Starting from Scratch to Sort Out the Investment Logic of DePIN

Grayscale released a DePIN research report 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 hasn't been a flagship project in the DePIN field yet. (Helium can be considered a leading project, but it emerged even before the concept of DePIN; the projects Bittensor, Render, and Akash listed in the table are more categorized under the AI track ).

It seems that DePIN lacks a sufficiently strong leading project to elevate the upper limit of this track. There may still be some Alpha opportunities in the DePIN track over the next 1-3 years.

This article attempts to outline the investment logic of DePIN from scratch, including why DePIN is a worthy investment track to pay attention to, and proposes a simple analytical framework. As DePIN is a comprehensive concept covering numerous sub-tracks, this article will explain the concept in a slightly macro way but will still provide 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 an impractical idea, nor is it merely a "narrative hype"; it is something that can be executed on the ground. 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 tens of billions of dollars in 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 Federal Communications Commission for the 3.45GHz 5G spectrum, a large operator invested $9 billion, becoming the operator with the highest investment. This centralized infrastructure model leads to high communication service prices.

A certain decentralized mobile network shares the early costs among users through community crowdsourcing, where individuals only need to purchase hotspot devices for $249 or $499 to connect to the network and become "micro-operators." This drives community-driven networking through token incentives, thus reducing the overall investment. The cost for a large operator to deploy a macro base station is approximately $200,000, whereas this decentralized network can achieve a similar coverage area by deploying around 100 hotspot devices at a total cost of about $50,000, resulting in a cost reduction of approximately 75%.

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

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

In summary, a 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 accomplish things that traditional methods cannot.

( as a convergence point between infrastructure and consumers

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

Infrastructure projects generally have two characteristics: First, they have strong technical attributes, such as ZK, FHE, MPC, etc., which have high thresholds, and there is a certain disconnection in market perception. Second, apart from the projects we are familiar with, such as Layer 1/2, cross-chain bridges, and staking, 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 promote user awareness and have poor dissemination. Although high-quality infrastructure has a certain market match and revenue, allowing it to be self-sustaining through cycles, the lack of awareness in a market with scarce attention makes it difficult to go public later.

On the other hand, consumer projects have a natural advantage in capturing awareness as they are directly aimed at end users. However, new concepts can easily be debunked by the market and may plummet after a shift in trends. These types of projects often fall into a cycle of narrative-driven short-term bursts followed by debunking and decline, with a short lifecycle. Examples include certain social token projects.

Growth, awareness, and listing coins are all issues that have been widely discussed in this cycle. Overall, DePIN can effectively address the challenges of combining the above two points and find a balance.

1. DePIN is based on the real demand in the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid market match and revenue, are difficult to falsify, and are easy for the market to understand. For example, a certain decentralized mobile network offers an unlimited data plan for 30 dollars a month, which is clearly cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage demands and can capture awareness. For example, users can download a browser extension from a certain decentralized data collection platform to contribute their idle bandwidth. Currently, this platform has reached 2.5 million end users, many of whom are non-crypto native users. Other fields such as eSIM, WiFi, and in-vehicle data are similar, being very close to users.

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DePIN Investment Framework

( Direction

Starting from intuition, 5G and wireless networks are a large market, while in-vehicle data and weather data are a small market. From the demand side, whether it is a necessity )5G### or has strong demand. Moreover, since the share of 5G in traditional markets is very large, even if DePIN can capture a small portion of it, the market capacity is still quite considerable when viewed under the size 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 monopoly patterns, and underutilized resources. The essence of answering the market matching degree question essentially 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 map collection track of a certain decentralized map project, traditional map collection at least has three major issues:

• Traditionally relies on professional fleets and manual labeling, which is costly and has poor scalability.
• A certain large map service has a long update cycle and low coverage in remote areas.
• Centralized map service providers monopolize data pricing power

The decentralized mapping project allows users to collect data by selling dashcams, utilizing a crowdsourcing model to turn data collection into something users do during their daily driving. It guides users through token incentives, prioritizing resource allocation to high-demand areas.

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

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

Manufacture

Does the project team design and manufacture their own hardware, or do they use existing hardware? For example, a certain decentralized mobile network provides both types of proprietary hotspots and also supports the integration of existing WiFi networks. Alternatively, for computing and storage type DePIN projects, they can directly use existing graphics cards and hard drives, etc.

Sales

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

Distribute

How to distribute? Distribution involves many uncertain factors: logistics efficiency, transportation costs, and the delivery cycle from the start of the pre-sale, among others. 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 decentralized data collection platform where users only need to download a browser extension, with no other operations required; or a hotspot for a decentralized mobile network that can continuously operate with just a simple installation. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is that of a decentralized data collection platform - directly utilizing existing network bandwidth, requiring no manufacturing or distribution, allowing users to start without barriers, and not needing 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 choices of paths and resource investments in hardware, progressing gradually rather than rushing in.

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

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) token economy

The token mechanism design is the most challenging aspect of the DePIN project. 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. 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 founder must have at least one person with 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 the preferences and mental models of crypto users from those of non-crypto users.

( Others

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

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Summary

Cryptocurrencies have not really achieved "breaking the circle" applications in this cycle, and it seems we are still far from the adoption of users outside the circle.