Exploring the future of DePIN Unveiling value, innovation, and market potential

Unleashing Potential Discovering DePIN's Future through Value, Innovation, and Market Potential

Author: DWF Labs Research Source: medium Translation: Shan Ou Ba, Lian Guai

In the constantly evolving web3 and Internet of Things (IoT) space, a revolutionary concept has emerged that challenges traditional connectivity paradigms and paves the way for a decentralized future. DePIN (Decentralized Physical Infrastructure Network) is an innovative framework at the intersection of decentralized technology and IoT.

In this article, we will delve deep into the unique value proposition offered by “DePINs” compared to existing solutions. Additionally, we will explore some key challenges the project may face and the key elements we are looking for in building projects in this vertical.

Understanding DePIN: Origins and Market Potential

Messari coined the term DePIN at the end of 2022, which stands for Decentralized Physical Infrastructure Network. This term accurately describes web3 protocols that aggregate and provide services or resources from decentralized physical machine networks incentivized through token models.

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To understand the importance of DePIN, it is necessary to delve into the origins and evolution of the Internet of Things itself. The birth of the IoT can be traced back to the 1980s. The basic concept revolved around integrating computing capabilities into everyday objects to enable them to communicate with each other. As the internet rapidly developed from the early 2000s, the proliferation of interconnected devices sparked a need for standardization. Under the leadership of the Internet Engineering Task Force (IETF), the Internet Protocol (IP) became the framework for cross-network data transmission. With time, new iterations of IP continued to evolve, with the latest IPv6 breaking the limitations of the current infrastructure by being able to support the ever-changing demands of the internet.

The rapid expansion of the internet brought forth various challenges, with security and privacy becoming prominent concerns. The interconnected nature of devices brought about significant risks, as a vulnerable device could compromise the entire network. Data breaches are among the most common examples of IoT vulnerabilities, with notable increases in data breaches in the United States since the mid-2010s. This provides a compelling reason to explore decentralized alternatives to protect the dynamic and ever-evolving IoT environment.

Despite advancements in the IoT space, the pursuit of efficiency improvement remains. This driving force has given rise to Helium – a decentralized wireless network aimed at improving connectivity and fostering fair user participation. In a realm dominated by oligopolies, the emergence of decentralized alternatives provides valuable opportunities for users and potential founders. This fuels healthy competition and has the potential to launch superior products. The IoT market is rapidly growing, with revenue expected to double within five years and potentially exceed 2 billion dollars by 2028. Therefore, these decentralized alternatives, or what we call “DePINs,” undoubtedly have incredible growth potential in the coming years.

Exploring the DePIN spectrum: From physical machines to digital resources in the evolution of Web3

In the dynamic landscape of DePIN, the definition covers a wide range. Blockchain itself can be seen as fitting the DePIN concept. They operate through miners or validators in decentralized networks, ultimately providing key resources known as “consensus”. The concept of DePIN may have existed since the theoretical birth of decentralized networks like Bitcoin, but it has only recently gained official recognition.

To provide clarity, it is crucial to map DePIN across the entire spectrum. This range covers from a decentralized physical machine network that emphasizes hardware specificity and software agnosticism, to a decentralized digital resource network that emphasizes software specificity and hardware agnosticism.

Many decentralized resource networks can be traced back to their corresponding versions in Web2, as their goal is to address existing problems more efficiently. However, some are created to meet specific needs on the blockchain. In the Web2 world, such solutions were either impossible or unnecessary. For example, oracle solutions like Chainlink are unique to Web3. They enable smart contracts to execute based on real-world data, maintaining trustlessness through the use of decentralized networks operated by independent oracle node operators.

There has been debate about whether solutions like Chainlink can be seen as DePIN. This depends on one’s interpretation of the physicality of nodes/service providers in the network, which typically run on separate machines. However, a more important consideration is the value these decentralized networks bring in comparison to centralized networks. By focusing on the advantages of decentralization, we hope to guide the development of Web3 and create real, substantive value for the masses.

The overarching value proposition of DePIN

Now that we’ve introduced the “what,” it’s time to explore the “why.” Every DePIN protocol has three main stakeholders, and they highlight the value propositions:

1. Demand-side users (consumers of resources)

2. Supply-side users (providers of resources)

3. The protocol itself (team and investors)

Considering all the stakeholders involved, decentralization effects can bring three unique value propositions to DePIN:

1. Economic efficiency of underutilized resources

The primary and most significant benefit of DePIN lies in the economic advantages they provide, benefitting all relevant stakeholders. The decentralization brings significant economic efficiency through the utilization of globally idle resources that would otherwise go to waste.

When it comes to decentralized computing, the assets of globally idle servers, GPUs, CPUs (supply-side) devalue or become obsolete over time, and now there is a way to monetize these assets. At the same time, DePIN protocols (middlemen) can aggregate these computing resources globally at lower integration and operational costs and offer them to users in need (demand-side) at lower prices. This also means that substitutable resources like computing power and bandwidth can be used more uniformly on a global scale, not just because of lower costs, but also because there is no need to establish infrastructure in different locations.

The global market size of cloud computing is 633 billion US dollars, with a projected Compound Annual Growth Rate (CAGR) of 16% from 2023 to 2032. Based on use cases, companies spend hundreds of thousands to millions of dollars on cloud computing demands, which can be greatly reduced through distributed computing.

For example, Akash is a decentralized network for cloud service providers that can aggregate and provide the necessary cloud computing capabilities to developers at a lower cost. Through decentralization, this service can be efficiently planned and can enjoy approximately 80% discounts compared to traditional centralized service providers such as AWS, Google Cloud, and Microsoft Azure.

Another potential source of economic efficiency is the ability to identify performance differences between nodes for different use cases. Certain nodes may specialize in producing/acquiring certain resources, and the DePIN protocol can intelligently allocate work to match the strengths of each node. This efficiency is similar to the economic efficiency brought about by global trade globalization, where each country naturally specializes in a set of resources and then trades them with each other’s non-specialized resources, creating an overall more efficient global economy. This further lowers the costs for the protocol and demand-side users, and allows supply-side users to focus on providing what their assets are best at, rather than trying to optimize everything.

2. Reducing barriers for stakeholders and geographic entry

DePIN fundamentally changes the dynamics of market access by significantly reducing barriers for resource providers and new projects, fostering a more inclusive and vibrant ecosystem.

Easy access to resources and services

DePIN simplifies the onboarding process for resource and service providers, removing unnecessary barriers and welcoming participants who meet the DePIN standards. This simplified approach has been proven effective, attracting a diverse range of contributors and strengthening the DePIN network. Storj’s success in having a larger supplier base than Filecoin reflects the positive impact of this accessible onboarding process.

Achieving cross-regional adaptability through localized solutions

DePIN can effectively expand across different jurisdictions at the same time. By leveraging incentive measures, DePIN can easily grow its network, bypassing the traditional expansion processes of centralized entities. Additionally, DePIN can utilize its decentralized structure to provide tailored resource solutions to different geographical and population communities. This flexibility ensures that resources can be universally accessible and highly relevant to specific local market demands.

Hybrid expansion with centralized configurations

DePIN can adopt a flexible expansion approach, combining decentralized and centralized resource allocation. For example, Storj optimizes scalability through centralized access and database management controlled by Storj satellites. This strategic hybrid model enables individual operators to protect the network with minimal infrastructure and achieve higher success rates in going live, as evident from Storj’s large supplier base (approximately 514k) compared to Filecoin (approximately 3.8k).

Essentially, DePIN fosters a more inclusive, globally responsive, and dynamically adaptable ecosystem for resource providers and project developers by lowering barriers and adopting a hybrid expansion approach.

3. Governance and Security

A decentralized network also enables the implementation of better governance systems. Users investing in the DePIN protocol from both the supply and demand sides can voice their opinions through voting and open governance proposals. This allows decisions to align with the best interests of all stakeholders and promotes proposals that have a synergistic effect on stakeholders. In contrast, centralized systems are driven entirely by investors, who are primarily concerned with personal financial returns.

The inherent trustlessness, security, and agility of resource provisioning are core features of DePIN. They do not incur the high costs associated with security and high-quality infrastructure required by centralized systems. Even if certain nodes fail, the DePIN network can still maintain service provision. In contrast, centralized service providers face single points of failure, and if their systems fail or are compromised, it can lead to significant disruptions. In 2022, various cloud service interruptions occurred, such as Google Cloud experiencing delays in January and Slack suffering a three-hour outage in February. Centralized providers like AWS faced a two-hour outage in July 2023 due to a power failure. While not common, the likelihood of individual nodes in the DePIN network independently crashing or being compromised is much lower, providing better reliability and security guarantees.

However, ensuring that these benefits truly provide value to stakeholders requires taking appropriate measures. When building DePIN, factors and obstacles that DePIN may face should also be considered, which is what DWF Ventures is looking for in the DePIN protocol.

Potential barriers to success and factors to consider

While DePIN does have the potential to create significant value for demand-side and supply-side users using the resources we have today, several factors need to be considered to form a successful DePIN project.

Some key factors to consider:

1. Scalability to match centralized players

2. Easy onboarding and adoption

3. Coordination of token economics and incentives

1. Scalability to match centralized players

While addressing economic benefits, DePIN must also ensure competitiveness in performance compared to centralized participants. The performance of the DePIN protocol is a driving factor for demand-side adoption, which in turn encourages supply-side adoption. The performance of the DePIN protocol can be managed in three main ways:

1. Hardware and software specifications

2. Addressable demand

3. Location sensitivity and density

Hardware and software specifications

The hardware and software specifications involve the requirements that supply-side participants need to meet to provide resources or services of satisfactory quality. DePIN may require specialized equipment/programs to ensure consistency in service quality or allow compatibility with more common devices like mobile phones or laptops. The need for specialized equipment/programs can enhance reliability and uptime for end-users but can create additional entry barriers for service providers. In most cases, performance is prioritized as any entry barrier is typically worth it for service providers when there is strong demand for their services.

The project can also choose to become the exclusive distributor of its dedicated equipment/software or collaborate with third parties for outsourcing production/development. Outsourcing can promote competition, which may enhance the provider’s capabilities and reduce costs. However, if production is too dispersed among different suppliers, there is a risk of quality issues, or if suppliers cannot meet the project’s requirements, there may be a risk of supply shortages.

For example, Helium started creating its own hotspots as early as 2019 but only had around 15,000 hotspots by the end of 2021. At the beginning of 2021, a proposal was passed to allow third-party manufacturers to join as long as they meet the requirements, which could result in exponential growth of hotspots from early 2021 to 2022. Helium currently has over 28 manufacturers, which helps decentralize and provide users with a wider range of choices. One of the cheaper hotspots can be purchased from Sensecap for only around $130, which is much cheaper than the original Helium hotspot, which costs around $495.

Solvable Needs

One aspect that many DePINs lack compared to centralized peers is the full range of functionalities provided by these more mature participants. Centralized cloud service providers like AWS offer users a large tool ecosystem for deploying applications and developing products, whereas many DePINs nowadays focus on single services such as computing power or data storage. This demonstrates the growth potential of the DePIN space to match the functional scope of centralized solutions.

OORT is taking a step in this direction by building a decentralized computing and storage infrastructure through a network of service providers spanning different use cases vertically and horizontally. OORT achieves this by having three layers of service providers:

1. Archive Nodes: Data storage nodes from Filecoin, Storj, Crust, and Arweave.

2. Edge Nodes: OORT network releases devices with household PC capabilities for decentralized computing.

3. Super Nodes: Public and private cloud service providers like Tencent Cloud, Aliyun, Seagate, etc., catering to higher-end computing and storage demands.

This means OORT can offer a full range of cloud computing services while retaining the advantages of decentralization, as any requirements for intensive or simple computing and big or light data storage can be met by one or more of the service providers in the three layers.

Location Sensitivity and Density

For certain projects, achieving a sufficient level of user density within specific geographical areas is crucial for ensuring the effectiveness and practicality of the services they provide. This is similar to hosting in traditional technologies and is particularly important for services that heavily rely on location-based data and interactions, such as map services or ride-hailing platforms.

For map services like Hivemapper, having a highly concentrated user base in specific regions is crucial for providing accurate and up-to-date information on the platform, which affects the utilization of the product. For example, Hivemapper’s coverage is currently mostly concentrated in the United States and a few European countries. As the coverage in regions like East Asia is more scattered, Hivemapper has established bounties as part of the targeted mapping program under MIP-2. Extra rewards have been allocated to the fields listed in the proposal to incentivize more comprehensive coverage of these areas. This is what enables Hivemapper to be on par with centralized alternatives.

Similarly, for ride-hailing services, having a sufficient number of drivers and passengers in specific regions is crucial to ensure the best experience for both parties. The higher the driver density, the shorter the wait time for passengers and the more transportation options available. Drife is an example of a company that focuses on bringing drivers onto its platform in Bangalore, having recruited over 10,000 drivers so far. This ensures that passengers have a better user experience, thus generating a continuous demand for rides to match the supply of drivers. Therefore, achieving sufficient density in specific geographical areas is crucial for improving service performance.

2. Easy onboarding and adoption

The onboarding process is the initial stage of engagement between providers and the network. While hardware specifications play an important role, the steps after acquiring the necessary hardware are also crucial. Once the setup is completed, providers must monitor the hardware to ensure that the necessary conditions for earning rewards are met. Projects that require passive or active management by providers will affect the number of providers motivated to join.

For example, setting up a Helium hotspot is relatively simple for most users. For providers using Sensecap, the intuitive process of turning on the device and configuring Bluetooth is enough to start earning rewards. Although there is a one-time setup fee of $15, it eliminates the complexity of interacting with the blockchain, making it more attractive to a wider range of potential providers. Providers using the application can easily monitor the status of the hotspot in one interface, ensuring that it stays operational and passively earning rewards.

In contrast, projects like Spexigon require users to actively participate in the project to earn rewards. After purchasing the specified drone (DJI Mini 2, priced at about $339), users must personally fly and capture images from their location while ensuring compliance with local regulations. Additionally, since Spexigon focuses on capturing images in different geographical areas, users’ income potential may be limited by the surrounding environment. Therefore, the number of users who can join Spexigon is constrained by various factors ranging from joining, regulations, to the need for actively utilizing drones to earn rewards.

In general, easy navigation and quick startup programs will enable this project to reach a wider audience. However, this depends on the specific requirements and priorities of the project. For services that benefit from a large number of providers (such as Helium), this factor is more important than the management of high-quality providers.

3. Combination of Token Economics and Incentives

The last important factor that the DePIN protocol should carefully plan for is the utility and value flow achieved by the token mechanism. A great product needs an equally good token model to ensure that all stakeholders are incentivized in some way, allowing the token to accurately reflect the value of the project.

Firstly, we can look to Chainlink for a tried and tested token utility model to determine the basic token framework for DePIN. In terms of Chainlink’s token utility model, stakeholders are similar to any decentralized resource network:

1. Consumer users (token consumers)

2. Provider users (token recipients and stakeholders)

3. Team and investors (token holders)

Consumer users pay LINK tokens for Oracle services, while provider users receive LINK tokens in exchange for their services. This creates a demand for the token in a way that is directly related to the product demand.

Provider users also need to stake tokens to ensure service quality, otherwise they will face significant penalties. This encourages higher quality services and creates a demand for the token, which is directly related to the overall service quality of all service providers, and the token itself depends on the demand for the product – higher demand encourages more service providers to offer higher quality services.

Finally, token demand benefits token holders, which is what they seek. This creates more demand for the token among secondary market investors.

Therefore, consumer users are least concerned about the token price, while the team and investors are most concerned. Provider users are in the middle because they also have a certain exposure to the token through staking. Nevertheless, this framework creates a scenario where all stakeholders play a role in supporting the token price.

Token issuance must also be planned. In most cases, token issuance is part of early incentive activities to attract users. Considering the three stakeholders and the project’s perception of the difficulty of attracting these users to join the network, it makes sense to distribute token incentives among the three stakeholders. Of course, token issuance comes with inflation, so the project must also consider how to manage token issuance and destruction. The project must be careful not to rely too heavily on token issuance to incentivize consumer users, as these users should be attracted by high-quality products in the first place – that’s where everything starts. In general, token incentives should focus more on attracting provider users to meet the demand for high-quality products.

Some DePINs also allow demand-side users to make payments through alternative methods. As long as the received payment is used to purchase tokens for payment to supply-side users, this does not affect token demand. In fact, this just provides flexibility for demand-side users to choose their payment channels.

For the protocol itself, revenue can come from a portion of the fees paid by supply-side users from the demand side, or membership fees or licensing fees charged separately to demand-side and supply-side users. These revenue streams can be used to cover operational costs, and any excess revenue can be used to further increase token demand through revenue sharing or token buyback and burn mechanisms. Projects can also require token holders to stake tokens or provide liquidity to benefit from revenue sharing, thereby stabilizing token prices or increasing liquidity.

Shaping the next era of DePIN: What are we looking for?

At DWF Ventures, we believe that the success of the DePIN project lies in the fusion of specific elements. These elements include customized hardware specifications that meet the project’s resource requirements. In addition, a strong incentive model combined with a well-structured token economy is crucial for maintaining the project’s ecosystem. Prioritizing the creation of optimized user experiences for both supply-side and demand-side participants is also important. This ensures that the project can attract and retain users, ultimately contributing to the overall success and longevity of the project. These comprehensive factors lay the foundation for the success and sustainable development of the DePIN initiative.

Currently, we see that most existing DePIN projects have already established the first three elements, as most projects are primarily focused on incentivizing supply-side users. It is understandable that supply-side users are crucial for the initial network expansion. However, it is still important to invest significant resources in developing high-quality products that truly meet the demand—not just decentralized alternatives to existing services.

Nevertheless, the entire DePIN ecosystem is still relatively nascent. Despite the projects being established for many years, we anticipate more innovations and possibly a game-changing protocol emerging.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!