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

Original Title: "IOSG Weekly Brief | DePIN 101 #275"

Original author: Jiawei, IOSG Ventures

Source: Grayscale

Grayscale published a research report on DePIN earlier this year, and the table above shows the top DePIN projects along with their market capitalizations. Since 2022, DePIN and AI have been regarded as two new directions for Crypto investment. However, there seems to be no iconic project emerging in the DePIN field. (Helium can be considered a leading project, but it appeared even before the concept of DePIN; Bittensor, Render, and Akash in the table are more attributed to the AI track.)

It seems that DePIN does not have a strong leading project that can break through 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 slightly zoom out and 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 important to clarify that decentralizing the infrastructure of the physical world is not a fancy idea, nor is it merely a simple "narrative play"; it is something that can be implemented. In DePIN, there indeed exist scenarios where decentralization can "enable" something or "optimize" something.

Here are two simple examples:

Source: IOSG

In DePIN, one of the main tracks — the telecommunications sector, taking the U.S. market as an example, traditional communication operators (such as AT&T, T-Mobile) 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 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 dominant infrastructure model results in high prices for communication services.

Helium Mobile distributes the early costs to each user through community crowdsourcing, allowing individuals to join the network as "micro-operators" by purchasing hotspot devices for only $249 or $499. This incentivizes the community to spontaneously build the network through token rewards, thereby reducing overall investment. The cost for Verizon to deploy a macro base station is approximately $200,000, while Helium can achieve similar coverage by deploying about 100 hotspot devices (total cost around $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/year in API fees to platforms like Reddit and Twitter to acquire 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 cracked this dilemma through distributed Web Scraping, allowing users to share idle bandwidth by downloading a browser extension, helping to scrape public webpage data, and earning token rewards from it. This model significantly 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 participating from 190 countries, contributing an average of 1,000 TB of internet data daily.

In summary, the starting point for investing in the direction of DePIN is that decentralized physical infrastructure has the opportunity to perform better than traditional physical infrastructure, and even to 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 strong technical attributes, such as ZK, FHE, MPC and other technologies that have high thresholds, leading to a certain disconnection in market perception. Second, apart from the Layer1/2, cross-chain bridges, staking and other projects that we are familiar with 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 dissemination. 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 challenging to do Listings later.

On the other hand, 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 may plummet in popularity after a trend shift. Such projects often fall into a cycle that goes from narrative-driven to short-term explosive growth, and then to disproval and decline, with a short lifecycle. Examples include friend.tech and Farcaster, among others.

Growth, mindshare, and listing coins are all issues that have been discussed a lot during this cycle. Overall, DePIN can better address the dilemmas of the above two points and find a balance.

DePIN is built on the real needs of the physical world, such as energy, wireless networks, etc., and high-quality DePIN projects have solid PMF and revenue, are not easily falsified, and are easily understood by the market. For example, Helium's $30 per month unlimited data plan is obviously cheaper than the plans offered by traditional carriers. DePIN also has the need to use the user side, which can capture mindshare. For example, users can download Grass's browser plug-in to contribute their own idle bandwidth, and Grass has reached 2.5 million users on endpoints, many of whom are non-crypto-native. The same goes for other tracks such as eSIM, WiFi, in-car data, etc., which are very close to the user.

DePIN investment framework

Source: Messari, IOSG

Direction

Intuitively, 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 assess whether it is a necessity (5G) or if the demand is strong. Moreover, since 5G has a very large share in traditional markets, even if DePIN can capture a small portion of it, the market capacity appears quite considerable when viewed 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, obvious monopoly patterns, and underutilization of resources. Answering the PMF question essentially looks at two points.

Source: Hivemapper

On the supply side, has DePIN achieved things that were previously not possible, or does it have outstanding advantages over existing solutions (cost, efficiency, etc.)? For example, in the map collection track where Hivemapper operates, traditional map collection at least has 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 rights

Hivemapper allows users to collect data by selling dash cams, turning data collection into something users do during their daily driving through a crowdsourcing model. Users are guided by token incentives to prioritize resources in high-demand areas. On the demand side, the products offered by DePIN must have real market demand, preferably with a strong willingness to pay. Similarly, Hivemapper can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, confirming key demand. Regarding hardware, Multicoin's 2023 article "Exploring The Design Space Of DePIN Networks" starts by discussing hardware. Here, I would like to add a few points.

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 offers two types of its own hotspots and also supports integration with existing WiFi networks. Alternatively, for computing and storage-related DePIN projects, they can directly use existing graphics cards and hard drives, etc.

· Sales: A clearly marked price for sales means that users will calculate the payback period based on potential earnings. The price of Helium's home mobile hotspot is $249, and the price of DIMO's vehicle data collector is $1,331.

· Distribution: 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 may greatly 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 with no other operations required; or Helium's hotspots, which only require a simple installation to operate continuously. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is the Grass model—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 rapidly expand the network in the early stages of the project. Indeed, different projects have varying hardware requirements. However, hardware relates to the friction of initial adoption. The less friction in the early stages of the project, the better; as the project matures, some friction can lead to retention and a certain level of binding relationships. For startup teams, it's essential to control the path choices and resource investments in hardware, progressing gradually rather than trying to achieve everything at once.

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

Token Economy

The token mechanism design is the most challenging part of the DePIN project. 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 that conducts some case studies, which will not be elaborated on in this text.

Team

In the team composition, the founder needs at least one person with 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, someone who is native to crypto, 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 the collection of road images and data domestically, are obviously very sensitive.

Summary

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

Source: Helium

Although the characteristics of DePIN combined with reality lead to 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 interruption. Earlier this year, Helium announced a collaboration 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 with traditional monopoly large enterprises, DePIN has more flexible deployment methods and means, and can align incentives within the ecosystem through the token model. For example, the traditional telecom industry is usually dominated by a few giants and lacks the impetus to innovate. In rural areas, for example, there is no incentive for traditional operators to deploy due to their dispersed populations and low and time-consuming return on investment. And with proper tokenomics design, the network can be encouraged to deploy in places where hotspots are scarce. The same goes for Hivermapper to set higher incentives where map resources are scarce.

2. DePIN has the opportunity to bring positive externalities. From AI companies purchasing internet data collected by Grass, self-driving companies buying street-level map data from Hivemapper, and Helium Mobile offering low-cost data packages, it can be seen that DePIN can actually step outside the realm of Crypto, bringing value to real life and other industries, and feeding back the entire ecosystem through token economics. In other words, there is real value supporting the DePIN token, 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 a area we will focus on in 2025, and we will also provide more research related to DePIN in the future.

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