Binance Research: The Narrative Potential and Challenges of DePIN, Landscape and Industry Analysis

Original Title: "Depin An Emerging Narrative"
Original Source: JieXuan Chua, Brian Chen, Binance Research
Original Compilation: Kate, Mars Finance

Key Points

In recent months, the decentralized physical infrastructure network (DePIN) sector has become a prominent focus due to its vast potential market and extensive possibilities.

DePIN refers to infrastructure-related projects that utilize blockchain technology and cryptoeconomics, aiming to incentivize individuals to allocate capital or underutilized resources to create a more transparent and verifiable network, with the goal of achieving a more efficient scaling trajectory than centralized networks.

DePIN is a broad field composed of several sectors, each playing a different role in achieving the decentralization of network infrastructure. In this report, we will introduce developments in the fields of computing networks, wireless networks, storage, and sensors.

As the industry continues to evolve, we expect a surge in DePIN projects in the coming years. However, their long-term viability and success will ultimately depend on real-world applicability and remain to be tested in practice.

I. Overview

Among the various narratives that have gained attention in recent months, the decentralized physical infrastructure network (DePIN) sector has become a prominent focus. Due to its broad total potential market and the ability to scale infrastructure networks in a decentralized manner through bottom-up growth strategies, the industry is seen as having immense growth potential. Some even view DePIN as a paradigm shift in global resource allocation (including both physical and digital) and a transformative approach to scaling large-scale infrastructure.

In this report, we explore this emerging narrative. We first outline the basics of DePIN and how it works. Then, our analysis transitions to a top-down industry view, providing an ecosystem map and dissecting the landscape of various sub-industries. Finally, we examine the challenges faced by the adoption of DePIN, identify key market themes, and provide insights into the future prospects of the industry.

II. What is DePIN?

DePIN refers to infrastructure projects that utilize blockchain technology and cryptoeconomics to incentivize individuals to allocate capital or underutilized resources to create a more transparent, decentralized, and verifiable infrastructure network.

These projects can be broadly categorized into physical or digital resource networks, each encompassing different domains. Regardless of their focus, these projects typically operate under similar operational models, emphasizing collective ownership and prioritizing distributed systems over centralized market structures.

Figure 1: Conceptual diagram of centralized and decentralized systems; Source: Binance Research

How DePIN Works

DePIN projects typically involve several key components:

1. Target Resources: Specific resources that the project aims to provide to consumers. Common types of resources include storage capacity and computing power.

2. Hardware: The necessary equipment used by network contributors to run the network and collect data or resources for the products. Depending on the type of resource, the costs, manufacturers, and usage of these devices may vary.

3. Incentive Mechanism: A predetermined mechanism that rewards supply-side contributors with tokens, incentivizing them to contribute resources and provide reliable services. Some projects may also implement penalties to deter malicious activities.

4. Supply-side Contributors: Individuals or entities that provide unused or underutilized resources to the network. In return, they typically receive token rewards.

5. Consumers: End users who participate in the network to use the services provided by DePIN projects.

DePIN projects first identify the specific resources they aim to provide. These resources vary widely, including storage capacity, computing power, bandwidth, hotspot deployment, and more. At the core of these projects is an incentive system designed to encourage positive contributions and deter harmful behavior. The system primarily uses native tokens to reward compliant behavior.

For example, Filecoin is a leading DePIN project in cloud storage that compensates storage providers with its native token, FIL. These providers often must stake collateral as a security measure. If they fail to provide reliable services or engage in malicious activities, they may face penalties such as withholding rewards, collateral slashing, or removal from the network. Conversely, consumers use the project's tokens to pay for service fees, such as using FIL to pay for storage fees on Filecoin.

Supply-side contributors are an integral part of DePIN projects, as the network relies on them to provide services. In Filecoin, they are storage providers, while in projects like Helium and Hivemapper, they are individuals setting up the necessary hardware to provide wireless coverage or map data.

Figure 2: DePIN projects aim to facilitate a self-reinforcing cycle to sustain their ongoing growth; Source: Binance Research

Having a self-reinforcing growth cycle will aid the sustainability of DePIN projects. Token rewards serve as useful incentives to overcome the "cold start" challenge of attracting supply-side participants. As the network scales, demand should rebound as consumers begin to use the network's services. Given that service payments are typically made in network tokens, increased adoption should translate into higher token prices, further incentivizing contributors. With demand and supply growing in sync, this virtuous cycle can continue, sustaining the project's ongoing growth.

III. DePIN by Industry

The origins of DePIN can be traced back several years, even before the term was officially coined. This is not surprising, as the fundamental principles of DePIN closely align with the spirit of the crypto industry. However, the sector initially did not gain significant attention or traction as it does now, hindered by immature infrastructure development, limited public awareness, and a smaller crypto user base. Despite these challenges, projects related to DePIN have been steadily building over the years, leading to a currently diverse landscape, as shown in Figure 3.

It is important to note that this map only showcases a small portion of DePIN projects. According to data from IOTeX's DePINscan, approximately 160 DePIN projects have been recorded. The classification of these projects may also vary depending on how DePIN projects are defined. Regardless of these nuances, it remains evident that the industry is experiencing sustained growth and expansion.

Source: IOTeX, Binance Research

As shown in the ecosystem map above, DePIN is a broad field composed of multiple sectors. Each sector plays a different role in achieving the decentralization of network infrastructure and powering various use cases. In this section, we will delve deeper into each of them, sharing how they work and highlighting relevant case studies.

Please note that mentioning specific projects does not constitute Binance's endorsement. Instead, the cited projects are used solely for illustrative purposes.

Computing Networks

Decentralized computing networks utilize distributed computing resources to perform complex computational tasks. These may include analyzing large datasets, running complex artificial intelligence (AI) algorithms, or any other tasks requiring computational power. By connecting idle systems to those in need of computation, decentralized computing networks act as a bridge between the demand and supply of computing resources.

Given the importance of computation in today's digital age and the rise of emerging technologies like blockchain and AI, the demand for computing resources has been steadily increasing. Additionally, the surge in AI development has led cloud computing companies to demand these chips in large quantities. This has resulted in long waiting lists, with wait times extending up to nearly a year in some cases. This is where decentralized computing networks come into play. They provide an alternative to existing solutions dominated by centralized cloud providers and hardware manufacturers. In this regard, decentralized computing networks are leading the shift of power away from centralized cloud providers (such as Amazon Web Services and Google Cloud) and introducing competition through an open market operated by numerous providers.

Broadly speaking, decentralized computing networks incentivize computing power suppliers to provide idle computing resources to those in need by establishing a bilateral market. Furthermore, the pricing of decentralized computing networks is competitive, as suppliers incur no significant additional costs to provide computing power to the network.

Case Study: Akash Network

Akash Network enables users to deploy their own cloud infrastructure or sell idle cloud resources to others. Akash likens itself to the Airbnb of server hosting.

It has built a marketplace that allows users to rent computing resources with spare capacity from others. This allows Akash to tap into a global market estimated to have 8.4 million data centers with underutilized resources.

Currently, the network offers over 8,900 CPUs, 171 GPUs, 45 TB of memory, and over 583 TB of storage. In practice, Akash's users can utilize the network for any general computing functions.

Akash caters to two key markets for computing demand, pushing underutilized computing resources to market in an open and permissionless manner:

High-performance chips: Crucial for complex computing tasks such as AI training, but with limited market supply.

Consumer-grade chips: Used for general tasks, as well as in places with significant unused computing capacity.

Notably, the pricing for using Akash services is highly competitive, often just a fraction of what other centralized cloud providers charge. A key contributor to this is its "reverse auction" system, which allows customers to submit their desired prices and lets suppliers compete for business.

Figure 4: Akash Network's pricing is competitive; Source: Cloudmos, as of January 25, 2024

Note: Pricing for 1 CPU, 1GB RAM, and 1GB Disk

As explored in our recent report on the intersection of artificial intelligence and cryptocurrency, decentralized computing networks like Akash are also riding the wave of AI growth, seeing increased activity on their platforms. High-performance GPUs are critical in numerous machine learning and AI applications, and the widespread adoption of large language models has led to a surge in demand for them. Over the past year, active leases on the Akash network have more than doubled compared to early 2023. Leases represent the rental of computing resources.

Figure 5: Surge in active leases on the Akash network in Q4 2023; Source: Cloudmos, as of January 25, 2024

Wireless Networks

Decentralized wireless (DeWi) networks support the deployment of networks such as 5G, WiFi, low-power wide-area networks (LoRaWAN), and Bluetooth using cryptographic incentives.

Given the substantial funding required to build wireless network infrastructure, this field is primarily dominated by large telecom companies that possess the necessary scale and financial strength. Consequently, the industry has traditionally been controlled by a few players. DeWi networks offer an alternative where many independent entities or individuals coordinate the deployment of wireless infrastructure with the help of cryptographic incentives.

Broadly speaking, there are currently four types of decentralized wireless networks:

Cellular 5G: 5G offers high download speeds and low latency.

WiFi: WiFi networks provide connectivity to a network in a specific area.

LoRaWAN: LoRaWAN is widely used for communication in the Internet of Things (IoT).

Bluetooth: Bluetooth can transmit data over short distances.

In terms of mechanisms, DeWi networks typically use tokens to guide the initial phase, incentivizing operators to invest in and deploy hardware. These token rewards provide operators with monetary support and a small return on investment, encouraging them to continue operating even if the network has not yet generated sufficient fees from users. Over time, as the network scales and economies of scale are achieved, the combination of lower unit economics and better coverage should theoretically attract more users to the network, generating more revenue for operators. The ultimate goal is to achieve a self-sustaining network where user-generated fees can exceed operational costs and any additional investments required to develop the network.

Case Study: Helium

Helium is a global decentralized wireless infrastructure project that provides wireless coverage for IoT devices and cellular devices supporting LoRaWAN. Its flagship product, Helium Hotspot, was launched in 2019 to provide wireless access for IoT devices. Since then, Helium has also expanded its product range to include 5G coverage.

1. Helium IoT Network

The Helium IoT Network is a decentralized network that uses the LoRaWAN protocol to provide internet connectivity for IoT devices. Example use cases include automotive diagnostic tools, environmental monitoring, and energy usage monitoring.

2. Helium 5G Network

The Helium 5G Network is supported by thousands of user-operated nodes. Helium envisions the future of mobile networks as a combination of large operators and crowdsourced 5G hotspots. This is driven by consumer expectations for higher bandwidth and lower latency, necessitating denser networks and more nodes, which increases site acquisition costs. The crowdsourced model of the Helium 5G Network eliminates site acquisition costs, enabling users to participate in providing high-bandwidth coverage. Interested operators can participate in the network by purchasing FreedomFi gateway hardware, allowing them to provide cellular coverage.

Operators are rewarded with MOBILE tokens.

Following the nationwide launch of Helium Mobile's $20 monthly unlimited data, text, and call plan, along with a surge in sales of the Solana Saga smartphone (which offers a 30-day free subscription to Helium Mobile), the Helium Network has witnessed a spike in new hotspots in recent months.

Figure 6: Increase in new Helium hotspots in recent months; Source: Dune Analytics (@helium-foundation), Binance Research, as of January 25, 2024

Helium's ecosystem is supported by several tokens:

HNT: This is Helium's native token, which is key to facilitating network usage, as it is burned for "data credits" used for data transmission. Hotspot hosts can also exchange network tokens (such as IOT and MOBILE) for HNT.

IOT: This is the protocol token for the Helium IoT Network, mined through data transmission revenue and coverage proofs by LoRaWAN Hotspots.

MOBILE: This is the protocol token for the Helium 5G Network, awarded to those providing 5G wireless coverage and validating the Helium network.

Additionally, Data Credits (DC) are the only accepted payment method for data transmission on the Helium network, priced at $0.00001. For example, on the IoT network, users pay 1 DC for every 24-byte data packet transmitted. As more data is transmitted and more Data Credits are burned, subnets (such as the IoT network) will earn more HNT tokens, rewarding and incentivizing their activity.

Overall, the aforementioned tokens serve as utility tokens for services within the network and incentivize operators to maintain and operate the necessary infrastructure. Since its launch, Helium has expanded its network to over 970,000 hotspots, enabling it to cover countless IoT and mobile devices in a decentralized manner.

Storage

Decentralized storage systems operate on a peer-to-peer (P2P) network model, where user-driven storage providers (SPs) or miners allocate unused computer resources and earn rewards in the project's native tokens. Unlike centralized systems, where a single entity manages data, decentralized storage encrypts and shards data, distributing it across the network. This process enhances accessibility and ensures data redundancy.

Figure 7: Conceptual illustration of centralized and decentralized storage systems; Source: Binance Research

The distinction between centralized storage and decentralized storage primarily depends on two aspects: security and cost.

Centralized storage systems store data through a single entity using one or a few servers, which introduces potential single points of failure. This can lead to issues such as data breaches and potential system outages, jeopardizing customer data. Additionally, user privacy is at risk. The infamous "Facebook-Cambridge Analytica data scandal" clearly highlights these concerns. In contrast, decentralized storage systems can reduce security risks and enhance data resilience by distributing data across a global network of nodes.

Cost is another key factor in the comparison. An analysis released in May 2023 highlighted that decentralized storage is, on average, about 78% cheaper than centralized storage. This price difference is even more pronounced in enterprise-level data storage, where costs can be up to 121 times higher. This disparity can be attributed to the significant capital investments and related overheads required for centralized storage infrastructure. In contrast, decentralized storage leverages the availability of global surplus computing resources. Furthermore, while the centralized storage market is oligopolistic—where a few tech giants influence pricing—the decentralized storage market is largely driven by open market forces.

Despite potential security vulnerabilities and higher costs, centralized storage still excels in certain areas, particularly user experience and product maturity. These systems often provide a more user-friendly interface for the average user, complemented by comprehensive product suites to meet various computing needs beyond just storage. The combination of user-friendly design and all-encompassing solutions has contributed to its continued dominance.

Figure 8: Centralized storage vs. decentralized storage

Case Study: BNB Greenfield

BNB Greenfield is the third blockchain in the BNB Chain ecosystem, a storage-centric blockchain supported by a series of SPs. Greenfield aims to serve as the foundational storage for the BNB ecosystem and EVM-compatible addresses, distinguishing itself through its inherent integration with the BNB chain. This unique connection allows it to leverage the vast DeFi ecosystem of BNB Chain and its large developer community.

BNB Greenfield operates on a dual-layer architecture: a PoS-based blockchain secured by BNB staked validators and a storage network maintained by storage nodes. The role of validators is to store metadata on-chain, verify data availability, and secure Greenfield. In contrast, SPs handle the actual storage of data and provide various storage services.

A key feature of BNB Greenfield is its cross-chain programmability, allowing users to integrate their data with financial applications in the BSC ecosystem. The cornerstone of this cross-chain functionality is the native cross-chain bridge, complemented by a relayer system that connects Greenfield and BNB Chain. These components work together to facilitate interaction between the two ecosystems.

Figure 9: BNB Greenfield's cross-chain architecture; Source: BNB Greenfield

Decentralized storage services like BNB Greenfield have a wide range of applications.

Their use cases extend beyond blockchain-related scenarios to include various practical applications. Examples include:

Blockchain Data Storage: Layer-1 blockchains contain a vast amount of historical data.

This data can be efficiently stored on BNB Greenfield to reduce latency on L1 and enhance data accessibility. Additionally, BNB Greenfield provides a cost-effective solution for storing Layer-2 transaction data.

Decentralized Social: Decentralized social networks can leverage BNB Greenfield, allowing creators to maintain ownership of their content and data.

Personal Cloud Storage: Users can transfer encrypted documents, images, and videos across devices. Access to these files is maintained through personal private keys.

Website Hosting: BNB Greenfield can be used by users as a tool in their website deployment toolkit.

Looking ahead, BNB Greenfield is undergoing several developments aimed at improving user experience and advancing the utility of decentralized storage. In a recently released roadmap, users can expect enhanced performance, cross-chain support, and AI adoption, among other features.

Figure 10: BNB Greenfield roadmap; Source: BNB Greenfield, Binance Research

For more information on decentralized storage networks and BNB Greenfield, please refer to our previous report "Traversing Decentralized Storage."

Sensors

Decentralized sensor networks help monitor and capture data from various environments in a secure and transparent manner. These networks consist of a grid of devices equipped with sensors that can collect a range of data, from traffic and weather conditions to local street maps. By adopting a decentralized and bottom-up approach, decentralized sensor networks enhance data integrity and reliability while reducing the possibility of data manipulation or censorship.

In a world where countless devices continuously generate data around us, decentralized sensor networks optimize the utilization of our data-rich environments by collecting such data.

The field has several subdomains, each involving different forms of data collection:

Environment: Monitoring and analyzing environmental conditions such as air quality, weather conditions, and water levels.

Energy: Measuring energy-related data such as production and consumption.

Location and Mapping: Collecting geographic information for urban planning, navigation, and other location-based services.

Supply Chain: Collecting and verifying sustainability claims, sources of production materials, etc., to enhance transparency in the supply chain.

Smart Environment: Monitoring data such as traffic patterns, pollution levels, or foot traffic.

Mobility: Collecting traffic-related or vehicle-related data.

Case Study: Hivemapper

Hivemapper is building a global decentralized mapping network that collects up-to-date high-resolution data in a permissionless manner. Hivemapper relies on a community of contributors using vehicle dash cams to collect 4K street-level images. These contributors range from rideshare drivers to delivery drivers and enthusiasts. Additionally, a group known as "AI trainers" engages in image analysis using Hivemapper's Map AI engine, transforming it into valuable information for customers.

As payment for data consumption, the network's native HONEY token is used by consumers of map data (such as companies). Contributors are also rewarded with HONEY tokens for their services, incentivizing them to expand the network. In practice, contributors share in the value created by the demand for map data.

Figure 11: How contributors participate in Hivemapper; Source: Hivemapper, Binance Research

Hivemapper covers over 1,920 regions, mapping roads on all continents except Antarctica. Specifically, it has mapped over 112 million kilometers of roads, including over 7.2 million unique kilometers of roads. The ratio of total road kilometers to unique road kilometers indicates coverage frequency, which translates into higher accuracy due to the repeated collection of data. Hivemapper claims that the frequency with which the network views locations is 24 to 100 times that of other services like Google Street View.

Hivemapper's extensive coverage is supported by a global network of 38,500 contributors across different countries/regions. Similar to trends observed in other DePIN projects, we have also seen an increase in activity on Hivemapper in recent months. For instance, the number of new contributors each week has recently increased.

Figure 12: Increase in the number of new contributors each week in recent months; Source: Dune Analytics (@murathan), as of January 17, 2024

The opportunity in the digital mapping market is enormous—estimated to reach $18.3 billion in 2023 and projected to grow to $73.1 billion by 2033.

By providing up-to-date maps, Hivemapper also unlocks new use cases that existing solutions cannot achieve. This includes providing home insurance companies with access to the latest data on external home conditions and enabling developers of autonomous vehicles to obtain the latest road information and awareness of construction areas. Hivemapper's Bursts feature also allows users of map data to request new data on demand, further enhancing the utility of the network.

IV. Key Themes and Challenges

In this section, we will explore the potential future trajectory of DePIN projects and discuss some challenges they must overcome for broader adoption.

Key Themes

Looking ahead, we anticipate several noteworthy developments.

DePIN coexisting with traditional infrastructure players: Given that the latter possess substantial capital resources and mature infrastructure, it is unlikely that DePIN will replace traditional networks in the short term. Nevertheless, DePIN can facilitate a resource-driven sharing economy and allow for last-mile coverage where traditional players may not be financially viable, providing a feasible solution to expand the current landscape. Therefore, a more likely scenario is that DePIN networks coexist with traditional infrastructure players, complementing any last-mile coverage and offering solutions that allow smaller entities or individuals to participate in infrastructure building.

DePIN powering Web2 frontends: It is undeniable that direct interaction with DePIN may be technically too complex for the average person, which may be a factor in the relatively slow adoption compared to existing Web2 services. In addition to focusing on improving user experience and user interfaces, we hope that DePIN projects can collaborate with traditional players or Web2 companies to expand their reach. In practice, users may interact with Web2 frontends without realizing that the underlying backend leverages DePIN and blockchain technology. This could lower the steep learning curve and perceived risks associated with cryptocurrencies, making the use of DePIN products as user-friendly as products in the Web2 space, but with the added advantages of cost-effectiveness and transparency.

Enhancing token utility and composability: Most DePIN tokens primarily serve as payment mediums for accessing project services. While this provides basic utility, one of the most compelling aspects of blockchain technology is its composability within a broader on-chain ecosystem, particularly in DeFi. The ability for users to earn additional yields or explore different use cases with their earned tokens can further enhance the appeal of participating in DePIN projects.

The Filecoin Virtual Machine and the intrinsic integration of BNB GreenField with BNB Chain illustrate this potential. These projects go beyond the basic utility of merely using FIL and BNB for data storage, providing users with opportunities to engage with their tokens within a broader ecosystem. Although these extended uses are still in their early stages, they hint at potential future directions that could stimulate the growth and adoption of DePIN projects.

Challenges

Despite the transparent and verifiable systems of DePIN projects, challenges remain that could affect their widespread adoption.

Price volatility affecting supply and demand dynamics: The inherent price volatility of tokens may deter some from participating in DePIN projects. Given that supply-side contributors are compensated in the project's native tokens, price fluctuations introduce uncertainties that could impact their profitability. While hedging strategies may mitigate this issue, they may not be feasible for less sophisticated network participants or tokens with smaller market capitalizations.

This also affects the demand side of the equation, considering that tokens are used to pay for network services. Rapid surges in token prices without corresponding adjustments in service prices may deter potential users. Therefore, well-designed token economics and operational models are crucial for mitigating price volatility.

Users primarily driven by profit: Although DePIN projects have clear value propositions, the performance of their native tokens plays a critical role in attracting and retaining users. When token prices are on the rise, it is generally easier to attract more users interested in participating in the upswing. Conversely, during bear markets, declines in token prices and profitability may lead network participants to exit the projects. This situation is particularly challenging for tokens with smaller market capitalizations and lower liquidity, potentially leading to a vicious downward spiral.

Overcoming this challenge is not easy, but projects that can provide valuable services and align with product-market demands will attract a broader audience rather than just profit-driven participants.

Lack of public awareness: Awareness is crucial for the adoption of DePIN products. While the services these projects typically offer are often more transparent and sometimes more cost-effective than centralized alternatives, they remain largely unknown outside the crypto industry. This limited awareness can be attributed to the general public's unfamiliarity with blockchain technology and the complexities of digital assets. Consequently, only a small portion of the population appreciates the advantages of these decentralized services.

V. Conclusion

DePIN projects leverage distributed and transparent systems to enhance the scalability and efficiency of infrastructure. This approach aligns with the principles of the crypto industry. By utilizing token economics, DePIN can forecast crowdsourced resources such as storage capacity and computing power, eliminating the need for substantial initial capital investments. Their potential applications across various fields indicate a vast potential market.

However, challenges remain in achieving widespread adoption. In the short term, the likelihood of fully replacing centralized counterparts is low, and we are more likely to see an intermediate space where DePIN and traditional infrastructure providers coexist.

Looking ahead, achieving a more seamless user experience and expanding the on-chain use cases of DePIN tokens are key trends to monitor. While we expect the number of DePIN projects to increase as the industry evolves, their ultimate long-term viability and success will depend on real-world applicability, which has yet to undergo thorough practical testing.