‘DePIN’ Is Venture Capitalists’ Latest Crypto Obsession. Can It Match the Hype?

A significant portion of the cryptocurrency world operates in a abstract or ethereal realm, whether metaphorically or physically: data traveling through blockchains, prices fluctuating on graphs, and numerous other intangible elements.

An exciting new development that is generating significant interest among venture capitalists is the ability to use blockchains to manage real-world infrastructure. For instance, initiatives such as the Helium protocol, which establishes a wireless network through a token-driven ecosystem, or Filecoin’s data-storage platform. In simpler terms, these projects allow businesses and individuals to leverage blockchain technology for practical applications in areas like networking and data storage.

Decentralized physical infrastructure networks, or DePIN for short, is not a very catchy name for this concept, but a significant amount of investment, over $1 billion according to a Crypto.com report, has been poured into it by venture capital firms, indicating they see great potential in these projects.

Pranav Kanade, a VanEck digital assets alpha fund portfolio manager, expressed his belief in the significant potential of DePIN as a category capable of accommodating an app with over a billion users. These users would engage with public blockchains unknowingly, interacting with crypto products in a seamless and natural manner.

Despite the clear attraction from venture capitalists, DePIN continues to grapple with a long-standing issue in cryptocurrency: a limited customer base.

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The combined value of tokens in DeFi projects reaches tens of billions of dollars. However, their annual earnings as a whole are estimated to be around $15 million, according to Rob Hadick, a general partner at Dragonfly, a cryptocurrency investment firm. Hadick explained in an interview that while the supply is not typically a limiting factor for these protocols, it’s often demand that falls short.

Nonetheless, DePIN is quickly shooting up the list of crypto buzzwords.

What is DePIN?

DePIN projects are built on blockchain technology and manage physical infrastructure in a decentralized manner. Incentives, typically in the form of tokens, are frequently employed to motivate users in expanding these networks. The field encompasses various domains such as wireless communication, data gathering, computation, and data preservation.

Historically, wireless networks have been centrally managed, giving companies such as AT&T, Deutsche Telekom, and China Mobile total authority over their phone networks. Users merely pay a fee to access these services, with little control or influence in return.

Instead of “Helium’s DePIN-driven network is decentralized with members of the public able to establish hotspots and receive HNT tokens as compensation for supporting the wireless network,” you could also say:

According to a report by Crypto.com, the combined value of all DePIN tokens in circulation surpassed $25 billion in total market capitalization by February. A significant portion of this vast sum can be attributed to sectors such as computing, storage, and artificial intelligence.

Although that market capitalization figure is impressive, it isn’t inflated by hordes of individual investor funds, as per Christopher Newhouse, an expert in decentralized finance at Cumberland Labs. Instead, DePIN primarily caters to the investments of large institutions and venture capitalists.

Newhouse expressed in an interview that this might be a great time to join in and acquire some DePIN tokens without much competition.

Solana’s role

Sean Farrell, the digital asset strategist at FundStrat, explained that many Decentralized Finance (DeFi) projects would have had to construct on a high-throughput chain with minimal adoption or create their infrastructure from scratch. However, now that Solana has emerged as a legitimate platform for development, it has resolved this issue for these projects.

Hivemapper, a decentralized mapping platform that remunerates contributors with its own token HONEY, is established on the Solana blockchain. As stated by co-founder Ariel Seidman, there were three primary motivations behind Hivemapper’s selection of Solana: affordable transaction costs, user-friendliness, and a robust ecosystem.

“Farrell explained that DePIN tokens can directly function in Decentralized Finance (DeFi) applications on Solana, unlike tokens built on Layer 2 solutions requiring interoperability tools to communicate with apps on Ethereum mainnet or other Layer 2s. He commended Helium Mobile for successfully creating both the supply and demand sides of their network. This is an excellent demonstration that other projects can draw inspiration from,” Farrell concluded.

Venture capital interest

DePIN projects have attracted a significant amount of attention from venture capital funds.

Since 2021, Borderless Capital has been actively investing in various projects and was among the initial supporters of the Helium network. They manage a specialized DeFI fund with over 30 investments in this sector and have secured funding from prominent investors such as a16z and Google Ventures.

Borderless Capital noted in their DePIN investment thesis that adoption and usage of these networks (including Helium) are still at very early stages. Borderless told CoinDesk that it is in the process of creating the $100 million DePIN Fund II to support the growing DePIN ecosystems in Solana.

At Borderless, we believe there’s great promise in combining crypto technology, AI, mobility, mapping, wireless networks, and digital resources. In this area, DePIN holds a distinct edge due to its efficiency, leading to more affordable and superior services for consumers.

Rob Hadick of Dragonfly believes that the investment trend towards Decentralized Identity Protocols (DeIPs) among venture capitalists is persistent. However, he raises a concern about the need to address the limited user base on these protocols.

“According to Hadick, investors often ponder the potential ways cryptocurrencies and blockchain technology could revolutionize finance and society. However, the promising DeFi projects present a more concrete image, igniting greater enthusiasm among the investment community.”

In simpler terms, Hadick explained that these projects aren’t making much money at the moment. He noted that their token mechanisms haven’t effectively addressed the challenge of breaking into crowded markets dominated by established companies. No DePIN project has attracted a substantial user base yet. It remains to be seen how they can maintain this trend or even surpass it.

Anand Iyer, the founder of Canonical Crypto and an early-stage venture capitalist, expressed that the genuine value of decentralized hardware is emerging as artificial intelligence (AI) requires increasingly more computational power.

Iyer stated that companies and initiatives such as Akash Network and Ritual are pioneering the use of decentralized networks for non-cryptocurrency applications, and it is anticipated that more entities will adopt this approach in the future.

Risks and challenges

In the words of Strahinja Savic, the chief data and analytics officer at FRNT, DePIN projects carry greater investment risk than more conventional options such as exchanges, mining, or staking infrastructure. He pointed out that: “The process of encouraging the creation of physical infrastructure for a project demands an additional level of dedication.”

In simpler terms, many DePIN projects give out tokens as an incentive for people to collaborate in creating real-life infrastructure through crowdsourcing.

In simpler terms, Savic stated that relying on doubtful investments for incentives to build expensive physical structures can be challenging. The DePIN project carries more risk since it operates in an area with abundant risks.

According to Brian Rudick, a strategist at GSR, there will likely be multiple successful DePIN (Digital Partnerships and Innovation) projects. However, the success of these projects will ultimately depend on the excellence of the offered products or services.

“According to him, DePIN projects could theoretically reduce infrastructure costs and pass these savings onto customers to boost demand. But in reality, the DePIN offerings might not match the high-quality standards of long-established solutions, thereby canceling out any potential price advantage.”

According to Rudick, projects in the field of AI that utilize Decentralized Pinch-off Infrastructure (DePIN), such as Render, and decentralized cloud marketplaces like Akash, are worth keeping an eye on.

According to a report from Crypto.com, unpredictability in cryptocurrency prices may pose a problem for Decentralized PIN (DePIN) projects. Since rewards for these networks are given out in the project’s native token, price swings in those tokens could influence the long-term earnings of contributors.

The report mentioned that significant price fluctuations could make some people hesitant to continue their investment if they view the returns as unpredictable or inconsistent.

contributors receive tokens as reward for their contributions, while consumers surrender tokens when making payments – maintaining economic balance.

Pranav, from VanEck’s digital assets liquid fund, separates DeFi projects into two groups in terms of their potential for success. The initial category consists of projects that adopt a “build it and they will come” mentality. To thrive in this group, these projects must expand the supply side of their network using token incentives, leading to an increase in token circulation.

Pranav explained, “To tackle the demand side of that service, its supply must first reach a tipping point. However, these initiatives can be quite risky, as in several instances, there may not be sufficient demand, making it challenging to attract users.”

He expressed doubt that this collection of DePin projects in the bucket would be successful in the future, since the demand for the tokens (the rate at which they are burned) is uncertain, and the token supply keeps increasing without end.

According to Pranav, successful projects are those in which the demand for the related service is evident, as there are already existing customers. The ultimate objective of such initiatives, as described by Pranav, is to have users engaging with public blockchains unknowingly, thereby interacting with crypto products in a seamless manner.

Using this method, the DePIN project could establish a competitive advantage over its older centralized rivals, according to Pranav. By doing so, we think these projects have a greater chance of thriving because they can manage the supply and demand of their tokens more effectively from the token’s early stages.