Analysis of DePIN Investment Logic: Opportunities and Challenges Coexist

Grayscale released a research report on DePIN earlier this year, showcasing leading DePIN projects and their market capitalization. Since 2022, DePIN and AI have been regarded as two new directions for cryptocurrency investment. However, there seems to be no iconic project in the DePIN field yet. (Helium can be considered a leading project, but its emergence predates even the concept of DePIN; Bittensor, Render, and Akash in the table are more categorized under the AI track ).

This indicates that DePIN lacks a sufficiently strong leading project to break the ceiling of the track. Therefore, there may still be some opportunities in the DePIN track in the next 1-3 years.

This article attempts to outline the investment logic of DePIN from scratch, including why DePIN is a worthy investment direction and proposing a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the concept from a relatively abstract perspective, while also providing some concrete examples.

Why Pay Attention to DePIN Investment

DePIN is not just a buzzword.

First, it is necessary to clarify that decentralizing the infrastructure of the physical world is not an impractical idea, nor is it merely a simple "narrative hype"; it is something that can be executed. In DePIN, there are indeed situations where decentralization can "achieve" or "optimize" certain scenarios.

Here are two simple examples:

In one of the main tracks of DePIN - the telecommunications field, taking the U.S. market as an example, traditional telecom operators usually need to invest billions of dollars for spectrum license auctions and base station deployments, and then pay deployment costs of $200,000 to $500,000 for each macro station covering a radius of 1-3 kilometers. In an auction by the U.S. Federal Communications Commission for 5G spectrum in the 3.45GHz band in 2022, a large operator invested $9 billion, becoming the operator with the highest investment. This centralized dominant infrastructure model leads to high prices for communication services.

A certain mobile communication project employs a community crowdsourcing approach to distribute the early costs among each user. Individuals only need to purchase hotspot devices for $249 or $499 to access the network and become "micro-operators", driven by token incentives to spontaneously form a network in the community, thereby reducing overall investment. The cost for a major operator to deploy a macro base station is approximately $200,000, while this project can achieve a similar coverage area by deploying about 100 hotspot devices at a total cost of approximately $50,000(, resulting in a cost reduction of about 75%.

Additionally, in the field of AI data, traditional AI companies need to pay up to $300 million per year in API fees to certain social platforms to obtain training data, and they rely on residential proxies and data center proxies to scrape data. Moreover, they are increasingly facing more and more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain project has solved this dilemma through distributed Web Scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape public web data and earn token rewards. This model significantly reduces the data acquisition costs for AI companies while achieving diversity and geographical distribution of data. According to statistics from the project, there are currently 109,755,404 IP addresses from 190 countries participating in the network, contributing an average of 1,000 TB of internet data daily.

In summary, the starting point for investing in the DePIN direction is that decentralized physical infrastructure has the opportunity to perform better than traditional physical infrastructure and even achieve things that traditional methods cannot.

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) as a junction point between infrastructure and users

As the two main lines of cryptocurrency investment, infrastructure and user-facing projects each face some challenges.

Infrastructure projects generally have two characteristics: first, they have strong technical attributes, for example, technologies like ZK, FHE, and MPC have high thresholds and there is a certain disconnect in market perception. Second, aside from the projects we are familiar with such as Layer 1/2, cross-chain bridges, and staking that can directly reach end users, most infrastructure is actually aimed at enterprises. For example, developer tools, data availability layers, oracles, co-processors, etc., are relatively distant from users.

These two points make it difficult for infrastructure projects to drive user mind share and result in poor dissemination. Although high-quality infrastructure has a certain degree of product-market fit and revenue, allowing it to be self-sustaining through cycles, the lack of mind share in a market with scarce attention makes it challenging to launch later.

Conversely, user-oriented projects have a natural advantage in capturing mind share as they are directly aimed at end users. However, new concepts can easily be invalidated by the market, and may plummet after a shift in trends. Such projects often fall into a cycle of narrative-driven short-term bursts followed by invalidation and decline, and have a short lifecycle. Examples include certain social token projects.

Growth, mental market share, and listing are all issues that have been widely discussed during this cycle. Overall, DePIN can better address the challenges of combining the above two points and find a balance.

1. DePIN is established on the real demands of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have solid product-market fit and revenue, are difficult to falsify, and are easily understood by the market. For example, a project offering an unlimited data plan for 30 dollars a month is clearly cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage demands, which can capture mind share. For example, users can download a browser extension for a certain project to contribute their idle bandwidth. Currently, this project has reached 2.5 million end users, many of whom are non-native crypto users. Other sectors like eSIM, WiFi, in-car data, etc., are similarly close to users.

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DePIN Investment Framework

) Direction

Starting from intuition, 5G and wireless networks are large markets, while in-car data and weather data are smaller markets. From the demand side, it is necessary to see whether it is a necessity ### like 5G ( or a strong demand. Moreover, since the share of traditional markets like 5G is very large, even if DePIN can capture a small portion of it, the market capacity is still quite considerable when viewed under the scale of cryptocurrency.

) product

According to a certain research report, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, obvious monopolistic patterns, and underutilization of resources. Essentially, answering the question of product-market fit looks at two points.

On the supply side, has DePIN achieved things that were previously impossible, or does it have significant advantages over existing solutions in terms of cost, efficiency, etc. ###? For example, in the track of a certain map collection project, traditional map collection faces at least three major issues:

• Traditional reliance on professional fleets and manual labeling is costly and lacks scalability.
• A well-known map service has a long update cycle and low coverage in remote areas.
• Centralized map service providers monopolize data pricing power

This project allows users to collect data by selling dash cams, turning data collection into something users do during their daily driving through a crowdsourcing model. By incentivizing users with tokens, resources are prioritized in high-demand areas.

On the demand side, the products provided by DePIN must have real market demand, preferably with a strong willingness to pay. A similar example is this mapping project, which can sell mapping data to companies in autonomous driving, logistics, insurance, and municipalities, thus validating the key demand.

Regarding hardware, an investment institution's article in 2023 starts by discussing hardware. Here are a few additional viewpoints.

The hardware timeline can be summarized as "manufacturing - sales - distribution - maintenance".

Manufacture

Does the project party design and manufacture its own hardware, or does it use existing hardware? For example, a certain wireless network project provides two types of proprietary hotspots and also supports the integration of existing WiFi networks. Alternatively, for computing and storage-related DePIN projects, existing graphics cards and hard drives, etc., can be directly used.

Sales

The clear pricing of sales means that users will calculate the payback period based on potential returns. A home mobile hotspot for a certain wireless network project is priced at 249 USD, and a data collector for a certain vehicle data project is priced at 1,331 USD.

Distribution

How to distribute? Distribution involves many uncertain factors: logistics timeliness, transportation costs, and the delivery cycle from the beginning of the pre-sale, etc. For projects targeting a global scale, inappropriate distribution design and methods can significantly slow down the progress of the project.

Maintenance

What do users need to do to maintain hardware? Some devices may experience depreciation or wear and tear. The simplest example of maintenance is a bandwidth sharing project where users only need to download a browser extension without any other operations required; or a hotspot for a wireless network project, which only requires simple installation to keep running. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is to directly utilize the existing network bandwidth, without the need for manufacturing and distribution. Users can start without any barriers, and there is no need for sales, which helps to quickly expand the network in the early stages of the project.

Indeed, the hardware requirements differ for projects in every direction. However, hardware is related to the friction of initial adoption. The less friction there is in the early stages of a project, the better; as the project matures, some friction can lead to retention and a certain degree of binding relationships. For startup teams, it is necessary to manage the path selection and resource investment regarding hardware, progressing gradually rather than achieving everything at once.

Imagine, if it is not easy from "manufacturing - sales - distribution - maintenance", then unless there are very strong and highly certain incentives, why would users participate?

( token economy

The design of the token mechanism is the most challenging aspect of DePIN projects. Unlike projects in other fields, DePIN needs to incentivize various participants in the network at an early stage, which requires launching tokens very early in the project's lifecycle. This topic is suitable for a new article to conduct some case studies, so this article will not elaborate further.

) Team

In the team composition, the founders must have at least one member with each of the following backgrounds: first, someone who has worked in traditional companies in this field and has rich experience, responsible for practical matters such as technology and product implementation; second, someone who is native to crypto, understands token economics and community building, and can distinguish between the preferences and mental models of crypto users and non-crypto users.

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( Other

Regulatory issues, such as the collection of road images and data in certain areas, are clearly very sensitive.

Summary

Cryptocurrencies have not really achieved "breakthrough" applications in this cycle, and it seems that the adoption by users outside the circle is still a long way off. The short-term incentives provided by some crypto applications are the reasons users engage with them, but they cannot last. On the other hand, the economic benefits derived from DePIN at the foundational level may replace traditional infrastructure on the user side, thereby achieving application sustainability and enabling mass adoption.

Despite the characteristics of DePIN being closely integrated with reality, resulting in a longer development cycle, we have already seen some glimmers of hope from the development of a certain wireless network project: this project collaborates with a large operator, allowing user devices to seamlessly switch to the operator's nationwide 5G network. For example, when users leave the community hotspot range, they automatically connect to the operator's base station, avoiding signal interruptions. At the beginning of this year, the project announced a partnership with a global telecommunications giant to collaborate in Mexico.