DePIN Investment Logic Analysis: Opportunities and Challenges Coexist

Recently, Grayscale released a research report on DePIN( decentralized physical infrastructure networks). The report lists some leading DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been seen as two emerging directions for cryptocurrency investment. However, it seems that a truly iconic project has yet to emerge in the DePIN space. Although Helium is a leading project, it actually predates the concept of DePIN; the projects mentioned in the report, such as Bittensor, Render, and Akash, are more categorized under the AI track(.

This indicates that the DePIN track lacks a sufficiently strong leading project to elevate the overall industry's ceiling. Therefore, there may still be some investment opportunities in the DePIN track in the next 1-3 years.

This article will start from the basics to outline the investment logic of DePIN, including why DePIN is worth paying attention to, and propose a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the concept from a more abstract perspective, while also providing some concrete examples.

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Reasons to Pay Attention to DePIN

) DePIN is not just a buzzword.

First of all, it is necessary to clarify that decentralizing the infrastructure of the physical world is not a fanciful idea, nor is it merely a "concept hype"; it is indeed feasible. In DePIN, there are indeed situations where decentralization can "realize" or "optimize" certain scenarios.

Here are two simple examples:

In one of the main tracks of DePIN - the telecommunications field, 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, with each macro station covering a radius of 1-3 kilometers requiring deployment costs of $200,000 to $500,000. In 2022, a major operator invested $9 billion in a 5G spectrum auction by the Federal Communications Commission ###FCC(. This centralized infrastructure model leads to high prices for telecommunications services.

A certain mobile network utilizes community crowdsourcing to distribute the early costs among each user, where individuals only need to purchase a hotspot device for $249 or $499 to access the network and become "micro-operators." This model drives community-driven networking through token incentives, thereby reducing overall investment. The cost for a major operator to deploy a macro base station is approximately $200,000, while this emerging 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 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 certain social platforms to obtain training data, and rely on third-party services to scrape data. Furthermore, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A data collection platform has overcome this dilemma through distributed web scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape public web data and earn 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, 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 between infrastructure and consumer applications

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

Infrastructure projects usually have two characteristics: first, they have strong technical attributes, such as ZK, FHE, MPC and other technologies with high thresholds, leading to certain disconnection in market awareness. Second, aside from a few 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 average users.

These two points make it difficult for infrastructure projects to enhance user awareness and have poor dissemination. Although high-quality infrastructure has a certain degree of product-market fit and revenue, allowing it to be self-sufficient through cycles, the lack of awareness in a market environment with scarce attention can lead to difficulties in later market entry.

In contrast, consumer applications are directly aimed at end users and have a natural advantage in raising awareness. However, new concepts can easily be disproven by the market and may plummet after the hype shifts. Such projects often fall into a cycle of hype from concept to short-term explosion, followed by disproof and decline, resulting in a short lifecycle.

Issues such as growth, awareness, and listing have been widely discussed during this period. Overall, DePIN can better address the dilemmas of the two aspects mentioned above and find a balance.

1. DePIN is based on the real needs of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid product-market fit and revenue, making them difficult to falsify and easy for the market to understand. For example, a mobile network's unlimited data plan for $30 per month is obviously more affordable than traditional operators' plans.

2. DePIN also has user-side usage demands, which can enhance awareness. For example, users can download a browser extension from a certain data platform to contribute their idle bandwidth; currently, the platform has reached 2.5 million terminal users, many of whom are non-crypto native users. Other sectors such as eSIM, WiFi, and in-vehicle data are similar, closely related to users.

DePIN Investment Framework

Direction

At first glance, 5G and wireless networks are large markets, while in-vehicle data and weather data are smaller markets. From the demand side, it is important to determine whether there is a strong demand ( like 5G ) or if the demand is intense. Furthermore, since 5G and similar fields have a large share in traditional markets, even if DePIN can only capture a small portion of it, the market capacity is still quite considerable when viewed under the scale of cryptocurrency.

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) 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 underutilization of resources. The product-market fit is mainly assessed based on 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 track of a certain map collection project, traditional map collection faces at least three major issues:

• Traditionally relies on professional fleets and manual labeling, which 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

This emerging project allows users to collect data by selling dash cameras, turning data collection into something users are already doing in their 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 offered by DePIN must have real market demand, preferably with a strong willingness to pay. A similar example is that this mapping project can sell data to companies in autonomous driving, logistics, insurance, and municipal departments, verifying key demand.

Regarding hardware, it can be considered from several aspects: "manufacturing - sales - distribution - maintenance".

Manufacturing: Does the project party design and manufacture the hardware themselves, or do they use existing hardware? For example, a certain wireless network provides two types of proprietary hotspots and also supports integration with existing WiFi networks. Alternatively, in the case of computing and storage DePIN projects, existing graphics cards and hard drives can be used directly.

Sales: The clear pricing of hardware 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-mounted data collector is priced at $1,331.

Distribution: How to distribute? Distribution involves many uncertain factors: logistics timeliness, transportation costs, and the delivery cycle from the start of the presale, etc. For projects targeting a global scope, 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. The simplest example of maintenance is a certain data platform, where users only need to download a browser extension and no other operations are required; or a certain wireless network hotspot that can continuously operate with just a simple installation. If it involves solar power generation, it may be more complex.

Overall, the simplest model is that of a data platform - directly utilizing 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.

Different projects have varying hardware requirements in each direction. However, hardware relates to the friction of initial adoption. The less friction in the early stages of the project, the better; as the project matures, some friction can contribute to retention and a certain degree of binding relationship. For startup teams, it is necessary to manage the choice of paths and resource investment in hardware, progressing gradually rather than achieving it all at once.

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( 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 early on, which necessitates the launch of tokens at a very early stage of the project. This topic is suitable for separate discussion, and this article will not elaborate further.

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) Team

In team configuration, the founder needs to 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 implementation matters such as technology and products; second, a crypto native, familiar with token economics and community building, able to distinguish between the preferences and mental models of crypto users and non-crypto users.

Others

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

Summary

Currently, there are no truly "breakthrough" applications in the cryptocurrency space for the current cycle, and it seems that there is still some distance before mass adoption by users outside the circle. Although some crypto applications offer short-term incentives that attract users, they are difficult to sustain. However, the economic benefits derived from DePIN at the underlying layer may replace traditional infrastructure on the user side, thereby achieving application sustainability and facilitating mass adoption.

Although the characteristics of DePIN's integration with reality lead to a longer development cycle, we have already seen some glimmers of hope from the development of a certain wireless network: this network collaborates with a major operator, allowing user devices to seamlessly switch to the operator's nationwide 5G network. For example, when users leave the range of community hotspots, they automatically connect to the operator's base station, avoiding signal interruptions. Earlier this year, the network announced a partnership with a global telecom giant to deploy 5G hotspots in Mexico City and Oaxaca, starting its expansion in South America. The telecom giant's subsidiary in Mexico has approximately 2.3 million users, and this collaboration directly connects these users to the 5G network.

In addition to the above discussion,