Lisa:EO@codeboymadif, Lisa@lisal1l1, Ryan@Ryan0xfmg, Kelv@KelvinYuan13, Simon
Part 01 What and Why DePIN
The use of crypto-economy to deploy real-world physical infrastructure actually has a long history. Some typical projects can be traced back to 2013. They have conducted very valuable explorations in the fields of communications, storage, computing, etc. Today, this model has expanded to more fields such as AI, energy, data collection, etc., and the ecosystem has also ushered in a period of prosperity.
DePIN represents a paradigm of decentralized applications: node economy, miner model, and transformation of the real world.
Compared with centralized infrastructure, DePIN has a higher unit economic effect. DePIN's smart contracts, equipment standardization, and economic model replace CePIN hardware deployment, operation, and management, which will bring 75%-90% cost savings.
Token economics is the key to expanding the node network and forming network effects. When token prices rise, economic incentives lead to rapid growth in node size.
If Web2.0 allows humans to interact with the Internet through various input devices, Web3.0 allows physical hardware to interact with the blockchain through DePIN.
We have experienced DeFi Summer, NFT, and Metaverse craze. Will the next wave of craze turn to DePIN? Between 2020 and 2021, the market value of DeFi increased by nearly 100 times, from US$1.75 billion to a maximum of US$172.2 billion. Assuming that in this bull market, the total market value of DeFi increases by 10 times, and the total market value of DePIN reaches 50% of DeFi, then the total market value of DePIN will reach US$500 billion, with at least 20 times of growth space. According to Messari's estimate, the market value of DePIN will reach US$3.5 trillion in 2028, and DePIN has a potential growth space of 120 times.
We believe that the DePIN architecture has the following five opportunities from the bottom up:
DePIN blockchain infrastructure. The DePIN blockchain infrastructure acts as the settlement layer of the DePIN application, providing support for transactions and token economic model operations.
DePIN middleware. DePIN middleware is a middleware layer that connects the underlying infrastructure and upper-layer applications, providing standardized interfaces and tools. This layer is a key hub of the DePIN ecosystem.
DePIN upper-layer applications. DePIN upper-layer applications are various applications built on the DePIN infrastructure and middleware layer, providing users with practical services and value. This is the front-end and landing scenario of the DePIN ecosystem.
Derivative opportunities: Edge AI. Edge AI is an important extension direction of the DePIN ecosystem, which uses the DePIN network to deploy edge computing and AI applications, process data locally, and provide intelligent services.
Derivative Opportunities: RWA. Combine DePIN with Real World Assets (RWA) to create new financial products and services.
Part 02 Opportunities for DePIN infrastructure
L1/L2 that may benefit from the DePIN ecosystem in the future
DePIN is the main track of Solana OPOS (Only Possible On Solana) concept. Benefiting from this positioning, Solana fought back from the shadow of FTX, and its market value increased from a minimum of 3.6 billion US dollars to 89.8 billion US dollars, a 25-fold increase. In the future, DePIN will still be an important narrative of Solana. The selection of head projects often represents a trend. Helium's migration of the main network to Solana has a clear demonstration effect. According to this logic, Polygon and Arbitrum are both underlying chains that may benefit from the growth of DePIN in the future.
Proprietary chains that provide DePIN modular infrastructure will benefit from the growth of the ecosystem and head applications, such as IoTeX and Peaq.
The ecology of public chains that are closely integrated with the concept of AI will inevitably extend to the upstream DePIN sector. For example, Near has developed a public chain narrative around AI, and Aptos has cooperated with Microsoft to try to combine AI with Web3 products.
Universal middleware is the crown jewel of DePIN
Seamlessly connecting physical infrastructure to blockchain requires powerful middleware. Currently, trusted hardware is mainly controlled by official authorization, and anti-cheating is achieved through governance and miner management tools.
Difficulties in developing general-purpose middleware:
The technology is difficult, and it is difficult to prevent cheating and upload credible data to the chain by technology alone.
The overall DePIN market size is limited, resulting in limited middleware market space.
Once the universal middleware breaks through, the threshold for DePIN applications will be greatly lowered and the ecological prosperity will be promoted, and the middleware will be the direct beneficiary.
DePIN Miner Service Layer: Miners’ Borderless Guild, the People’s Network
The miner service layer is located at the bottom of the DePIN ecosystem and is an essential component of DePIN applications. It is mainly divided into two categories: hardware production and node operation and maintenance:
Hardware manufacturers are responsible for providing the physical equipment needed to build the network, such as servers, storage, and network equipment. Hardware manufacturers can open up new markets by innovating and improving products to meet specific needs, and are direct beneficiaries of the growth of the DePIN ecosystem. Therefore, powerful hardware manufacturers will participate in the DePIN ecosystem in various forms, including hardware support and financial support. For various reasons, hardware manufacturers have become an important driving force in the development of DePIN.
The hardware operation and maintenance project helps nodes to deploy and operate, and charges a certain service fee. This model will perform better in the late bull market. Under the DePIN flywheel effect, the token price will rise in the late bull market, and the node payback period will be very fast. Ordinary users can quickly start to make profits by paying service fees.
Potential opportunities:
1. Hardware manufacturers with global distribution and the ability to quickly produce trusted devices.
2. The permissionless DePIN node deployment platform will play a role similar to a blockchain game guild.
3. We look forward to the emergence of better DePIN tool layer projects and the capture of value. The device data aggregation platform is a high-quality user portal. At present, DePIN data is still not transparent enough, and some key data for judging the development of projects are difficult to obtain, such as the number of device nodes, miner return comparison, the number of demand-side users and income, which makes decision-making difficult and there are vacancies in the DePIN tool layer.
Part 03 DePIN application value assessment logic: Finding the unchanging rules
DePIN Protocol is a two-sided market where the supply side provides services and the demand side contributes to revenue, so value assessment should be conducted from both the supply and demand sides.
Demand-side value judgment
Compared with dividing by concepts, industries and supply sides, we believe that judging the demand market is more important, so we pay special attention to projects targeting the C-end market.
Two judgments on the demand side:
For C-end applications, there are more high-profit scenarios and greater room for imagination.
Applications that meet AI data needs are still in their very early stages.
Bold speculation on the end of demand: Web3 mobile phones and the new sharing economy
1. Encrypted mobile phones will be the key to breaking through the C-end market
Through customized mobile phones, the DePIN application can be built into the mobile phone, and rapid growth can be achieved through airdrop incentives. Subsidies are often needed to obtain the market for the C-end. Taking Helium Mobile as an example, the revenue is the $20 package paid by users. Due to the need to pay cooperation fees to T-mobile, when 70-80% of the download services are provided by Helium's own network, it just reaches the profit point (Messari, as of December 2023, the proportion in Miami is 55%). Once the profit point is exceeded, the project will achieve self-sustaining blood, and the DePIN flywheel will run better.
2. Build a Web3 version of the sharing economy network
Relying on Web3 mobile applications and through effective token incentives, large-scale sharing economy/social networks can be realized in the future.
Supply-side value judgment
Over the past two decades, the price of hardware equipment has dropped dramatically, making it possible for individuals to act as infrastructure service providers.
Our criteria for judging the supply market:
Is the product easy to standardize? The more standardized the product is, the easier it is to financialize. For example, computing power is priced according to time, and different configurations have different prices.
Is the equipment cost low enough? The lower the cost, the larger the potential supply scale and the more decentralized it is.
Supply-side endgame: Focus on projects that can be quickly scaled and standardized
The node equipment costs of the six tracks are mostly medium ($300-$1000), which can reach the consumer level. Among them, the high-end GPUs (A100, H100) with high computing power are more expensive, and AI requires professionalism, so we also define it as high cost. Some equipment in energy costs more than $1000.
In terms of product standardization, there is a general problem of low standardization. Bandwidth in Wireless is a standardized product, while other segments such as 5G and WiFi are non-standard products.
Part04 DePIN application layer potential analysis
According to Messari statistics, by 2023, there will be more than 650 DePIN application projects covering six sub-tracks: computing, AI, wireless networks, sensors, energy and services.
01 Computing is the most mature sector of DePIN
Computing (computing power + storage) is the largest TAM track, with enterprise cloud service revenue reaching US$270 billion in 2023 (Synery Research).
Demand side: Demand for the computing sector comes from small and medium-sized enterprises and individuals, among which GPU demand is the strongest, benefiting from the growth of AI.
Supply side: Akash has a diverse hardware network including CPU, GPU and storage, Render has a large number of GPUs. io.net obtains a large number of GPUs from its own network and other platforms.
Two trend judgments in the computing sector:
1. The GPU computing power market is currently the most promising segment. We believe that there are more secondary market opportunities in this field, and it will move towards head concentration and horizontal integration in the future.
GPU computing power platform growth logic:
1. Global GPU shortage and skyrocketing demand
2. Resonate with the concept of AI
3. World computing power currency under geopolitical conflicts
The development trend of decentralized GPU platforms is to attract top computing projects through token incentives and horizontal integration of resources. Currently, there is a risk of failure in matching demand and supply, and demand growth or model innovation is needed to support the current market value. In the future, the growth point of decentralized GPU platforms is that the supply side will bypass the B-side, expand computing power to the C-side, and build an edge computing network. The demand side is to closely integrate with the downstream demand side or build its own application scenarios.
2. The storage sector will move towards integrated storage and computing, becoming a unique Layer 1.
After superimposing computing, some large storage DePINs will become unique Layer1s - blockchains that can provide decentralized storage and computing capabilities. Compared with current blockchains, this unique Layer1 can significantly reduce on-chain storage and computing costs. Some applications that require large-scale storage and complex logic can be implemented here, such as content platforms, social networking, games, etc.
02 DePIN AI realizes open AI model platform, AI data, and AI Agent through decentralization
Bittensor is a typical model of DePIN AI. It creates a decentralized machine learning (ML) network to encourage the development and decentralization of artificial intelligence. Bittensor has a first-mover advantage in the Web3 AI large model track and is a leading project in this field. Its model iteration and ecological construction are developing steadily. It is expected that Bittensor will be able to take another step forward with the outbreak of AI narratives or the promotion of high-quality subnets.
ORA has stronger scalability than Bittensor. The current application cost of Bittensor's subnet is huge, and it requires a considerable amount of TAO tokens to be pledged. ORA, which has realized the on-chain AI oracle, will have more ecosystems (AI Agent / AIGC NFT / AI-powered Protocol and other projects) blooming on its on-chain AI technology.
03 Sensors: The new AI-driven sector with the greatest growth potential
There are currently fewer sensor-based projects, especially those focusing on data, which means more primary market opportunities.
Sensor sector value analysis:
Is the market space large enough? The size of the downstream demand market determines the project ceiling.
Is the data value high enough? The uniqueness of the data and the application scenario determine the value of sensor-based DePIN applications.
Growth logic of the sensor sector:
1. New sectors driven by AI
2. Decentralization is needed from the underlying logic
3. The built-in mining machine supply chain provides a richer source of funds and a longer profit cycle.
04 Wireless network: fierce competition and high operational difficulty
DePIN provides information transmission services for the Internet of Things and end users through decentralized base stations, routers and other physical devices. The main difficulty is that the demand is scattered and decentralized networks are difficult to meet the demand. It is necessary to rely on the power of traditional operator networks to expand the market, such as DePIN as a supplement to traditional operators or provide them with data. Therefore, the core competitiveness in the field of wireless communications lies in cooperation with traditional operators. (Helium Mobile relied on the power of T-mobile in the market cold start stage).
05 Energy network: the need to rely on centralized networks to achieve minimum viable products
DePIN Energy Network reduces energy transmission through distributed power supply, improves energy utilization efficiency, and ultimately realizes VPP virtual power plant. With the development of energy collection and storage technology, individuals can become energy suppliers, but transmission faces high costs. Smart grids can guide the construction of power supply networks through electricity consumption data collection, which is relatively easy to build. Therefore, the fastest-growing segment of DePIN Energy will be smart grids. Similar to wireless communication networks, power generation projects need to cooperate with centralized power grids to achieve mode operation.
Our judgment on DePIN Energy:
VPP (Virtual Power Plant, VPP) virtual power plant is the DePIN energy finale: through the DePIN incentive model, small power supply networks and demand sides are connected to form a virtuous circle, and ultimately realize the VPP virtual power plant.
Currently, the DePIN energy project is gradually realizing some aspects of VPP, such as data, electricity meters or power generation.
06 DePIN + Consumer Products: A New Revolution in Marketing Model
Since the DePIN track became popular in October last year, a large number of DePIN consumer products have emerged in the market, including watches, rings, e-cigarettes, power banks, game consoles, etc., promoting the sales and high-frequency use of devices through DePIN incentives.
Features of DePIN+ consumer products:
The market size ceiling is high: The market space for consumer-grade devices is huge, estimated to be between trillions and hundreds of trillions of dollars in the Web2 world, including various consumer products.
Reaching C-end users: Most Web3 users are transactional users, with relatively few connections to the real world and lack of close connection with user life. However, the business model and operation mode of DePIN consumer products can integrate Web3 applications into real life, establish connections with users and increase user stickiness, so that it can truly integrate into the real world.
High return expectations promote the Web3 transformation of traditional brands: the new Web3 marketing model allows products to not only have use value, but also have profitable attributes. This model helps products quickly occupy the market, thereby significantly improving profitability.
Potential risks and shortcomings of consumer-grade DePIN hardware:
Restricted by a single token incentive, most users buy hardware for free rather than users with real needs. This is similar to the current verification problem between DePIN hardware devices and software, and more anti-cheating solutions are needed to overcome it.
Part 05 Two new opportunities derived from DePIN
01 The breakthrough point of DePIN supply side in the second half is Edge AI: mobile phone and PC
Mobile phones and PCs are the most popular hardware devices. They do not require cryptocurrency experience and are an excellent entry point. There are two ways to join the DePIN network:
Run the node program and become the control terminal of DePIN hardware.
Directly provide sensor data or computing resources.
Opportunities for the rise of encrypted phones: 4 major application scenarios to leverage the market through potential benefits
Mobile encryption apps. The encryption app market built into encrypted mobile phones is an excellent user entrance for dAPP. As the most commonly used device in daily life, mobile phones provide a platform for the popularization of encryption applications.
Edge computing. Edge computing is a clear development trend. Data processing and analysis tasks are transferred from centralized data centers to places closer to the data source, thereby improving efficiency and reducing costs. Token economic incentives combined with encrypted mobile phones can accelerate the development of edge computing.
Token airdrops. For mobile phone buyers, airdrops can bring financial returns. For project owners, airdrops to encrypted mobile phones can make token holdings highly dispersed, which is conducive to the spread of memes or the cold start of consumer applications.
DePIN mining. For the DePIN project, the sensors and computing modules of encrypted mobile phones are the natural supply side. As a DePIN device, mobile phones can participate in the DePIN economy and receive rewards.
Key to competition in encrypted mobile phones
The barriers to mobile phone hardware production are relatively small, the mobile phone production supply chain is mature, the production cycle is short, and the cost is controllable, which makes the selling price low. The current encrypted mobile phones are priced between US$100 and US$1,000.
The difficulty of mobile phone delivery lies in the sales network. Projects with Internet sales and offline promotion networks will find it easier to gain market share.
The application ecosystem is the key to forming a barrier for encrypted phones. Once a network is formed, it will have the opportunity to become the traffic entrance of Web3.
Other challenges: Hardware iteration, testing the project's financial strength and operational capabilities.
The end of encrypted mobile phones: DePIN + sharing economy
In the Web2 era, through the Internet, personal cars and houses are aggregated to form a huge service market, enabling personal assets to be monetized.
In the Web3 era, through the token economy, idle and scattered personal hardware devices can be organized to form productivity and monetize personal hardware devices. Software based on Web3 mobile phones will also build Web3 service infrastructure, innovate the Web2 sharing economy model, and cover various aspects such as catering, travel, and accommodation. Mobile Web3 applications have the following characteristics: marketing innovation through crypto-economy, token airdrops, high-frequency social networking, and consumer-level products.
02 DePIN hardware and data assets use the RWA model to achieve on-chain financialization
DePIN physical hardware tokenization:
Release the liquidity of DePIN hardware. After the physical hardware of DePIN is tokenized, RWA derivative projects such as income separation and mortgage lending can be realized, and the DePIN income rights can be traded without physical delivery.
DePIN income provides a source of interest for stablecoins.
DePIN hardware assets are securitized on the blockchain and issue products similar to the traditional financial Reits model, such as packaging GPUs on the chain to create a GPU Index.
Data asset (NFT) tokenization:
Standardizing and tokenizing data assets is the key to facilitating their circulation in the market.
DePIN data assets enable on-chain finance. Based on the tokenization of data assets, data-supported financial products can be created to achieve innovative applications. For example, DIMO's car data can be used for on-chain car loans.
Summary and prediction
The expansion of blockchain into the real world is an inevitable trend. DePIN represents a paradigm of decentralized applications: node economy, miner model, and transformation of the real world. According to Messari's estimate last year, the market value of DePIN will reach 3.5 trillion US dollars in 2028. According to the current scale of 30 billion US dollars of the DePIN category on Coingecko, it can be concluded that the potential growth space is 20-120 times.
Layer1/2 is the most certain and stable beneficiary of ecological growth. In this cycle, the public chain that supports the DePIN ecosystem will gain the biggest dividend.
At present, the middleware is mainly an important component of DePIN's dedicated Layer1. Although the general middleware technology is difficult, we still look forward to breakthroughs, which will greatly promote the prosperity of DePIN applications, and the middleware will be a direct beneficiary of the prosperity.
Similar to gaming guilds, the DePIN miner service layer is expected to develop into a borderless hardware miner guild. The current potential opportunities are global hardware supply chain and node deployment services. There are also vacancies in the DePIN data aggregation tool layer.
In the computing sector, GPU is the fastest-growing and most mature segment. In the future, GPU platforms will move towards horizontal integration and vertical integration. In addition, "computing and storage integration" based on storage superposition computing will be the new narrative, and traditional storage such as Filecoin and Arweave will be rejuvenated.
Current development status of DePIN AI: AI large language models, led by Bittensor, have gradually absorbed many leading projects in the field by taking advantage of their first-mover advantage. At the same time, other large models like Fetch.ai are also being actively deployed. The competition is fierce and the situation is unclear. In the future, there will be a war of thousands of models, just like the Internet explosion in 2000, and everyone will have an opportunity.
Sensors are a potential sector activated by AI, and revenue from proprietary equipment sales will provide sensor projects with more room for innovation and risk resistance.
The logic of the wireless network and energy network models is similar. The ultimate goal of wireless networks is to bind large operators, and it is more likely to break through from the third world; the ultimate goal of energy networks is virtual power plants (VPPs). Currently, the project is exploring various aspects of VPPs, and the track is still in the early stages of development.
Edge AI based on mobile phones and PCs is the next development trend of DePIN. Universal Web3 terminal devices will also give birth to a new type of Web3 sharing economy, and more high-frequency consumer-grade Web3 applications for the C-end will gradually emerge.
DePIN is a new way to issue RWA assets. Combining it with on-chain DeFi will unlock the liquidity of DePIN hardware and data.
Thanks to DePhy, Exabits, Ora, EthStorage, Hotspotty, IoTeX, and DePIN Hub for their guidance and suggestions on this report.
Reference:
https://messari.io/report/state-of-depin-2023
https://public.bnbstatic.com/static/files/research/depin-an-emerging-narrative.pdf
https://mirror.xyz/sevenxventures.eth/Hx4AScWLZf4HrCl1IoumFTq1L20e3SzF-9XEkgWmrG4
https://www.galaxy.com/insights/research/understanding-intersection-crypto-ai/
https://gpus.llm-utils.org/nvidia-h100-gpus-supply-and-demand/
https://messari.io/report/the-depin-sector-map
FutureMoney Group (FMG) is a Singapore-based blockchain, crypto technology and Web3.0 investment institution. Co-founded by serial entrepreneur EO Hao and equity investment professional Steven Li in 2018, MG has invested in nearly 100 startups since 2018. With a total of more than US$300 million in assets under management, it has become one of the largest crypto funds in the DePIN field in Asia.
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