DePIN Investment Logic Analysis: There are still Alpha opportunities in the coming years

Grayscale listed some top DePIN projects and their market capitalizations in the DePIN research report published earlier this year. Since 2022, DePIN and AI have been viewed as two new directions for cryptocurrency investment. However, there does not seem to be a truly representative project in the DePIN space yet. Although Helium is considered a leading project, its emergence predates the DePIN concept itself; the projects mentioned in the report, such as Bittensor, Render, and Akash, are more classified under the AI track.

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

This article will outline the investment logic of DePIN from scratch, including why DePIN is worth paying attention to, as well as presenting a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple subfields, this article will explain the relevant concepts from a macro perspective while also providing some specific examples.

Why Pay Attention to DePIN Investment

DePIN is not just a trendy term.

First of all, it is important to clarify that decentralizing the infrastructure of the physical world is not an empty concept, nor is it merely "hype". There are indeed some scenarios in DePIN where decentralization can achieve or optimize certain functions.

Here are two simple examples:

In one of the main areas of DePIN - the telecommunications industry, taking the U.S. market as an example, traditional communication operators often need to invest huge amounts of money in spectrum license auctions and base station deployment. The deployment cost of each macro base station with a coverage radius of 1-3 kilometers can reach 200,000 to 500,000 USD. In 2022, a large operator invested 9 billion USD in the 3.45GHz 5G spectrum auction held by the Federal Communications Commission (FCC). This centralized infrastructure model leads to high communication service prices.

In contrast, a certain mobile network shares the initial costs among users through community crowdsourcing. Individuals only need to purchase a hotspot device for $249 or $499 to access the network and become "micro-operators," driving community self-organization through token incentives, significantly reducing overall investment. The cost for traditional operators to deploy a macro base station is about $200,000, while this network can achieve a similar coverage by deploying about 100 hotspot devices at a total cost of approximately $50,000 (, resulting in a cost reduction of about 75%.

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 rely on data proxy services to scrape data. In addition, they face increasing copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain distributed network solves this problem through decentralized web data collection. Users can download a browser extension to share idle bandwidth, assist in scraping publicly available web data, and earn token rewards. This model significantly reduces the data acquisition costs for AI companies while achieving data diversity and geographical distribution. According to statistics, there are currently over 100 million 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 goals that traditional methods cannot reach.

) Intersection of Infrastructure and Consumer Applications

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

Infrastructure projects typically have two characteristics: first, they have a high technical threshold, such as ZK, FHE, MPC, and other technologies, with a certain disconnection in market recognition. Second, apart from projects that can directly reach end users, such as Layer 1/2, cross-chain bridges, and staking, 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 promote user awareness and have poor dissemination. Although high-quality infrastructure projects have a certain market fit and revenue, allowing them to be self-sustaining through cycles, a lack of awareness in a market environment with scarce attention can lead to difficulties in later listings.

On the contrary, consumer applications are directly aimed at end users, giving them a natural advantage in attracting attention. However, new concepts can be quickly validated by the market as unfeasible, and may even decline rapidly after the trend shifts. Such projects often fall into a cycle of narrative-driven short-term bursts, followed by a refutation and decline, with a short life cycle. Typical examples include certain social application platforms.

Issues such as growth, awareness, and listing have been widely discussed during this cycle. Overall, DePIN can balance the dilemmas of the above two aspects well.

1. DePIN is built on the real demands of the physical world, such as energy and wireless networks. High-quality DePIN projects have a solid market fit and revenue, are difficult to falsify, and are easily understood by the market. For example, a mobile network's unlimited data plan for $30 per month is clearly more affordable than traditional carriers' offerings.

2. DePIN also has user-side usage demands, which can attract attention. For example, users can download a certain browser extension to contribute their idle bandwidth. Currently, the project has reached 2.5 million terminal users, many of whom are non-crypto native users. Other sectors 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-vehicle data and weather data are relatively small markets. It is necessary to examine from the demand side whether they are essential needs like 5G or have strong demand. Moreover, since the share of fields like 5G in traditional markets is huge, even if DePIN can only occupy a small portion of it, it is still quite considerable under the scale of the cryptocurrency market.

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) 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. The product-market fit is mainly assessed based on two points.

On the supply side, has DePIN achieved things that were originally impossible, 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 have at least three major problems:

• Traditional reliance on professional fleets and manual labeling is costly and has 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

A certain DePIN project allows users to collect data by selling dash cameras, turning data collection into an incidental activity during users' daily driving through a crowdsourcing model. By incentivizing users with tokens, resources are prioritized for deployment 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. Taking the above example, the project can sell map data to companies in autonomous driving, logistics, insurance, and municipal departments, with key demand being validated.

Regarding hardware, it can be considered from the timeline of "manufacturing-sales-distribution-maintenance:"

Manufacturing Is the project team designing and manufacturing the hardware on their own, or are they using existing hardware? For example, a certain wireless network provides two types of proprietary hotspots and also supports integration with existing WiFi networks. DePIN projects related to computing and storage can directly use existing graphics cards and hard drives.

Sales Transparent pricing means that users will calculate the payback period based on potential returns. A home mobile hotspot for a certain wireless network is priced at $249, and a vehicle data collector is priced at $1,331.

Distribute How to distribute? This involves many uncertain factors: logistics timeliness, transportation costs, and the delivery cycle starting from the pre-sale, etc. For projects targeting the global market, improper distribution design can significantly slow down project progress.

Maintenance How should users maintain hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance, such as for a certain data-sharing network, requires users to only download a browser extension without any further actions; or for a certain wireless network hotspot, it just needs a simple installation to keep running. Situations involving solar power generation may be more complex.

Overall, the simplest model is to directly utilize the existing network bandwidth, without the need for manufacturing and distribution, allowing users to start without barriers, and there is no need for sales, which helps the project to rapidly expand the network in the early stages.

The hardware requirements differ for projects in each direction. 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, moderate friction can lead to user retention and a certain degree of binding. Startup teams need to control the path choices and resource investments related to hardware, progressing gradually rather than all at once.

Imagine, if it is very difficult from "manufacturing - sales - distribution - maintenance", then unless there is a very strong and highly certain incentive, why would users participate?

Token Economy

The design of the token mechanism is the most challenging aspect of DePIN projects. Unlike other fields, DePIN requires incentives for various participants in the network at an early stage, which necessitates the launch of tokens very early in the project. This topic deserves a separate discussion on some case studies.

( Team

In the team configuration, the founder needs at least one person with the following backgrounds: first, someone with rich experience working in traditional companies in related fields, responsible for practical matters such as technology and product implementation; second, someone native to the cryptocurrency industry, knowledgeable about token economics and community building, capable of distinguishing the preferences and cognitive models of crypto users and non-crypto users.

) Other

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

Summary

The cryptocurrency industry has not really seen any "breakout" applications in this cycle, and it seems we are still a distance away from mass adoption by users outside the circle. Some short-term incentives provided by crypto applications are the reasons users engage with them, but they are difficult to sustain. However, the economic benefits derived from DePIN at the underlying level have the potential to replace traditional infrastructure at the user level, thereby achieving sustainability of applications and enabling mass adoption.

Although the characteristics of DePIN combining with reality result in a longer development cycle, we have already seen some hope from the development of a certain wireless network: this network has collaborated with a major operator, allowing user devices to seamlessly switch to the operator's national 5G network. For example, when users leave the community hotspot range, they automatically connect to the operator's base station, avoiding signal interruptions. Earlier this year, this network announced a partnership with a global telecom giant to deploy 5G hotspots in a certain country, marking the beginning of its expansion in South America. The telecom giant has about 2.3 million users through its local subsidiary, and this collaboration directly connects these users to the 5G network of this wireless network.

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

1. Compared to traditional monopolistic large enterprises, DePIN has a more flexible deployment approach and can align incentives within the ecosystem through a token model. For example, the traditional telecommunications industry is usually dominated by a few giants, lacking innovation motivation. Taking rural areas as an example, due to population dispersion, traditional operators have low investment returns and long cycles, resulting in a lack of deployment motivation. However, with appropriate token economic design, it is possible to encourage network deployment in areas with scarce hotspots. Similarly, certain mapping projects set higher incentives in resource-scarce areas.

2. DePIN