With a growing emphasis on real-world applications and the rise of Solana, DePin has regained significant popularity in 2024. However, DePIN is not a novel concept. In my opinion, the essence of DePIN is about the token economic model that turns participants into stakeholders, rather than creating new productivity.
In the previous bull run, projects like Arweave, Filecoin, and Helium stood out, while many others fell short, and even went down to zero. Now, as we approach the cusp of the next bull market, our challenge lies in discerning between fleeting fads and genuinely sustainable innovations that will usher us into a new era of real-world applications.
This piece sets out to provide a balanced critique of DePIN’s historical shortcomings, exploring areas such as regulatory hurdles, lack of demand, flawed tokenomics, and the risk of rugs. Nevertheless, it also highlights the substantial prospects within this space, including overcoming profit margins, value anchors, token incentives, and robust community engagement. And I’ll provide a DePIN evaluation framework, and in-details case studies of DePIN projects. Hopefully this piece can equip readers with insights and tools to build, evaluate and invest in DePIN landscapes.
The blockchain domain has focused on infrastructure development, emphasizing scaling solutions (Layer2s, Data Availability), privacy enhancement (Zero-Knowledge), and user experience improvement (Account Abstraction) over the years to prepare for broad adoption. The need for real-world, mass adoption is now more evident than ever. Initiatives such as exchanges working towards compliance and ETFs entering the traditional markets have marked significant progress and are paving the way for us.
DePIN is not a specific area, this term originally brought up by Messari as the short for Decentralized Physical Infrastructure Networks. It represents a community-driven, decentralized hardware network incentivized by token. Its primary goal is to replace the monopolized coordinator and use native tokens to transform participants into stakeholders of the network. Since the last bull market, there has been a significant expansion into high-value sectors such as AI/ML, 5G, WiFi, Bandwidth, Vehicle, Energy and so on.
So, what’s new that DePIN brought to the table in this spectrum?
Assets: Type, distribution, trading methods
Looking at successful crypto projects, typically feature assets with generic attributes and continuously refine these assets’ functionalities and use cases. DePIN projects can incorporate physical assets, transforming the services provided or data collected by the hardware into tokenized assets. This tokenization facilitates permissionless trading and staking, paving the way for a broader spectrum of financial activities.
Participants: Roles, amount, stickiness and relationship
DePIN enhances the ecosystem by diversifying roles, creating a cohesive network of hardware manufacturers, miners, network applications, consumers and so on. Reducing entry barriers and expanding geographical reach draws a broader range of participants. More importantly, DePIN transforms all parties involved into stakeholders through crypto assets, fostering both labor contribution and consumption. This approach ensures ongoing engagement, increasing the ecosystem’s stickiness and surpassing the traditional, simplistic buy-and-sell relationships. By fostering complex interconnections, DePIN significantly bolsters the robustness and sustainability of its ecosystem.
Scenarios: Premium value, frequency and scalability
DePIN is grounded in real-world scenarios, addressing existing needs. Beyond the focus on crypto investors, the network’s generic value can be derived from the number of purchasers, value per transaction, and frequency of transactions. Success could be achieved if any two of these parameters excel. E.g. 5G user base is huge, approximately over 100 million in the U.S. pay once a month for 80 dollars. While individual AI companies may represent a smaller volume of transactions compared to 5G consumers, the high frequency and value of these transactions, propelled by extensive demand, highlight a substantial opportunity.
Beyond the initial excitement, several critical factors warrant attention: Achieving product-market fit remains essential for success, even with sufficient supply; the implementation of protocol designs that ensure partition tolerance and censorship resistance is crucial to avoid new forms of censorship; moreover, incentives must be meticulously crafted to avert unsustainable inflation. We will explore these aspects in more detail below.
This sector examines the roles and objectives of its five principal stakeholders: hardware manufacturers, hosters (referred to as miners for ease of memory), network providers, operators, and end-users.
Hardware Manufacturer: The Physical Devices that Provide Services or Collect Data
Manufacturer Evolution:
Transitioning from centralized, whitelisted manufacturers to a permissionless system is a natural progression. Initially, it’s reasonable to depend on a single entity to produce reliable hardware. However, to prevent a single vendor from becoming a monopoly threat or a bottleneck in network growth, opening the ecosystem to more qualified hardware manufacturers is advisable. Eventually, an open market can foster full competition to offer the best products at fair prices to miners(e.g. Helium HIP19).
Miner: Entities That Run Hardware as Nodes in the Network