Understand the Decentralized API Data Service Protocol Pocket Network in One Article

Author: Beam, H.Forest Ventures

At EthDenver 2022, protocol expert Daniel Olshansky gave a talk on the Pocket network here, while they distributed multiple prizes to the best projects integrated with Pocket to support the development of the ecosystem.

Pocket network belongs to the web3 infrastructure track by establishing incentive mechanisms among all blockchain participants (application developers and full node operators) and providing access to blockchain data through a decentralized node structure. In simple terms, Pocket network's mission is to provide reliable, blockchain-agnostic, decentralized API access for web3 applications at a cost far lower than centralized competitors (like Infura).

Before understanding what Pocket network specifically does, it's important to grasp some knowledge about web3 application development. If you are a developer, before your protocol runs perfectly, for example, if you have deployed a lending protocol on a public chain and users come to interact with your protocol, you need data from the public chain, which is usually operated in the form of API session requests. Currently, blockchain developers generally use centralized blockchain infrastructure like Infura to call and return data from the public chain.

However, there is a hidden risk: these web3 API providers incur significant costs in purchasing data centers, building their own servers, and investing in hardware research, so most web3 API providers typically operate on existing web2 platforms (like AWS, Amazon Cloud). This means that within our top-down decentralized architecture, a key link is centralized.

Pocket network can solve this problem; it is a value exchange platform built around the supply and demand of nodes, with its ecosystem participants divided into:

• Supply side of nodes, who can join the protocol by staking POKT and providing node operation services;
• Demand side of nodes, namely developers of various Dapps, who also need to stake POKT to obtain node services.

This article will analyze the project in terms of relevant track outlook, business development status, project economic model, team, and financing background, for industry communication purposes only and not as investment advice.

I. Key Points Summary

• Project Highlights

① The track has broad prospects and strong certainty

Pocket network is a decentralized API data service protocol, belonging to the web3 infrastructure track. We are optimistic about this track mainly based on the following logic:

1. The future certainly belongs to multi-chain, with explosive growth in on-chain ecosystems. Currently, apart from Ethereum, other public chains often experience security incidents due to insufficient decentralization in node operation, such as the SOL outage incident in September 2021.
2. For most Dapp development teams, the cost of renting and maintaining their own nodes is too high, leading them to prefer node hosting operators like Infura. However, as a centralized and opaque operating entity, Infura has higher risks regarding censorship resistance and privacy protection; for example, the incident on March 4th where a configuration error in Infura nodes led to Metamask blocking user IPs.
3. In the node operator track, leading projects (Infura/Alchemy) have already gained significant market share. For small and medium-sized operators, perhaps uniting under the protocol to counter large operators is one of the future choices.

Therefore, from the perspective of the decentralized demand for public chain operation, the security needs of Dapp deployment and operation, and the market strategies of small and medium-sized node operators, the sub-track where Pocket is located has great certainty and significant market prospects.

② Rapid business development after launch

Based on tracking observations of Pocket's official website and Dashboard, we found that Pocket currently has over 30,000 nodes (up from 600 at the beginning of 2021), processing over 200 million relays daily (up from 3 million/day at the beginning of 2021), supporting over 20 public chain networks (mainly Harmony).

③ Economic model upgrade brings stronger deflation

Pocket adopts a very novel token value capture method. For node suppliers, they join the network by staking POKT to receive block rewards; as service demanders, developers also need to stake POKT to join the network, with the amount of staked tokens corresponding to the upper limit of the number of data relay services obtained in a session cycle. Unlike the traditional pay-per-use model, when developers do not need node services and exit the network, the staked tokens will be unlocked after 21 days. In other words, the payment method for developers is opportunity cost—since nodes continuously produce tokens, the value of the POKT staked by developers is effectively diluted, which is known as pay via dilution.

According to the official white paper, the project adopts this economic model for rapid development in the early stages. In essence, it is subsidizing both the demand and supply sides through token issuance, allowing developers to obtain services at a lower price while node suppliers receive POKT output as a cost subsidy. When the market matures, the team considers adopting a pay via burn method, where a portion of the POKT staked by developers will be burned to achieve greater deflation in exchange for better value.

2. Project Risks

The project benchmarks against AWS or Infura, essentially redistributing value among a group of small and medium-sized operators within the same protocol: the protocol acts as a whole against centralized operators. Therefore, under the current economic model, the protocol's token essentially serves as a two-way subsidy between node operators (miners) and Dapp developers (node users), which may lead to issues such as:

1. If market expansion does not meet expectations, leading to insufficient staking and inflation exceeding expectations, resulting in excessive selling pressure, thus requiring long-term observation of its ecosystem expansion and cooperation with public chains;
2. The concentration of node operators in Pocket network undermines the decentralization narrative, leading to a decrease in token value;

II. Business Overview

1. Basic Architecture

The core business of Pocket network is to provide decentralized data relay services for developers, and its network consists of three components: applications, nodes, and network layer.

Applications submit relay or API requests. Nodes process these requests by submitting them to the corresponding public databases and returning relevant data to the applications. The network layer consists of protocols and deterministic storage, which are the pillars of interaction between applications and nodes, including (but not limited to) configuration, record tracking, governance, and economic policies. The mechanism used to regulate interactions between applications and nodes is called sessions.

2. Business Objects

Thus, the business objects of Pocket network are typically public chains and Dapp developers.

Some public chains, due to being in an early development stage, having insufficient decentralization of node operators, and fewer ecosystem participants, can choose to connect to the Pocket network, such as the integration of Harmony and Solana in October 2021. Another category of business objects is the developers of various decentralized applications. For developers, they can choose to build their own nodes, which offers higher security; however, it is costly, so most developers opt for API service providers like Infura or Alchemy to reduce costs while bearing risks such as censorship, privacy leaks, and single-point failures. Pocket network provides developers with a third solution, enhancing system stability in a decentralized manner, avoiding the risk of network service interruption due to a single node failure, and reducing usage costs due to the diverse topological structure of its full node operators.

3. Business Development

The project’s track primarily benchmarks against Infura or Alchemy. According to the information released by the latter two, their daily data requests are usually in the hundreds of billions, with a valuation of around $3 billion, while Pocket's daily data requests currently stabilize around 200 million, accounting for a very small portion of the relevant market, with Pocket's fully diluted valuation approximately $700 million.

However, mechanically comparing decentralized service provision protocols with centralized node operating companies is akin to seeking a sword in a boat. The exploration of decentralization is a long-term process, with decentralized applications emerging from Ethereum smart contracts, decentralized storage represented by AR, decentralized content distribution represented by Theta, and decentralized network infrastructure construction represented by HNT. The decentralization of data infrastructure is a weak link in the entire infrastructure construction, and Pocket can be said to fill the gap in this field.

III. Token Model

The initial issuance of Pokt is 650 million tokens, with no upper limit on the total supply. According to the official website, the distribution and release of the initial 650 million tokens are as follows:

Inflation:

For each relay data request processed and verified by Pocket network, 0.01 Pokt is minted, with 89% allocated as rewards to the validating nodes that correctly processed the data request, 10% allocated to the Pocket foundation, and the remaining 1% rewarded to the validating nodes that package blocks in the Pocket network.

The DAO of Pocket network will adjust the output speed of Pokt as needed to balance its inflation. Core team member Adam initiated a parameter adjustment proposal (PUP-11) in community governance, called the WAGMI parameter. Considering the recent significant increase in relay numbers, the output of Pokt has reached 2-3 million per day, he suggested carefully considering this inflation rate. On February 8, its governance community Pocket DAO released governance proposal PUP-13, the proposal aimed to gradually reduce the inflation rate of POKT by decreasing node rewards, and the proposal has been approved. The inflation rate adjustments are as follows:

After the proposal is approved: Target inflation rate = 84.85 POKT/day

+30 days: Target inflation rate = 76.36 POKT/day

+60 days: Target inflation rate = 67.88 POKT/day

+90 days: Target inflation rate = 59.39 POKT/day

+120 days: Target inflation rate = 50.91 POKT/day

+150 days: Target inflation rate = 42.42 POKT/day (or 15,486 POKT/year)

Deflation:

Both the demanders and providers of data relay services need Pokt to participate in the network.

For developers, to obtain system services, they need to stake at least 1 Pokt to receive data relay services, with each staked 1 Pokt allowing approximately ten uses of relay services in a session cycle. For node operators, the minimum staking requirement to become a service node capable of processing relay requests is 15,000 Pokt.

According to the official plan, when the entire system has passed the early growth phase and entered the mature phase, to ensure system balance, the DAO will initiate an application burn mechanism, meaning that when applications use relay services, a certain proportion of their staked Pokt will be burned. At this point, the payment model for applications will gradually shift to a SaaS model, charging based on actual business usage.

IV. Financing Situation

Pocket Network has undergone multiple rounds of financing. According to official news, in April 2021, it raised $9.3 million, with investors including Blockchain.com, Eden Block, DACM, LD, OKEX, FBG, and over 200 other node operators.

In January 2022, according to the official announcement, it completed a $10 million strategic financing round, led by Republic Capital, RockTree Capital, Arrington Capital, and C² Ventures, with participation from Coinshares, Decentral Park Capital, Dominance Ventures, and others.