Much of the crypto industry exists in the ether, both figuratively and literally. Data moving on blockchains, lines moving up and down on price graphs, and other mostly intangible things.
But a hot new trend that venture capitalists are salivating over promises a direct connection to the real world: running infrastructure using blockchain. Projects like the Helium protocol, which powers wireless networks with a token-powered ecosystem, and Filecoin's data storage platform.
The not-so-catchy term for all of this is decentralized physical infrastructure network, usually shortened to DePIN. A notable amount has already been invested, a sign that venture capital firms see potential. In total, his top DePIN projects have raised more than $1 billion, according to a report on Crypto.com.
“We believe DePIN is a category that has the potential to host a killer app with a billion users,” Pranav Kanade, portfolio manager of VanEck’s Digital Assets Alpha Fund, said in an interview. “These users end up using the blockchain without necessarily realizing that they are interacting with a cryptocurrency product.”
However, despite obvious interest from the VC community, DePIN faces one of the oldest challenges in cryptocurrency: relatively few customers.
In total, the DePIN project holds tens of billions of dollars worth of tokens. But how much revenue do they make as a group? Rob Haddick, general partner at crypto venture capital fund Dragonfly, said it's around $15 million a year. “Most of the protocols are not constrained by supply, they are constrained by lack of demand,” he said in an interview.
Nevertheless, DePIN is quickly emerging on the list of cryptocurrency buzzwords.
The DePIN project is blockchain-based and operates on physical hardware infrastructure in a decentralized manner. They often use token reward systems to incentivize users to help build the network. This field covers a wide range of areas including wireless connectivity, data collection, computing, and data storage, to name a few.
Traditionally, infrastructure such as wireless networks has been completely centralized. Major companies like AT&T, Deutsche Telekom and China Mobile have complete control over their phone networks, customers pay for their services, and users have only so much influence.
Helium's DePIN-driven network, on the other hand, is decentralized. Ordinary people can set up hotspots and earn rewards in HNT tokens by helping run wireless networks. Other of his DePIN projects have similar community-driven systems.
According to research by Crypto.com, the market capitalization of all DePIN tokens exceeded $25 billion as of February. Compute, storage, and artificial intelligence accounted for the bulk of that.
That's an eye-catching amount, said Christopher Newhouse, a decentralized finance (DeFi) analyst at Cumberland Institute, but the market capitalization wasn't driven by large amounts of retail investor money. Rather, he added, DePIN has so far been a playground for large institutions and venture capital.
“This could be a good opportunity to get involved and get some DePIN-related tokens while people aren’t looking,” Newhouse said in an interview.
There are countless other distractions for retail traders at the moment. To name just two, Bitcoin (BTC) is hitting new all-time highs and memecoins are seeing huge gains. “There's a very retail-driven craze going on for hot coins,” Newhouse said. In comparison, DePIN tokens are not widely available on retail-friendly exchanges and may be difficult to purchase.
Newhouse said he is investigating several liquid DePIN tokens, including Nosana {{NOS}} and Render (RNDR). “But some of the most interesting ones, like io.net, haven’t launched their tokens yet.”
Render, io.net, and Nosana run a decentralized computing network, a platform that allows people to contribute computing resources for others to use, all built on the Solana (SOL) blockchain . According to the Solana Foundation, there are about 20 DePIN projects. One of the most prominent blockchains, Helium (HNT), abandoned its own blockchain last year and adopted Solana's blockchain. (Helium says Solana is more reliable and stable than Helium, despite its own history of failures. Blog post. )
Sean Farrell, head of digital asset strategy at FundStrat, says Solana has brought a lot of people on board. “Many of these DePIN projects would have either not been adopted and built on high-throughput chains, or would have had to build their own chains,” he said. “With Solana coming in as a legal construction location, the infrastructure problem has been solved.”
One of the key advantages that Solana has over other layer 1 blockchains such as Ethereum (ETH) is that it can process large numbers of transactions relatively cheaply without having to pass them to a more efficient layer 2 blockchain. It's about having the bandwidth. Performing transactions on Ethereum is notoriously expensive and time-consuming, leading to layer 2 bundling within its ecosystem. Solana took a different path.
Hivemapper is a decentralized mapping network that rewards contributors with the native token HONEY, built on Solana. According to co-founder Ariel Seidman, he chose Hivemapper for three reasons. These are low transaction fees, ease of use, and quality of the ecosystem.
“DePIN tokens will likely be built on L2 and ready for use in DeFi apps on Solana, as opposed to ETH mainnet or needing interoperability tools to interact with other apps on L2.” We will be able to do that,” Farrell said. “I think Helium Mobile has demonstrated how to effectively build both sides of the network,” he added. “Supply and demand – I think that’s what was missing in the layer 1 blockchain that they built.” “This is a great proof of concept that other projects can build upon,” Farrell said.
The DePIN project has received significant attention from venture capital funds.
For example, Borderless Capital has been investing in the project since 2021 and was an early backer of Helium Network. The company runs his dedicated DePIN fund, in which he has made over 30 investments and has raised funding from the likes of a16z and Google Ventures.
Borderless Capital notes in its DePIN investment thesis that the adoption and use of these networks (including Helium) is still in the very early stages. Borderless told CoinDesk that it is preparing to create a $100 million DePIN Fund II to support the growing DePIN ecosystem on Solana.
“We see a lot of potential at the intersection of cryptography + AI, mobility, mapping, wireless networks and digital resources. DePIN has a competitive advantage in terms of efficiency and “This will lead to better, cheaper services built around the world,” said David Garcia, managing partner at Borderless.
Dragonfly's Rob Hadick believes that while interest in DePIN among VCs will continue, there is an issue that needs to be addressed: a lack of users using the protocol.
“Investors are spending a lot of time imagining how cryptocurrencies and blockchain will usher in new financial and social paradigms,” Haddick said. “But his much-talked-about DePIN project looks and feels more tangible, and is more likely to generate excitement.”
However, these projects currently generate little revenue. “This means their token mechanism does not solve the core problem of having to implement traditional go-to-market strategies in a highly competitive industry filled with entrenched incumbents.” Haddick said, adding that no DePIN project has accumulated a significant number of users. “Until someone bucks this trend, or someone emerges, it's unclear how this momentum will continue.”
Anand Iyer, founder of early-stage VC firm Canonical Crypto, said the true utility of decentralized hardware is becoming a reality as computing needs for AI skyrocket.
“With companies and protocols like Akash Network and Ritual leading the way in this space, we expect to see more players leveraging decentralized networks for non-cryptocurrency use cases,” Iyer said. Ta.
According to Strahinja Savic, Head of Data and Analytics at FRNT, the DePIN project poses higher risks for investors compared to more established investments such as exchanges, mining and staking infrastructure. “Encouraging the development of physical infrastructure is another level of commitment to the project,” he said.
The majority of DePIN projects use tokens as a form of reward to encourage users to crowdsource and build connected real-world physical infrastructure.
“Using tokens with questionable long-term value to facilitate the development of physical infrastructure that can sometimes be expensive can be a difficult challenge,” Savic said. “In risk-rich areas, he will have a higher DePIN along the risk curve.”
GSR strategist Brian Ruddick agrees with Savich. He believes that there are some of his DePIN projects that will lead to breakthroughs, but believes that the key determining factor will be the quality of the product or service provided.
“In theory, the DePIN project could pass on lower infrastructure construction costs to customers and stimulate demand,” he said. “However, in reality, his DePIN products and services provided may be of lower quality than existing solutions that have been optimized for decades, negating this cost advantage. .”
According to Rudick, AI-related DePIN projects like Render and decentralized cloud marketplaces like Akash are notable projects.
The Crypto.com report also notes that price volatility could pose a challenge for the DePIN project. Because most of the rewards on the DePIN network are paid in the platform's own tokens, price fluctuations in these tokens can impact contributors' earnings over time, the report said.
“If compensation is seen as an unreliable source of income, significant volatility may discourage continued engagement,” the report states.
Most DePIN projects follow a burn-and-mint equilibrium model, a format that requires both supply and demand to function. This model uses two token systems. Contributors earn tokens and consumers burn them when they use them to pay, maintaining economic equilibrium.
Pranav of VanEck's Digital Asset Liquidity Fund divides the chances of success for DePIN's projects into two categories. The first is a project that takes a “build it and it will happen” approach. These should scale the supply side of the network with token incentives that increase the supply of tokens.
“The demand side can only be addressed once the supply of that service reaches critical scale. These projects tend to be highly speculative, and often the demand is non-existent, making it difficult to find users. It will be,” Pranav said.
He said he does not believe this set of DePIN projects will be successful in the long term as demand (token burn) is uncertain and token supply schedules will continue to expand.
According to Pranav, a potential project is one where demand for the underlying service can be clearly identified, meaning the customer already exists. According to Pranav, the ultimate goal of these types of protocols is for users to use public blockchains without realizing that they are actually interacting with a cryptocurrency product.
“This approach allows the DePIN project to build an economic moat against traditional centralized competitors,” Pranav explains. “We believe these projects are more likely to succeed because they are able to balance the supply and demand of the tokens fairly early in the lifecycle of the tokens.”
