Intro
Decentralized Physical Infrastructure Networks (DePINs) bridge the physical world with blockchain technology by incentivizing contributions of digital or physical infrastructure resources, such as computing power, storage capacity, wireless network bandwidth, sensors, etc to create a crowd-sourced network.
Participants who contribute these resources earn tokens (usually native coins) based on their contributions.
This creates a peer-to-peer marketplace/network of providers and users of these real-world facilities and infrastructure offering a cost-efficient, decentralized, and scalable approach to physical infrastructure services that have traditionally been centralized.
At the time of writing, data from DePIN Ninja shows that the aggregate market capitalization of DePIN is around $60 billion, with AI being the category that contributes the most to the sector.
Understanding how DePIN works
The concept of crowd-sourced solutions that link participants who provide resources to people in need of them and get paid usually in cash is not new.
Fine examples of this are ride-sharing apps like Uber and hospitality apps like Airbnb.
The DePIN concept closely resembles this model, with the main distinction being that these services are now integrated into blockchain. Additionally, instead of receiving fiat currency, contributors are rewarded in cryptocurrency.
The use of blockchain ensures decentralization effectively allowing on-demand access to this P2P resource network whilst eliminating central control and leveraging on blockchain for transparency and security.
Here is how DePIN systems work and combine blockchain architecture, physical infrastructure/off-chain networks, and token rewards:
- Blockchain Framework/Architecture: projects utilize this immutable and distributed ledger to execute smart contracts, manage transactions, charge fees, and distribute rewards.
- Physical/Digital Network Infrastructure: this includes resources required for network functionality, such as routers and other networking equipment which facilitate the transmission of data, resources, or information to the DePIN projects.
- Off-Chain Network/Computing Systems: These are the devices that participants provide and transfer their spare resources to the network to earn rewards, users either buy the required resources such as computing power, GPUs, data storage, sensor, etc., or contribute if they already have them.
- Token Rewards: Individuals and entities who contribute resources to the network are rewarded with crypto tokens to encourage continuous/more infrastructure contribution.
The DePIN Flywheel
If designed correctly and run properly, DePIN projects can employ incentive mechanisms to harness and cultivate a self-sustaining cycle that expands the network’s user base and contributors, commonly known as a flywheel:
As user engagement and interaction increase, the demand for DePIN crypto tokens (used to pay fees/charges) will naturally increase.
- Increased Usage: DePIN protocols, being crowd-sourced, effectively eliminate the need for centralized infrastructure. Consequently, projects can offer services at rates lower than those of centralized competitors. This has the potential to increase the demand for their services.
- Token Price Rise: Increased demand and usage of the protocol will likely result in a rise in the price of the native token. Additionally, the DePIN protocol can implement mechanisms such as token burns and buybacks amidst the surge in demand to further drive up token prices.
- Contributor Incentive: The increase in token value will attract more individuals with the required resources to contribute to the network. Furthermore, the rewards earned by those already contributing will be of greater value.
- Network Expansion and Investor Interest: As more contributors provide additional physical infrastructure, the DePIN network expands its capacity, enabling it to accommodate a larger user base and offer a wider range of services. This growth in users, contributors, and token value attracts investors, who bring additional funding, expertise, and support, further accelerating the development of the DePIN protocol.
Types of Decentralised Physical Infrastructure Networks
DePINs can be classified into two major types, they are:
- Physical Resource Networks (PRNs): these refer to location-dependent infrastructure and hardware resources. Contributors are rewarded for providing such resources. Examples include wireless/network connectivity and geospatial data.
- Digital Resource Networks (DRNs): unlike PRNs, DRNs are not restricted to particular geographical areas because they are location-independent digital resources such as storage space, computing power (GPU) etc.
Benefits & Challenges of DePIN
Benefits
Accessibility: DePIN are permissionless, they allow broad participation from everyone.
Decentralization: Since they operate on the blockchain and are also peer-to-peer solutions, DePIN effectively eliminates single points of failure and reduces risks of censorship.
Cost-efficiency and rapid scalability: DePIN utilizes shared global resources provided by contributors; this goes a long way in reducing costs and enabling rapid scalability.
Challenges
Technicality and complexity: Setting up and contributing resources to DePIN protocols might be too complex and technical, especially for first-timers, which is why more education is needed on this front to engage potential adopters effectively.
Unfavorable token price volatility: Can potentially have a negative effect on a DePIN protocol since the business model relies on rewarding contributors. If the incentive is not deemed worth their time due to a low token price, it may discourage contributors.
Final Thoughts
In conclusion, DePIN stands as another testament to the disruptive potential of blockchain technology within traditional industries. As evidenced by the insights from Messari researchers, the DePIN flywheel harbors the potential to inject up to $10 trillion into the global GDP within the coming decade.
The concept of a decentralized peer-to-peer marketplace for infrastructure resources, such as storage capacity and computing power, emerges as revolutionary. Not only do users benefit from competitive prices for these services, devoid of any single point of failure, but contributors also get remuneration for their efforts.
Through its innovative framework, DePIN symbolizes a significant stride towards reshaping the landscape of digital infrastructure provision.
