How can PoPW networks win?

By Mohamed Fouda and Qiao Wang

Web 3 has enabled new ways of coordinating human activities on a global scale. Web 3 networks have the unique characteristic of being blind to state borders and user backgrounds as they only recognize the individual contributions to the network. Because of this unique characteristic of Web 3 networks, they can be utilized to create decentralized solutions that can replace centralized companies. Decentralized wireless networks, e.g. Helium, Pollen, Nodle, and decentralized mapping imagery, e.g., Hivemapper, Spexigon, are great examples of this concept. These projects demonstrate that participants from all over the world can come together and contribute toward a unified market that is accessible to everyone. Such networks have the potential to showcase the true power of decentralization as they grow to become one of the largest retail applications of Web3. The industry often refers to these networks as Proof of Physical Work (PoPW) networks. Although this term does not capture the majority of activities that can be performed by these networks, we will stick to this terminology instead of introducing a new term.

In this article, we will dive into the traits of successful PoPW networks and which ideas can have an easier path for reaching scale and product-market fit. If you are building a PoPW network, please reach out to us on Twitter and/or apply to Alliance. We are looking to support and fund builders in this space.

What is PoPW and why does it matter?

PoPW networks are collaborative networks where the network participants create a decentralized two-sided marketplace. The network participants are often split between service providers; who contribute work to the network and service buyers; who pay to benefit from the service provided by the network.

In an optimal scenario, these networks should operate similar to a decentralized exchange, where service requests (asks) are automatically matched with the service provider offers (bids). The network just takes an exchange fee that goes to reward the infrastructure nodes that run the network. This is likely the long-term goal for the current PoPW networks such as Helium. However, at the bootstrapping phase, there is a need for a centralized entity to develop the system and lead its growth through partnerships and marketing. This entity also needs to develop a sound tokenomic design to bootstrap the network’s supply side and create a valuable network that attracts customers.

We can take Amazon as a simplified example of how PoPW development can progress. Similar to Amazon, the goal of PoPW networks is to create global marketplaces. The marketplace initially runs at a loss during building the business infrastructure and bootstrapping the supply side. Eventually, when the supply side grows and the marketplace succeeds to offer high-quality service to buyers, the marketplace economics shift to profitability. The main difference from Amazon or any centralized marketplace is that when PoPW networks succeed in attracting customers, the economic value will flow back to the network participants, via the native token appreciation, instead of flowing to a centralized company.

There is a lot of content that discusses the benefits of PoPW networks over existing centralized implementations. This article will not repeat this discussion and instead refers to Multicoin’s article that lists some of these advantages such as cost-effectiveness due to reducing dependence on intermediaries and the ability to scale infrastructure faster due to decentralized deployment and the larger pool of contributors.

How can PoPW networks succeed?

There is little discussion on how PoPW networks can produce similar quality to centralized solutions to make the cost-effectiveness argument of PoPW meaningful. This article is an effort in this direction. This section discusses five fundamental characteristics needed for PoPW networks to succeed.

Simplicity of contributor operation

For a PoPW network to work at a global scale, the service provider contribution should be as simple as possible. This simplicity increases the potential contributor pool and achieves the goal of faster scalability. Networks that require contributors with specialized experience or training are also possible but will have a smaller contributor base.

Some of the current PoPW networks require complex operation and multiple levels of planning and coordination that can significantly limit their user base. Decentralized mobile networks are examples of those. Operating a mobile network is way more complicated than deploying “micro” cell stations. The nature of demand for mobile coverage is dynamic and the structure of a decentralized network cannot adapt quickly to these changes in demand. Further, mobile networks require significant technical work in planning, deploying infrastructure, servicing, and maintenance that can hardly be performed by decentralized contributors. To understand the scale of this complexity, XNET which is a decentralized mobile network project estimates that for every $1 in network revenue, $0.60 will go to support the complex backend operations and only $0.40 will go to reward the deployment of cell stations. This complexity indicates that a centralized entity needs to exist to coordinate these activities and a decentralized PoPW will be harder to achieve.

Standardization of contributions

Another important factor in the success of PoPW networks is the standardization of work contributions. Service provider contributions cannot be subjective. The subjectivity of contribution could lead to low-quality contributions that affect the overall functionality of the network. Evaluating such contributions to exclude low-quality ones will require complex systems that cannot be implemented on-chain. PoPW projects that collect complex data such as imagery have recognized the importance of standardized contributions. For instance, Hivemapper requires a dashcam with certain specs. Spexigon goes even a step further and the system’s software controls the movement of the drone to create consistent aerial imagery. The standardization also guarantees fairness and neutrality between service providers. Service providers can be rewarded differently based on metrics that are tied to the network goals such as coverage, recency, or customer demand. However, the rewards should not be related to subjective opinions on the contributed work.

Reliable Oracles

In PoPW networks, the off-chain contributions of the network participants need to be proven on-chain. These proofs allow rewarding the contribution using the network’s native token. This is the classic Oracle problem. The oracle needs to prove the existence, correctness, and authenticity of the contribution before submitting these contributions to the chain. This oracle problem is one of the toughest challenges of PoPW networks. Malicious actors have incentives to manipulate the oracle to extract the maximum value from the network. An example of this problem is the malicious behavior of some participants in the Helium network. As the network benefits from extended geographical coverage and rewards that through a Proof of Coverage mechanism, incentives emerge to fake the existence of hotspots or spoof their location. As both behaviors were observed and reported by the network participants, multiple efforts were launched to combat them. These efforts include creating Deny Lists for untrustworthy participants and using a hotspot challenging system. Despite these efforts proving the existence and correctness of location of a Helium hotspot is still a challenge.

Other PoPW platforms such as Hivemapper fight oracle manipulation by relying on hardware authentication. Hivemapper dashcams use GPS location and connections to Helium hotspot as part of the Proof of Location protocol that is used to prove the correctness of the mapping contributions. Moreover, Hivemapper adds a human-operated quality assurance layer to check the authenticity of the submitted imagery. Despite its usefulness, human review of contributions adds a layer of complexity and can create opportunities for malicious coordination between contributors and reviewers.

Efficient PoPW oracles are still an open question and a potential area for innovation. Currently, there is no general solution for this problem. Hardware authentication can offer some protection for specific use cases because hardware is typically harder to manipulate. Examples include spoofing-resistant GPS modules for location-sensitive PoPW contributions. However, more resilient and generic oracles are needed to enable a wider range of use cases.

Avoiding monopolies

For a decentralized PoPW network to succeed, single points of failure should be avoided. These points of failure include depending on patented technologies or specific software or hardware vendors. Instead, the network should adopt contribution standards that can be supported by multiple vendors for any hardware or software needed for the network. By removing any chances of centralization and monopoly, the network becomes more reliable and secure. An example to follow in this regard is Helium which has more than 20 vendors producing the LoRaWan hotspots needed for the network.

Conservative and agile token design

A major element in the success of a PoPW network is a tokenomic design that can successfully attract contributors to the network, balance supply and demand, and prevent useless or malicious value extraction from the network. The topic of balanced token design is a large topic and could need a separate article. However, some important guidelines are that 1) the demand side is much harder to get right than the supply side, and 2) it’s almost impossible to get the design right from the first attempt. As a result, the PoPW developing entity should be clear and transparent about the inevitability of changing the token design based on actual data from the project’s mainnet. The best approach is to start with a thoughtful design with conservative rewards for the supply side in the beginning and launch this as the initial product. As the network usage increases, feedback will allow changing the token design to improve the network economics.

Current landscape of PoPW

A common requirement for PoPW networks is the need to scale quickly to compete with centralized solutions. A major limiting factor for that participant acquisition is the cost of participation in the network. A network with a low participation cost can quickly attract more users, achieve better supply quality, achieve great decentralization, and test out product-market fit sooner. PoPW participation costs are often split between upfront entry costs and ongoing participation costs. In this section, PoPW projects are categorized based on these participation costs.

Entry cost (Capex)

Entry cost is an upfront cost that has to be paid for the user to be part of the network. Examples include the cost of a Helium hotspot or the cost of a drone for the Spexigon protocol. We can refer to this part of the cost as Capex. The higher this Capex, the harder it is to acquire users to the network. A high entry cost is often associated with specialized equipment that is needed to participate in the network. In addition to the cost, specialized equipment also take longer to fabricate and distribute to the network participants which slows down adoption. PoPW networks that require simple or generic equipment, e.g., a cell phone, have better odds of attracting participants.

Ongoing participation cost (Opex)

This is the ongoing operating cost paid by the user for active participation in the network. Examples include the energy cost and time needed to map an area using Hivemapper or Spexigon. We refer to these as Opex costs. High Opex costs means that participants need to get paid quicker and more frequently for their contributions. It also means that participants will need to sell a considerable portion of the earned token reward to cover their operating costs creating a continuous selling pressure on the token price. This pressure needs to be balanced by demand, i.e., native token buying pressure, to protect the native token’s price from going into a downtrend that can shake the participants’ confidence in the network. Networks that require high Opex can often benefit from a gradual growth strategy to balance the supply and demand sides.

PoPW Startup Ideas

As alluded to earlier, we envision many more use cases that can benefit from a decentralized marketplace model. If you are thinking along these lines, please reach out to us on Twitter and/or apply to Alliance.

1. Infrastructure and tooling for PoPW networks

Before discussing specific use cases for PoPW networks, it’s important to recognize the common need for infrastructure and tools to enable this sector. Examples of this needed infrastructure include innovative oracle solutions that are manipulation-resistant. These oracle solutions can be based on hardware or cryptographic primitives to ensure the authenticity of contributions and eliminate cheating.

Another needed tool is an SDK to launch modular PoPW networks as L2s or appchains with customizable tokenomic models. PoPW networks do not often need to be launched as L1s as is the case now. These SDKs need to focus on modularity by creating separate modules such as token utilities, rewarding mechanisms, the oracle solution, and the storage solution (in the case of data-related PoPW). Such modularity allows PoPW developers to tweak each module independently to achieve the optimal customization for their specific use cases. The availability of such SDKs can greatly simplify the work needed to launch a PoPW network.

2. Health data sharing

A major challenge for researchers in public health is the lack of sufficient datasets to test their research hypotheses. One approach to address this issue is decentralized contribution of health data by individuals to be used for research and drug development. An example here is sharing DNA data by individuals, i.e., a decentralized 23andme, where participants get rewarded for sharing their DNA data along with relevant health information. Universities, hospitals, and pharmaceutical companies can access this data via the decentralized marketplace for research and commercial applications. Another example is sharing physical activity data, heart rate, sleep data, and other types of data that are collected by wearable devices. These data can be used by wellness-focused businesses to improve their products. In these applications, user contributions are simple and standardized making them ideal candidates for PoPW networks. In addition, health data use cases can benefit from privacy-enhancing technologies like zero-knowledge proofs.

3. Decentralized VoIP international calling

Voice over Internet Protocol (VoIP) technology has enabled a significant reduction in the cost of international calls as it enables the routing of phone calls over the internet. The cost of international calls can be reduced by another 10x through decentralization. A PoPW network consisting of users who connect local phone lines to the internet creates a global phone network that performs international calls at the cost of a local phone call.

4. Balancing renewable energy distribution

Sustainability and clean energy have been a growing focus in recent years. The use of solar cells and other renewable energy sources can be improved by creating efficient distribution networks that balance generation and consumption. Decentralized energy contributions can also be integrated with public energy networks to support the network in periods of high demand reducing the need of using fossil fuels during these periods. An example project in this area is React network.

5. Decentralized mechanical turk

Amazon MTurk is a platform that allows the outsourcing of tasks that require human intelligence to be performed by a distributed set of workers. The current MTurk model is not suitable as a PoPW network because of the variety of tasks. However, with the development of the right technical tools, MTurk can be implemented as a PoPW network that aggregates smaller on-demand PoPW networks. In this model, the sub-PoPW-networks are created on-demand by the requesting entity and worker contributions are submitted to the sub-networks according to their rules. All the sub-networks share the same native token creating a contributor-owned platform that is flexible enough to serve different niche use cases. In addition to the benefit of reducing costs through cutting intermediary fees, there are several additional benefits of a decentralized on-chain MTurk including:

• Work requesters and workers don’t need to share PII as is currently required by Amazon MTurk.
• Requesters and workers’ history and achievements are transparently available on-chain for counterparty review.
• Specific worker qualifications can be proven by SBTs issued by third-parties identity providers.
• Earned on-chain reputation can be transferred to other user-facing clients.
• Payments can be settled more quickly over crypto rails.

6. AI dataset creation

Training advanced AI models requires large and complex datasets. For computer vision, these datasets are typically labelled images which require significant human input in the dataset creation. For instance, to create a dataset to train an autonomous driving model, the first step is to capture photos of actual traffic conditions at different times and during different scenarios. Then the second part is to label/annotate these images correctly to train the computer vision model. Both steps require considerable human involvement. It’s possible to build a PoPW network that aggregates human contributions to create large datasets for AI and other use cases. These datasets will be used by companies that develop and train large AI models. As the complexity of the AI models increases, the PoPW networks can continuously amend and extend the datasets to achieve better performance.

7. Regenerative Finance

PoPW networks can accelerate regenerative finance by incentivizing sustainable activities with tokens. The tokens are generated as a reward to participants who perform sustainable activities. The tokens are purchased and burned by institutions seeking to achieve a greener footprint and a greater sustainability impact. The system works similarly to carbon credits but incentivizes activities and goals that are harder to achieve, e.g., cleaning waterways, encouraging recycling, financing better industrial filtration systems, etc.

Conclusion

We believe that PoPW networks are positioned to create massive economic networks that showcase the true benefits of decentralization. Compared to financial use cases of Web 3 which are dominated by speculation, PoPW networks facilitate services that touch our everyday life. There are several use cases where PoPW can take on monopolies and outcompete them by providing better service at a lower cost. We are particularly excited about decentralized data-sharing applications and end-user services. We encourage builders in this domain to reach out to us at Alliance, we want to support builders in these areas.