DePIN Investment Logic Analysis: Opportunities and Challenges Coexist

Grayscale released a research report on DePIN earlier this year, showcasing leading DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been regarded as two new directions for cryptocurrency investment. However, it seems that there has yet to be a truly iconic project in the DePIN space. Although Helium is considered a leading project, it emerged even before the concept of DePIN; meanwhile, Bittensor, Render, and Akash in the table are more often classified under the AI track.

It seems that the DePIN track currently lacks a strong leading project to elevate the overall industry's ceiling. This means that there may still be some alpha opportunities in the DePIN track in the next 1-3 years.

This article will systematically outline the investment logic of DePIN from scratch, including why DePIN is worth our attention, as well as proposing a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the core concepts from a relatively abstract perspective, while also providing some specific cases.

Why Focus on DePIN Investment

( DePIN is not just a gimmick.

First, it is necessary to clarify that decentralizing the infrastructure of the physical world is not just a flashy idea, nor is it merely a simple "narrative hype"; rather, there are practical scenarios where this can be implemented. In DePIN, there are indeed situations where decentralization can "enable" or "optimize" certain areas.

Here are two simple examples:

In a major track of DePIN - the telecommunications sector, taking the U.S. market as an example, traditional telecom operators usually need to invest billions of dollars in spectrum license auctions and base station deployments. Each macro base station covering a radius of 1-3 kilometers also requires deployment costs of $200,000 to $500,000. In 2022, a large operator invested $9 billion in an auction for the 3.45GHz 5G spectrum at the Federal Communications Commission )FCC###. This centralized infrastructure model leads to high prices for communication services.

A certain decentralized mobile network project spreads the early costs to each user through community crowdsourcing. Individuals only need to purchase hotspot devices for $249 or $499 to access the network and become "micro-operators." Community self-organizing is driven by token incentives, thus reducing the overall investment. The cost for traditional operators to deploy a macro base station is about $200,000, while this project can achieve a similar coverage area by deploying about 100 hotspot devices for a total cost of approximately $50,000, resulting in a cost reduction of about 75%.

In addition, in the field of AI data, traditional AI companies need to pay up to $300 million per year in API fees to social media platforms to obtain training data, and they use 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 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 earning token rewards from it. This model has significantly reduced the data acquisition costs for AI companies while achieving data diversity and geographical distribution. According to statistics, 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, a fundamental starting point for investing in DePIN is that decentralized physical infrastructure has the opportunity to perform better than traditional physical infrastructure, and even to achieve things that traditional methods cannot.

( as a convergence point of infrastructure and consumer applications

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

Infrastructure projects generally have two characteristics: first, they have strong technical attributes, such as ZK, FHE, and MPC, which have high technical thresholds and a certain disconnection in market recognition. Second, aside from Layer 1/2, cross-chain bridges, staking, and other projects directly aimed at end users, most infrastructure is actually aimed at enterprises. For example, developer tools, data availability layers, oracles, co-processors, etc., are relatively distant from ordinary 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-sufficient through cycles, the lack of mind share in a market environment where attention is scarce leads to difficulties in later market entry.

In contrast, consumer-grade applications have the advantage of being directly oriented towards end users, which gives them a natural advantage in terms of market penetration. However, new concepts can easily be disproved by the market, and they may rapidly decline after a shift in trends. Such projects often fall into a cycle of narrative-driven hype, short-term explosions, and subsequent disproof and decline, resulting in a short lifespan. For example, certain social token projects.

Issues such as growth, mental ownership, and listing have been widely discussed topics in this cycle. Overall, DePIN can better balance and address the dilemmas in the two aspects mentioned above.

1. DePIN is built on the real needs of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid product-market fit and revenue, are hard to disprove, and are easily understood by the market. For example, a certain decentralized mobile network offers an unlimited data plan for $30 per month, which is clearly more affordable than traditional operators' plans.

2. DePIN also has user-side usage needs and can gain 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-crypto native users. Other tracks such as eSIM, WiFi, and in-car data are similar, closely related to users' daily lives.

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DePIN Investment Framework

) Direction

From an intuitive perspective, 5G and wireless networks are large markets, while in-car data and weather data belong to smaller markets. It is necessary to assess from the demand side whether they are necessities like 5G### or in strong demand. Furthermore, since fields like 5G occupy a huge share in traditional markets, even if DePIN can only capture a small portion of it, the size in the cryptocurrency market is still quite considerable.

product

According to a certain research report, the DePIN model is particularly suitable for industries with high capital demand, high entry barriers, obvious monopoly patterns, and underutilization of resources. Evaluating product-market fit mainly focuses on two points:

On the supply side, has DePIN achieved functionality that was previously unattainable, or does it have significant advantages over existing solutions in terms of cost, efficiency, etc.? For example, in the field of map collection, traditional methods face at least three major issues:

• Relying on professional fleets and manual labeling, the cost is high and scalability is poor.
• Mainstream street scene services have long update cycles and low coverage in remote areas.
• Centralized map service providers monopolize data pricing rights

A certain decentralized mapping project allows users to collect data during their daily driving by selling dash cameras, turning data collection into a routine activity for users through a crowdsourcing model. It guides users with token incentives and prioritizes resource allocation to high-demand areas.

On the demand side, the products provided by DePIN must have real market demand, ideally with a strong willingness to pay. Taking the aforementioned mapping project as an example, it can sell map data to companies in autonomous driving, logistics, insurance, and municipal departments, verifying the key demand.

Regarding hardware, it can be considered from several stages: "manufacturing - sales - distribution - maintenance".

Manufacturing: Does the project party design and manufacture hardware themselves, or do they use existing hardware? For example, a certain wireless network project provides its own hotspots while also supporting the integration of existing WiFi networks. Computing and storage-type DePIN projects can directly use existing graphics cards and hard drives, etc.

Sales: Clear pricing 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 dollars, and a vehicle-mounted data collector is priced at 1,331 dollars.

Distribution: How to distribute? It involves uncertain factors such as logistics timeliness, transportation costs, and the cycle from pre-sale to delivery. For projects targeting the global market, inappropriate distribution design may severely delay project progress.

Maintenance: How do users maintain hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance, such as for a bandwidth sharing project, requires users to simply download a browser extension without any further action; or for a wireless network project's hotspot, it only requires a simple installation to continue running. If it involves solar power generation, it may be more complex.

Overall, the simplest model is to directly utilize 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 the project quickly expand its network in the early stages.

Each direction has different hardware requirements. However, hardware relates to the friction of initial adoption. The less friction there is in the early stages of the project, the better. As the project matures, a moderate level of friction can lead to user retention and a certain degree of binding. Startups need to manage the choices of hardware paths and resource investments, progressing gradually rather than trying to achieve everything at once.

If there are difficulties in all aspects of "manufacturing - sales - distribution - maintenance", then unless there is a very strong and highly certain incentive, why would users want to participate?

( token economy

The token mechanism design is the most challenging aspect of DePIN projects. Unlike other fields, DePIN requires incentivizing various participants in the network from an early stage, thus necessitating the launch of tokens very early in the project's life cycle. This topic deserves a separate case study, which will not be elaborated on in this article.

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( Team

In team configuration, the founder must have at least one person with the following backgrounds: one is experienced in traditional companies in related fields, responsible for practical matters such as technology and product implementation; the other is crypto-native, familiar with token economics and community building, capable of distinguishing between the preferences and mental models of crypto users and non-crypto users.

) Others

Regulatory issues also need to be considered, for example, collecting road images and data in certain areas may involve sensitive issues.

Summary

Although there has not yet been a truly "breakthrough" application in this round of the cryptocurrency cycle, large-scale adoption by non-crypto users still seems a long way off. Some short-term incentives offered by crypto applications are reasons for user engagement, but they are hard to sustain. However, the economic benefits derived from DePIN at the underlying level may replace traditional infrastructure on the user side, thereby achieving application sustainability and ultimately leading to widespread adoption.

Although the characteristics of DePIN that integrate with reality result in a longer development cycle, we have already seen some positive progress: for example, a decentralized mobile network has partnered with a major carrier, allowing user devices to seamlessly switch to the carrier's nationwide 5G network. Earlier this year, the project announced the deployment of 5G hotspots in Mexico City and Oaxaca in collaboration with a global telecom giant, marking the beginning of its expansion in South America. The telecom giant's subsidiary in Mexico has approximately 2.3 million users, and this collaboration directly connects these users to the project's 5G network.

In addition to the content discussed above, we believe DePIN has two unique advantages:

1. Compared to traditional monopolistic large enterprises, DePIN deployment is more flexible, and the token model can align incentives within the ecosystem. For example, the traditional telecommunications industry...