What DePIN got wrong and how to fix it | Opinion

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As a researcher with a background in traditional infrastructure and a passion for blockchain technology, I can’t help but notice the striking parallels between the challenges faced by DePIN projects and the lessons we’ve learned from past infrastructure developments. The fixation on native tokens and hasty expansion without considering demand is reminiscent of the infamous “build it and they will come” approach that has left us with countless white elephant projects in the real world.

A strong focus on native tokens, combined with hardware installation in regions with minimal need, often results in many DePIN (Decentralized Physical Infrastructure Network) projects failing to maintain longevity. These large-scale projects, commonly referred to as DePINS, require significant effort and are not just about quickly creating a trendy memecoin.

The goal of connecting real-world assets, such as energy grids and transport networks, to blockchains is one that takes time, resources, and scale. Because of this, it’s little wonder that The Block Research suggests funding has now hit a new all-time high of $1.91 billion.

The growing fascination with artificial intelligence is fueling more growth in the emerging DePIN field, but it’s important to note that not every project holds the same value, and those aiming for success must address substantial challenges in order to achieve their maximum potential within this competitive landscape.

Transfixed on tokens

One particular issue relates to the mistaken notion that startups need to launch a native token to be successful. This can be a fatal error, as it means the value of a network is tied to the wider market and macroeconomic events that are completely out of its control. 

Helium (HNT) serves as a practical demonstration of its kind. This platform, which is built on blockchain technology, aims to foster a community-driven wireless internet network. In this setup, individuals running hotspots are incentivized through the issuance of HNT tokens as rewards.

However, in practice, the project’s success can be attributed to the timely launch of its digital asset, which coincided with a massive bull run. This surge in investor fear of missing out (FOMO) significantly boosted the token’s value. It’s important to note that these substantial increases in value were not indicative of the network’s robustness or client base. Instead, this situation reduced HNT to a memecoin with limited practical use.

Interestingly enough, if we examine Helium’s yearly income from its recurring sales, a rather alarming figure comes to light. Despite possessing a billion dollars’ worth of equipment, it would take the Internet of Things roughly a millennium to recoup this investment.

Competitors in this field also feature Peaq, a network that boasts over 50 Decentralized Physical Infrastructure Nodes (DePINs). However, it’s crucial to exercise careful examination since many blockchains struggle with the transaction volumes of a single decentralized physical infrastructure network, so managing 50 might be challenging.

In summary, Essentially, this highlights a key takeaway for growing DePIN brands: having your own token isn’t necessarily required if user rewards are easily exchangeable. We’ve seen instances where similar digital assets have caused trouble, such as Pollen Mobile encountering legal issues in the U.S. over allegations of creating coins out of nothing and selling them for money, which is often referred to as “minting coins from thin air.

In terms of capital return, DePIN ranks among the worst across all industries globally. This is due to its decentralized structure, which transfers financial responsibility from the founders to those investing in projects. To achieve significant impact, founders should concentrate on developing demand-driven solutions, channeling their efforts towards acquiring more clients rather than expanding their networks excessively.

As a researcher, I’d like to clarify the practical implications of a demand-driven approach. Instead of blindly constructing facilities under the assumption that people will flock to them, this method involves identifying and catering to existing markets. In other words, we look for locations where customers who are already eager for such services or products are concentrated, thus creating ‘hotspots’ in these areas.

India serves as a compelling illustration of a region with an unquenchable thirst for internet connectivity, yet 600 million individuals are without access. By separating ownership from installation, a DePIN investor could acquire hardware that would then be utilized in the places where it’s truly required – sometimes even halfway across the globe.

Rethinking DePINs

Of course, hardware is a crucial element when creating DePINs—but right now, the incentives are misaligned. Too many projects have sold equipment at inflated prices, all while becoming reliant on shifting more units to bolster their revenues. Others have allocated a share of each purchase to token burning in an attempt to make these digital assets more palatable. While this may inflate their price in the short run, it means such cryptocurrencies violate the Howey Test, which determines whether an asset is a security. Worse still, it often means that investors enter a project for all the wrong reasons—putting financial interest first instead of benefiting others.

The approach of “construct it and they’ll show up” leads to an atmosphere where DePIN hardware accumulates dust without being utilized, while disgruntled investors persistently seek their returns. However, lavish payouts may lead to unsustainability, causing a surge in indifference as rewards decrease. Furthermore, offering compensation in the form of a fluctuating native token can be extremely unappealing to corporations, who prefer to receive payments in digital dollars rather than a volatile token.

Prioritizing usage initially implies that the worth of a native token takes a back seat, allowing attention to be refocused on maximizing the positive impact of a Decentralized PIN (DePIN). The initial action is to identify consumers who could profit from this infrastructure and then guarantee that investor-funded hardware reaches them. This approach fosters genuine earnings and facilitates organic growth for the network. When it comes to compensation, dispersing income as stablecoins can make income streams significantly more transparent and consistent compared to current standards.

In the traditional realm of infrastructure development, it’s crucial to conduct thorough planning and investigation prior to investing a single dollar. These studies assess whether an ambitious project can be realized, who its intended beneficiaries are, and where they reside. Similarly, Digital Public Infrastructure (DePIN) projects should adopt this methodology and prioritize end-users in their strategic decisions.

Utilizing blockchain technology and distributing funding costs among a wider group of individuals can be incredibly revolutionary, offering emerging markets the chance to acquire the necessary technology for economic growth and prosperity. However, DePIN projects aiming to facilitate this change should be cautious about incorporating native tokens as a bonus, as it might divert attention and potentially lead to complications in the future, such as legal issues and regulatory problems.

In this context, the key is to focus on sustainability. Overproduction with insufficient demand can only lead to problems. However, prioritizing demand and gradually increasing supply is a strategy that leads to prosperity. This approach should guide us in nurturing the DePIN sector and ultimately transforming it for the better and impacting the world positively.

Mike James

Mike James, in essence, serves as a co-founder and CTO at DFLX. He’s instrumental in shaping DFLX into a premier platform for listing and investing in fixed-income NFTs linked to real-world tangible assets. Mike’s professional journey commenced at BAE Systems within the Mobile Sentry Division, where he offered technical know-how and development plans for land-based radar systems, later transitioning to the Unmanned Air Systems department. In 2022, Mike co-founded DeFli Networks, assuming responsibility for its dynamic business strategy, overseeing four direct reports while contributing his technical skills. His enthusiasm lies in bridging TradFi and DeFi to maximize the potential of both sectors.

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2024-12-03 15:36