Alpha opportunities still exist, starting from scratch to sort out the investment logic of DePIN.

Grayscale released a research report on DePIN at the beginning of this year, showcasing leading DePIN projects and their market capitalization. Since 2022, DePIN and AI have been regarded as two new directions for cryptocurrency investment. However, the DePIN space seems to have lacked a flagship project. (Helium can be considered a leading project, but it existed even before the concept of DePIN; while Bittensor, Render, and Akash in the table are more categorized as AI projects.)

From this perspective, DePIN lacks a strong leading project to enhance the potential of the entire 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 the basics, including why DePIN deserves our attention and proposing a simple analytical framework. Since DePIN is a comprehensive concept covering multiple different sub-tracks, this article will explain the concept from a relatively 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 an impractical idea, nor is it merely a "concept hype"; it is something that can be implemented. In the DePIN field, there is indeed 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 sector, taking the U.S. market as an example, traditional telecom operators usually need to invest huge amounts of money for spectrum license auctions and base station deployment, with the deployment cost of each macro base station covering a radius of 1-3 kilometers ranging from $200,000 to $500,000. In 2022, a telecom giant invested $9 billion in a 5G spectrum auction held by the Federal Communications Commission (FCC) in the U.S. This centralized dominant infrastructure model has led to high prices for communication services.

A certain mobile communication project distributes the early costs to each user through community crowdsourcing. Individuals only need to purchase a hotspot device for $249 or $499 to access the network and become "micro-operators," driven by token incentives to spontaneously form a network, thereby reducing overall investment. The cost for traditional operators to deploy a macro base station is about $200,000, while this project can achieve a similar coverage with around 100 hotspot devices (total cost of about $50,000), resulting in a cost reduction of 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 they crawl data using residential proxies and data center proxies. Furthermore, they are also facing increasing copyright and technical restrictions, making it difficult to ensure compliance and diversity of data sources.

A data collection project 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 significantly reduces the data acquisition costs for AI companies while achieving diversity and geographic 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 cryptocurrency investment, infrastructure and consumer projects each face some challenges.

Infrastructure projects usually have two characteristics: first, they have strong technical attributes, such as ZK, FHE, MPC, etc., which have high thresholds and there is a certain disconnection in market recognition. Second, apart from the projects we are familiar with, like Layer1/2, cross-chain bridges, staking, etc., which 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 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-sufficient through cycles, the lack of mind share in a market with scarce attention makes it challenging to go public later.

On the other hand, consumer projects have the advantage of being directly aimed at end users, giving them a natural edge in capturing mind share. However, new concepts can easily be disproven by the market and may plummet after a shift in trends. Such projects often fall into a cycle of concept-driven short-term explosions followed by disproval and decline, resulting in a short lifecycle. Examples include a certain social token project and a certain decentralized social protocol, among others.

Growth, market share, and listing new coins are all issues that have been widely discussed in this cycle. Overall, DePIN can better address the dilemmas associated with the two points mentioned above 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 difficult to falsify, and are easily understood by the market. For example, a mobile communication project 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 and can capture mental market share. For example, users can download a browser extension for a certain data collection project to contribute their idle bandwidth. Currently, this project has reached 2.5 million end users, many of whom are non-native crypto users. Other sectors such as eSIM, WiFi, and vehicle data are similar, being very close to users.

DePIN Investment Framework

Direction

Starting from intuition, 5G and wireless networks are large markets, while in-vehicle data and weather data are small markets. From the demand side, we consider whether it is a necessity (5G) or has strong demand. Moreover, since 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 under the scale of cryptocurrency.

product

According to a report from a research institution, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, evident monopoly patterns, and underutilization of resources. The essence of answering the product-market fit question is essentially about two points.

On the supply side, has DePIN accomplished things that could not be done before, or does it have outstanding advantages over existing solutions (cost, efficiency, etc.)? For example, in the map collection track where a certain map collection project is located, traditional map collection at least has three major problems:

• Traditional methods rely on professional fleets and manual labeling, which are costly and have poor scalability.
• A large map service provider has a long street view update cycle 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 something users do during their daily driving through a crowdsourcing model. It guides users with token incentives to prioritize resources in high-demand areas.

On the demand side, the products provided by DePIN must have real market demand, preferably 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, verifying critical demand.

Regarding hardware, a well-known investment institution mentioned hardware at the beginning of an article in 2023. I would like to add a few points of view here.

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

Manufacturing

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

Sales

The clearly marked prices for sale mean that users will calculate the payback period based on potential returns. A home mobile hotspot for a certain mobile communication project is priced at 249 dollars, while an onboard data collector for a certain vehicle data project is priced at 1,331 dollars.

Distribute

How to distribute? Distribution involves many uncertainties: logistics timeliness, transportation costs, and the delivery cycle starting from the pre-sale, etc. For projects aiming at a global scale, improper distribution design and methods can greatly slow down the project's progress.

Maintenance

What does a user need to do to maintain hardware? Some devices may experience depreciation or wear and tear. The simplest maintenance example is a data collection project where the user only needs to download a browser extension with no other operations required; or a hotspot for a mobile communication project, which only requires a simple installation to continue running. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is that of a data collection project - directly utilizing existing network bandwidth, without the need for manufacturing and distribution, allowing users to start without barriers, and no sales required, 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 startups, it is necessary to manage the path choices and resource investments in hardware, gradually and not all at once.

Imagine 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 economy

The token mechanism design is the most challenging aspect of DePIN projects. Unlike projects in other fields, DePIN needs to incentivize various participants in the network early on, which requires launching 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 further.

Team

In the team composition, the founder must have at least one individual with the following backgrounds: first, someone who has worked in a traditional company in this field with rich experience, responsible for practical matters such as technology and product implementation; second, a crypto native who 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

Cryptocurrency has not truly achieved "breaking out of the circle" in this cycle, and it seems we are still far from the adoption by users outside of the circle. The short-term incentives provided by some cryptocurrency applications are the reason users use them, but they cannot be sustained. However, the economic benefits derived from DePIN at the underlying level have the potential to replace traditional infrastructure on the user side, thereby achieving the sustainability of applications and facilitating widespread adoption.

Despite the long development cycle of DePIN due to its integration with reality, we have already seen some glimmers of hope from the development of a certain mobile communication project: this project collaborates with a major operator, allowing user devices to seamlessly switch to the operator's nationwide 5G network. For example, when users leave the community hotspot coverage, they automatically connect to the operator's base station, avoiding signal interruptions. Earlier this year, the project announced a partnership with a global telecom giant to deploy 5G hotspots in Mexico City and Oaxaca, marking the beginning of its expansion in South America. The telecom giant's subsidiary in Mexico has approximately 2.3 million users, and this cooperation 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: