Introduction to DEPIN Track Investment Logic

Core Sector: Balancing institutional fundamentals and small fund emotions for fair launches.

In the nascent stages of market recovery, where funds are yet to exert significant influence, retail investors are drawn to equitable chip distribution and narrative innovation. The catalyst for the surge in such assets lies in the efficient dissemination of information. Meanwhile, institutional funds demand assets grounded in a longer-term logic, necessitating the creation of robust moats to mitigate investment volatility and accommodate substantial funds. The DEPIN track, as a long-term asset category, boasts a transparent fundamental logic, an optimized cost structure, well-defined use cases, and stands as a pivotal element in the Web3 infrastructure. Simultaneously, it provides a cost-effective means for both institutional and retail investors to acquire chips, catering to diverse preferences.

The high threshold for entrepreneurship has led to limited overall asset supply, but there are many successful cases, resulting in a high success rate of investments.

A scrutiny of projects within the top 1000 market cap reveals fewer than 50 circulating assets in the DEPIN category. In periods of heightened market sentiment, the count of non-circulating projects dwindles to less than 30. Since 2017, approximately 10 projects with a market cap around ten billion USD, including Filecoin, Arweave, Theta, Helium, etc., have emerged, presenting lucrative investment opportunities. The formidable entrepreneurial barriers and protracted development cycles mitigate the likelihood of new projects flooding the market with subpar supply.

Growing infrastructure demands in AI and gaming propel Web3 adoption by DEPIN

Decentralized infrastructure has long been a focal point for blockchain’s mass adoption. The industry’s evolution from simple protocol projects in 2017 to diverse tracks like DeFi, middleware, NFTs, etc., has amplified the demand for technical services in tandem with user scenario expansion. The rise of AI agents and gaming projects will further stimulate the industry’s need for computing, paving the way for new narratives and practical scenarios for DEPIN.

A Three-Dimensional User Structure and Closed-Loop Fund Flow Prolong Project Lifecycles

The success factors for most industry projects revolve around technological and application scenario monopolies, robust branding, or the distribution of private domain information (Meme type). DEPIN projects not only offer the potential for a closed-loop business logic but also boast a more three-dimensional user hierarchy, encompassing B-side miners and demand parties, C-side miners and users, token traders, etc. Once an effective network effect takes hold, it captures more value and attracts funds more efficiently. The “thick value layer” results in a more stable lifecycle, distinguishing itself from projects reliant solely on brand-driven traffic, which often experience rapid growth followed by prolonged decline.

1. Overview of DEPIN by Messari

Messari classifies the DEPIN track into four distinct segments:

Server Network, Wireless Network, Sensor Network, Energy Network

1.Server network:

Orchestrating decentralized computing servers to disperse storage, computing, and communication resources to meet the demands of various parties.

The server network can be divided into 4 sub-parts:

• Storage: Encompassing file storage networks for long-term data and relational database networks for dynamic access and updates.
• Computation: Covering general computing networks and specialized ones for scenarios like transcoding, rendering, and machine learning.
• Content Delivery Network (CDN): Leveraging caching near end-users for quicker data distribution.
• Virtual Private Network (VPN): Establishing secure connections between devices and the internet using public networks.

1. Wireless network:

Decentralized Wireless Networks (DeWi): Reducing capital expenditure for traditional network providers, with categories such as cellular, WiFi, LoRaWAN, Bluetooth, positioning, and hybrid networks. Notable projects include Helium and Pollen Mobile.

1. Sensor Networks:

Utilizing dispersed sensor devices to collect, transmit, and analyze data from the real physical world. Applications span environmental, weather, vehicle and traffic, street view, and aerial image data.

1. Energy Network:

Connecting globally distributed energy nodes to act as virtual power plants, ensuring a stable supply of energy resources for the entire network.

Reference:

https://messari.io/report/the-depin-sector-map

2. Core Mechanism and Flywheel of DEPIN

The DEPIN ecosystem operates through three main components:

1.Hardware Providers: Offering physical hardware devices, including idle computing/storage/communication resources and various sensor devices (GPU, CPU, storage space, bandwidth, WiFi, etc.), and receiving Token incentives as rewards.

1. DePIN Middleware Protocol: Constructs a distributed network using blockchain to provide Token incentives to hardware providers and charges users of the network. Encompasses integrations, data tools, wallets, payment gateways, device ownership, and task statistics.

2. Demand Side of DEPIN Network: Constituents include entities accessing the DEPIN network, utilizing services governed by the DEPIN protocol, and making payments. Includes Web3 public chain ecosystems, DApps, or Web2 resource consumers.
   

As a long-term narrative for large-scale application of Web3, DEPIN has the following core growth drivers:

1. Political Correctness: (Vision) Rooted in blockchain, aiming to prevent the monopoly and wrongdoing of centralized platforms. Emphasizes decentralized architecture and privacy concerns as foundational to industry applications.

2. Distributed Hardware Network with a Closed-Loop Business Model: (Uniqueness) Apart from BTC mining/exchanges/DeFi, DEPIN forms a closed-loop category. Incentivizes physical hardware providers with Tokens.

3. Cost Reduction and Economies of Scale: For example, Filecoin’s success demonstrates significant cost reduction in storage compared to Amazon S3, leveraging token incentives for idle resources. Represents an innovative improvement in cost structure and operations.

While acknowledging potential disparities in stability and performance compared to centralized services, DEPIN’s service supply addresses pillars of the IT industry (storage/computing/communication), with a combined market size exceeding 50 trillion USD. Even a modest share of this market could substantially contribute to the overall growth of Web3 assets.

Image Source:https://messari.io/report/the-depin-sector-map

3. Two Distinct Construction Frameworks for DEPIN Projects

Blockchain Native Demand Types: Composing Underlying Networks

Projects falling into this category dismantle blockchain’s functionality into a “decentralized server.” They utilize various DEPIN networks to implement specific modules of server functionality, catering to the diverse requirements of the underlying blockchain network. The central feature is the deployment of a decentralized hardware network to address the native demands of the blockchain network.

Examples include:

• Independent storage layers represented by Filecoin and Arweave, utilizing decentralized storage nodes for long-term file storage and data access.
• PoW projects employing GPU or ASIC mining machines for cryptographic consensus, as seen in Kaspa.
• Layer2/Layer3 projects leveraging external GPU and communication networks to tackle specific blockchain issues, with Aleo as an example.
• Node staking projects combining liquidity staking and hardware validation for transaction validation and network security, with Rocket Pool as an example.
• CDN-type Content Delivery Networks, like Meson Network, enhancing DApp and public chain efficiency.

Outreach Service Types: Constructing Collaborative Networks

Projects in this category leverage blockchain networks and token incentives to organize decentralized idle resources, creating new hardware supply services. This approach significantly reduces costs and rapidly estimates, constructing a protocol layer as a coordination network and a service settlement layer. The main feature is the combination of hardware and blockchain, resembling BAAS (Blockchain as a Service), where the blockchain is part of the supply.

Examples include:

• Render Network, a decentralized GPU network serving 3D rendering and AI industries, categorizing users into tiers based on GPU rendering speed.
• Helium incentivizes users to build a decentralized wireless network, utilizing token incentives to encourage device installation for cellular coverage.
• Other projects involving decentralized energy networks (React), vehicle traffic networks (Dimo), meteorological and geographical spatial data (Geonet), combining hardware devices with token incentives to form new collaborative networks.

4. Investment Analysis Approach for DEPIN Projects

DEPIN projects present a more complex ecological cycle compared to other blockchain protocol or middleware projects. This complexity is evident in:

1. The upstream and downstream links of the industrial chain are complex. The upstream involves hardware production and manufacturing, sensors and chips and other manufacturing fields; the downstream involves software services and integration, covering Web2 software development and smart contract development. For B-end users and C-end users The service undertaking capacity has higher requirements;‍

2. In the token design in the blockchain field, there are high requirements for the project party’s comprehensive understanding and experience. First, it must contribute to the growth of the entire ecological scale. Second, it must be based on the supply and demand at different stages of development. Feature changes require rapid feedback and challenges. It is necessary to have the ability to control changes in technology demands in the industry and operational strategies for DeFi and token liquidity. ‍‍

DEPIN projects usually adopt the BME token model (Burn-and-Mint Equivalent), which means that users purchase goods or services by burning Tokens, and service providers reward various contributors in the supply chain of goods or services by minting new Tokens.

Picture source: https://medium.com/mvp-workshop/burn-and-mint-equilibrium-pros-and-con-s-c27d83748cf5

1. DEPIN projects, with strong fundamentals, must align with product delivery and milestone achievements. Managing expectations and hype alone is challenging but essential for effective results.

In summary, DEPIN project development and operation present significant challenges, requiring high overall capabilities. However, once initial network effects accumulate, there is potential for greater stability on a larger scale.

DEPIN projects typically follow the standard development process of blockchain protocol projects, divided into three growth stages: Narrative Stage, Testnet Stage, and Mainnet Stage. These stages demand different observation focuses, and the two construction approaches of DEPIN, native demand type, and outreach service type, also have distinct investment analysis criteria.

In essence, the key focus of the project analysis centers on two aspects: the initial narrative examination and the strategy post-Testnet delivery.

For projects with native demand orientation, those closely aligned with customer demands on the Web3 side, the spotlight is on the efficiency of product delivery and the subsequent expansion of the network post-market deployment.

As for projects with an outreach service approach, operating at a more distant nexus in the supply-demand loop, they might appear somewhat “virtual.” Consequently, these projects prioritize the quality of their narrative and the ability to build a strong brand. To stand out, they must showcase notable strengths, be it in Web2 resources or the supply of hardware devices, to elevate the overall project value.

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