DePIN Investment Logic Analysis: Opportunities and Challenges Coexist

Gray released a research report on DePIN at the beginning of this year, showcasing leading DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been viewed as two new directions for cryptocurrency investment. However, it seems that no iconic projects have emerged in the DePIN space yet. Although Helium is regarded as a leading project, it actually predates the introduction of the DePIN concept; while Bittensor, Render, and Akash are more often classified under the AI track.

This indicates that DePIN lacks sufficiently strong leading projects to break the ceiling of the track. Therefore, there may still be some Alpha 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 worth paying attention to, and proposes a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the concept from a more abstract perspective, while also providing some specific 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 just a fancy idea, nor is it merely a "concept hype", but something that can be practically implemented. There are indeed scenarios in DePIN where decentralization can "realize" or "optimize" certain situations.

Here are two simple examples:

In one of the main tracks of DePIN - the telecommunications sector, taking the U.S. market as an example, traditional communication operators typically 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 base station with a coverage radius of 1-3 kilometers. In a 2022 auction by the U.S. Federal Communications Commission for 5G spectrum in the 3.45GHz band, a major operator invested $9 billion, becoming the operator with the highest investment. This centralized infrastructure model leads to high prices for communication services.

A certain mobile network project uses 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." The community spontaneously forms a network driven by token incentives, thereby reducing the overall investment. The cost for a traditional operator to deploy a macro base station is around $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 social platforms to obtain training data and rely on residential proxies and data center proxies to scrape data. Furthermore, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

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

As the two main lines of cryptocurrency investment, infrastructure and consumer applications each face some issues.

Infrastructure projects generally have two characteristics: First, they have strong technical attributes, such as ZK, FHE, MPC, etc., which have a high threshold, and there is a certain disconnect in market recognition. Second, apart from the projects we are familiar with, such as Layer 1/2, cross-chain bridges, staking, etc., which 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 attract user attention and have poor dissemination. Although high-quality infrastructure has a certain product-market fit and revenue, enabling it to be self-sufficient across cycles, the lack of user attention in a market with scarce attention makes it very difficult to go public later.

On the other hand, consumer applications have a natural advantage in gaining attention as they are directly aimed at end users. However, new concepts can easily be disproven by the market, and may even plummet after the hot trend switches. Such projects often fall into a cycle of narrative-driven short-term bursts, followed by disproof and decline, and have a short lifecycle. Examples include certain social token projects.

Growth, attention, and listing are all issues that have been widely discussed in this cycle. Overall, DePIN can better address the dilemmas associated with the two points mentioned above and find a balance.

1. DePIN is built on the real demands of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid product-market fit and revenue, making them hard to falsify and easy for the market to understand. For example, a certain wireless network project offers an unlimited data plan for $30 a month, which is clearly cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage demands and can gain attention. 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 such as eSIM, WiFi, in-car data, etc., are similar and very close to users.

DePIN Investment Framework

Direction

Starting from intuition, 5G and wireless networks are a large market, while in-vehicle data and weather data are small markets. From the demand side, we need to see if it is a necessity (5G) or if the demand is strong. Moreover, since the share of 5G in the traditional market is very large, even if DePIN can capture a small portion of it, the market capacity is quite considerable when viewed in the context of cryptocurrency.

product

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

On the supply side, has DePIN achieved things that were not possible before, or does it have significant advantages over existing solutions in terms of cost, efficiency, etc.? For example, in the map collection track of a certain mapping project, traditional map collection at least has three major issues:

• Traditionally relies on professional fleets and manual labeling, which 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

The project allows users to collect data by selling dash cameras, turning data collection into something users do during their daily driving through a crowdsourcing model. It guides users with token incentives, prioritizing resources in high-demand areas.

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

Regarding hardware, a certain investment institution's article in 2023 begins by discussing hardware. The author would like to add a few points of view here.

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

Manufacture

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

Sales

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

Distribute

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

Maintenance

What do users need to do to maintain hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance example is a data collection project where users only need to download a browser extension with no other operations required; or a hotspot for a wireless network project that only requires simple installation to continue running. If it involves solar power generation and so on, it may be more complex.

Considering the above points, the simplest model is to directly utilize existing network bandwidth, requiring no manufacturing or distribution, allowing users to start without barriers, and needing no sales, which helps to quickly expand the network in the early stages of the project.

Indeed, projects in every direction have different hardware requirements. However, hardware relates 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 essential to manage the choice of paths and resource allocation regarding hardware, progressing gradually rather than trying to achieve 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

Tokenomics design 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 necessitates the launch of tokens very early in the project. This topic is suitable for a new article to conduct some case studies, and this article will not elaborate further.

( Team

In the team composition, the founder must have at least one person with the following backgrounds: first, someone who has worked in a traditional company 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 differentiate the preferences and mental models of crypto users and non-crypto users.

) 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 "breakout" applications in this cycle, and it seems we are still far from the adoption of users outside the circle. The short-term incentives provided by some cryptocurrency applications are the reasons users engage with them, but they are not sustainable. However, the economic benefits derived from DePIN at the foundational level could potentially replace traditional infrastructure on the user side, thereby achieving sustainability of applications and enabling mass adoption.

Despite the long development cycle due to DePIN's characteristic of integrating with reality, we have already seen some glimmers of hope from the development of a certain wireless network project: this project collaborates with a major operator, allowing user devices to seamlessly switch to the operator's nationwide 5G network. For example, when users leave the community hotspot coverage area, they automatically connect to the operator's base station, avoiding signal interruptions. Earlier this year, the project announced a partnership with a global telecom giant to operate in Mexico City and瓦.