DePIN Investment Logic Analysis: Alpha Opportunities Still Exist

Grayscale's DePIN research report released earlier this year showcased top DePIN projects and their market capitalizations. Since 2022, DePIN and AI have been viewed as two new directions for cryptocurrency investment. However, the DePIN field seems to have been lacking a flagship project. ( Although Helium is regarded as a leading project, its emergence predates the concept of DePIN; Bittensor, Render, and Akash in the table are more categorized under the AI track ).

It seems that DePIN lacks a sufficiently strong leading project to explore the potential of this track. In the next 1-3 years, there may still be some Alpha opportunities in the DePIN track.

This article aims to outline the investment logic of DePIN from scratch, including why DePIN is worth paying attention to and proposing a simple analytical framework. Since DePIN is a comprehensive concept covering multiple sub-tracks, this article will explain the concept from a more abstract perspective while also providing some concrete 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 just a flashy idea, nor is it merely simple "concept hype"; it is actionable. 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 telecom operators often need to invest billions of dollars in spectrum license auctions and base station deployments, and then pay deployment costs of $200,000 to $500,000 for each macro base station with a coverage radius of 1-3 kilometers. In an auction by the Federal Communications Commission in 2022 for the 3.45GHz band 5G spectrum, a large operator invested $9 billion, becoming the operator with the highest investment. This centralized infrastructure model leads to high prices for communication services.

A certain decentralized mobile network distributes the early costs to each user through community crowdsourcing. Individuals only need to purchase hotspot devices for $249 or $499 to connect to the network and become "micro-operators," driving spontaneous network formation in the community through token incentives, thereby reducing the overall investment. The cost for a traditional operator to deploy a macro base station is about $200,000, while this decentralized network can achieve a similar coverage area by deploying about 100 hotspot devices for a total cost of around $50,000 (, reducing costs by approximately 75%.

Additionally, in the field of AI data, traditional AI companies need to pay up to $300 million per year in API fees to social media platforms to obtain training data and use proxy services to scrape data. Moreover, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

A decentralized data collection 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 in return. This model has significantly reduced the data acquisition costs for AI companies while achieving data diversity and geographic distribution. According to the platform's 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.

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)# As a point of intersection between infrastructure and users

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

Infrastructure projects generally have two characteristics: First, they have a strong technical attribute, with technologies such as ZK, FHE, and MPC having high thresholds, leading to a certain disconnection in market awareness. Second, apart from the projects we are familiar with, 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 enhance user awareness and have poor dissemination. Although high-quality infrastructure has a certain product-market fit and revenue, and can be self-sufficient through cycles, the lack of awareness in a market with scarce attention makes it challenging to go public later.

On the other hand, user-end projects have the natural advantage of directly targeting end users, which gives them an edge in capturing awareness. However, new concepts can easily be disproven by the market, and they may plummet after a shift in trends. Such projects often fall into a cycle of narrative-driven hype, followed by short-term bursts, and then a decline due to disproof, resulting in a short lifecycle. Examples include some social token projects.

Growth, awareness, and listing coins are all issues that have been heavily discussed in this cycle. Overall, DePIN can better address the dilemmas associated with the above two points and find a balance.

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 hard to falsify, and are easily understood by the market. For example, a decentralized mobile network offering an unlimited data plan for $30 a month is clearly cheaper than the plans provided by traditional carriers.

2. DePIN also has user-side usage demands, which can capture awareness. For example, users can download a browser plugin for a certain decentralized data collection 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 and very close to users.

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) DePIN investment framework

Direction

Starting only from intuition, 5G and wireless networks are a large market, while in-car data and weather data are small markets. From the demand side, is it a necessity ### 5G ( or is the demand strong? Furthermore, because the market share of 5G in the traditional market is very large, even if DePIN can capture a small part of it, the market capacity is still quite considerable when viewed under the scale of cryptocurrency.

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)# Product

According to a report from a certain research institution, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, obvious monopolistic patterns, and underutilized resources. Essentially, answering the question of product-market fit boils down to two points.

On the supply side, has DePIN accomplished things that could not be done before, or does it have significant advantages over existing solutions in terms of cost, efficiency, etc., such as in the case of a decentralized mapping collection platform in the mapping collection field, where traditional mapping collection at least faces three major problems:

• Traditional reliance on professional fleets and manual labeling, high costs and poor scalability.
• The street view update cycle of a well-known map service is long, and the coverage in remote areas is low.
• Centralized map service providers monopolize data pricing power

This decentralized platform 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 exist in a real market demand, preferably with a strong willingness to pay. A similar example is that this decentralized mapping platform can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, with key demand being validated.

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

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

Manufacture

Do the project team design and manufacture their own hardware, or do they use existing hardware? For example, a certain decentralized mobile network provides two types of proprietary hotspots while also supporting the integration of existing WiFi networks. Alternatively, for computing and storage-type 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 returns. A household mobile hotspot from a certain decentralized mobile network is priced at 249 USD, while a vehicle data collector is priced at 1,331 USD.

Distribution

How to distribute? Distribution involves many uncertainties: logistics timeliness, transportation costs, and the delivery cycle from the start of the pre-sale, etc. For projects targeting a global scope, inappropriate distribution design and methods can significantly slow down the progress of the project.

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 decentralized data collection platform where users only need to download a browser extension without any other operations required; or a decentralized mobile network hotspot that can run continuously 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 that of a decentralized data collection platform - directly utilizing existing network bandwidth, requiring no manufacturing or distribution, allowing users to start without barriers, and not needing sales, which helps to rapidly scale the network in the early stages of the project.

Indeed, projects in different directions have different hardware requirements. However, hardware is related to the friction of initial adoption. The less friction there is in the early stages of the 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 necessary to manage the path choices and resource investments in hardware, progressing gradually rather than achieving 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?

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)# Token Economy

Token mechanism design is one of the most challenging aspects of DePIN projects. Unlike projects in other fields, DePIN needs to incentivize various participants in the network at an early stage, which requires launching tokens very early in the project's lifecycle. This topic is suitable for a new article doing 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 in this field with rich experience, responsible for practical implementation matters such as technology and product; second, a person who is crypto-native, understands token economics and community building, and can distinguish between the preferences and mental models of crypto users and non-crypto users.

Others

Regulatory issues, such as the collection of road images and data in certain countries, are obviously very sensitive.

( Summary

Cryptocurrencies have not really achieved "breaking the circle" applications in this cycle, and it seems that we are still far from the adoption of users outside the circle. Some short-term incentives provided by crypto applications are the reasons for users to use them, but they cannot be sustained. DePIN derives from the underlying layer.