Alpha opportunities are still there, and we will sort out DePIN's investment logic from scratch

Original title:IOSG Weekly Brief｜DePIN 101 #275

Original author: Jiawei, IOSG Ventures

Source: Grayscale

Grayscale wrote a research report on DePIN early this year, which shows the top DePIN projects and their market value. Since 2022, DePIN and AI have been compared as two new directions of Crypto investment. However, there seems to be no iconic project in the DePIN field. (Helium is considered a top project, but Helium even appeared earlier than DePIN; Bittensor, Render and Akash in the table are more classified as AI tracks)

From this point of view, DePIN does not have a strong enough leading project to open the ceiling of this track. DePIN track may still have some alpha in the next 1-3 years.

This article attempts to sort out the investment logic of DePIN from scratch, including why DePIN is an investment track worthy of our attention, and propose a simple analysis framework. Since DePIN is a comprehensive concept that covers many diverse sub-tracks, this article will zoom out slightly to explain the concept from an abstract perspective, but will still give some concrete examples.

Why pay attention to DePIN investment

DePIN is not a buzz word

First of all, it is necessary to clarify that decentralizing the infrastructure of the physical world is not a fancy idea, nor is it a simple "narrative play", but can be implemented. There is indeed a scene in DePIN where decentralization can "enable" something or "optimize" something.

Here are two simple examples:

Source: IOSG

In the telecommunications field, a major track in DePIN, taking the US market as an example, traditional communications operators (such as AT&T, T-Mobile) often need to invest billions of dollars in spectrum license auctions and base station deployment, and then pay a deployment cost of $200,000-500,000 per acous base station with a coverage radius of 1-3 kilometers. In a 22-year Federal Communications Commission (FCC) auction of 5G spectrum in the 3.45GHz band, AT&T invested $9 billion, becoming the highest-invested operator. This centralized and dominant infrastructure model leads to high prices for communication services.

Helium Mobile distributes this early cost to each user through community crowdsourcing. Individuals only need to purchase hotspot equipment of US$249 or US$499 to access the network and become a "micro operator", driving the community to spontaneous networking through token incentives, thereby reducing overall investment. Verizon's cost of deploying an acous base station is about $200,000, while Helium achieves approximate coverage by deploying about 100 hotspot devices (total cost of about $50,000), with a cost reduction of about 75%.

In addition, in the field of AI data, traditional AI companies need to pay up to US$300 million per year of API fees to Reddit, Twitter and other platforms in order to obtain training data, and crawl data with the help of Bright Data (residential agent) and Oxylabs (data center agent). Not only that, it is also facing increasing copyright and technical restrictions, and the compliance and diversity of data sources are difficult to guarantee.

Grass cracked this dilemma through distributed Web Scraping, allowing users to share idle bandwidth by downloading browser extensions, helping to crawl public web data, and obtain token rewards from it. This model greatly reduces the data acquisition cost of 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 per day.

In summary, a basic starting point for investing in DePIN is that decentralized physical infrastructure has the opportunity to do better than traditional physical infrastructure, or even do things that traditional methods cannot do.

As the intersection of Infra and Consumer

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

Infra projects generally have two characteristics: one is that they have strong technical attributes, such as ZK, FHE, MPC and other technologies with high thresholds, and there is a certain disconnection in market perception. Second, except for the familiar Layer1/2, cross-chain bridge, pledge and other projects that can directly reach end users, most Infra is actually toB. For example, developer tools, data availability layer, oracle, coprocessor, etc., are relatively far away from users.

These two points make it difficult for the Infra project to promote users' mindshare, which has poor communication. Although high-quality Infra has a certain PMF and income and can be self-sufficient in the time-travel cycle, the lack of mindshare makes it difficult to do listing in the later stage in a market with scarce attention.

On the other hand, Consumer is fortunately directed to end users and has a natural advantage in mindshare capture. But the new concept is easily falsified by the market, and may even plummet after hot spots are switched. Such projects are often trapped in a cycle from narrative-driven to short-term outbreaks to falsification recession, with a short life cycle. Examples include friend.tech and Farcaster, etc.

Growth, mindshare, and listing are all issues that have been discussed a lot in this cycle. Overall, DePIN can better solve the difficulties combined with the above two points and find a balance point.

DePIN is based on the real needs of the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have solid PMF and revenue, which are not easily falsified and are easily understood by the market. For example, Helium’s unlimited traffic package of $30 per month is obviously cheaper than the solutions provided by traditional operators. DePIN also has user needs and can capture mindshare. For example, users can download Grass' browser plug-in to contribute their idle bandwidth. Grass has reached 2.5 million users of the terminal, and many of them are non-encrypted native users. The same is true for other tracks such as eSIM, WiFi, in-vehicle data, etc., which are very close to users.

DePIN Investment Framework

Source: Messari, IOSG

direction

From intuition alone, 5G and wireless networks are the big markets, while on-board data and weather data are the small markets. From the demand side, whether it is a urgent need (5G) or a strong demand. Moreover, since 5G has a very large share in the traditional market, even if DePIN can capture a small part of it, the market capacity is quite considerable in terms of Crypto's size.

product

According to Grayscale's report, the DePIN model is especially suitable for industries with high capital requirements, high entry threshold, obvious monopoly pattern and insufficient resource utilization. Answering PMF questions essentially depends on two points.

Source: Hivemapper

On the supply side, does DePIN do something that was originally impossible, or has outstanding advantages over the original solutions (cost, efficiency, etc.). For example, in the map collection track where Hivemapper is located, there are at least three major problems with traditional map collection:

· Traditionally relies on professional fleets and manual annotations, which are expensive and have 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 through sales of dash recorders and uses crowdsourcing mode to turn data collection into something users are doing in daily driving. Guide users through token incentives and give priority to resources to high-demand areas. On the demand side, the products provided by DePIN must have real market demand, and it is best to have a strong willingness to pay. In the same example, Hivemapper can sell map data to companies such as autonomous driving, logistics, insurance, and municipalities, and key needs are verified. Regarding hardware, Multicoin begins with the 2023 article "Exploring The Design Space Of DePIN Networks". Here I will add some views.

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

· Manufacturing: Does the project design and manufacture the hardware themselves, or uses existing hardware? For example, Helium provides two types of own hotspots and supports the integration of existing WiFi networks. Or DePIN projects in the computing and storage class, you can directly use existing graphics cards, hard disks, etc.

· Sales: The clear price of sales means that users will calculate the return period based on potential returns. Helium’s home mobile hotspot costs $249, and DIMO’s on-board data collector costs $1,331.

· Distribution: How to distribute? Distribution involves many uncertainties: logistics timeliness, transportation costs, and delivery cycles starting from pre-sales, etc. For projects targeting globally, inappropriate distribution designs and means can greatly slow down the progress of projects.

· Maintenance: What do users need to do to maintain hardware? Some equipment may be depreciated or lost. The simplest maintenance example is Grass, where users only need to download browser extensions and do not require other operations; or Helium's hot spots, which only require a simple installation to run continuously. If solar power generation is involved, it may be more complicated.

Based on the above points, the simplest model is Grass' model - directly utilizing the existing network bandwidth, no manufacturing and distribution, users start without thresholds, and no sales, which helps quickly expand the network early in the project. Admittedly, projects in each direction have different hardware requirements. But the hardware is related to the friction of the initial adoption. The smaller the friction in the early stage of the project, the better. As the project matures, some friction can bring about retention and a certain degree of binding relationship. For start-up teams, they need to control the path selection and resource investment in hardware, and gradually progress rather than achieve it overnight.

Imagine if it is not easy to go from "manufacturing-sale-distribution-maintenance", then why should users participate unless there is a very strong and highly certain incentive?

Token Economy

Token mechanism design is the most challenging part of the DePIN project. Unlike projects in other fields, DePIN requires incentives to various participants in the network at an early stage, so tokens are required to be launched at a very early stage of the project. This topic is suitable for a new article to do some case studies, so this article will not be expanded.

team

In team matching, the founder needs at least one of the following backgrounds: First, he has worked in a traditional company in this field and has rich experience, and is responsible for actual implementation of technology and products. Second, he is crypto-native, understands the token economy and community construction, and distinguishes the preferences of crypto users and non-crypto users and the similarities and differences of mental models.

other

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

summary

Crypto has no real application to "break the circle" in this cycle, and it seems that we are still far from adopting users outside the circle. Some Crypto apps provide short-term incentives for users to use them, but they cannot last. The economic benefits derived from DePIN from the underlying layer may replace traditional infrastructure on the user side, thereby achieving sustainable application and large-scale adoption.

Source: Helium

Although the combination of DePIN and reality makes the development cycle longer, we have seen some light from the development of Helium Mobile: Helium Mobile cooperates with T-Mobile, and user equipment can seamlessly switch to T-Mobile's national 5G network. For example, when users leave the Helium community hotspot range, they will automatically access the T-Mobile base station to avoid signal interruption. Earlier this year, Helium announced a partnership with global telecom giant Telefónica to deploy Helium Mobile 5G hotspots in Mexico City and Oaxaca, beginning its expansion in South America. Telefónica's Mexico subsidiary Movistar has approximately 2.3 million users, and the cooperation directly connects these users to Helium's 5G network.

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

1. Compared with large enterprises with traditional monopoly, DePIN has more flexible deployment methods and means, and the token model can align incentives within the ecosystem. For example, the traditional telecommunications industry is usually occupied by several giants and lacks the motivation to innovate. Taking rural areas as an example, due to the dispersed population in the region, traditional operators have low return on investment and time-consuming, and traditional operators have no motivation to promote deployment. And through appropriate token economic design, network deployment can be encouraged in places with few hot spots. The same applies to Hivermapper setting higher incentives in places where map resources are scarce.

2. DePIN has the opportunity to bring positive externalities. From the Internet data collected by AI companies by purchasing Grass, street-level map data purchased by autonomous driving companies by purchasing Hivemapper, and the low-priced traffic package provided by Helium Mobile, it can be seen that DePIN can actually break out of Crypto, bring value to real life and other industries, and feed back to the entire ecosystem through the token economy. In other words, behind DePIN tokens is real value support, not Ponzi model.

Of course, DePIN also faces a lot of uncertainty: for example, uncertainty in the time cycle due to operating hardware, regulatory risks, due diligence risks, etc. In summary, DePIN is the track we focus on in 2025, and we will also output more DePIN-related research in the future.