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A Deep Dive Into DePin (Decentralized Physical Infrastructure)

A Deep Dive Into DePin (Decentralized Physical Infrastructure)

Table of Contents

A 2024 Update

DePIN has become one of the hottest narratives going into the anticipated 2024 bull run. The 2024 Binance Research report is bullish on DePIN:

“Decentralized Physical Infrastructure (“DePIN”) is one of the most interesting innovations in the crypto world and something to keep a close eye on in the coming year.”

Here’s what you need to look out for in DePIN in 2024…

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Keep an Eye on DePIN Ecosystems

Binance Research serves up the game plan on a platter:

“Solana has very much become the home of DePIN, playing host to the likes of Helium, Render, Hivemapper, and others. DePIN forms part of the class of dApps that are seen as ‘only possible on Solana,’ owing to its localized fee markets and high throughput.”

Binance seems to be onto something because the results speak for themselves:

  • Helium is up 386% since November 1.
  • Render is up 76% since November 1.
  • Hivemapper is up over 1,900% since November 1.
Solana seems destined for more DePIN price upside although Ethereum L2s may have something to say about that following the 2024 Ethereum upgrades.

The Market Opportunity

Messari lists DePIN as one of the Top 10 Trends in Peer-to-Peer Infrastructure in 2024. The crypto analytics firm outlines the rationale for investing in DePIN:

“Cloud infrastructure services are a $5 trillion market cap sector in the legacy markets, and DePIN sits at just 0.1% of that. […] A 1% “insurance premium” to eliminate Big Tech deplatforming risks would lead to a 10x in DePIN utilization rates. It doesn’t take much to move the needle, especially with AI-driven demand for GPUs and compute in general.”

The TLDR: the market opportunity is massive and even a tiny flow into DePIN could cause several X’s in price upside.

2024 Could Be The Year of DePIN Storage

Cloud and storage networks are one of the main categories of DePIN. Experts are betting on them to become the main DePIN narrative in 2024.

Zoomer Oracle, a well-regarded key opinion leader on X/Twitter, wrote a detailed long-form post, outlining his thesis for a potentially promising storage protocol.

Messari dedicated an entire subchapter to “DePIN Storage Wars.” The company writes:

“In a tech ecosystem driven by outrageous hype cycles, the economics behind DePIN networks are easier to understand (“Airbnb for digital storage”), and their tokens are easier to underwrite. If decentralized networks eventually take 10% of the cloud market, the results in this sector will be eye-popping.”

The bullish tone makes it clear: Messari and social media think DePIN storage solutions could really provide a solution to growing storage demand fueled by AI and Big Data companies. Or at least the narrative around it could develop.

Original Article:

Could web3 physical infrastructure become one of the big crypto narratives in 2023?

Messari seems to think so. Why else would they anoint the space with the new title “decentralized physical infrastructure?”

Vox populi decided in a highly representative 136-vote Twitter poll:

Call it DePIN, Proof of Physical Work (PoPw), Token Incentivized Physical Networks (TIPIN), EdgeFi, or whatever you want, this umbrella term describes “real-world stuff” that makes crypto run. CoinMarketCap Alexandria went into the DePIN trenches and explains:

  • What is DePIN and how does it work?
  • The main sectors and main players in web3 infrastructure
  • Two case studies of decentralized infrastructure projects

What Is DePIN?

Web3 infrastructure lacked a good buzzword. How can the sector pump without a snappy term that opens the wallets of VCs and retail alike?
Good thing Messari is memeing the decentralized physical infrastructure term into existence.

DePIN refers to infrastructure projects using tokenization to coordinate and incentivize their bootstrapping phase. Individuals build up the supply of the infrastructure in a decentralized manner and get rewarded with token incentives.

The key idea is to flip the traditional model on its head. The traditional way is for corporations in telecommunications or energy to invest a lot of time and money into building and maintaining infrastructure. Web3 companies try to outsource this build-up and maintenance process to a token-incentivized army of volunteers and monetize later once the coverage rate is high enough.

This is the same liquidity incentive principle used in other web3 sectors, such as DeFi (yield farming), play-to-earn, or move-to-earn.

Source: Messari

What Belongs to Decentralized Physical Infrastructure (DePIN)?

The four categories in DePIN are:

  • Cloud/storage networks: File storage, relational database, CDN and VPN networks.
  • Wireless networks: 5G, LoRaWAN (Internet of Things).
  • Sensor networks: Interconnected devices embedded with sensors that collect real-time data from the physical world, such as maps.
  • Energy networks: Aggregate distributed energy sources to create a more resilient and efficient energy grid.

What Are the Benefits of Decentralized Physical Infrastructure (DePIN)?

DePIN’s declared goal is to create a more equitable and efficient process to bootstrap infrastructure networks compared to legacy companies’ top-down, capital-intensive approach.

If you ask web3 VCs like Multicoin Capital, they will extol the following benefits of the decentralized approach:
  • You can build infrastructure 10-100x faster.
  • It is better synced to hyper-local market needs.
  • It can be far more cost-effective.
  • It can be scaled across jurisdictions in a permissionless way.
  • The network is credibly neutral and collectively owned.
  • Blockchains support frictionless micropayments and integration with DeFi.

That is, of course, the best-case scenario. We will look at the limitations of DePIN in the case studies below.

What Are the Trends and Challenges of Decentralized Physical Infrastructure (DePIN)?

The combined market cap of the global top 10 cloud companies is $5 trillion. Not bad. If web3 companies could take a tiny share of that market, they would be in fantastic shape. Messari sees several trends and challenges in this sector:

Source: Messari

Trends

Most people access the internet from a mobile device these days. Crypto is the one big exception, simply because much of it hasn’t developed a good mobile interface. But to succeed, crypto will have to go mobile eventually. Technological trends like AI tools and more capable smartphones point towards more mobile traffic, not less.

Moreover, with the possibility to produce and consume content in a decentralized way increasing (again, AI), the demand thereof will also increase. And with it the demand to access and store it, which concerns wireless and storage providers.

Challenges

DePIN faces several challenges, explaining why the sector hasn’t taken off yet. For instance, as we will still explore further, the incentive models are highly dilutive and often sound better than they are in reality. The time horizon to build applications and demand is significantly longer than for mere consumer apps. The market is big, but companies compete against web2 giants like Amazon, Microsoft and Google.

In other words, disrupting legacy competition will take a lot more effort and professionalism than in purely retail-facing sectors of web3 like gaming.

What Is the Flywheel of Decentralized Physical Infrastructure (DePIN)?

Web3 enthusiasts point out that tokenization allows globally distributed individuals to collectively bootstrap a network in a permissionless and trustless manner. Ideally, the costs of building the network are borne by and distributed among the supply-side participants, usually retail, who get paid token incentives to bootstrap the network.

Once the network has built an infrastructure base, it attracts users. These users pay to use the network and boost further supply-side growth. In the best-case scenario, this kicks off the virtuous cycle of more demand fueling more supply, which is incentivized by token rewards that grow in value, thanks to growing demand.

Source: Messari

Supporters argue that only tokenization via blockchains makes this incentive scheme possible.

Popular Projects in Decentralized Physical Infrastructure (DePIN) According to Sectors

Messari’s DePIN sector map shows the most relevant players in the web3 infrastructure space divided into 4 sectors. Here are the top 10 DePIN companies:

Source: Messari

Server Networks

Filecoin

Filecoin is a P2P storage network that creates a decentralized market for storage space. Users pay to store their files and providers receive Filecoin (FIL) for providing storage space. Nodes propose storage and retrieval deals and pay for them. Filecoin wants to create an open market for data storage and rival established providers on price and decentralization.

Arweave

Arweave (AR) allows for the permanent censorship-resistant storage of information. It operates with blockweave, a set of data blocks that link to previous blockweave history. Miners can earn AR tokens by proving they have been randomly verifying data. The protocol aims to be a permanent storage solution for NFTs and DeFi.

Sia

Sia is another decentralized storage platform that offers a marketplace for idle hard drive capacity on computers around the world. Hosts determine the market rate they want to list storage space at and do so in Siacoin (SC).

Storj

Storj is a decentralized cloud storage layer that allows users to upload files. These get encrypted and split up into 80+ pieces and distributed across storage nodes. Storj offers different options for decentralized club space with up to 50GB of storage.
Learn more about file storage providers here: Top Decentralized File Storage and Sharing Services.

Wireless networks

Helium

Helium (HNT) is a network for wireless infrastructure. Users can buy Helium hotspots and earn the native HNT token for providing wireless coverage. Helium aims to provide coverage for Internet of Things wireless connections and 5G. It has scaled to more than 900,000 hotspots today.

Pollen

Pollen Mobile is a mobile network provider that works according to the same principle as Helium does. Users can acquire hotspots and earn the Pollen Coin in return. Its goal is to build a decentralized mobile coverage network that is completely owned by its users.

Sensor Networks

Hivemapper

The Hivemapper Network is a decentralized version of Google Maps, where participants map street data with dashcams they have to acquire. They are rewarded with the native HONEY token for driving or walking around with a dashcam and contributing to the Hivemapper mapping process.

DIMO

The DIMO Network enables users to earn rewards for their mobility data by allowing them to connect their car to a hardware device. The data can be used by automotive finance, insurance, maintenance and others. Users earn the native DIMO token.

Energy Networks

React

React Protocol is a community-owned network connecting batteries to power markets. It aims to help stabilize the grid by connecting batteries and sharing their excess energy. This is also supposed to clean the energy supply and provide users with a steady flow of passive income that is dubbed connect-to-earn.

Arkreen

Arkreen builds “web3-powered infrastructure for globally-distributed renewable energy resources.” It wants to build renewable energy infrastructure in a decentralized way, although the company is still in its infancy and has no token or product.

Decentralized Physical Infrastructure Case Studies

So is decentralized physical infrastructure the next big narrative? We all ape, and Lambos for everyone?

Or are we two years late to the party? Check out the following token valuations.

Helium (HNT):

Filecoin (FIL):

The two biggest protocols in the DePIN space saw a huge rally during the 2021 bull market, but would we see a resurgence in these projects, or will Helium and Filecoin show why decentralized physical infrastructure may not be the big hype it is made out to be?

Helium — The Air Got Sucked Out

If you read about Helium in older reports, the project sounds like it is on a path to success. Here is an excerpt from a Messari report on DeWi (decentralized wireless):

“In July 2019, Helium pioneered the DeWi movement with its LoRaWAN network designed to power the Internet of Things (IoT). Through the success of its LoRaWAN network, which has grown from 15,000 hotspots in January 2021 to over 900,000 hotspots today, Helium has shown that token incentives can be used to build out distributed infrastructure networks. Helium’s LoRaWAN network stands as the largest IoT network in the world, operating in over 182 countries.”

What’s not to like about the largest IoT network in the world?
Well, it turns out that Helium raised a lot of money, but its use case was, let’s say, exaggerated. Here are Helium’s weekly revenue numbers over the last year:

Source: Tokenterminal

Allegedly, most of that revenue was driven by selling hardware to new network providers. That would mean that supply was going up, but there was almost zero revenue from actual demand for Helium’s product.

Web3 critic, Liron Shapira, made the case that Helium was built on an overblown use case and took in a measly $6.5K in revenue from demand for data in June 2022. The incentives, he said, are not sustainable.

Helium CEO, Amir Haleem, responded that Helium is in it for the long run, and demand for its use case isn’t even there yet:

It remains to be seen whether the demand is likely to show up soon, however Helium’s has pivoted to 5G help, although that did not help its cratering revenue and token price.

Forbes wrote a damning investigative article titled “Crypto Darling Helium Promised A ‘People’s Network.’ Instead, Its Executives Got Rich.” The article alleges that the company’s executives and their friends accumulated a majority of the tokens earned at the project’s start, hoarding much of the wealth generated in its earliest and most lucrative days. It also identifies 30 digital wallets that appear to be connected to Helium employees, their friends & family and early investors.

As is often the case with crypto projects, the rewards were massively frontloaded. Each hotspot earned an average of 33,000 HNT in August 2019, but today it’s only 2 HNT per month.

Can Helium rebound?

Nothing is impossible. But you’d be a brave man to bet on it.

Filecoin — The Storage Provider That Got Filed Away

Filecoin is betting on decentralized storage space becoming a thing. But alas, the protocol’s revenue numbers paint a similar picture to Helium:

Source: Tokenterminal

Monthly revenue has plummeted so much from its bull market peak that recent months do not even register anymore. Zooming in on the last year:

Source: Tokenterminal

How did Filecoin fall from grace that much?

The article titled Is Filecoin Dead? explains some of the protocol’s issues. The short version: storage space providers gamed the system for token rewards until the summer of 2021. That made Filecoin look bigger than it actually was and inflated its utility. The project addressed this by introducing Filecoin Plus, a new product providing free storage space to verified users. Rewards for storage providers caused revenue to plummet to almost zero and 99% of users to shift to Filecoin Plus.

That is why storage deals are up exponentially (who doesn’t want free storage space?):

Source: Messari

The utilization rate of the available storage space is up to 3%. Still low, but an exponential increase from its previous base:

However, now Filecoin has a new problem. Unless the company finds a good use case for its FIL coin (50% of the circulating supply is posted as collateral), it will face a selling wave at some point. Moreover, users have to sign up for Filecoin Plus, which is not very permissionless.

Is Filecoin done?

Maybe not. But it has a whole host of problems to sort out.

Conclusion

So is the decentralized physical infrastructure sector just a big ponzi, or are there real use cases and demand?

As so often, it depends. As good as some of these projects may sound, you should ask yourself:

Can this project really compete with established web3 companies?

And can it earn revenue to sustain massive token valuations?

The DePIN space is worth monitoring, but be careful about believing the hype and as always, do your own research (DYOR).

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