Why is DePIN a worthwhile investment track for us to follow?

Written by: Jiawei @IOSG

▲ Source: Grayscale

Grayscale published a research report on DePIN at the beginning of this year, and the table above shows the leading DePIN projects along with their market capitalizations. Since 2022, DePIN and AI have been discussed as two new directions for Crypto investments. However, it seems that there has not been a landmark project in the DePIN field. (Helium can be considered a leading project, but it emerged even before the concept of DePIN; Bittensor, Render, and Akash in the table are more categorized under the AI track.)

It seems that DePIN does not have a strong leading project that can break the ceiling of this track. There may still be some Alpha in the DePIN track in the next 1-3 years.

This article attempts to outline the investment logic of DePIN from scratch, including why DePIN is an investment track worth our attention, and proposes a simple analytical framework. Since DePIN is a comprehensive concept that encompasses many diverse sub-tracks, this article will slightly zoom out to explain the concept from an abstract perspective, while still providing some concrete examples.

Why pay attention to DePIN investment

DePIN is not a buzz word

First, it is necessary to clarify that decentralizing the infrastructure of the physical world is not a flashy idea, nor is it simply a "narrative play"; it is something that can be executed in practice. In DePIN, there are indeed scenarios where decentralization can "enable" something or "optimize" something.

Here are two simple examples:

▲ Source: IOSG

In the DePIN landscape, one major sector is telecommunications. Taking the U.S. market as an example, traditional telecom operators (such as AT&T and T-Mobile) often need to invest billions of dollars in spectrum license auctions and base station deployments, paying deployment costs of $200,000 to $500,000 for each macro base station covering a radius of 1-3 kilometers. In a 2022 auction conducted by the Federal Communications Commission (FCC) for 5G spectrum in the 3.45GHz band, AT&T invested $9 billion, becoming the operator with the highest investment. This centralized infrastructure model results in high prices for communication services.

Helium Mobile spreads the early costs to each user through community crowdsourcing, allowing individuals to access the network by purchasing hotspot devices for just $249 or $499, becoming "micro-operators" who are driven by token incentives to spontaneously build the network, thus reducing the overall investment. The cost for Verizon to deploy a macro base station is about $200,000, while Helium can achieve a similar coverage area by deploying around 100 hotspot devices (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 API fees of up to $300 million per year to platforms like Reddit and Twitter to acquire training data, and they scrape data using Bright Data (residential proxies) and Oxylabs (data center proxies). Moreover, they are increasingly facing more and more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

Grass 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 earn token rewards from it. This model significantly reduces the data acquisition costs for AI companies while achieving diversity and geographical distribution of data. According to Grass statistics, 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 fundamental 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 to achieve things that traditional methods cannot.

As the intersection of Infra and Consumer

As the two main lines of Crypto investment, Infra and Consumer each face some issues.

Infra projects generally have two characteristics: first, they have a strong technical nature, for example, technologies like ZK, FHE, and MPC have high thresholds, and there is a certain disconnection in market awareness. Second, apart from the familiar Layer1/2, cross-chain bridges, staking, and other projects that can directly reach end users, most Infra projects are actually toB. For instance, developer tools, data availability layers, oracles, co-processors, etc., are relatively distant from users.

These two points make it difficult for Infra projects to gain user mindshare and have poor dissemination. Although high-quality Infra has a certain PMF and revenue, allowing it to be self-sufficient across cycles, the lack of mindshare in a market with scarce attention makes it challenging to do listings later on.

On the contrary, Consumer has a natural advantage in capturing mindshare as it directly targets end users. However, new concepts can easily be disproven by the market, and may plummet after a shift in trends. Such projects often fall into a cycle of being driven by narrative, experiencing short-term surges, and then declining after being disproven, resulting in a short lifecycle. Examples include friend.tech and Farcaster, among others.

Growth, mindshare, and listing are all issues that have been widely discussed during this cycle. Overall, DePIN can effectively address the dilemmas associated with the above two points and find a balance.

DePIN is built on the real demands of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid PMF and revenue, are not easily falsifiable, and are easily understood by the market. For example, Helium's unlimited data plan at $30 per month is clearly cheaper than the offerings from traditional carriers.

DePIN also has user-side usage demands and can capture mindshare. For example, users can download the Grass browser extension to contribute their idle bandwidth. Currently, Grass has reached 2.5 million end users, many of whom are non-crypto native users. Other sectors such as eSIM, WiFi, and in-car data are also similar, being very close to users.

DePIN Investment Framework

▲ Source: Messari, IOSG

Direction

Just from intuition, 5G and wireless networks are large markets, while in-vehicle data and weather data are small markets. From the demand side, we need to see if it is a necessity (5G) or if the demand is strong. 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 in terms of the scale of Crypto.

Product

According to Grayscale's report, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, obvious monopolistic patterns, and underutilized resources. Essentially, addressing the PMF question looks at two points.

▲ Source: Hivemapper

On the supply side, has DePIN achieved what was previously impossible, or does it have significant advantages over existing solutions (cost, efficiency, etc.)? For example, in the map collection track where Hivemapper operates, traditional map collection faces at least three major problems:

Traditional reliance on professional fleets and manual labeling is costly and has poor scalability.

Google Street View has a long update cycle and low coverage in remote areas.

Centralized map service providers monopolize data pricing power

Hivemapper allows users to collect data by selling dash cams, 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 Hivemapper, which can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, where key demand has been validated.

Regarding hardware, Multicoin's article "Exploring The Design Space Of DePIN Networks" in 2023 begins by discussing hardware. Here, I would like to add a few additional points.

The timeline for hardware can be summarized as "Manufacturing - Sales - Distribution - Maintenance."

Manufacturing

Do the project parties design and manufacture their own hardware, or do they use existing hardware? For example, Helium provides two types of its own hotspots and also supports the integration of existing WiFi networks. Alternatively, in computing and storage-related DePIN projects, existing graphics cards and hard drives can be directly used, among others.

Sales

The clear pricing of sales means that users will calculate the payback period based on potential earnings. The price of Helium's home mobile hotspot is 249 USD, and the price of DIMO's vehicle data collector is 1,331 USD.

distribute

How to distribute? Distribution involves many uncertain factors: logistics timeliness, transportation costs, and the delivery cycle starting from the pre-sale, etc. For projects targeting a global scope, inappropriate distribution design and methods can greatly slow down the progress of the project.

maintenance

What do users need to do to maintain hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance example is Grass, where users only need to download a browser extension with no other requirements; or Helium's hotspots, which only require a simple installation to keep running. If it involves solar power generation, it may be more complicated.

Considering the above points, the simplest model is the Grass model - directly utilizing existing network bandwidth, without the need to manufacture and distribute. 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, projects in every direction 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 selection and resource investment in hardware, gradually progressing rather than expecting immediate results.

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 want to participate?

Token Economy

The design of the token mechanism 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 necessitates 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 on it further.

team

In the team composition, the founder needs to have at least one person with the following backgrounds: first, someone who has worked in traditional companies in this field with rich experience, responsible for technical and product implementation matters; second, someone who is crypto-native, understands token economics and community building, and can differentiate the preferences and mental models of crypto users and non-crypto users.

Other

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

Summary

Crypto has not really achieved "breaking the circle" in this cycle, and it seems we are still far from attracting users outside the circle. Some short-term incentives provided by Crypto applications are the reasons for users to use them, but they are not sustainable. The economic benefits derived from DePIN at the foundational level may replace traditional infrastructure on the user side, thus achieving sustainability in applications and enabling large-scale adoption.

▲ Source: Helium

Although the combination of DePIN and reality makes for a long development cycle, we are already seeing some light in the evolution of Helium Mobile: Helium Mobile has partnered with T-Mobile to seamlessly switch user devices to T-Mobile's nationwide 5G network, for example, when users leave the Helium community hotspot range, they will automatically connect to the T-Mobile base station to avoid signal interruptions. Earlier this year, Helium announced a partnership with global telecommunications giant Telefónica to begin its expansion in South America with the deployment of Helium Mobile 5G hotspots in Mexico City and Oaxaca. Telefónica's Mexican subsidiary, Movistar, has approximately 2.3 million subscribers, and the partnership connects these subscribers directly to Helium's 5G network.

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

Compared to traditional monopolistic large enterprises, DePIN has a more flexible deployment method and means, and can align incentives within the ecosystem through the token model. For example, the traditional telecommunications industry is usually dominated by a few giants, lacking the motivation for innovation. Taking rural areas as an example, due to the dispersed population in these regions, traditional operators have low investment returns and long timeframes, leading to a lack of motivation for traditional operators to promote deployment. However, through appropriate token economic design, it is possible to encourage network deployment in areas with scarce hotspots. Hivermapper similarly sets higher incentives in places where map resources are scarce.

DePIN has the potential to bring positive externalities. The purchase of internet data collected by Grass by AI companies, the acquisition of street-level map data from Hivemapper by autonomous driving companies, and the low-cost data plans offered by Helium Mobile all demonstrate that DePIN can actually extend beyond the realm of Crypto, bringing value to real life and other industries, while also reinvesting into the entire ecosystem through token economics. In other words, the DePIN token is backed by real value, rather than a Ponzi scheme.

Of course, DePIN also faces many uncertainties: for example, uncertainties in time cycles caused by operating hardware, regulatory risks, due diligence risks, and so on.

In summary, DePIN is the key area we will focus on in 2025, and we will also provide more research related to DePIN in the future.