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

Grayscale released a research report on DePIN at the beginning of this year, showcasing leading DePIN projects and their market capitalization. Since 2022, DePIN and AI have been viewed as two new directions for Crypto investment. However, the DePIN space seems to have been lacking a flagship project. (Helium can be considered a leading project, but its emergence predates the concept of DePIN; the projects in the table such as Bittensor, Render, and Akash are more often categorized under the AI track.)

It can be seen that DePIN has not yet seen a sufficiently strong leading project to break the ceiling of this track. This means that there may still be some Alpha opportunities in the DePIN track in the next 1-3 years.

This article will outline the investment logic of DePIN from scratch, including why DePIN is a noteworthy investment track and presenting a simple analytical framework. Since DePIN is a comprehensive concept that covers many different sub-tracks, this article will explain the concept from a more abstract perspective while also providing some specific examples.

Why focus on DePIN investment

DePIN is not just a buzzword.

First, it is important to clarify that decentralizing the infrastructure of the physical world is not just a fancy idea, nor is it simply a "narrative hype", but something that can be practically implemented. In DePIN, there are indeed scenarios where decentralization can "achieve" or "optimize" certain functions.

Here are two simple examples:

In one of the main tracks of DePIN - the telecommunications sector, taking the US market as an example, traditional telecom operators (such as AT&T, T-Mobile) typically need to invest billions of dollars in spectrum license auctions and base station deployments, with the deployment cost of macro base stations covering a radius of 1-3 kilometers ranging from $200,000 to $500,000. 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 leads to high telecommunications service prices.

Helium Mobile spreads the early costs to each user through community crowdsourcing, allowing individuals to connect to the network by purchasing hotspot devices for only $249 or $499 and become "micro-operators". This drives community-driven networking through token incentives, thereby reducing overall investment. The cost for Verizon to deploy a macro base station is about $200,000, while Helium can achieve a similar coverage with about 100 hotspot devices (total cost about $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 per year in API fees to social platforms to acquire training data, and they rely on residential proxies and data center proxies to scrape data. Moreover, they are increasingly facing more copyright and technical restrictions, making it difficult to ensure 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 public web data and earn token rewards from it. This model significantly reduces the data acquisition costs for AI companies while achieving diversity and geographical distribution of data. According to Grass statistics, there are currently 109,755,404 IP addresses participating in the network from 190 countries, contributing an average of 1,000 TB of internet data daily.

In summary, a fundamental starting point for investing in the DePIN direction is that decentralized physical infrastructure has the opportunity to perform better than traditional physical infrastructure, and even achieve things that traditional methods cannot.

As a junction between infrastructure and consumers

As the two main lines of Crypto investment, infrastructure and consumer projects each face some issues.

Infrastructure 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, aside from the familiar Layer1/2, cross-chain bridges, staking, and other projects that can directly reach end users, most infrastructure is actually aimed at enterprises. For example, developer tools, data availability layers, oracles, co-processors, etc., are relatively distant from users.

These two factors make it difficult for infrastructure projects to drive user mindshare and have poor dissemination. Although high-quality infrastructure has a certain degree of product-market fit and revenue, allowing it to be self-sufficient across cycles, the lack of mindshare in a market with scarce attention makes later market entry very challenging.

On the flip side, consumer projects have the inherent advantage of directly targeting end users, which gives them a natural edge in capturing mind share. However, new concepts can easily be disproven by the market, and may plummet after a shift in hot trends. These types of projects often fall into a cycle of narrative-driven short-term surges followed by disproving decline, and they tend to have short lifecycles.

Growth, mind share, and listing coins are all issues that have been widely discussed during this cycle. Overall, DePIN can effectively address the dilemmas associated with the two points mentioned above and find a balance.

1. DePIN is built on the real demand in the physical world, such as energy, wireless networks, etc. High-quality DePIN projects have solid product-market fit and revenue, are difficult to disprove, and are easily understood by the market. For example, a certain mobile network project offers an unlimited data plan for $30 a month, which is clearly cheaper than the plans provided by traditional operators.

2. DePIN also has user-side usage demands, which can capture mind share. For example, users can download a browser extension for a certain project to contribute their idle bandwidth. Currently, this project has reached 2.5 million end users, many of whom are non-crypto native users. Other sectors such as eSIM, WiFi, in-car data, etc. are similar, being very close to users.

DePIN Investment Framework

Direction

Intuitively, 5G and wireless networks are large markets, while in-vehicle data and weather data are smaller markets. From the demand side, we need to consider whether it is a necessity (5G) or if the demand is strong. Moreover, since the market share of 5G in traditional markets is very large, even if DePIN can capture a small portion of it, the market capacity looks quite considerable when viewed under the scale of Crypto.

Product

According to a report from a certain research institution, the DePIN model is particularly suitable for industries with high capital requirements, high entry barriers, obvious monopoly patterns, and underutilized resources. Addressing the question of product-market fit essentially involves looking at two points.

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

• Traditional reliance on professional fleets and manual labeling is costly and lacks scalability.
• A well-known map service has a long update cycle and low coverage in remote areas.
• Centralized map service providers monopolize data pricing power

The project allows users to collect data by selling dash cameras, 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, the project can sell map data to companies in autonomous driving, logistics, insurance, and municipalities, validating key demand.

Regarding hardware, a certain investment institution's article in 2023 opens with a discussion on hardware. Here, I would like to add a few supplementary points.

The timeline of hardware can be summarized as "Manufacturing --- Sales --- Distribution --- Maintenance."

#Manufacturing

Does the project party design and manufacture their own hardware, or do they use existing hardware? For example, a certain wireless network project provides two types of proprietary hotspots and also supports integrating existing WiFi networks. Alternatively, for computing and storage-type DePIN projects, they can directly use existing graphics cards and hard drives, etc.

#Sales

The clear pricing in sales means that users will calculate the payback period based on potential returns. One project's home mobile hotspot is priced at 249 USD, while another project's in-vehicle data collector is priced at 1,331 USD.

#Distribution

How to distribute? Distribution involves many uncertain factors: logistics timeliness, transportation costs, and the delivery cycle from the start of the presale, etc. For projects targeting a global scope, 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 have depreciation or wear and tear. The simplest example of maintenance is a certain project where users only need to download a browser extension with no other operations required; or for a hotspot of a certain wireless network project, a simple installation is sufficient for it to run continuously. If it involves solar power generation, it may be more complex.

Considering the above points, the simplest model is to directly utilize the existing network bandwidth, without the need for manufacturing and distribution. Users can start without any barriers and there is no need for sales, which helps to quickly expand the network in the early stages of the project.

Indeed, the hardware requirements differ for projects in each direction. However, hardware is related to the friction of initial adoption. The less friction there is in the early stages of a project, the better. As the project matures, some friction can lead to retention and a certain degree of binding relationships. For startup teams, it is necessary to control the choice of paths and resource investment in hardware, progressing gradually rather than all at once.

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 want to participate?

Token Economy

The design of the token mechanism is the most challenging part of the DePIN project. Unlike projects in other fields, DePIN requires incentivizing various participants in the network from the early stages, which necessitates the launch of tokens at a very early phase of the project. This topic is suitable for a new article to conduct some case studies, and this article will not elaborate further.

Team

In the team composition, the founder needs at least one person with 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 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 collecting road images and data in certain areas, are clearly very sensitive.

Summary

Crypto has not really had any "breakthrough" applications in this cycle, and it seems that we are still a long way from adoption by users outside the circle. The short-term incentives offered by some Crypto applications are