The Alpha opportunity still exists, starting from scratch to sort out the investment logic of DePIN.

Author | Jiawei @IOSG

▲ Source: Grayscale

Grayscale published a research report on DePIN earlier this year, and the table above shows the leading DePIN projects along with their market capitalizations. Since 2022, DePIN and AI have been discussed as two new directions for Crypto investment. However, it seems that there has yet to be a flagship project in the DePIN space. (Helium can be considered a leading project, but Helium actually appeared even before the concept of DePIN; Bittensor, Render, and Akash in the table are more associated with the AI track.)

It seems that DePIN does not have a strong leading project that can break the ceiling of this track. There may still be some Alpha in the DePIN track in the next 1-3 years.

This article attempts to outline the investment logic of DePIN from scratch, including why DePIN is an investment track worth our attention, and proposes a simple analytical framework. Since DePIN is a comprehensive concept that encompasses many diverse sub-tracks, this article will zoom out slightly to explain the concept from an abstract perspective, but will still provide some concrete examples.

Why focus on DePIN investment

DePIN is not a buzz word

First, it is necessary to clarify that decentralizing the infrastructure of the physical world is not a flashy idea, nor is it merely a "narrative play"; it is something that can be practically executed. In DePIN, there indeed exist scenarios where decentralization can "enable" something or "optimize" something.

Here are two simple examples:

▲ Source: IOSG

In the DePIN sector, one major area is telecommunications. Taking the U.S. market as an example, traditional telecom operators (such as AT&T and T-Mobile) often need to invest billions of dollars in spectrum license auctions and base station deployments, then pay deployment costs of $200,000 to $500,000 for each macro base station covering a radius of 1-3 kilometers. In a 2022 auction by the Federal Communications Commission (FCC) for 5G spectrum in the 3.45GHz band, AT&T invested $9 billion, becoming the operator with the highest investment. This centralized infrastructure model leads to high prices for telecommunications services.

Helium Mobile distributes this early cost to each user through community crowdsourcing, where individuals only need to purchase hotspot devices for $249 or $499 to connect to the network and become "micro-operators." This is driven by token incentives that encourage the community to spontaneously network, thereby reducing the overall investment. The cost for Verizon to deploy a macro base station is about $200,000, while Helium can achieve a similar coverage area by deploying about 100 hotspot devices (total cost of about $50,000), resulting in a cost reduction of approximately 75%.

Additionally, in the AI data field, traditional AI companies need to pay up to $300 million/year in API fees to platforms like Reddit and Twitter to obtain training data, and they scrape data using Bright Data (residential proxies) and Oxylabs (data center proxies). Moreover, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure the compliance and diversity of data sources.

Grass has broken this deadlock 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 Grass 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 the intersection of Infra and Consumer

As the two main lines of Crypto investment, Infra and Consumer each face some issues.

Infra projects generally have two characteristics: first, they have a strong technical attribute, for example, technologies such as ZK, FHE, and MPC have high thresholds, and there is a certain disconnect in market perception. Second, aside from the projects we are familiar with such as Layer 1/2, cross-chain bridges, and staking that can directly reach end users, most Infra projects are actually toB. For example, developer tools, data availability layers, oracles, co-processors, etc., are relatively distant from users.

These two points make it difficult for Infra projects to gain user mindshare and have poor spreadability. Although high-quality Infra has a certain PMF and revenue, allowing it to be self-sufficient through cycles, the lack of mindshare in a market with scarce attention makes it difficult to do listings later on.

On the flip side, Consumer has a natural advantage in capturing mindshare as it directly targets end users. 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 growth, short-term bursts, and then disproval and decline, with a short life cycle. Examples include friend.tech and Farcaster, among others.

Growth, mindshare, and listing are all issues that have been discussed a lot in this cycle. On the whole, DePIN can better solve the dilemma of combining the above two points and find a balance.

1. DePIN is built on the real needs of the physical world, such as energy, wireless networks, etc., and high-quality DePIN projects have a solid PMF and revenue, which is not easy to falsify and easy to understand by the market. For example, Helium's $30 per month unlimited data plan is obviously cheaper than the plans offered by traditional carriers.
2. DePIN also has user-side usage demands and can capture mindshare. For example, users can download the Grass browser plugin to contribute their idle bandwidth. Currently, Grass has reached 2.5 million end users, many of whom are non-crypto native users. Other sectors such as eSIM, WiFi, and in-car data are similarly close to users.

DePIN investment framework

▲ Source: Messari, IOSG

Direction

Simply from intuition, 5G and wireless networks are large markets, while automotive data and weather data are smaller markets. From the demand side, we need to see if it is a necessity (5G) or if the demand is strong. Moreover, since the share of 5G in traditional markets is very large, even if DePIN can capture a small part of it, the market capacity looks quite considerable under the scale of Crypto.

Product

According to Grayscale's report, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, clear monopoly patterns, and underutilized resources. Essentially, answering the PMF question looks at two points.

▲ Source: Hivemapper

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

• Traditional reliance on professional fleets and manual labeling is costly and has poor scalability.
• Google Street View has a long update cycle and low coverage in remote areas.
• Centralized map service providers monopolize data pricing power

Hivemapper 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 Hivemapper, which can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, with key demand being validated.

When it comes to hardware, Multicoin's 2023 article, "Exploring The Design Space Of DePIN Networks," begins with hardware. The author would like to add a few points here.

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

#Manufacturing

Does the project team design and manufacture their own hardware, or do they use existing hardware? For example, Helium provides two types of proprietary hotspots and 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 for sale means that users will calculate the payback period based on potential returns. The price of Helium's home mobile hotspot is 249 USD, and the price of DIMO's in-vehicle data collector is 1,331 USD.

#Distribution

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 reach, improper 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 Grass, where users only need to download a browser extension without any other operations required; or with Helium's hotspot, which only requires a simple installation to keep running. If solar power generation is involved, it may be more complex.

Considering the above points, the simplest model is the Grass model - directly utilizing existing network bandwidth, without the need to manufacture and distribute, allowing users to start without barriers, and no need for sales, which helps to quickly expand the network in the early stages of the project.

Admittedly, projects in each direction have different hardware needs. But hardware is about the friction of initial adoption. In the early stages of the project, the less friction the better, and as the project matures, some friction can lead to retention and a certain degree of binding. For start-up teams, it is necessary to control the path selection and resource investment in hardware, and gradually rather than overnight.

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 participate?

Token Economy

Token mechanism design is the most challenging aspect of DePIN projects. Unlike projects in other fields, DePIN requires early incentives for all participants in the network, thus necessitating 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, which will not be elaborated on in this text.

Team

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

Other

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

Summary

Crypto has not really achieved a "breakthrough" application in this cycle, and it seems we are still a long way from adoption by users outside the circle. Some short-term incentives offered by Crypto applications are the reasons users engage with them, but they are not sustainable. The economic benefits derived from DePIN at the underlying level may replace traditional infrastructure on the user side, thereby achieving the sustainability of applications and enabling large-scale adoption.

▲ Source: Helium

Although the DePIN's characteristic of being integrated with reality results in a longer development cycle, we have already seen some glimmers of hope from the development of Helium Mobile: Helium Mobile has partnered with T-Mobile, allowing user devices to seamlessly switch to T-Mobile's nationwide 5G network. For example, when users leave the coverage area of Helium community hotspots, they automatically connect to T-Mobile's base stations to avoid signal interruptions. Earlier this year, Helium announced a partnership with global telecom giant Telefónica to deploy Helium Mobile 5G hotspots in Mexico City and Oaxaca, marking the beginning of its expansion in South America. Telefónica's subsidiary Movistar in Mexico has approximately 2.3 million users, and this collaboration directly connects these users to Helium'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 internally within the ecosystem through a token model. For example, the traditional telecommunications industry is usually dominated by a few giants, lacking the motivation for innovation. Taking rural areas as an example, due to the dispersed population, traditional operators have low investment returns and long timelines, leading to a lack of motivation for traditional operators to advance deployment. However, with appropriate token economic design, it can encourage network deployment in areas with scarce hotspots. Similarly, Hivermapper sets higher incentives in areas where map resources are scarce.
2. DePIN has the opportunity to bring positive externalities. This can be seen from AI companies purchasing internet data collected by Grass, autonomous driving companies buying street-level map data from Hivemapper, and Helium Mobile offering low-cost data plans. In fact, DePIN can transcend the realm of Crypto, bringing value to real life and other industries, and feeding back the entire ecosystem through token economics. In other words, the DePIN tokens are backed by real value, rather than a Ponzi model.

Of course, DePIN also faces many uncertainties: for example, uncertainties in time cycles due to operating hardware, regulatory risks, due diligence risks, and so on.

In summary, DePIN is the track we will focus on in 2025, and we will also release more research related to DePIN in the future.