Fragile Data Infrastructure
Decentral Park recently participated in Pocket Network’s latest $10m strategic round along with Rocktree Capital and Arrington Capital, building on our very first investment back in April 2020.
Applications within Web3 need data from public blockchains in the form of API requests to operate.
Given the sheer number of Web3 applications that will be in need of public blockchain and public data as well as the diversification of blockchains that are in need to offer that public data, the size of the Web3 data infrastructure market will be measured in the hundreds of billions.
To-date, we have seen centralized blockchain infrastructure like Infura drive API calls to blockchain data in the billions by being able to easily implement, maintain, and develop data networks.
However, the costs associated with those centralized providers are significant. In November 2020, Infura experienced a severe outage for the Ethereum network, directly impacting all applications using the service. More recently in September 2021, Avalanche node providers for Metamask went down, leading Coinbase to ask for information on available public nodes on twitter.
Events like these clearly highlight the risks of single points of failure from both a redundancy and security standpoint. At the same time, app developers don’t have the resources, expertise, or time to host their own full nodes. Together, this has led to an over reliance on a few, centralized providers.
Data infrastructure is the last fragile piece of the antifragile puzzle.
We believe a crucial part of the problem is the lack of relay node incentivisation at the protocol level. The good news is this is now changing.
Enter Pocket Network
Pocket Network is a decentralized API protocol that services Web3.
Pocket operates as an independent, application-specific Tendermint blockchain. At its core is a two-sided marketplace between applications and infrastructure providers running full nodes (e.g. Ethereum, Solana). Through token incentives, cryptographic proofs, and verifiable random functions, Pocket is able to provide a more robust and lower-cost API service for developers and their applications.
POKT: Aligning Pocket Stakeholders
Within Pocket, developers of Web3 applications who demand data from public blockchains in the form of relays are serviced relative to the amount of POKT they stake. Therefore, the POKT token represents a right to access Pocket’s network resources.
Equally, on the supply-side, infrastructure providers run full nodes and service these relays, receiving POKT proportional to the work performed. For node operators, POKT represents a right to provide work to the marketplace with each node required to stake ~15k POKT.
Each relay mints 0.01 POKT with service nodes receiving the large majority of tokens (89%), 10% funnelled to the Pocket DAO, and 1% to the block producer. Therefore, Pocket adjusts its rewards dynamically based on underlying market demand of API relays.
There are no centralized servers, no single points of failure, or limitations around node incentivisation.
Pocket is truly unique in how it provides a more resilient, lower-cost alternative to centralized solutions that exist today for Web3:
- A more diversified topology of full node operators in both number and geography
- Incentivisation of redundancy creates a resilience by design structure
- Node runners can a operate a wide range of different client software across all supported chains
- The demand-side only pays for the relays they want to use
- The supply-side can increase/decrease their node count depending on overall market demand (e.g. incentives are dynamic and reactive)
- Pocket’s incentive structure within its marketplace adds no additional overheads to the network
- No payment intermediary between developers and node operators
A Burgeoning Infrastructure Ecosystem
As an agnostic middleware protocol, Pocket can provide API services for developers regardless of what blockchain that application lives on.
What’s unique about Pocket is its horizontal nature and not relying on any one blockchain to succeed for Pocket itself to succeed. The opportunity for Pocket is to become the default node infrastructure platform for multichain applications across the entire Web3 ecosystem.
With Pocket expanding across multiple chains, we will see rich development around its tooling. Over the past 6 months, we have already seen a large number of community-led projects like fractional staking and network explorers launch.
We expect the community engagement around existing and new Pocket-related infrastructure projects to only accelerate in 2022 and beyond as the network matures.
Lastly, by first focussing at the node (access) layer, it is possible that Pocket eventually adds an indexing layer that can sit on top of Pocket to eventually organize the data it serves to applications. Developing downstream within the tech stack into the indexing market marks just one potential natural evolution of the Pocket ecosystem longer-term.
The last but crucial element of Pocket’s structure is the Pocket DAO. The DAO will be the oversight to coordinate both sides of this marketplace and guide the long-term development of the protocol. Taking a truly novel and gamified approach to DAO voting, users have to earn the right to vote based on engagement and knowledge known as POKT Arcade.
Since inception, we have been nothing but impressed with the team’s commitment to building and shipping a secure and stable product.
While still in its nascent stages, we can already see the power of focussing on incentives for data infrastructure. Pocket now services over ~300m daily relays - a 12x increase from 6 months prior. This is still far below Infura’s multi-billion daily API requests but that gap is now closing fast.
Accelerated growth in relays has driven the average daily POKT rewards per node higher, increasing nearly 4x since last summer. As we continue to look ahead to a yield-starved world, individuals and entities are starting to identify and capitalize on Pocket’s future yield opportunity.
This has led to a healthy growth of nodes servicing relays for applications. Today, over 20,000 operating nodes across 24 countries are supporting the network. Over the past few years, we concluded that a higher node count would fuel a positive feedback loop for relays where the network becomes more resilient and attractive for applications to be serviced. This is the case today - scaling node runners paves the way for scaling usage by applications and vice versa.
We anticipate the introduction of stake pools like poktpool will also make it even easier for smaller POKT holders to support the network.
The current economics of Pocket dictates that higher relays serviced by nodes leads to proportionally higher POKT issuance. It is plausible that Pocket’s incentives will lead to most newly issued POKT to be staked back into the system to capitalize on further relay growth and avoid dilutionary effects. This brings the benefit of making the network even more resilient and scalable over time. Just this month, we saw the total staked POKT supply overtake non-staked POKT supply for the first time.
As Pocket moves from its bootstrapping to its growth phase, the DAO may vote to burn POKT staked by applications proportional to the number of requests they submit. Alternatively, nominal rewards per relay may drop once Pocket reaches some level of total supply or relay count. Discussing these critical aspects of the network is where Pocket’s community shines.
How successful Pocket is in realizing its vision will be determined by the breadth of blockchains it supports. Today, Pocket now supports an impressive 37 chains for 2,000+ applications. We look forward to seeing chain diversification accelerate over the coming quarters with blockchain integrations being a primary focus for the team in 2022.
We believe a key factor in driving this multi-chain growth is Pocket’s ability to dominate at the client layer too. There is a large design space for building simpler clients which offload work to other protocols.
This presents a clear opportunity for Pocket to become the primary node interface for protocols to build on.
One example is using Pocket’s SDK by default for archival, full, and light clients. This fits within our wider thesis of blockchain clients offloading much of their storage and networking layers to specialized middleware protocols.
Revenue Measured In The Billions
Pocket’s relay growth has led to 92% average MoM growth in protocol revenue over the past 6 months. Despite the network still in its nascent stages, annualized revenue for December surged past $1B (243x since July 2021) with service nodes receiving the majority of this protocol revenue.
This makes Pocket Network one of the highest revenue generating protocols in Web3 today.
At a $1.7B fully-diluted valuation, January’s forecasted annualized revenue implies a P/S ratio of just 1.05 - one of the lowest ratios in the entire market. As we enter a raised rate environment, analysts will be focusing more on fundamentals and value investing - a sentiment we think will carry over to cryptoassets more over time as the market becomes increasingly institutionalized.
We have also been impressed in the community’s engagement around Pocket’s economics in order to optimize the network further. For example, a proposal has been made for implementing an on-chain revenue share mechanism that aims to accelerate the onboarding of high-quality full node providers and enhance the overall efficiency of the network.
A current consideration by the community is the isolated liquidity of POKT on its Tendermint chain. In order to bridge POKT liquidity to other ecosystems and catalyze the onboarding of applications, the network will introduce a wrapped version of POKT (wPOKT).
Pocket will be introducing a truly unique ‘data farming programme’ that will allow users to stake against applications on their behalf to subsidize their infrastructure costs and earn yield via relays. Farmers looking for yield help extends usage by applications, increasing node revenue and yield in the process.
Finally, allowing farmers to stake against the perceived highest value dApps for Pocket and subsidize associated costs will increase the likelihood those applications will adopt Pocket over existing centralized solutions. Therefore wPOKT will be an effective mechanism to scale the supply to meet the demand for those applications that use Pocket the most.
wPOKT turns ‘speculative capital towards productive work within the Pocket ecosystem’.
Decentral Park is proud to have been a long-standing supporter of the 30-strong Pocket team and is excited to be helping them as well as Pocket’s community in achieving their goal of creating the default data infrastructure platform in Web3.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.