DePIN Investment Logic Analysis: Alpha Opportunities Still Exist

Grayscale released a DePIN research report at the beginning of the year, listing the 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 is not yet a landmark project in the DePIN field. (Although Helium is considered a leading project, its emergence predates the concept of DePIN; projects like Bittensor, Render, and Akash in the table are more categorized under the AI track.)

This indicates that DePIN lacks a sufficiently strong leading project 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 aims to outline the investment logic of DePIN from scratch, including why DePIN is a noteworthy investment track and proposing a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the concept from a relatively abstract perspective while also providing some specific examples.

Why Pay Attention to DePIN Investment

DePIN is not just a buzzword.

First, it is important to clarify that decentralizing the infrastructure of the physical world is not a fancy idea, nor is it merely a "narrative strategy"; it is something that can be practically executed. 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 telecom operators typically need to invest 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 covering a radius of 1-3 kilometers. This centrally dominated infrastructure model leads to high prices for communication services.

A certain mobile network utilizes a community crowdsourcing method to distribute this early cost among each user, allowing individuals to access the network by purchasing hotspot devices for only $249 or $499, thus becoming "micro-operators". The community is driven to spontaneously form networks through token incentives, thereby reducing overall investment. The cost of deploying a macro base station by a telecommunications company is approximately $200,000, while deploying around 100 hotspot devices (with a total cost of about $50,000) can achieve a similar coverage area, 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 platforms to obtain training data, and they scrape data using residential proxies and data center proxies. Moreover, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain project has solved this dilemma through distributed Web Scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape public web data and earning token rewards from it. This model has greatly reduced 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, 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.

as a junction between infrastructure and consumers

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

Infrastructure projects generally have two characteristics: first, they have a strong technical nature, for example, technologies such as ZK, FHE, and MPC have high thresholds, and there is a certain disconnection in market recognition. Second, besides 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 product-market fit and revenue, allowing it to be self-sustaining through cycles, the lack of awareness in a market with scarce attention makes it challenging to list tokens later.

On the flip side, consumer projects have the natural advantage of being directly aimed at end users, which gives them an edge in capturing awareness. However, new concepts can easily be disproven by the market, and they may plummet after the shift in trends. These types of projects often fall into a cycle of narrative-driven hype followed by short-term bursts and then disproval and decline, resulting in a short lifespan. Examples include some social media-related projects, among others.

Growth, awareness, and token listing are all issues that have been widely discussed during this cycle. Overall, DePIN can effectively address the challenges associated with the above two points 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, are difficult to be falsified, and are easily understood by the market. For example, a certain 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 needs and can capture awareness. 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 cryptocurrency users. Other sectors such as eSIM, WiFi, in-car data, etc., are also similar, being very close to users.

DePIN Investment Framework

Direction

Based solely on intuition, 5G and wireless networks are large markets, while in-vehicle data and weather data are smaller markets. From the demand side, we need to see if it is a necessity (5G) or has strong demand. Furthermore, given that the market share of 5G in traditional markets is very large, even if DePIN can capture a small portion of it, considering the scale of cryptocurrency, the market capacity is still quite considerable.

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 underutilized resources. Answering the question of product-market fit essentially looks at two points.

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

• Traditional methods rely on professional fleets and manual labeling, which are costly and have poor scalability.
• Some map services have long update cycles 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 to prioritize resources in high-demand areas.

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

Regarding hardware, a certain investment institution discussed hardware at the beginning of an article in 2023. Here, the author would like to add a few points.

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

#Manufacturing

Does the project team design and manufacture the hardware themselves, or do they use existing hardware? For example, a project may offer two types of self-owned hotspots while also supporting the integration of existing WiFi networks. Alternatively, for computing and storage-type DePIN projects, they might directly use existing graphics cards and hard drives, etc.

#Sales

The clearly marked price for sale means that users will calculate the payback period based on potential returns. One project's home mobile hotspot is priced at 249 dollars, while another project's in-vehicle data collector is priced at 1,331 dollars.

#Distribution

How to distribute? Distribution involves many uncertain factors: logistics efficiency, transportation costs, and the delivery cycle starting from 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. A simple example of maintenance is a certain project where users only need to download a browser extension without any other operations required; or a hotspot for a certain project that only needs to be installed simply to keep running. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is to directly utilize existing network bandwidth, without the need for manufacturing and distribution. Users can start without barriers and there is no need for sales, which helps to quickly expand the network in the early stages of the project.

Indeed, different projects have different hardware requirements. 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 relationship. For startup teams, it is necessary to control the path choices and resource investments in hardware, progressing gradually rather than trying to achieve it all at once.

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

Token Economy

The token mechanism 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 requires 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 needs 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 technical and product implementation matters; second, a native in crypto, knowledgeable in token economics and community building, who can distinguish between 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 obviously very sensitive.

Summary

Cryptocurrencies have not really seen "breakthrough" applications in this cycle, and it seems we are still far from the adoption of users outside the circle. Some short-term incentives provided by crypto applications are the reasons users engage with them, but they are not sustainable. However, the economic benefits derived from DePIN at the underlying level may replace traditional infrastructure on the user side, thereby achieving application sustainability and enabling mass adoption.

Despite the long development cycle of DePIN due to its integration with reality, we have already seen some glimmers of hope from the development of a certain mobile network: the project collaborates with a certain telecommunications company, allowing user devices to seamlessly switch to the company’s nationwide 5G network. For example, when users leave the community hotspot range, they automatically connect to the company's base station, avoiding signal interruptions. Earlier this year, the project announced a partnership with a global telecommunications giant to deploy 5G hotspots in a certain country, marking the beginning of its expansion in South America. This telecommunications company has about 2.3 million users through its local subsidiary, and this collaboration directly connects these users to the project’s 5G 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 method and means, 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 the motivation for innovation.