Alpha opportunities still exist, starting from scratch to sort out the investment logic of DePIN.

Grayscale released a research report on DePIN at the beginning of this year, showcasing leading DePIN projects and their market values. Since 2022, DePIN and AI have been seen as two new directions for crypto investment. However, the DePIN space seems to have been lacking a flagship project. While Helium can be considered a leading project, it actually predates the concept of DePIN. Additionally, Bittensor, Render, and Akash in the table are more categorized under the AI track.

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

This article aims to outline the investment logic of DePIN from scratch, including why DePIN is a noteworthy investment track and presenting a simple analytical framework. Since DePIN is a comprehensive concept covering 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 Investments

DePIN is not just a buzzword.

First of all, it is important to clarify that decentralizing the infrastructure of the physical world is not an impractical idea, nor is it merely a "narrative hype"; it is something that can be implemented. 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 sector, taking the US market as an example, traditional communication operators typically need to invest huge amounts of capital for spectrum license auctions and base station deployment. The deployment cost for each macro base station with a coverage radius of 1-3 kilometers ranges from $200,000 to $500,000. This centralized-dominated infrastructure model results in high prices for communication services.

A certain mobile network uses a community crowdsourcing approach to distribute the early costs among each user. Individuals only need to purchase a hotspot device for $249 or $499 to access the network and become "micro-operators." This model drives community self-organization through token incentives, significantly reducing the overall investment. The cost for a large operator to deploy a macro base station is about $200,000, whereas this new model can achieve a similar coverage area by deploying around 100 hotspot devices (with a total cost of about $50,000), resulting in a cost reduction of approximately 75%.

In the AI data field, traditional AI companies need to pay high API fees to social media platforms to obtain training data and rely on third-party services to scrape data. Moreover, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure compliance and diversity of data sources.

A certain data collection platform has broken this deadlock through distributed Web Scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape data from public web pages, and earning token rewards in the process. This model greatly reduces the data acquisition costs for AI companies while achieving diversity and geographical distribution of data. 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 achieve things that traditional methods cannot.

as a junction of infrastructure and consumer applications

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

Infrastructure projects generally have two characteristics: first, they have strong technical attributes, such as ZK, FHE, MPC, etc., which have high thresholds and a certain disconnection in market recognition. Second, aside from the projects we are familiar with, such as Layer1/2, 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 promote user mind share and have poor dissemination. Although high-quality infrastructure has a certain product-market fit and revenue, allowing it to be self-sufficient across cycles, the lack of mind share in a market with scarce attention makes it challenging to list tokens later.

On the other hand, consumer applications have a natural advantage in capturing mind share as they are directly aimed at end users. However, new concepts can easily be disproven by the market, and may even plummet after a shift in trends. Such projects often fall into a cycle that goes from narrative-driven to short-term explosion, and then to disproof and decline, with a short lifecycle.

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

1. DePIN is built on the real-world demand for physical needs, such as energy, wireless networks, etc. High-quality DePIN projects have a solid product-market fit and revenue, are difficult to disprove, and are easily understood by the market. For example, a certain telecom project offers an unlimited data plan for $30 per month, which is obviously cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage demands and can capture mind share. For example, users can download a browser plugin from a certain data collection platform to contribute their idle bandwidth. Currently, this platform 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 similarly close to users.

DePIN Investment Framework

Direction

Starting from intuition, 5G and wireless networks are large markets, while vehicular data and weather data are small markets. From the demand side, we need to see whether it is a necessity (5G) or has strong demand. Moreover, due to the significant share of 5G in traditional markets, even if DePIN can capture a small portion of it, the market capacity looks quite considerable in the context of Crypto's scale.

product

According to a report from a certain research institution, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers,明显的垄断格局, and underutilized resources. The essence of answering the question of product-market fit can be seen in two points.

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

• Traditional methods rely on professional fleets and manual labeling, which are costly and have poor scalability.
• A well-known map service has a long update cycle and low coverage in remote areas.
• Centralized map service providers monopolize data pricing rights

This project allows users to collect data through the sale of dash cameras, turning data collection into something users are already doing in their daily driving through a crowdsourcing model. It guides users with token incentives to prioritize resources in high-demand areas.

On the demand side, the products provided 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, where the key demand has been validated.

Regarding hardware, a certain investment institution mentioned hardware right at the beginning of an article in 2023. The author would like to add a few points of view here.

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

#Manufacturing

Does the project team design and manufacture their own hardware, or do they use existing hardware? For example, a certain telecom project provides two types of its own hotspots and also supports the integration of existing WiFi networks. Alternatively, DePIN projects related to computing and storage can directly use existing graphics cards and hard drives, etc.

#Sales

The clearly marked prices for sale mean that users will calculate the payback period based on potential returns. A home mobile hotspot for a certain telecom project is priced at 249 USD, while a data collector for a certain vehicle data project is priced at 1,331 USD.

#Distribution

How to distribute? Distribution involves many uncertainties: logistics timeliness, transportation costs, and the delivery cycle starting from the presale, etc. For projects targeting a global audience, improper 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. A simple example of maintenance is a data collection platform where users only need to download a browser extension without any other operations required; or a hotspot for a telecom project that only requires a simple installation to continue running. If it involves solar power generation, it could be more complex.

Considering the above points, the simplest model is that of a data collection platform - directly utilizing 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 each 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 essential to manage the path choices and resource investments concerning hardware, progressing gradually rather than rushing to achieve it all 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

Token mechanism design is one of the most challenging aspects of the DePIN project. Unlike projects in other fields, DePIN requires early incentives for various participants in the network, which necessitates the launch of tokens at a very early stage of 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 needs at least one individual with each of the following backgrounds: first, someone who has worked in traditional companies in this field with 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 between the preferences and mental models of crypto users and non-crypto users.

Other

Regulatory issues, such as collecting road images and data domestically, are clearly very sensitive.

Summary

Crypto has not truly "broken the circle" in this cycle, and it seems we are still a long way from adoption by users outside the circle. The short-term incentives offered by some Crypto applications are the reasons users engage with them, but these are not sustainable. However, the economic benefits derived from DePIN at the underlying level have the potential to replace traditional infrastructure on the user side, thus achieving the sustainability of applications and enabling large-scale adoption.

Although the characteristics of DePIN that integrate with reality lead to a longer development cycle, we have already seen some glimmers of hope from the development of a certain telecommunications project: this project collaborates with a large operator, allowing user devices to seamlessly switch to the operator's national 5G network. For instance, when users leave the coverage area of a community hotspot, they automatically connect to the operator's base station, avoiding signal interruptions. Earlier this year, the project announced a partnership with a global telecommunications giant to deploy 5G hotspots in Mexico City and Oaxaca, marking the beginning of its expansion in South America. The subsidiary of this telecommunications giant in Mexico has approximately 2.3 million users, and this collaboration directly connects these users to the project's 5G network.

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