Messari: The PoPW token distribution mechanism is changing the infrastructure of the real world

Messari
2022-08-05 16:44:34
Collection
Considering the success of Proof of Physical Work in various fields and its ability to provide value by establishing global infrastructure, PoPW is likely to ignite the next bull market.

Original Title: 《Using Crypto to Build Real-World Infrastructure

Original Author: Sami Kassab, Messari

Compiled by: Biscuit, Chain Catcher

Summary

  • Proof of Physical Work (PoPW) is an innovative token distribution mechanism that rewards participants for completing verifiable physical work in the real world.
  • Many protocols are leveraging the PoPW framework to incentivize supply-side participants to build hardware networks, including wireless, mobile, environmental, computing, and storage networks.
  • Crypto-economic protocols are powerful in incentivizing and coordinating human activities, making them very useful for developing decentralized infrastructure and hardware networks in the real world.
  • Using the PoPW framework, protocols can incentivize participants to build their networks, making it attractive for users to discover.

During market downturns, cryptocurrency critics become active, questioning whether the industry has any real use cases. Their arguments seem reasonable, aside from innovations in capital formation, the use cases of non-sovereign currencies, the removal of intermediaries, and breaking monopolies. However, in reality, crypto protocols have been so successful in coordinating activities in the digital realm that projects have begun to use crypto for real-world infrastructure.

Crypto-economic protocols can incentivize the development of real-world infrastructure and hardware networks through the coordination capabilities of blockchain technology. Millions of individuals can come together to deploy and operate infrastructure in a trustless, permissionless, and programmatic manner, rather than relying solely on a single centralized entity.

Multicoin Capital refers to this mechanism as Proof of Physical Work (PoPW). PoPW rewards users for performing verifiable physical work, such as deploying 5G hotspots. The protocol's algorithm verifies the status of devices and rewards the owners based on a set of predetermined rules. Many PoPW protocols are already coordinating hundreds of thousands of participants globally, covering areas such as wireless networks, mobility, environment, computing, and storage.

Proof of Physical Work

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There are two main types of infrastructure networks: fungible and non-fungible. Fungible infrastructure networks use hardware devices that are location-agnostic, with computing and storage protocols falling into this category, as their services do not depend on the hosting location of servers/nodes. A 1 TB storage space in Hong Kong is exactly the same as a 1 TB storage space in Singapore. In contrast, the location of wireless network hotspots is crucial, defining it as a non-fungible type of infrastructure network.

Many communities are building in the PoPW space, many of which are still in early stages. Most of these protocols are based on existing L1 to build applications. So far, applications in the PoPW track can be categorized into the following areas:

  • Wireless Networks
  • Logistics Networks
  • Natural Environment
  • Computing and Storage

Wireless Networks

Helium and Pollen Mobile are two prominent protocols operating in the decentralized wireless (DeWi) space. Helium currently consists of IoT and 5G networks, while Pollen Mobile focuses on 5G. These protocols incentivize supply-side participants (hotspot operators) to provide network coverage in exchange for token rewards. Additionally, participants earn fees for routing data through their hotspot services.

Logistics Networks

Logistics networks refer to the industry of transporting people and goods, with two emerging networks being Hivemapper and DIMO. Hivemapper is a decentralized map built by participants using dashcams. The protocol rewards supply-side participants (map miners) for driving or using dashcams to contribute to the network map.

DIMO allows users to own their mobility data to provide services in areas such as automotive finance, insurance, and maintenance. Supply-side participants (data miners) are rewarded for connecting hardware devices to their cars and contributing that data to the network.

Natural Environment

WeatherXM is a decentralized weather network supported by a distributed network of hardware devices. It allows supply-side participants (weather station operators) to earn rewards by deploying small weather stations and providing accurate weather services.
PlanetWatch is a decentralized global air quality sensor network. The protocol rewards supply-side participants (sensor operators) for streaming real-time air quality data back to the network.

Computing and Storage

The computing and storage category includes the most mature protocols in the PoPW space in terms of network usage and revenue. Filecoin and Arweave are storage networks with different models. Filecoin uses a contract-based storage model, while Arweave uses a permanent storage model. Both protocols incentivize supply-side participants (storage providers) to dedicate physical storage drives to store data in exchange for token rewards.
Render Network is a distributed GPU rendering platform. Its token economics are designed to reward supply-side participants (node operators) for dedicating GPU hardware to the network and completing rendering tasks.

Why Use Blockchain?

Building large physical networks typically requires significant capital injection and complex assurance systems, often necessitating large companies to construct them. This often leads to a few companies controlling the pricing structure and terms for users, preventing the formation of a free market.

Crypto-economic protocols fundamentally solve this problem, allowing globally distributed individuals to collaboratively guide the network in a permissionless and trustless manner. By co-building and maintaining the network and distributing all profits to supply-side participants, this is a more cost-effective solution.

Taking the decentralized storage platform Filecoin as an example, it demonstrates the benefits of using a decentralized blockchain solution. Compared to centralized infrastructure approaches (like Amazon S3), storage providers on Filecoin earn token rewards for providing storage capacity to the network, which has grown to over 17 EiB in two years. Furthermore, Filecoin does not charge high fixed rates but allows market participants to set storage prices.

In an article by Evan Conrad, he emphasizes that if Filecoin were a centralized entity, it would likely take a cut from the network's revenue. As the network becomes more popular, Filecoin's network effects continue to grow. In Filecoin's current situation, all value accrues to the protocol, making it "the cheapest commodity market where no single intermediary can take a cut."

Benefits of Using Crypto for Infrastructure

As described by Tushar Jain, Managing Partner at Multicoin Capital, there are two benefits to using crypto-economic protocols for infrastructure networks: the ability to rapidly scale networks globally and the creation of a system that is jointly owned by participants rather than a small group of shareholders.

Crypto-economic protocols allow users around the world to build permissionless networks in parallel. Participants can also focus on deploying infrastructure that meets local market demands. In exchange for establishing network supply, participants gain ownership stakes in the network, incentivizing them to grow it.

While the aforementioned protocols allow individuals to contribute to the network and earn passive income, they also open doors for franchise-like businesses. Mike Zajko, co-founder of Lattice Capital, describes the entrepreneurial opportunities:

Participating in these networks looks a lot like opening a franchise, which is a significant component of the economy (over 10%). You need some startup capital, physical real estate, some operational knowledge, and then the community and protocol will help handle the rest.

Hexagon Wireless is one such franchise business operating in the DeWi space. The company currently leverages their technical expertise and proprietary relationships to deploy hardware for Helium and Pollen mobile networks, accelerating the growth of DeWi.

Economic Model

Token incentives play a crucial role in building real-world infrastructure and solving coordination problems. Helium has proven this theory over the past year. It expanded its IoT network from 30,000 to over 900,000 physical hotspots distributed across 170 countries by rewarding hotspot deployers.

To initiate this economic model, project teams first need to provide rewards to users for completing verifiable physical activities in the real world:

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Supply-side participants are incentivized with inflationary tokens, targeting specific activities necessary for network growth. These rewards act as subsidies for supply-side participants. Typically, rewards support participants in building the network until it begins to generate sustainable fees from demand-side usage.

As the network develops, developers and product builders are attracted to the network. Additionally, the protocol's subsidies for its supply-side participants enable them to offer cheaper services, helping to attract more users.

End users begin to pay for network services, which can increase the income for supply-side participants and the protocol. This creates a positive feedback loop that can attract more supply-side participants and investors.

Value is typically captured through a Burn-Mint-Equilibrium (BME) model or a work token model. As network utility increases, supply is either burned through the BME model or collateralized by service providers through the work token model, with the reduction in circulation prompting token prices to rise. The continually rising token prices then attract more supply-side participants, creating a virtuous cycle.

The economic model of PoPW fundamentally resolves the chicken-and-egg dilemma. By using token rewards, protocols can incentivize participants to build the supply side of the network to a level that is attractive to users. This provides the initial momentum for crypto protocols to compete with Web2 companies.

Final Thoughts

Proof of Physical Work represents an innovative token distribution mechanism. Tushar Jain believes that new token distribution mechanisms may trigger the next bull market.

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Data shows that changes in token distribution mechanisms coincide with bull markets: PoW tokens in 2013, ICOs in 2017, IEOs in 2019, DeFi liquidity mining in 2020, and NFTs in 2021. Each new token distribution mechanism has coincided with a bull market. If this argument holds true, the next successful token distribution mechanism could usher in a bull market. Given the success of Proof of Physical Work across various domains and its ability to provide value through building global infrastructure, PoPW is likely to ignite the next bull market.

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