State of Pocket Q2 2023

Key Insights

• Activity on Pocket Network increased over the past four quarters, as relays serviced grew 2% QoQ and 41% YoY.
• With a 38% QoQ fall in POKT-USD price and a 15% QoQ decline in the POKT inflation (3% more POKT was still minted), total revenue decreased 45% QoQ in USD terms.
• The total revenue drop was driven by a 47% QoQ decrease in the USD value of supply-side revenue (minting), accounting for 97% of total revenue. Simultaneously, protocol revenue (POKT burns) accounted for 3% of total revenue.
• While staking participation remained constant at about 62% of the current 1.6 billion total supply, Q2’23 saw over 1 billion of total POKT staked for the first time.
• In Q2’23, Pocket Network completed voting on five governance proposals, out of which four were approved and required a total commitment of $175,000.
• Pocket Network’s V1 upgrade scheduled for early 2024 aims to improve utility, introduce a new consensus, and improve peer-to-peer communication and the data persistence module.

Primer on Pocket Network

Pocket Network is a Web3 node infrastructure protocol that creates a two-sided marketplace for RPC node providers to offer developers access to blockchain data.

A remote procedure call (RPC) is an application programming interface (API) interaction that allows apps to communicate with servers on a shared network like Ethereum. RPC nodes enable users (applications/developers) to communicate with blockchains. Relays (calls) to RPC nodes are usually required by apps, exchanges, wallets, and analytical tools for a range of tasks including, but not limited to, retrieving wallet balances and smart contract event logs, or interacting with DeFi liquidity pools.

Pocket Network’s protocol runs atop its Proof-of-Stake blockchain, which uses a Stake-for-Access (SFA) model, also known as a work token model. In other words, Pocket requires its node providers to stake the native token (POKT) to provide services on the network. Simultaneously, end users are required to stake POKT to access the network’s services. Previously, the protocol would mint new POKT for each relay, directly paying nodes through minting rather than paying for each RPC relay. Inflation is no longer tied to relays and is, instead, determined through Pocket DAO governance. Most recently, Parameter Update Proposal-32 (PUP-32) set the minting to roughly 220,000 POKT per day (~4.9% inflation). Currently, service nodes earn POKT in proportion to their stake-weight (and rewards multipliers).

Additionally, since the implementation of Pocket Improvement Proposal-29 (PIP-29) in May 2023, Pocket gateways (access portals) must pay a $0.00000085 fee per relay to the Pocket DAO, which is then burned. This fee is called the GatewayFeePerRelay parameter, which specifies how much USD-equivalent POKT the gateway operators owe for every relay they send through the network. Of note, paying Pocket users spend an average of $0.000004 per relay, which shows that gateways (currently only the Pocket Portal) are still net positive in fees earned after paying the gateway fee per relay to the DAO.

The key participants in Pocket Network are described below.

• Service Nodes: These nodes stake POKT to provide servicing relays to users (applications/developers); get compensated in POKT per relay fulfilled and proved; retain 85% of total POKT rewarded for relays.
• Validator Nodes: These nodes stake POKT to validate the PoS blockchain; confirm blocks that contain proofs of the relays serviced; retain 5% of total POKT rewarded for relays and 1% of POKT paid for transaction fees (the other 99% is sent to the Pocket DAO).
• Users: Often applications or developers that stake POKT to request RPC relays to various blockchains. Currently, staking is conducted through the Pocket Portal. The Pocket V1 upgrade will change this dynamic by enabling decentralized demand-side access points for gateways and users.
• Pocket DAO: A whitelisted group of holders of the POKTDAO token (on Gnosis Chain), which is strictly used for governance on Snapshot and currently has a supply of 61 POKTDAO. Members must go through a proof-of-participation onboarding process before admission to the DAO. The DAO votes on Pocket’s monetary policy, validator requirements, and other protocol updates while retaining 10% of total POKT rewarded for relays and 99% of transaction fees.
• Gateways: Access points for developers to use the Pocket Network. Gateways must pay the Pocket DAO a $0.00000085 fee per relay serviced that is then burned by the DAO on a weekly basis. Currently, the Pocket Portal is the only gateway available and is operated by Pocket Network Inc. Pocket plans to launch its first community-run gateway by Q4’23.

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Key Metrics

Activity on Pocket Network increased over the past four quarters, as relays serviced grew 2% QoQ and 41% YoY. The amount of POKT staked grew steadily over the past year, with Q2’23 seeing over 1 billion of total POKT staked for the first time. Regarding financials, the 38% QoQ fall in POKT-USD price and 15% QoQ decline in the POKT inflation in Q2’23 led total revenue to decrease by 45% QoQ in USD terms.

Performance Analysis

Relay Requests

Pocket users are usually applications or developers submitting relay requests (API requests) to service nodes. These relay requests are routed to any of the supported relay chains. Service nodes then receive a response from a relay chain and forward it to the requesting application. The interaction between users and service nodes represents the fundamental utility of Pocket Network. Thus, the demand for Pocket Network’s services can be derived by measuring relay requests.

Relays are the most important metric for determining the activity and health of Pocket. Despite falls in Pocket transaction volume, staked nodes, and the price of the POKT token, Pocket Network saw a 2% QoQ growth in relays serviced to 107 billion relays (i.e., almost 1.2 billion relays serviced daily). The movement builds on the overall growth in relays throughout the past year, up 41% YoY.

Staked and Jailed Service Nodes

Staked service nodes route relay requests from users (applications/developers) to relay chains, then forward the responses back to applications. Nodes that unstake POKT are referred to as unstaking nodes and must wait 21 days before their POKT is unstaked. Jailed nodes are staked service nodes that double-sign a block or fail to sign a certain amount of blocks within a set time period.

While average staked nodes declined over the past four quarters to nearly 21,000 in Q2’23, the percentage of unstaking nodes versus staked nodes continued its downward trend as well. It fell to 4% in Q2’23, down from almost 6% in Q1’23. Simultaneously, jailed nodes followed a similar downtrend over the past four quarters.

Unique Block Proposers

Validators are service nodes that also propose and validate blocks on the Pocket blockchain. Hence, all validators are service nodes, but not all service nodes are validators. The top 1,000 service nodes for POKT staked can become validators (which keeps validators constant). Validators earn 1% of transaction fees and 5% of POKT inflation when they are a proposer for a given block.

The number of average daily unique block proposers remained stable at 96 in Q2’23 and has been steadily increasing over the past four quarters. The rise in unique block proposers shows that POKT is becoming more widely distributed among the validator set. Given that block rewards are only sent to the proposers, the mechanism distributing POKT is even further decentralizing the holder base as more unique validators continue to propose new blocks.

POKT Supply

Pocket Network has an inflating total supply of 1.6 billion POKT where newly minted POKT goes to key network participants: 85% to service nodes, 5% to block proposers (validators), and 10% to the Pocket DAO. Because relays are paid through the dilution of POKT (minting to the key participants), measuring the total supply by staked and non-staked POKT shows the percentage of POKT utilized for services on Pocket Network.

Pocket uses a Stake-for-Access (SFA) token model to capture value. Hence, observing the total POKT supply through the lens of staked and non-staked POKT reveals what percentage of POKT is being used. An average of over 60% of the POKT supply has been staked over the past four quarters. Despite falls in other metrics such as price and transaction volume, most of the POKT token continues to be utilized throughout the network.

Q2’23 saw over 1 billion of total POKT staked, up 3% QoQ and up 21% YoY. In Q2’23, service nodes accounted for over 90% of the POKT staked, whereas less than 1% were staked by users (via the Pocket Portal). Of note, the Pocket V1 upgrade will enable decentralized demand-side access points for gateways and applications/developers, giving users a more direct way to stake on Pocket.

Total Revenue

Pocket Network’s total revenue is calculated from multiple sources:

• Supply-side revenue (minting): This revenue comes from inflation, where 85% is minted directly to service nodes based on the number of relays serviced and 5% is minted to block proposers (validators). What’s not recorded as revenue is the remaining 10% that goes to Pocket DAO.
• Transaction fee revenue: This revenue accounts for the 1% of the transaction fees rewarded to block proposers, while the remaining 99% that goes to Pocket DAO is not considered revenue.
• Protocol revenue (burns): This revenue accounts for gateway fees being burned. That is, after PIP-29, a gateway fee per relay of $0.00000085 was introduced where gateway operators send gateway fees to Pocket DAO to then be burned weekly.

Q2 2023 was the first quarter that supply-side revenue did not account for nearly 100% of total revenue, as POKT burns were introduced in May 2023 after the success of PIP-29. Burns consist of the $0.00000085 gateway fee per relay that is sent to Pocket DAO to then be burned weekly. The decision to include burns in the revenue calculations stemmed from the idea that burning POKT would accrue value to all tokenholders.

Supply-side revenue accounted for 97% of total revenue, while POKT burns accounted for 3%. Theoretically, transaction fee revenue is included in total revenue; however, in practice, it accounts for a negligible amount that it rounds to 0%.

Despite a 2% QoQ gain in relays serviced, the 38% QoQ fall in the USD price of POKT and the 15% QoQ decline in the amount of POKT inflated (3% more POKT was still minted in Q2’23) led total revenue to decrease by 45% QoQ in USD terms.

Transaction Fee Volume

Transaction fees are another indicator of Pocket Network activity and play a small part in total revenue. Of all transactions, roughly 1% of the fees goes to block proposers (validators), and 99% is sent to Pocket DAO.

Transaction fees on Pocket Network function similarly to gas fees on Ethereum. Fees can be customizable depending on the platform used. Consumer Pocket wallet apps simplify the process, reducing the possibility of errors. On the other hand, service nodes tend to use a command line interface (CLI) when interacting with Pocket Network. Because CLIs do not have guardrails, they open the possibility for human errors.

In Q1’23, a service node erroneously entered the “send” amount into the “fee” category via the CLI. This fat-fingered mistake led to an additional 90,000 POKT being sent as a transaction fee, which cost the validator roughly $7,200 (on the date of the transaction). That extra 90,000 POKT led to a 31% increase in Q1’23 transaction fees and the subsequent 27% QoQ decrease in Q2’23. Without this outlier, transaction fees would have only steadily decreased by 2% QoQ for the past two quarters.

Qualitative Analysis

Pocket DAO

Pocket Network completed voting on five governance proposals among Pocket DAO holders in Q2 2023, down from 12 in the previous quarter. After the voting was conducted on Snapshot, four proposals were approved, and one was rejected. The four proposals required a total commitment of $175,000. All passed proposals are listed below. An additional proposal that started voting in June, but ended in July, is also listed below.

PEP-57: GRIP Renewal

Following PEP-45, which initiated the creation of GRIP (Group to Review and Improve Proposals), PEP-57 requested $5,000 a month for a six-month trial of funding GRIP’s operations. GRIP aims to improve governance and help community members submit better proposals by providing feedback, writing assistance, and visual aids. GRIP consists of Pocket community members with technical and economic expertise, an editor, and a graphic artist.

PEP-58: RAD2 – RAD Harder

Following PEP-42, which secured an initial budget for one-off contributor activities via a Pocket DAO bounty program and other contributions to the V0/V1 protocols, PEP-58 requested $20,000 a month for a six-month timeframe. PEP-58 proposed a plan to expand the original scope of PEP-42 in ways that would attract more contributors, improve its payout system, and experiment with putting bounties into new areas.

PEP-59: Sponsor Encode Club Bootcamp Series

Encode Club, an educational platform focused on Web3, requested Pocket to sponsor its educational bootcamp series for $25,000. The series aims to educate, develop, and onboard talent into the Web3 space. Encode Club also proposed that it would add instruction about Pocket’s technology into the bootcamp curriculum, and that Pocket would be entitled to conduct two workshops per quarter, receive student data, and access hiring support from Encode’s head of talent.

PIP-29: Burn Gateway Burn

PIP-29 was proposed as a replacement for PUP-23, which sought to establish sustainable economics (increasing required stake by users) and monetize the Pocket Portal. Instead, PIP-29 proposed a plan to realize the ideas conceived in the Road to Revenue forum post. After being the only vote to pass by unanimous decision in Q2’23, PIP-29 introduced a gateway fee per relay of $0.00000085 and the Fee Collection & Burning Process. The gateway fee accrues to the Pocket DAO and the Fee Collection & Burning Process enables the Pocket Network Foundation to burn the fees collected from the DAO’s treasury. PIP-29 also sunsetted two parameters that preceded the gateway fee per relay. After the passing of PIP-29, roughly $62,000 was burned over the rest of Q2’23.

BONUS — PEP-60: Enabling Responsible Allocation of Budget (ERA Budget)

The Pocket Network Foundation (PNF), on behalf of the community, requested just over $1.4 million for the ERA budget. The PNF plans to use the ERA budget to fund prioritized “keystone” projects that are instrumental in pushing Pocket’s vision forward. A few of these keystone projects include activating at least one new gateway, compensating contributors (POPs and Sockets), and adding wPOKT to Ethereum. PEP-60 also proposed a change in the block reward allocation that previously allocated 10% of all rewards to the DAO treasury. This change proposed allocating only 2% to the DAO treasury with the remaining 8% going to the ERA budget.

Pocket V1 Roadmap

Planned to fully launch in early 2024, the Pocket V1 mainnet aims to improve Pocket’s utility, introduce a new consensus mechanism, and improve peer-to-peer communication and the data persistence module. Notably, Pocket Network V1 will decentralize the demand-side access points for gateways and application developers.

Currently, there is only one Pocket gateway. It is centrally operated by Pocket Network Inc., a U.S.-registered entity. That is, Pocket’s architecture currently relies on a centralized, off-chain distributor mechanism. The off-chain relay distributor acts as a centralized choke point to the network where RPC requests can be restricted. This concern became a reality in 2022 when Pocket Network Inc. announced that the Pocket Portal would be blocking interaction with sanctioned addresses associated with Tornado Cash. As such, the Pocket team continues to have the roadmap milestone of removing this single point of failure in the protocol’s design.

The community-run gateways that are planned to launch by early Q4’23 will provide alternatives to the current Pocket Portal, currently the only gateway on Pocket. The V1 protocol upgrade will enable decentralized demand-side access points for gateways and application developers. The four specialized modules that make up the V1 protocol upgrade are summarized below.

Utility

The on-chain quality enforcement of relays will undergo improvements: a new role called "Fishermen" will be introduced, tasked with reporting service node quality metrics. Block rewards will be determined based not only on the volume of relays serviced but also on Fishermen sample reports. Another change will be the transition from pessimistic relay proofs to optimistic sample proofs, bringing greater efficiency and reliability to the process. Proof-based activity will be shifted from service nodes to Fishermen, improving overall system performance.

Consensus

Tendermint BFT will be replaced with a more efficient implementation of HotStuff BFT. This will reduce communication bandwidth and computational requirements. The migration also means moving from Round Robin leader selection to VRF (Verifiable Random Function) leader selection, combined with CDFs (Cumulative Distribution Functions) that consider validator stake, resulting in a blind, pseudorandom process resistant to denial of service (DoS) attacks. Additionally, transaction validation will optimize storage usage by excluding invalid transactions from blocks. These changes are set to provide a more secure, streamlined, and storage-efficient system.

Peer-to-Peer

The communication layer will be changed from random to structured gossip. The implementation of the RainTree gossip protocol will lead to increased efficiency, redundancy against non-participants, and guarantee 100% message propagation. This enhancement ensures seamless communication among the relevant parties, considering the existence of three roles after the V1 launch: validators, service nodes, and Fishermen. The improved communication system will result in a more robust and reliable network, enhancing the overall performance of the blockchain ecosystem.

Persistence

Pocket will undergo a transition from a key-value file system to a tamper-proof hybrid mutable DB. This will decouple the persistence layer from consensus. The new hybrid DB will utilize a persistence client middleware to communicate with the DB engine. This will result in quicker access to state data for Pocket users, reduced storage requirements, fewer resources needed for querying, and improved portability and horizontal scaling for full nodes.

Closing Summary

Activity on Pocket Network increased over the past four quarters, as relays serviced grew 2% QoQ and 41% YoY. Total revenue decreased 45% in Q2’23, driven by a decrease in the supply-side revenue, accounting for 97% of total revenue. Simultaneously, POKT burns accounted for 3% of total revenue. While staking participation remained constant at about 62% of the current 1.6 billion total supply, Q2’23 saw over 1 billion of total POKT staked for the first time.

In Q2 2023, Pocket Network completed voting on five governance proposals, out of which four were approved and required a total commitment of $175,000. Pocket Network’s V1 protocol upgrade aims to enable decentralized demand-side access points for gateways and application developers in early 2024. It plans to include specialized modules to improve utility, introduce a new consensus mechanism, and improve peer-to-peer communication and the data persistence module.

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