DePIN Investment Opportunities Still Exist, Reorganizing Investment Logic from the Beginning

Grayscale released a research report on DePIN earlier this year, showcasing major DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been regarded as two new directions for cryptocurrency investment. However, the DePIN sector seems to have lacked a flagship project. (Helium can be considered a leading project, but its emergence predates the concept of DePIN; the projects listed in the table, Bittensor, Render, and Akash, are more classified under the AI track.)

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

This article aims to systematically outline the investment logic of DePIN from scratch, 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, the article will explain the concept from a relatively abstract perspective while providing specific examples.

Why Pay Attention to DePIN Investment

DePIN is not just a buzzword.

First, it is essential to clarify that decentralizing the infrastructure of the physical world is not a fancy idea, nor is it merely a "concept hype"; it is something that can be implemented. In DePIN, there are indeed scenarios where decentralization can "achieve" or "optimize" certain situations.

Here are two simple examples:

In one of the main tracks of DePIN – the telecommunications sector, taking the U.S. market as an example, traditional communication operators usually need to invest heavily in spectrum license auctions and base station deployment. The deployment cost of each macro base station, with a coverage radius of 1-3 kilometers, ranges from $200,000 to $500,000. In 2022, during an auction by the Federal Communications Commission for 5G spectrum in the 3.45GHz band, a large operator invested $9 billion. This centralized infrastructure model leads to high prices for communication services.

A certain mobile network uses a community crowdsourcing approach to distribute the early costs among users, allowing individuals to access the network by purchasing hotspot devices for either $249 or $499, thereby becoming "micro-operators". The community is driven to spontaneously form networks through token incentives, thus reducing the overall investment. The cost for traditional operators to deploy a macro base station is about $200,000, whereas this network can achieve a similar coverage with the deployment of about 100 hotspot devices (total cost of around $50,000), reducing costs by approximately 75%.

In the field of AI data, traditional AI companies need to pay high API fees to social platforms to obtain training data and crawl data through various proxy services. They also face increasing copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A certain distributed data collection platform has solved this problem 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. This model significantly reduces the data acquisition costs for AI companies while achieving data diversity and geographical distribution. According to statistics, there are currently over 100 million IP addresses from 190 countries participating in the network, contributing an average of 1,000 TB of internet data per day.

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 consumers

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

Infrastructure projects usually have two characteristics: first, they have strong technical attributes, such as ZK, FHE, MPC and other technologies with high thresholds, and there is a certain disconnect in market awareness. Second, apart from a few projects like Layer1/2, cross-chain bridges, staking, etc. that can directly reach end users, most infrastructure projects are 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 mindshare 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 mindshare in a market environment with scarce attention leads to difficulties in later market entry.

On the contrary, consumer applications are directly aimed at end users and have a natural advantage in mind share. However, new concepts can easily be disproven by the market and may quickly decline after a shift in trends. Such projects often fall into a cycle of concept-driven short-term bursts followed by disproof and decline, resulting in a short lifecycle.

Growth, mental possession, and listing coins are widely discussed issues in this cycle. Overall, DePIN can better balance the dilemmas mentioned above.

1. DePIN is built on the real demands of 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 per month is clearly cheaper than traditional operators' offerings.

2. DePIN also has user-side usage demands, which can capture mental ownership. For example, users can download a browser extension from a data collection 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, being very close to users.

DePIN Investment Framework

Direction

From an intuitive perspective, 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 it is a necessity (like 5G) or has strong demand. Furthermore, since areas like 5G have a very large share in traditional markets, even if DePIN can capture a small portion of it, the market capacity is quite considerable when viewed within the scale of the cryptocurrency market.

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 essence of answering the question of product-market fit looks at two points.

On the supply side, has DePIN achieved something that was previously impossible, 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 has at least three major issues:

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

The project allows users to collect data by selling dashcams, turning data collection into something that can be accomplished during users' 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 a real market demand, preferably with a strong willingness to pay. A similar example is that the map project can sell map data to companies in autonomous driving, logistics, insurance, and municipal departments, validating the key demand.

Regarding hardware, a certain investment institution discussed hardware at the beginning of an article in 2023. Here are a few additional views.

The hardware timeline can be summarized as "manufacture-sale-distribution-maintenance".

Manufacture

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

Sales

The clearly marked price of sales means that users will calculate the payback period based on potential returns. A mobile hotspot is priced at 249 dollars, and an in-vehicle data collector is priced at 1,331 dollars.

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 significantly slow down the project's progress.

Maintenance

What does the user need to do to maintain the hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance example is a data collection platform where users only need to download a browser extension, with no other operations required; or a hotspot for a wireless network, which can be continuously operated with just a simple installation. If it involves solar power generation and the like, it may 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. 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 each 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 relationships. For startup teams, it's essential to control the path choices and resource investments in hardware, progressing gradually rather than expecting immediate results.

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 Economics

The design of the token mechanism is the most challenging aspect of DePIN projects. Unlike projects in other fields, DePIN requires incentives for various participants in the network at an early stage, which necessitates the launch of tokens very early in the project's development. This topic is suitable for a separate article to conduct some case studies, and this article will not elaborate further.

Team

In the team composition, the founder must have at least one individual with each of the following backgrounds: first, someone who has worked in traditional companies within this field and has rich experience, responsible for practical matters such as technology and product implementation; second, a native in crypto, who understands token economics and community building, distinguishing between the preferences and mental models of crypto users and non-crypto users.

Others

Regulatory issues, such as collecting road images and data in certain areas, are obviously very sensitive.

Summary

Cryptocurrencies have not really achieved "breakthrough" applications in this cycle, and it seems we are still far from the adoption of users outside the circle. The short-term incentives offered by some crypto applications are the reasons users engage with them, but these incentives cannot last. However, the economic benefits derived from DePIN at the foundational level may replace traditional infrastructure on the user side, thereby achieving the sustainability of applications and enabling 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 mobile network: the project collaborates with traditional telecom giants, allowing user devices to seamlessly switch to the partner's nationwide 5G network. For example, when users leave the community hotspot coverage, they automatically connect to the partner's base station to avoid signal interruption. Earlier this year, the project announced a collaboration with a global telecom giant to deploy 5G hotspots in Mexico City and Oaxaca, starting its expansion in South America. The partner's subsidiary in Mexico has approximately 2.3 million users, and this collaboration directly connects these users to the project's 5G network.

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

1. Compared to traditional monopolistic large enterprises, DePIN has a more flexible deployment method and means, and can align incentives within the ecosystem through a token model. For example, the traditional telecommunications industry is usually dominated by a few giants, lacking the drive for innovation. Taking rural areas as an example, due to the dispersed population in these regions, traditional operators have low return on investment and