps.
POKT can be held in their non-custodial wallet, pocket wallet.
POKT is currently inflationary. Dapps pay the node operator by way of inflation. For every relay that is routed through a node, 0.01 POKT is minted (as of writing), and distributed as follows:
- 89% to the Node who serviced the relay
- 10% to the Pocket DAO
- 1% to the Pocket Network block producer
Thus the rewards per block are primarily dependent on the number of relays in the respective block.
To keep inflation in check, the DAO reserves the right to alter the quantum of these inflationary rewards. Below is a chart that models the total POKT supply based on different growth scenarios.
POKT had a 650M supply at its Token Generation Event. With the distribution as follows:
The vesting schedule is as seen below.
The token will accrue value as network demand increases. This price appreciation due to demand will compound as tokens are locked up by nodes and dapps, removing liquid supply from the open market.
Due to node operators being selected randomly (and not by stake quantity), it is in their best interest to reinvest their rewards into setting up more RPC nodes, further decentralizing the network and reducing the free float. As of writing, the protocol has a total supply of ~970M POKT, with about ~640M staked.
A flywheel will kickstart as token appreciation leads to more node operators joining the network, improving the core service provided, causing more dapps to adopt POKT, increasing the token price, ad infinitum.
Pocket Network governance utilizes a three-party governance system, with no on-chain element.
Manages all operation and monetary policies of the network. Delegates to the foundation to implement network changes. The DAO utilizes a one-person-one vote system; not a plutocratic one. Any network participant can earn voting rights if they prove their contribution to the network. This ensures users and node operators have equal say in the network’s evolution.
Primary responsibility is to execute the will of the Pocket DAO, and to aid in its interaction with the real world. For example, navigating the legal and regulatory landscape.
As there is limited information on Pocket Inc., my guess is that it’s a for profit entity that is contracted by the foundation, to maintain and make the required updates to the network.
Currently, Pocket network boasts 30,000+ nodes (twice as many as Bitcoin), 2295 staked applications, across 30+ blockchains. In Q1 of 2021, there were <2500 nodes.
Number of daily relays serviced has shot up more than 10x in the last 6 months. From January 27th 2022 to February 23rd 2022, the network serviced a daily average of 282M relays.
Today, the majority of Pocket’s traffic is generated from the Harmony blockchain, due to a strategic partnership and increasing adoption of applications such as Defi Kingdom and Tranquil Finance.
Harmony acts as a good proof of concept, making it likely for other blockchains to adopt Pocket, as well.
In December 2021, Pocket Network raked in $56 million in total protocol revenue, up more than 50% from November. For a total of $101M in the period of August 2021 to January 2022, second only to Ethereum!
As per CoinMarketCap, trading volumes for Pocket are relatively low. For the last 24 hours, a total of ~$1 million only has been traded. Making it a difficult accumulate (as an institutional investment) without moving the market. However, it is available over-the-counter, as well.
Focus on Demand
After over a year of seeding the supply side of the 2-sided marketplace, the project’s focus will now shift to sustainability of the Pocket economy by addressing various demand side bottlenecks such as improving the Portal UI/UX, Pocket education for developers, etc.
The project is planning on launching an erc20 version of the POKT token — wPOKT. However, while the initial launch was scheduled for mid-2021, we are yet to see this happen. This is so because the initial goal for wPOKT was to bootstrap liquidity on Ethereum and incentivize a healthy POKT ecosystem. But, due to POKT’s exponential growth over recent times, the foundation believes the liquidity needs of POKT have already been met.
Therefore, while wPOKT is still being actively developed (and regular updates are being provided), the team is taking a more experimental approach as they find the ideal use case for wPOKT.
One of the largest risks Pocket Network faces is its inflationary tokenomics. However, the team has made it clear that this is only so as the network is in its initial growth phase, where bootstrapping early supply and demand is a priority. Once the protocol enters its “Maturity Phase” (as per the discretion of the DAO), a burning mechanism will be implemented. The protocol will burn the dapp staked tokens proportionally to the number or relays it requests, offsetting the tokens minted as consideration to the node operator. Effectively making the token supply hard capped, and converting the protocol’s revenue model into a standard credit system.
In an effort to successfully reach the global mainstream, Pocket v1.0 represents the migration of the Pocket Network from its current architecture — a blockchain built with Tendermint Core at its foundation — to a completely new stack, built in-house from the ground up.
Pocket network is attacking a large and critical problem for the Web3 vision to come to fruition. It faces limited to no competition with respect to the novel approach they are taking to solve for the decentralization of RPC nodes. The revenue model, especially, is a game changer in how RPC infrastructure value is captured.
The team is comprised of seasoned crypto natives. And the larger community is very active on all fronts; The project GitHub shows regular code commits, the team provides weekly network status updates on their blog, and they have a 10%+ engagement rate on their discord. Not to mention, the dev team has met promised milestones consistently, and if it hasn’t, they’ve been transparent with why this is so.
The protocol has seen serious adoption with growth on all fronts — relays serviced, # of node operators, and staked applications. And within the protocol, the POKT token has tangible utility (as a gateway to access/provide the service), above and beyond simple staking to generate unsustainable protocol subsidized yield (as it is for many other projects)
The roadmap directly addresses the main issues faced by the current avatar of the project. Namely, 1) redesigning the underlying tech infrastructure to help scale to mainstream adoption, and 2) implementing a burn mechanism, providing a max cap to the token supply, mitigating the inflation risk.
While the initial token distribution was not ideal — with significant stakes going to the founders and private investors (~40% in aggregate) — a major cliff in the vesting schedule has already been unlocked. Making it unlikely for this to be a reason for a flood of tokens hitting the market with sell pressure.
Essentially, Pocket represents a bet on Web3 adoption. As it’s an infrastructure commodity, the only way adoption continues is a focus on reducing the price and increasing the quality of service. I believe the team is well equipped to do exactly this.
It should be assumed that the author either has owned, currently owns, and/or will own all tokens mentioned in this document. Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This presentation contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. The author does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.