The Alpha opportunity is still there, a comprehensive review of DePIN investment logic.

Grayscale released a research report on DePIN at the beginning of this year, showcasing leading DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been mentioned as two new directions for cryptocurrency investment. However, it seems that there has yet to be a flagship project in the DePIN space. While Helium can be considered a leading project, it existed even before the concept of DePIN; and the projects listed in the table, Bittensor, Render, and Akash, are more classified under the AI track.

This situation indicates that the DePIN sector lacks a sufficiently strong leading project to elevate the overall industry's ceiling. Therefore, the DePIN sector may still have some Alpha opportunities in the next 1-3 years.

This article will start from scratch to sort out the investment logic of DePIN, including why DePIN deserves our attention, and propose a simple analytical framework. Since DePIN is a comprehensive concept that covers several different sub-tracks, this article will explain the concept from a more abstract perspective while also providing some specific examples.

Why Pay Attention to DePIN Investment

DePIN is not just a buzzword.

First, it is necessary to clarify that decentralizing the infrastructure of the physical world is not a flashy idea, nor is it merely a simple "narrative hype," but something that can be implemented. In DePIN, there indeed exists the possibility that decentralization can "achieve" 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 communication operators usually need to invest huge amounts of money in spectrum license auctions and base station deployment, with deployment costs for macro base stations covering a radius of 1-3 kilometers ranging from $200,000 to $500,000. In 2022, a well-known operator invested $9 billion in an auction for the 3.45GHz band 5G spectrum held by the Federal Communications Commission (FCC) in the United States. This centralized dominant infrastructure model results in high prices for communication services.

In contrast, a mobile network spreads the early costs to each user through community crowdsourcing, allowing individuals to access the network by purchasing hotspot devices for only $249 or $499, thus becoming "micro-operators". This is driven by community self-organizing through token incentives, thereby reducing the overall investment. The cost for traditional operators to deploy a macro base station is approximately $200,000, while deploying about 100 hotspot devices (with a total cost of around $50,000) can achieve a similar coverage area, reducing costs by about 75%.

Additionally, in the AI data field, traditional AI companies need to pay up to $300 million per year in API fees to social media platforms to obtain training data, and they crawl data using residential proxies and data center proxies. Furthermore, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain data platform has solved this dilemma through distributed Web Scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape publicly available web data, and earning token rewards from it. This model greatly reduces the data acquisition costs for AI companies while achieving data diversity and geographical distribution. According to 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 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 the intersection of infrastructure and consumers

As the two main lines of cryptocurrency 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 barriers to entry, and there is a certain disconnection in market awareness. Second, apart from the projects we are familiar with, such as Layer1/2, cross-chain bridges, and staking that 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 have poor dissemination. 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 under conditions of scarce attention makes it difficult to go public later.

On the other hand, consumer projects have the inherent advantage of being directly aimed at end-users, capturing mind share effectively. However, new concepts can easily be disproven by the market, and may plummet after a shift in trends. These types of projects often fall into a cycle of narrative-driven hype leading to short-term bursts, followed by disproof and decline, resulting in a short lifecycle.

Growth, market share, and listing are all issues that have been discussed a lot in this cycle. Overall, DePIN can effectively address the dilemmas associated with 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 difficult to falsify, and are easily understood by the market. For example, a mobile network's unlimited data plan for 30 dollars a month is clearly cheaper than the plans offered by traditional operators.

2. DePIN also has user-side usage demands and can capture mind share. For example, users can download a browser extension from a certain data platform to contribute their idle bandwidth. Currently, this platform has reached 2.5 million end users, many of whom are non-crypto native users. Other sectors such as eSIM, WiFi, in-car data, etc. are similar, very close to users.

DePIN Investment Framework

Direction

Intuitively, 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 whether it is a necessity (5G) or in strong demand. Moreover, given that 5G has a very large share in traditional markets, even if DePIN can capture a small portion of it, the market capacity looks quite considerable when viewed in the context of the cryptocurrency scale.

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 looks at two points.

On the supply side, has DePIN achieved something that could not be done before, or does it have significant 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 issues:

• Traditional methods rely on professional fleets and manual labeling, which are costly and have poor scalability.
• Mainstream street view services have long update cycles and low coverage in remote areas.
• Centralized map service providers monopolize data pricing rights

The project allows users to collect data by selling dash cameras, turning data collection into an activity that users engage in during their daily driving through a crowdsourcing model. By incentivizing users with tokens, resources are prioritized to areas of high demand.

On the demand side, the products offered by DePIN must have a real market demand, ideally with a strong willingness to pay. A similar example is that this mapping project can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, thus validating the key demand.

Regarding hardware, some investment institutions began their articles in 2023 by discussing hardware. Here are a few additional points of view.

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

Manufacture

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

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 mobile network is priced at 249 USD, while a vehicle data collector is priced at 1,331 USD.

Distribute

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. The simplest maintenance example is a certain data platform, where users only need to download a browser extension without any other operations required; or a hotspot of a certain network, which can run continuously with just a simple installation. If it involves solar power generation, it might be more complicated.

Considering the above points, 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.

Indeed, projects in every direction have different hardware requirements. 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 lead to retention and a certain degree of binding relationships. For startup teams, it is essential to control the path selection and resource investment in hardware, progressing gradually rather than trying to achieve it all at once.

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

Token Economy

The design of the token mechanism is the most challenging part of the DePIN project. 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 a new article to conduct some case studies, and this article will not elaborate on it.

Team

In the team composition, the founder must 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 matters such as technology and product implementation; second, someone who is native to crypto, understands token economics and community building, and can distinguish 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

Cryptocurrency has not really achieved "breaking the circle" applications in this cycle, and it seems we are still far from adoption by users outside the circle. Some short-term incentives provided by crypto applications are the reasons users engage with them, but these are not sustainable. The economic benefits derived from DePIN at the underlying level may replace traditional infrastructure on the user side, thus achieving application sustainability and large-scale adoption.

Although the characteristics of DePIN that integrate with reality lead to a longer development cycle, we have already seen some glimmers of hope from the development of a certain mobile network: this network collaborates with major operators, allowing user devices to seamlessly switch to the national 5G network.