Starting from scratch to sort out the investment logic of DePIN: Alpha opportunities still exist

Grayscale released a DePIN research report at the beginning of the year, showcasing leading DePIN projects and their market capitalization. Since 2022, DePIN and AI have been regarded as two new directions for Crypto investment. However, it seems that there hasn't been a flagship project in the DePIN space yet. While Helium is considered a leading project, it actually emerged even before the DePIN concept itself; meanwhile, Bittensor, Render, and Akash in the table are more classified under the AI track.

This indicates that DePIN lacks a sufficiently strong leading project to break open 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, as well as proposing a simple analytical framework. Since DePIN is a comprehensive concept that encompasses multiple sub-tracks, this article will explain the concept from an abstract perspective while 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 an impractical idea, nor is it merely a case of "narrative hype"; it is something that can be executed in practice. 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 sector, taking the US market as an example, traditional communication operators usually need to invest huge amounts of money in spectrum license auctions and base station deployment. Each macro base station with a coverage radius of 1-3 kilometers requires a deployment cost of $200,000 to $500,000. In 2022, AT&T invested $9 billion in a 5G spectrum auction. This centralized dominant infrastructure model leads to high prices for communication services.

In contrast, a certain mobile network uses a community crowdsourcing approach to distribute early costs among each user. Individuals only need to purchase a hotspot device for $249 or $499 to access the network and become "micro-operators." Community self-organization is driven by token incentives, thereby reducing overall investment. The cost for a major operator to deploy a macro base station is about $200,000, while this new model can achieve a similar coverage by deploying about 100 hotspot devices (total cost of about $50,000), resulting in a cost reduction of approximately 75%.

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 use residential proxies and data center proxies to scrape data. They also face increasing copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain platform has broken 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. This model significantly reduces 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 convergence point between infrastructure and consumers

As the two main lines of Crypto 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, and other technologies that have high thresholds, with a certain disconnection in market perception. Second, apart from the projects that are familiar to everyone, such as Layer1/2, 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 drive user mind share and hinder their spread. Although high-quality infrastructure has a certain degree of product-market fit and revenue, allowing it to be self-sustaining through cycles, the lack of mind share in a market with scarce attention makes it challenging to go public later.

On the contrary, consumer projects have a natural advantage in capturing mental share as they are directly aimed at end users. However, new concepts can easily be falsified by the market, and may plummet after a shift in hot topics. These types of projects often fall into a cycle of narrative-driven hype, short-term explosions, and then decline due to falsification, resulting in a short lifecycle. Examples include certain social platforms.

Growth, mental share, and listing coins are all issues that have been widely discussed during this cycle. Overall, DePIN can better address the dilemma of combining the above two points and find a balance.

1. DePIN is built on the real demand in the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have a solid product-market fit and revenue, are not easily falsifiable, and are easily understood by the market. For example, a certain wireless network offering an unlimited data plan for $30 a month is clearly cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage needs and can capture mind share. For example, users can download browser plugins to contribute their idle bandwidth; a certain platform has already reached 2.5 million end users, many of whom are non-native crypto users. Other fields such as eSIM, WiFi, in-car data, etc., are similarly close to users.

DePIN Investment Framework

Direction

Starting from intuition, 5G and wireless networks are a large market, while in-vehicle data and weather data are smaller markets. From the demand side, we assess whether it is a necessity (like 5G) or if the demand is strong. Due to the large market share of 5G in traditional markets, even if DePIN can capture a small portion of it, the market capacity looks quite considerable when viewed under the scale of Crypto.

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. Answering the question of product-market fit essentially involves looking at two points.

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

• Traditional reliance on professional fleets and manual labeling is costly and lacks scalability.
• Some street view updates have a long cycle, and coverage in remote areas is low.
• Centralized map service providers monopolize data pricing rights

This project allows users to collect data by selling dash cams, turning data collection into something users do during their daily driving through a crowdsourcing model. By incentivizing users with tokens, resources are prioritized 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. In a similar example, this project can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, validating the key demand.

Regarding hardware, a certain capital mentioned hardware at the beginning of an article in 2023. Here are a few additional thoughts.

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

Manufacturing

Does the project party design and manufacture their own hardware, or do they use existing hardware? For example, a certain network provides two types of its own hotspots but also supports integrating existing WiFi networks. Alternatively, for computing and storage-related 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 earnings. A home mobile hotspot from a certain network is priced at $249, while a vehicle-mounted data collector costs $1,331.

Distribution

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 project's progress.

Maintenance

What do users need to do for hardware maintenance? Some devices may face depreciation or wear and tear. The simplest maintenance example is a certain platform where users only need to download a browser extension without requiring any other operations; or a hotspot in a certain network that just needs a simple installation to keep running. If it involves solar power generation, it could be more complex.

Considering the above points, the simplest model is to directly utilize the existing network bandwidth, without the need for manufacturing and distribution, allowing users to start without barriers and without the need for sales, which helps to quickly expand the network in the early stages of the project.

Indeed, different projects have varying hardware requirements depending on their direction. 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 contribute to retention and a certain level of binding relationships. For startup teams, it is essential to manage the path choices and resource investments in hardware, progressing gradually rather than attempting to achieve everything at once.

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

Token Economy

Token mechanism design is the most challenging aspect of the DePIN project. Unlike projects in other fields, DePIN requires incentives for various participants in the network at an early stage, thus necessitating the issuance of 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 needs at least one person with the following backgrounds: one who has worked in traditional companies in this field and has rich experience, responsible for technical and product implementation matters; and one who is native to cryptocurrency, understands token economics and community building, and can differentiate between the preferences and mental models of crypto users and non-crypto users.

Other

Regulatory issues, such as collecting road images and data domestically, are obviously very sensitive.

Summary

Crypto has not truly achieved a "breakout" application in this cycle, and it seems that the adoption of off-circle users is still a long way off. Some short-term incentives provided by Crypto applications are the reasons users choose to use them, but they are not sustainable. The economic benefits derived from DePIN at the bottom layer could potentially replace traditional infrastructure on the user side, thereby achieving the sustainability of applications and enabling large-scale adoption.

Although the characteristics of DePIN combined with reality result in a longer development cycle, we have already seen some glimmers of hope from the development of a certain mobile network: this network collaborates with a major operator, allowing user devices to seamlessly switch to the operator's national 5G network. For example, when users leave the coverage area of a community hotspot, they automatically connect to the partner operator's base station, avoiding signal interruptions. Earlier this year, the network announced a partnership with a global telecommunications giant to deploy 5G hotspots in Mexico City and Oaxaca, marking the beginning of its expansion in South America. The network...