Blockchains: The era of economic experimentation

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Running economic experiments on steroids

One of the key components of the cryptocurrency industry is the open source nature of it. When everything is open source and protocols can easily be copied, tweaked, and deployed in a permissionless manner, it allows for quick iteration and experimentation within the ecosystem.

The graph above shows the number of Cryptocurrencies listed on Coinmarketcap.com since April, 2013. As is evident from the graph, we effectively have a rapidly quickening set of economic experiments. We saw this in the first wave of altcoins before Ethereum, and continues to rise due to the ease in which someone can deploy an ERC20 token. Historically, economic experiments took place over decades or hundreds of years in the wake of political change. Now, they can be created with a fork on Github by changing some configurations with Puppeth.

This constant iteration of protocols has significantly increased the experimentation of new economic systems. Each cryptocurrency and protocol launched is an experiment that allows for a set of independent, smaller economic experiments. While wholly isolated now, partly due to the oracle problem, it is inevitable that these economic systems do start to depend on each other to some extent.

Through this set of economic systems we are building it is inevitable we will have black swan events. Due to the independence of these economic systems, while some may be destroyed, falter for a bit then recover, or strengthen as a result — In Nicholas Nassim Taleb’s words, this can make our financial reality antifragile. This would be a significant improvement from today’s fiat financial system that regularly goes through boom and bust cycles which hurts many unsuspecting individual’s economic outlook.

A short primer on inflation

Economic theory says that inflation is the increase of price of goods. While intuition may tell us that inflation decreases the purchasing power of a given currency, in Keynesian economic terms, it actually increases the price of goods over time. This is partly because the United States economy is a global, interconnected system and the Fed cannot simply increase wages directly by subsidizing corporations to pay their employees a higher percentage.

As you can see, the European Central Bank’s latest attempt at a visual representation of inflation is to say the least, complicated.

While bitcoin has been revelation and a revolution in what is considered sound money, inflationary monetary policy in blockchains can be used to benefit users in unique ways and simplify our current inflation model. Protocol architects decide the monetary policy and the governance of that policy (more on governance in a later post). Each blockchain is, in effect, it’s own fed, controlling the money supply through inflation, deflation or neither (opting to pay for the network through fees instead). The monetary policy can directly increase or decrease the purchasing power of users of a given cryptocurrency through the protocol, since each is an independent ecosystem. The effect of any monetary policy can be measured and tracked through the blockchain and the market, starting with those who participate in it.

Not only that, but because these are open protocols, the monetary policy is not hid from public view. Everyone participating can see what is happening, and depending on the protocol, help govern the process of the monetary policy as well. This is an important distinction from our current model, as we have no idea how much more fiat currency is being injected into the system.

Where does Pocket Network fit into this?

While there is a big push and definite need to make the UI/UX of decentralized applications much simpler and easier to use for users, that same goal applies to developers as well. Crypto API’s are difficult to use. Developers have to hold a crypto wallet, keep their funds safe, and need to hold a specific coin to pay fees in certain decentralized applications. This significantly increases the barrier for developers who already aren’t crypto savvy.

Pocket’s goal is to make it as easy as possible for developers to build peer-to-peer applications. We are doing this by using an economic model that doesn’t have fees, but developers pay through inflation of their token over time. Along with client side management of keys and a decentralized network of nodes that abstract the majority of the blockchain part into simple API requests, all developers have to do is purchase the POKT token and stake it once. This abstracts most of the new things that developers have to learn, and lets them to build the app they want to.

Pocket uses its own version of a continuous token model, a term coined by Simon de La Rouviere. This means that there is an infinite amount of tokens that can be minted within the network, at a variable inflation rate. The network will use a decaying formula for minting tokens. The graph will look similar to bitcoin’s in the sense that less tokens will be minted over the course of time, reaching maturity after certain checkpoints have been crossed.

Unlike Bitcoin, when Pocket Network reaches maturity, instead of converting into a fee based system, it flatlines with the inflation rate of the token. Pocket Network has designed and is building a set of contracts to effectively “mine” the POKT token once work is verified within the network and Ethereum’s proof of work security underlying it.

To keep an economic system like this balanced there are other considerations the protocol has to make like staking and burning tokens for various functions, including governance for how much or little needs to be minted, staked and burned. These mechanisms will be explained in greater detail with later posts, but it is important for the protocol to adapt to changing economic conditions (in Pocket’s case developers creating applications that people use).

Along with the goal of decentralizing infrastructure for Ethereum, Pocket Network wants to decrease the friction in creating powerful peer-to-peer applications. We are excited to be sharing our vision with future blog posts and our upcoming white paper.

If you’re a developer and want to contribute to what we’re building, please visit our Github.

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