DAPPCON 2024: Tokenomics Of DePINs - Robert Koschig

Transcript

all right um yeah let's jump right into it uh who here knows what a dpin is okay that's fair then maybe I spend some seconds on deepins right it is this decentralized physical infrastructure networks that means you have some physical infrastructure in the back end it could be a server it could be and then 5G antenna could be anything and you provide the service uh you know to whoever needs you know Mobile coverage or whatsoever and the secret is really you crowdsource the the infrastructure this this is the secret and there used to be like just a couple of them early days was fcoin helium nowadays there's I don't know 700 I I lost track um I think

a good dissection is to understand there's like physical resource networks these are the guys who put antennas on their rooftops for 5G or for weather data or whatever or some sensors in their cars and there's a digital Resource Network which is you know fcoin and all the other guys we just provide a server basically for compute storage and and whatsoever um well then next question who knows what tokenomics are yeah fair enough um so I'm working at 1kx I'm a researcher but my bread and butter is basically token designs and tokenomics anded yeah as vitalic put it you don't really know what it is and you should not talk about it how I would

Define it or what I typically talk about with protocols is the economic design of your protocol because your protocol yes developers right they love the text de they love the software but if you think about the token economy it has economy in it so you should also think about that because if you leave this out of the picture typically your protocol is just software stack right so that's why I want to talk a little bit about that are there actually any economists in the audience okay so you guys made Better Life Choices than I did um okay so I don't want to go through all that but the basic message is it's all about Supply demand and balancing this sounds

easy but as you can see from the chart looking through your protocol and who's doing what that can get complicated uh we don't have too much time so I will not get into all of that uh I want to talk about some core functions uh and and how they relate uh especially with respect to D pins right this physical infrastructure networks they have something special and these are these roles um and yeah let me quickly walk you through what what this is because wherever you look at any deepin and uh the link in the bottom has some research where I skimmed through 100s of deepens to understand okay how can I abstract it and this is kind of like the condensed version of like okay if if I abstract it any deep in always

needs these functions or roles how I call them and yes it's actually also quite obvious as most economical stuff is you have a user and he needs I don't know Mobile coverage so he request a service you know give me a signal I I want that or he wants to store something you know give give me storage so he requests work typically he does so either directly with somebody who has storage like fcoin right he goes to the storage provider the he has a like yeah I have free storage you know be my guest um sometimes there's some abstraction layer it's the Gateway where you first go to the Gateway think about pocket for RPC request you go to a Gateway and then the Gateway distributes to whoever notes on the back end can can basically serve

your request um now the tricky thing is these service nodes in the decentralized in the D pins they are decentralized so anybody can do it how can I trust the guy I gave my data that he really stoed it there's typically some sort of verification and that function is the validator or Watcher and what they do is you know they say like yeah it's all good and they do some proofs or whatsoever and what they do is they typically store that proof on the blockchain which serves as your accounting layer right where you also store all sorts of track records on the payments and exchange so on and so forth um so yeah don't want to go too much into detail on that maybe it's a takeaway there are different walls in

your your protocol and actually you can expand that Beyond deepin uh but in the deep in space as we talked today these are the main characters these are the roles you need to think about now the thing is okay I have a service I want to spill out I have my protocol how do I get these guys to do what I want and uh what you do is basically you say okay uh come on I give you some tokens for providing your storage Supply because I have this great business model um and then with this the storage I will find customers eventually they will pay and with this payment I can attract more Supply guys more storage I can offer better services and there goes my flywheel right another cool thing in

deepin it's quite simple the flywheel is actually always the same the rols are very similar the flywheel is typically the same um now how do we do it it's also quite similar um when you think about reward emissions these initial tokens that you need to give away because initially there's no one paying for your service so you give award tokens and if you look across deepins uh I'm pretty sure you also find it like outside the deepin sector there's typically just two emission schedules that you can follow the one is kind of like the Bitcoin Classic on the left side from your side uh just ex you know decaying over time and I fix it over time every you know whatever four years

it's hening and then you get get this R we follows the same approach a bunch of protocols follow this one the right side is a little bit more sophisticated it's kpi based where you say Okay I I have it's not just time based I have certain kpis that I want to achieve for example filecoin they have these Baseline kind of like a capacity that they want to reach and if the network has more capacity if you have too much Supply then they actually uh you know cap the rewards accordingly so this more the kpi based and as you can see from this example from Life Pier um the resulting token emission this is the solid green line uh looks a little bit less um predictable as the time based um and

again as I said uh typically any deepin that you find will follow in each of these categories there are some small Nuance in the sense of like is it decaying or is it constant um not going to want to go too much into detail here because the cool thing I want to show you is if you look at the data um another thing that's quite common across deepins they're very similar um complex chart let's me briefly explain what it is so on the x-axis it's just time since Inception basically and on the yaxis it's the total the token Supply that you emit as rewards compared to your total Supply ever so for Bitcoin

you would basically divide by 21 million right um and for the other ones uh accordingly and what you can see is you look at all these D pins and they all do different stuff they all have different models but the reward emission is always quite similar you start typically between you know around half a percent of a total Supply until 1% and then after two years ideally you know you slow down with emissions which makes sense because eventually you also want to have some Revenue who that that pays that right um so we had the first piece of our economic design which is just like okay the rewards how do we structure them turns out okay just follow the example of everybody else and

and and there you go with your emission schedule um so this way you can incentivize the supply now is this all that needs for the economic design for your protocol um as you guess probably not because let's maybe look at fcoin right now um don't want to go through the whole uh p&l that's shown here but what it shows at the bottom uh not sure if you can see it this is a big negative sign and the issue is with filecoin they are still paying a lot of token rewards right each month like over 20 million in token rewards that that are emitted um and you can contrast that I'm not sure

if if you see the line above maybe can try this cool pointer thingy no doesn't really show um but um what you see above the red circle is $133,000 this is what the minor actually gets so you pay them 20 Millions to run the server architecture the storage and all this like it it's really big infrastructure that they run and customers paying $133,000 a month so obviously this is quite low compared to the effort you do on the other hand you also ask okay is it is it the low income that's the issue or is it the high cost and you know basically both right because when

you think about your economic design you as a designer can steer either or so what I mean is let's maybe look at the at the income side um right I mean we know it's low for deep in sector it's it's hyped deep in you know everybody talks about deepin but if if you look at the a actual revenues it's just over the all whole sector it's just a couple of Millions and the Funky detail is this is not even the revenue that goes to the actual miners right um for example some of this fcoin Revenue shown here it's the miners paying that as some sort of penalty fee um and that counts as protocol Revenue um but yeah just just as a as a side note because what I want

to allude to is when you talk about the income side how can you manage the income side well income you know the revenue of your protocol and again econ 101 revenue is price times volume and here we go again like how do you set your price um you can choose you can design it as you want because you're you're the head of your protocol you you can pick and choose and guys uh different protocols do it differently uh for example helium they say 0.1 Cent whatever per uh gigabyte data volume that you do don't quote me I don't know the exact number but just a fixed price for Service you you you use right on the other hand uh you have

ethereum where every block basically it's auction off it Supermarket base it's the auction the price every block is is separate right you have a very Market based price finding mechanism that that also changes each block and then in between you actually have uh some some different approaches uh fcoin for example is somewhat market-based because uh you as a user you go to fcoin and you can choose between different uh offers of different uh storage providers um what they offer as a as a price and another piece is also that you can also change that pocket used to be a fixed price that they had it baked in their in their formula or they charge uh now they

switched to different models now they have Gateway providers and the Gateway providers can basically tell you okay I charge you this price and if you don't like it you can go to the other Gateway providers so they went from the rather fixed price approach to more market-based approach um similar topic related to price typically how deep in start is they charge a very low price not to say they charge nothing typically you get get to use them for free um and that's something you need to also keep in mind when you think about your economic design for your protocol uh when you run a deep in here pocket uh Network the green line is the demand so to speak the relays they served

you see it looks like a the typical deepend flywheel story of oh we kicked off this the supply The Gray Line are the number of noes that serve the network kicked off exponential growth nice the demand follow suit you know also exponentially increases this is the start of the flywheel we're good the only thing they forgot is utilization is not monetization and in Q4 2023 um they decided to basically say okay let's lower the amount of free tiers we give away let's actually charge a proper price for our service and as you can see oh then a lot of the users that were loyal users before just said

oh no now now I need to pay something and I'm not using your service anymore um other part of the income side um and and pricing logic I don't want to go too much into that because I you know it's a complex topic it's afternoon um again just listing you that all these different design decisions that you can make is the pricing logic but then you can also distribute who gets what again pocket is uh a network where they say okay the network used to charge you like a certain amount for the Relay that you request they switch now and says like oh you know what we don't we no longer want to be in the sales business we don't

want to S stuff we actually decentralized the sales teams selling happened at the Gateway function so they decentralized their gateways and each Gateway can now set a price which is actually nice because you outsourced your sales stuff basically to anybody who wants to run a Gateway the only thing you is as a network you're like okay how do you earn money then if you basically let anybody else collect the money uh that's why they said no for any Gateway for any relay that you serve you need to pay like you know a certain fixed price 85 cents per million request or something like that and this is this black line at the bottom right it's like the network uh needs to needs to be paid but what the Gateway charges on top this

is totally their decision they can set the price that they want and again this is just coming back to the price setting is like you can Define the price logic you can Define who is allowed to set the price who not and you can tie this to any other economic aspect that you that you want um yeah with interest of time let's also jump to the cost aspect because I said earlier right these networks have you know it doesn't look great because the income seems low and the cost side yeah we don't even know right because if you look around any protocol and you ask them okay what's the cost to operate filecoin what's the cost to operate ethereum right like I'm not sure if there's an answer to to to that and um we ask

ourselves this question as well um and for example did did a framework for for pocket um which will also publish soon so trust me on the numbers for now you can challenge us once we publish this this research piece um for example po pocket is roughly $200,000 per per month to basically run all the servers to run the gateways to also run the blockchain the pocket blockchain you know to settle all these transaction or to pay all the roles that I mentioned earlier uh this is the estimated cost and why is this so interesting I mean this brings you back to like I need to balance Supply demand I kind of like first yes I need to incentivize people but eventually people need to pay enough that I can pay the

bills right this is again econ 101 and you kind of like need to do it with your protocol as well the cool thing is you have so many different ways that you can do it and decide how you want to do it you can change it over time you have tons of degrees of freedom um just a quick note on pocket because when you look at that you know we saw that earlier that the nodes the gray chart Gray Line went up tremendously obviously that means if each note basically has similar cost base your network cost goes up as well and this is typically not good because if you want to scale a business your cost shouldn't go up with your Supply right the one point you know if you double your demand your cost shouldn't

double um and that actually also happened with pocket initially they had this bad unit economics but then the you know node Runners they got chunk chunk down the cost had a bunch of initiatives not going to go into that for now but where they are right now is basically okay if they are where they are right now they are at a stage where they can scale because they got the cost in place now when they 5x their demand basically the costs don't grow as much um and then that's why they eventually become profitable um not going to talk about the accounting layer because this is a whole another level just a simple message which I guess is easy to understand life Pier started on ethereum

and had ethereum as their accounting layer obviously in 20 20 2021 right when the bull market was there was huge amount of cost for anybody who was not operating Life beer so it was technically a huge cost to the network was like 100 E I think in in in a month or something like that arbitrum came along so it was very natural for them to just say like hey we know over 95% of our total cost base is we we pay e for ethereum let's move to arbitrum and now the cost is like I think for sure less than two e a month or something like that because yeah I want to want to summarize because I know it was a lot especially since since there are no economists here

um but the message is the economic design that you can Define it's all in your control you need to think about Supply demand you know how much can you charge your customers how much you need to pay your supply that they keep operating and if this is imbalanced you probably need to tackle either way right the first thing to do that is you define the roles you need to understand in my network who is doing what and also think about what do you centrally own right now versus what can you centralize along the way because you can change the roles um the operating cost I mentioned that as well this is the one piece on your supply side if you

feel you're not getting enough income and somehow you don't can scale it up look at your cost side monitor them understand them like okay you know how do I get them down because you really you know whenever you launch a token whenever the bull market the price will be up you have good Runway so to speak to incentivize the supply but you really want to incentivize a scalable Supply s side because if it's not scalable the next bare Market basically the supply s side will just say okay you can't pay me no more I'm I'm out of here um yeah the other things um I I talked about Define the pricing logic uh also allow yourself to adjust reward emissions I I like it a lot when you kind of like keep yourself

flexible because you never know what's what's happening on your product side on the market side um so be keeping flexible is is good and for sure I think the main message is you don't need to do anything yourself right there's tons of other projects tons of other protocols uh tons of other Builders just see what they already do how we can integrate how we can maybe Outsource collaborate uh things like that um yeah and that's I guess my my main message from this little economics lesson I hope it was not too dry and yeah I guess we still have room for one question two uh we have time for a few questions actually

okay so yeah thank you Robert for for your amazing presentation and we have time for maybe three or four questions so yeah thank [Applause] you um anyone yeah hello thank you for the presentation I want to ask you because I saw the slide of the file coin so you see there is a huge discrepancy between what a customer pays and what they pay for for the storage providers and I know storage providers invested like hundreds of Millions for the bare metal to run

this so what what is their fix for this in your opinion I mean yeah how they fix it I mean then they need to figure it out I mean they're still well funded right big ecosystem I think they already on a good traction to actually Foster a lot of the on the demand side as well because that that used to be a problem because filecoin is a good example they had a huge basically budget in the last poll run there were months where this 20 million now in minor emissions used to be almost a billion in a month dollar um for the storage provider so for sure the storage providers they got a lot of money to operate so even if it's less now I I would guess they they

they got decently funded um but yeah for them I would say for sure they need to tackle more on the demand side which they do right FM Integrations ecosystem out um but they also learned the lesson that yeah that takes time um but yeah also the good side is they actually tackled cost as well like the ceiling cost used to be tremendously high they cut it by 90% but again that it feels to me like they need to speed up a little bit because uh to your point um eventually you know there's a lot of money the operation costs um but yeah that that's why it's so important if you design a protocol think a little bit up front how you think things since things might play

out onek um so one of your takeaways was to allow yourself to be adaptable with the emission I will worry that if I have to make let's talk about filecoin I have to make the decision about providing a storage for for others I would want to have some kind of predictability to make my decision so something like this dramatically increases my risk because then I don't know anything about what will happen so don't you think that affects very negatively the actual service provider for this infrastructure yeah and it's a good good

question and good point because I think the wording is probably a little bit misund misleading I'm not meaning that you know you want to be the the the protocol that says like okay I have 20% of my allocation for rewards but how it's done you know we throw a dice each week and see see where it lands it's really more about in the early days people follow a lot just blindly the Bitcoin model of like yeah Hing over this amount of time it's really super predictable and this is how we go which also means after four years after 8 years or after 12 years eventually you know the mon the Fiat value of these emissions will just dry out and then either we we made it or not and that's it so you want to probably a

little bit be more flexible in that regard to say hey I know these guys have Fiat costs maybe I should have a token reward model that gives them a base Fiat model that they can plan for if they can guarantee them no matter what the token price does you get 1,000 bucks each month because I know your operation is 500 bucks so you get this plus of profit could be a good token model creates other problems down the line as well right but this is exactly the discussion or the the thinking you need to have of like okay how can I think about it um because yeah if you don't think about it and just copy you know some plain schedule because it looks good in a paper and like cool math sounds nice uh then eventually you you you you

basically you mustn't run into issues but you steal yourself a big opportunity to you know be more flexible and actually optimize your your own degrees of freedom in in your economic design um I guess we have time for one more all right thanks this is great information really appreciate it U my question is about kind of growing the demand side so for these networks like R weave and filecoin right that have existed and bootstrap their supply side um and they have a web 2 competitor that's out there how how do you think about the like unit economics of using something like an R weave um or filecoin

compared to to a web 2 competitor yeah it's I I need to be mindful of time but there's two things to it the one thing I would say is for sure they are more flexible in expanding their use cage I mean the AO computer for example for rwe complete new use case will help fostering demand as well the other thing is typically decentralization is always seen as like disadvantage but for example if you look about the story of uber and how Uber scaled so quickly I think the guy recently also tweeted about it they put you know decentralized teams super small and these were their sales teams and they would say like you go in this city you go in this city you City so decentralization of your sales

similar to pocket is just another approach to just say actually I just want to have like more traffic on my side who's doing it I give it lots of degrees of freedom to I Outsource it to other guys but since I have this token to coordinate I have this mechanisms coordinate they can do it all over the world because my infrastructure is already integrated there's another way there's for sure more but these two things all alone are something where I feel like this decentralization of sales teams for example as I call it I haven't seen that so much yet I haven't seen sales teams anyway and deepen so much um but this is for sure something where like feel like okay why actually not for sure I can see the way we super early so there are reasons why not but I feel

like we are at a time where we could uh explore this path and yeah just follow the learnings from web 2 because web 3 seems even more destined to to to apply this okay I guess um that's it thank you so much for your presentation again Robert thanks guys