The full picture of the DePIN track: disruptive innovation or a "castle in the air"

Author: Jason, Puzzle Ventures

Introduction

DePIN stands for Decentralized Physical Infrastructure Networks, which, as the name suggests, refers to "decentralized network hardware infrastructure." In fact, the concept of decentralized hardware facilities has had vague practical applications for a long time, such as Bitcoin mining machines, which are a form of decentralized hardware network, and the grid management systems in the web2 world that also encompass certain decentralized hardware facility concepts.

To accurately define the concept of DePIN in this article, we adopt Messari's explanation of DePIN: a decentralized network of physical hardware facilities coordinated by multiple individual units using blockchain technology and token incentives, in a permissionless, trustless, and programmable manner. DePIN can also be described as Proof of Physical Network (PoPW) or Token Incentivized Physical Infrastructure Networks (TIPIN). In simple terms, it is a network composed of countless individual hardware units managed through token incentives, which can be used to serve specific projects.

Broadly speaking, the scope of DePIN is actually very wide. PoW mining machines are hardware facilities that maintain the operation of blockchain networks, but as traditional PoW models gradually become obsolete, mining machines are not within the scope of this discussion. This article will focus more on hardware networks that provide specific services on top of blockchain networks, rather than the blockchain networks themselves. From another perspective, the entire web3 world is built on DePIN networks, as the operation of each node is based on individual units renting their own servers. After clarifying these two logics, we can focus more on the research direction of this article: networks formed by hardware facilities that provide additional toB or toC services, but are managed and coordinated using blockchain networks, not including the blockchain networks themselves.

Figure 1

As shown in Figure 1, the entire vertical ecosystem of DePIN is more complex compared to general web3 projects. In the upstream, project parties need to consider the choice of hardware manufacturers, especially for projects involving high-precision sensors and chips, where suitable partners must be selected based on cost, quality, and scalability. In the midstream, project parties need to consider the usage scenarios of hardware devices and their integration with corresponding third-party service providers/carriers, which creates barriers based on users' own conditions; for example, the necessity of resources such as internet speed, electricity, and drone operation makes the overall usage cost for users relatively high. In the downstream, project parties must establish corresponding integration platforms based on project needs and design economic models that align with the flywheel effect, which poses a significant challenge to the project parties' understanding and experience. Overall, a well-developed DePIN project is a more complex and comprehensive web3 project.

Core Mechanism of DePIN

The foundational mechanism for building a DePIN network is that individual hardware units earn rewards by renting out the services they provide. To form this mechanism into a globally networked decentralized network, token economics must play a role. Therefore, the entire economic flow model can be summarized in Figure 2. This mechanism itself has already differentiated from traditional hardware industries, where traditional centralized hardware service providers often require a large amount of upfront capital to purchase or build hardware facilities, and their revenue depends on future orders. This model can only be undertaken by large enterprises with substantial financial resources or projects backed by government finances, while small and medium-sized enterprises can hardly participate. During the early bootstrapping period, DePIN operates as a dynamically spiraling mechanism, allowing users, providers, and platforms to participate and gradually grow while bearing relatively small risks. The key to this is the highly dynamic coordination role played by token incentives, where platforms can design one-time rewards, Staking APR, and other parameters based on the data from both supply sides to achieve dynamic balance.

Figure 2

For example, Render Network is a decentralized GPU rendering service matching platform that connects users executing rendering jobs with users having idle GPUs. In terms of token incentive mechanisms, Render Network first designed a rendering power unit standard based on OctaneBench (OB) according to its experience in the rendering industry, categorizing participating idle GPU users into three tiers based on different GPU rendering speeds. 100 RNDR tokens can pay for 2,500 OBh-20,000 OBh (depending on the GPU tier used), which concretely means that 100 RNDR tokens can be used for 50-100 hours with one RTX 2070 graphics card or for 5-10 hours with ten RTX 2070 graphics cards. This is the simplest initial token incentive model. After accumulating early users, Render Network gradually began to enter the fourth step, which is to further optimize and maintain the balance point of token rewards. In terms of optimization, Render Network mainly focuses on scalability, such as optimizing algorithms to reduce waiting times and establishing local APIs to improve upload and work efficiency. Regarding the balance of token rewards, the RNDR network voted in February 2023 to adopt the Burn-and-Mint Equilibrium (BME) model.

Figure 3

The essence of this model is that when users purchase GPU rendering services, they buy them with RNDR tokens, and the tokens used are destroyed after the task is completed, while the rewards for service providers are issued in newly minted tokens. The newly issued tokens will not only be based on task completion metrics but will also include customer satisfaction and be distributed comprehensively. In this way, RNDR tokens have a consumption scenario within the entire economy, and the balance can be adjusted based on the algorithm between the destroyed tokens and newly minted tokens, transforming the entire business model from a simple C2C to a more managed B2C.

Significance and Value of DePIN

The concept of DePIN is proposed due to its profound significance and value, whether for the future shape of the web3 industry or for the theoretical development of technological and economic revolutions.

Unit Cost and Scale Effect

DePIN's crowdsourcing model can reduce overall costs (or decentralize costs) and enable rapid scaling in a short time. In previous articles, we mentioned that decentralized storage platforms like Filecoin and Arweave can offer storage prices that are dozens to hundreds of times cheaper than Amazon S3, while the hotspot signals provided by Helium and the GPU rendering services offered by Render Network have price advantages over traditional centralized service providers. Helium's LongFi protocol has a coverage area 200 times that of WiFi, and for a device that needs to receive data packets, if it updates once every hour, the total annual cost is $0.09. In contrast, using a large signal service provider like AT&T would cost about $36. On the other hand, DePIN also reduces costs in other areas, including labor costs, factory costs, and operational costs, which are almost nonexistent due to its decentralized nature. Essentially, DePIN's light asset model is a disruptive innovation to the traditional heavy asset model of the ICT industry.

However, the flip side of the coin is instability and security risks. A completely permissionless hardware network managed by token incentives is, at least for now, merely an idealized concept. In practical applications, various issues may arise: imbalances in income and expenditure caused by token fluctuations leading to a "shutdown price," triggering a death spiral; operational errors caused by the unprofessionalism of individual nodes leading to failures; malicious behaviors by nodes, hacking issues, and so on. Therefore, addressing these problems requires a high level of business capability from the project team and further improvement of the overall blockchain infrastructure. It is foreseeable that different levels of demand correspond to different levels of service providers, with businesses requiring high security and stability opting for centralized large service providers, while high-frequency low-requirement data service needs can utilize DePIN. In other words, the significance of DePIN is akin to that of DEX in traditional finance.

Reutilization of Idle Resources

DePIN can concentrate dispersed idle resources and provide them to the most needy and valuable businesses. This topic is actually very interesting because the reutilization of idle resources can be said to create additional markets and value while also generating extra income for individuals. From the current mainstream DePIN projects, the collected idle resources mainly fall into four categories: hard disk storage space, communication bandwidth, GPU computing power, and energy. However, theoretically, we can imagine that more similar idle resources could be concentrated and reused in the future, such as cameras, screens, and cognitive abilities. This is essentially a global sharing economy attempt in the digital information field, akin to the management of idle funds in finance and the rental of idle vehicles in transportation.

But is this model of reutilizing idle resources a necessary factor for future economic development? Idle GPUs, hard disk space, or WiFi are indeed idle during non-normal usage or working hours, but is the complete coverage of all hardware at full capacity a state we hope to achieve in the future? These are actually deeper ethical questions. On one hand, the foundation of this large-scale sharing economy model is trust, so any error in the design of token incentives could lead to a small number of individuals exploiting loopholes for profit, resulting in losses for the majority of participants and users. On the other hand, large-scale access to hardware interfaces may lead to reduced privacy and data leakage issues. Therefore, under the current infrastructure environment, DePIN is not suitable for universal participation, and its market scale ceiling is lower compared to the sharing economy in non-digital information fields.

Regional Efficiency

Regional efficiency refers to the ability of distributed hardware to provide higher short-term efficiency compared to centralized hardware service providers, mainly in scenarios such as game rendering and computation. This characteristic has not yet been verified and widely applied, but it is still worth considering its significance. In the current multiplayer blockchain gaming scenarios, when a large number of users are online simultaneously, they need to call public RPC nodes to execute tasks such as reading smart contracts, and when nodes enter an overloaded state, it can cause delays or even crashes. This issue itself is a technical barrier to the scalability of blockchain applications, and there are currently some targeted measures, such as Altlayer's execution environment leasing, L2s, and gamefi-specific servers. Some DePIN projects are also attempting to solve this problem through denser hardware networks. For example, when exaBITS achieves sufficient density in its cloud computing hardware layout, it can instantly call nearby servers based on the geographical location of gamers, thereby distributing and addressing the computing or rendering demands of thousands of players more evenly. Similarly, when large-scale computing demands arise, such as GPU rendering or AI computation, a corresponding batch of hardware in the DePIN network can also meet the demand in a short time. From a theoretical perspective, the high-density, decentralized hardware laid out by DePIN can instantly meet short-term high-computation task demands, thus forming regional efficiency improvements. Of course, this is merely a hypothetical ideal state; the distribution of professional game servers may reach a certain breadth to meet the needs of global players, and the gaming experience brought by DePIN's comprehensive computing hardware may not necessarily be better than expected. Regardless, the imaginative space brought by DePIN is enormous, and a larger iceberg will gradually surface in the future.

Track Overview

The DePIN track is a special one, partly because its scope is very broad, and partly because many similar or analogous projects can be roughly classified as DePIN. This article is based on Messari's DePIN Sector Map and attempts to describe this track more clearly using a more detailed and three-dimensional breakdown logic.

Figure 4

Ecological Niche Dimension

Firstly, the most important classification dimension in the DePIN track is: the part of the blockchain network itself and the use of blockchain technology to achieve new businesses, a dimension not mentioned in the Messari report. There are two parts of the blockchain network ecosystem that can be adopted and optimized by DePIN: one part is data storage, invocation, and archiving, and the other part is the potential for L3 scaling. In the data storage part, independent storage layers represented by Filecoin and Arweave have become mainstream paradigms, and the decentralized storage nodes constructed by these projects are a form of DePIN. The other part consists of some L3 layers that attempt to enhance efficiency by renting external communication networks or GPU networks; these L3 layers are more inclined to customize solutions for specific problems but indeed call upon external hardware facilities of the blockchain network in the problem-solving process, so they can also be classified as DePIN. These two types of DePIN projects aim to address one or more needs of the blockchain ecosystem itself and can be considered components of the underlying blockchain network. The other dimension involves building new businesses based on the underlying blockchain network, using Blockchain as a Service to connect hardware facility providers and demanders in areas such as the Internet of Things, cloud computing, energy storage, traffic data, geographic and weather data, and image and video processing.

Device Dimension

Secondly, the DePIN track can be broken down by device dimension. Overall, the hardware devices involved in DePIN mainly consist of hard drives, databases, servers, communication signals, and GPUs that come with PCs or smartphones, while different categories of sensors and project-customized hardware represent another market. The customized hardware model led by Helium once became popular worldwide but has now fallen into a vortex of skepticism. According to data leaked by @Liron, Helium's data service revenue in June 2022 was only $6,500, while the number of hotspots deployed globally reached 900,000, leading to a significant imbalance between provider and user demand, which caused the value of the HNT token to plummet (since there were no additional revenue sources, balance could only be maintained through reduced token incentives). Helium's hardware products and concepts are sound; the core issue lies in the fact that the customized hardware model involves upstream manufacturers, whose profit goals are to sell more devices, while Helium's platform also aims to earn fees through device sales and registrations to some extent. In the absence of external revenue, it can only rely on existing device buyers or new device buyers for funding, which completely contradicts the original intention of the DePIN network. Currently, Helium is attempting to establish a "network of networks" that can be compatible with third-party wireless networks (5G, WiFi, CDN, VPN), but the effectiveness of this is still unknown.

From Helium's case, we can see that if the customized hardware model is not well managed in terms of layout and development pace, it can lead to a death spiral. Other more innovative devices include Spexigon's drone photography and Geodnet's spatial weather stations, which are full of imagination. However, when considering the probability of success for these projects, we should focus on several key indicators: 1. The cost of purchasing hardware and the payback period; is the project primarily selling hardware or providing services? 2. Are there solid, already cooperating service buyers using this network? 3. Does the hardware itself match the home environment and not consume excessive resources?

Field Dimension

Finally, the DePIN track can also be split from the field dimension, which refers to the specific types of services provided. The IoT and unlimited communication fields led by Helium represent one area, while the GPU field, focused on GPU rendering and video transcoding, represents another, and real-life data and image collection dominated by various sensors represent yet another. Hivemapper establishes a map data updating mechanism using dashcam hardware, Spexigon builds a high-definition, three-dimensional image library using drone cameras, and DIMO creates a connected vehicle information system using cars as hardware. These projects share a common characteristic: unknown demand. In the currently relatively mature web2 ecosystem, many aspects such as maps, photo capturing, and vehicle information can be partially or completely replaced by various web2 products, and the only advantage of these projects is that users can receive token incentives. Token incentives are not everything in web3; the significance of the DePIN era lies in connecting real life with web3 through hardware facilities, allowing web3 to better integrate with people's lives, and the true explosion of demand for DePIN may still need to wait for a better opportunity.

Latest Developments and Potential Issues

To fully understand the current development status of DePIN projects, we analyze the latest developments and community responses of the two leading projects—Helium and Render Network—and attempt to identify potential development bottlenecks.

✦Helium

Helium completed over $300 million in financing in 2021-2022, and early device sales once reached a FOMO level. As of now (May 2023), Helium has deployed 460,000 hotspots globally, covering 192 countries and 77,000 cities, and continues to add hotspots daily. However, despite such a perfect start, Helium's community reputation has experienced a dramatic decline, completing a plot reversal from "hard to obtain devices" to "selling at low prices." The main issues that have arisen include:

1. Miner income issues. The average price of a mining machine is around $500, and the current HNT income is about $20/month, leading to extreme imbalance between income and costs. Of course, after Helium migrated to Solana and converted to a new IoT token income, some miners' situations have slightly improved, but they still fall far short of expectations (as shown in Figure 5). According to the latest data from Heliumtracker.io, the recent average daily income per hotspot is around $0.2, while the average daily income for the $MOBILE 5G network is about $3.6, although the coverage requirements for 5G hotspots are higher.

Figure 5

2. Professional miners do not have an advantage. Operating a mature miner network requires not only ordinary enthusiasts but also the participation of professional miner teams. Helium's Proof of Coverage mechanism requires hotspots to maintain a distance of 500-1000 meters from each other, which is unfriendly to dense deployments, leading to the traditional model of professional miner teams deploying machines densely not being advantageous in the Helium project.

3. Helium migrated to the Solana network on April 20 this year, transforming into a project leaning towards the application layer. However, Solana's reputation and the fallout from the FTX incident have indirectly brought negative impacts to Helium, and Helium's abandonment of L1 network construction has caused some community core members to lose interest. From Helium's official Twitter, the benefits of migration include reduced transaction fees, stronger market integration capabilities, and a shift in programming language to attract more developers (originally an obscure Erlang), but the biggest problem is that it has diminished the unique appeal of the Helium network, transforming it from an L1 level project into a Solana ecosystem project.

From the latest community feedback, this migration has brought many technical issues for ordinary participants, such as the conversion from IoT to HNT and not receiving rewards, which are unfavorable factors for new user participation and old user retention. Overall, Helium is a pioneer in the DePIN track, having once sparked high enthusiasm and potential paradigm shifts, but based on Helium's current operational status, it cannot yet validate the future value of DePIN.

✦Render Network

Render Network's parent company OTOY is a leading project in rendering software, and its web2 product Octane has been adopted by projects in the film and music fields, including Disney and music producers. The project concept of Render Network is to provide a higher magnitude of decentralized rendering support for the future metaverse. From a demand perspective, Render Network provides essential services for all rendering needs in the future metaverse (dynamic NFTs, metaverse gaming), while Helium seems to be actively creating demand. As shown in Figure 6, Render Network completed 6 million and 9.4 million frames in 2021 and 2022, respectively, and $RNDR has been continuously circulating within this context.

Figure 6

From recent project dynamics, the adjustments made by the project team are beneficial for the long-term development of the project:

1. The RNP-001 proposal approved the previously mentioned BME token model, significantly enhancing the liquidity and supply-demand balance of tokens. Although this is merely a theoretical economic model optimization, it has had a considerable impact on community confidence, as seen in the price trends of $RNDR.

2. The RNP-002 proposal approved the decision to migrate to Solana and explained the main considerations: developer community, TPS, liquidity, transaction fees, programming language, and smart contract integration. This proposal was also considered from the perspective of the project's future scalability and ultimately received 99.26% of the votes. After the RNP-002 proposal was approved, community satisfaction and token prices both increased positively (the token price rose by 43% within two days), demonstrating a good relationship between Render Network and the community.

3. The RNP-003 proposal approved the Render Network Foundation's need for team expansion and token usage rights for grants necessary for future development, and this proposal also received a high approval rate of 99.9%. Render Network ensures that participants receive sufficient rewards while requisitioning a portion of newly minted tokens to develop the project ecosystem, which aligns with the community's long-term ecological interests.

In summary, Render Network is supported by an experienced parent company like OTOY, has a foundation and token mechanism that aligns with the spirit of web3, and can balance project development with community interests while maintaining good relationships with the community, making it a benchmark project in the current DePIN track.

Conclusion

The DePIN track can be seen as both a "new bottle for old wine" and a completely imaginative track that breaks through industry boundaries. The hardware network based on decentralized storage and computing remains an important underlying infrastructure for the entire web3 ecosystem, while also providing lower-cost backend designs for the application layer. Meanwhile, the hardware facility network centered around GPUs and sensors is attempting to establish a new service rental and matching market.

In the future, key directions worth our attention include:

1. Pan-entertainment DePIN
A pan-entertainment DePIN network composed of wearable hardware such as GoPro and AR glasses is an imaginative track. The essence of entertainment upgrading is experience upgrading, and the pan-entertainment network based on DePIN can not only enhance immersive participation in entertainment (supply side) but also bring more three-dimensional and dynamic entertainment methods (demand side). The industries involved will include sports, live streaming, gaming, media, etc., and how to combine DePIN with these fields to create a positive flywheel model is something we look forward to.

2. Real-world Data
The value that DePIN brings to society is inseparable from the application of data elements. From the current development trend, sensors have formed an interactive mechanism with meteorological data, motion data, and image data as input and output ports for real-world data, and more types of data can be captured in more ways in the future. Additionally, some real-world data are difficult to capture through centralized systems, and the decentralized nature of DePIN can more effectively capture those dispersed yet important data, leading to a complete industrial chain in the subsequent processes of data storage, usage, and transformation, thus offering significant market scale potential.