This blog is centred around DAOs appearing more like new economies.

I am not a genius polymath like Balaji who talks about “The Network State,” perhaps a related concept, and I write in plain English. Please bear with the simplicity.

To make my arguments, I use the Pocket Network DAO as my example.

Having engaged with Pocket DAO closely for the past couple of months, I exploit the insights I collected to share my observations about the DAO and the protocol, primarily from a business & economics perspective.

TLDR/In Scope

• DAOs are the new domestic economies.

• Survival and growth depend on how DAOs trade with other economies.

• The native currency or the token is the “Chi” or lifeforce.

• Pocket DAO should treat RPC gateways/sellers as customers (at least as exporters).

• Taxing them could have detrimental effects to the economy.

• Gateways/sellers should have the autonomy to decide pricing with end users.

• $POKT has utility in the domestic economy, utility outside is not mandatory.

• Pocket’s product has market-fit, priority should be to get demand soaring.

• Does decentralisation beyond a point have diminishing returns.

• Pocket’s protocol revenue is zero today but that is not existential for now.

• Token burn is a booster solution.

• Questions around emissions, infra cost, ongoing moat and investment thesis

• V1 looks like a game changer for the protocol.

Let’s rant-

I used to compare DAOs with cooperatives but they are more complex and bigger than coops.

So in POKT DAO, there are communities, investors and traders, voters, mercenaries and politicians, devs & builders, all being economic participants on the land and the infrastructure which is the protocol and the network of nodes, secured by the validators.

A special mention of PNI- PNI has the core dev team building on the protocol and they are also the only seller of Pocket Network’s product (or service)- decentralised RPC (dRPC). In simple terms, Pocket Network is a middleware infrastructure layer in Web3 that connects dApps with blockchains. The mission is to have multiple PNIs building and/or selling.

There is the foundation (Pocket Network Foundation) which is the neutral governing body and it owns the IP and I believe the protocol as well for the DAO.

The local currency in this economy is $POKT.

The DAO is politically democratic, almost like Switzerland- the land of referendums. Well it’s more representative than that I would say.

And economically capitalist, aiming to be meritocratic.

The DAO’s treasury has its income from the emissions that it uses for good and smart governance, upholding the DAO constitution and to make the DAO prosperous- attract the best talent, incentivise builders to continue building on the land (the protocol) through grants and payments.

So that was the domestic side.

The domestic economy ultimately depends on the demand for its local produce and how much it sells in the markets.

Without demand, the economy is bound to collapse, primarily because the native currency will lose its value.

The value of the token doesn’t impact the token investors alone. It also affects the economy of the DAO and its participants- the DAO treasury, node runners P&L, builders and contributors, the quality of DAO management, etc.

Therefore token price lies in the middle of the economy of the DAO.

Recently, the community at Pocket Network has been passionately debating the need for sellers of RPC service (such as PNI) and gateways paying the DAO. I can take the other side and argue why there is a case for the DAO to not charge the gateways and the sellers.

Instead of imposing a tax on the gateways and the sellers, the DAO could consider incentivising those who are selling the primary produce of the land.

There will be more and more dRPC providers in the future. The competition to onboard and retain will not just be limited to the supply side participants but also the demand side participants.

What are the drivers and the incentive for the sellers and the gateways to sell Pocket and not its competitors?

In addition to the quality of service, maybe decentralisation and ease of plugging in, I would assume it will be the taxes they pay. In other words, their bottom lines will decide which protocol they sell.

Low or no tax is pro-market and pro-growth. And jurisdictions compete against each other through tax breaks and incentives to attract those who enrich the economies, and so will DAOs.

This is just another perspective and drawn from the practices in the traditional world.

Here onwards, let me try to tackle a few appeals and questions I came across in the community channels-

The end users should pay-

We all agree there and I would say let the sellers and gateways decide how much they want to charge or not charge, and how they want to charge the end users. Let the demand side players compete amongst themselves in the free market without any kind of DAO intervention.

Collaboration that is also scalable is fine but intervention isn’t, if the DAO wants to support a free market. Otherwise it would be similar to government intervention in business.

Also, the DAO doesn’t have to try to cut through the middle men to engage with the end users directly. Rather use the leverage, expertise and the distribution network of the sellers and the gateways.

Focus on enabling building great products and creating a business friendly environment for it to get inundated with the best sellers and gateways.

If in other dRPC projects the sellers and gateways are not taxed, then it’s not a competitive advantage anymore. But at least avoid having a competitive disadvantage in that case.

I am not sure if it’s technically possible but theoretically speaking, there can be a rewards and penalty system from the DAO for the sellers and gateways to drive performance, prevent bad behaviours (possibly) and bolster competition.

How DAO’s internal economy interacts with the much larger economies on the outside is extremely critical. And at the cusp are the sellers and the gateways. If they manage to get demand soaring for RPC and success stories are told effectively by the DAO, some kind of value will continue to loop back to the DAO’s economy and that will reflect in the token price not going to zero.

More about this later.

What does the $POKT token do?

The token clearly has utility on the supply side economy and within the DAO itself, for maintaining security, growing the infrastructure, building, including its usage by the governing body for governance, rewards and compensations. All that should ultimately support building a compelling product.

Is there a real need for the token to have utility on the demand side?

If I were to treat RPC service as exports, the gateways and the sellers as the exporters, why should there be a mandate that native or the domestic currency has to be used between the exporter and the end user?

That doesn’t happen in the trad world. China is an export surplus country and most of the trade doesn’t happen in RMB. Trade in oil and gas from the gulf countries doesn’t happen in local currencies but in USD mostly.

It wouldn’t hurt if $POKT becomes money outside the economy of the DAO but then if the adoption is notional and not real- such as the end user buying $POKT to pay the seller/gateway in $POKT and then the seller/gateway selling it immediately to cover cost, then that symbolism might as well be avoided.

Having said that, discussing other creative use cases for the token tied to new kinds of services might not be a bad play.

How does $POKT capture value?

A token’s valued is impacted by-

1. Utility (usage) of the token

2. End user adoption of the product/service of the underlying protocol

3. Token supply and demand dynamics

4. Intangibles & miscellaneous

#1 $POKT’s utility is outlined above and therefore I would check this box as done.

#2 depends on the quality of products the DAO helps build and the demand the sellers/gateways can generate.

Question to ask is- what has been the growth of Alchemy, Infura, Quicknode, ANKR, the centralised RPC providers Vs Pocket’s, since Pocket’s mainnet launch?

Is max decentralisation a moat that the market wants and values, or is there a threshold beyond which the returns diminish?

#4 Narrative building, crypto native marketing, DEX/CEX listings, etc dictates #4. Also other fundamentals such as right kind of communities, developer mindshare specially when product-market-fit is in discovery mode. POKT already has one.

#3 POKT DAO’s approval of Sustainable Emissions Reduction (SER) takes annual inflation to single digits in 2024 and that is a big step forward but that is not enough in the mid and long term.

The market expects less than 5% given where other protocols are, preferably supported by a supply-demand equilibrium through burn.

That takes me to a related question-

What about protocol revenue?

In Pocket’s case, the DAO has a steady source of income- 10% of the emissions. Of course the true value depends on the price of the token.

Revenue works differently in the chains such as L1s, dapps such as Defi, etc. Lending protocols such as Aave, Compound are straightforward because they take a cut of the interest paid out to lenders.

In L1s, some kind of burn of transaction fees gets accounted for as revenue. Such as in Ethereum, the entire base fee is burnt but the tip is untouched.

The burning causes reduction in supply of the native token framed as value capture or accrual. It is similar to share buybacks- less supply assuming the same demand results in a higher price per share.

Unless there is burn, even with the fees there is no revenue for such protocols because otherwise it is essentially circulating or re-circulating the native token.

In the absence of a burn mechanism, protocol revenue of Pocket Network is zero at this moment.

Even if the sellers and gateways start paying a fee or a commission to the DAO somehow, unless the payment is in some other token or the fee gets burned if paid in $POKT, protocol revenue remains zero.

Having said that, I don’t see this as existential because of what I said above:

Therefore, despite the current state of Pocket’s protocol revenue, as long as there is building, maintenance and consistent growth in relays, the DAO and therefore the protocol can self-sustain for now.

Any obituary notices at this moment are false alarms and hoaxes.

Wen Burn?

This doesn’t mean the protocol can’t do better.

And I do see burn as a booster solution.

Burn could get accounted for as protocol revenue and burn can also be used to neutralise mint, switching the deflationary narrative (emissions turning negative) on.

Burn aligns with the standard accounting practices in the space and the narrative.

Question is- what should Pocket burn?

The current plan is to introduce burning of the $POKT required to stake by dAPPs (or end users) to receive relay throughputs.

Long term impacts not just on the domestic economy but also on DAO’s trade beyond borders which is the demand side should be carefully considered.

If dRPC gets commoditised, what will Pocket’s moat be and the basis for fee for the protocol and therefore the burn? Given that there is no clear signal of potential network effects and therefore stickiness, jumping ships and switching providers could be frictionless.

Remaining Questions and End-

The other open question is- will demand catch up for burn (as envisioned today) to neutralise mint anytime soon or a SER Round 2 will have to be introduced at some point.

Token emissions is a cost and it gets deducted from protocol revenue (or burn) to arrive at the profitability of the protocol, whenever Pocket is ready for such accounting.

How can the infrastructure cost be further reduced so that additional cuts in emissions that I reckon will be needed doesn’t hamper metrics such as optimum decentralisation, quality, latency, security, etc.

And lastly- this is not just a Pocket question but a general one for this space- if dRPC is a public good, what is the investment thesis behind it? Are there precedences for public goods turning out to be great financial investments?

Questions I am sure the DAO will continue to debate and occasionally brawl about.

To end on a positive note- I am still learning about V1, scheduled for Q1 24, and the sophistication level in the upgrades is just mind blowing to me.

I plan to write more about Pocket Network and the DAO in the near future.

Thanks for reading.

• The arguments are independent and do not aim to favour any individual or entity.

• The blog doesn’t factor in all changes and pre-decisions in Pocket’s V1 release.

• Ideally I would want to put charts, infographics and memes but time is limited.