FMG in-depth research report: 5 opportunities in the DePIN track from bottom to top

Original title: FMG The Future of DePIN

Original author: EO@codeboymadif, Lisa@lisal1l1, Ryan@Ryan0xfmg, Kelv@KelvinYuan13, Simon, FMG

Part 01 What and Why DePIN

The use of crypto-economy to deploy real-world physical infrastructure has a long history. Some typical projects were established as early as 2013. They have conducted very valuable explorations in the fields of communication, storage, and computing. Until today, this model has expanded to more fields, such as AI, energy, data collection, etc., and the ecology has also ushered in a phased 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 models will replace CePIN hardware deployment, operation, and management, which will bring 75%-90% cost savings.

· Token economy is the key to expanding the node network and forming network effects. When the token price rises, economic incentives enable the node scale to grow rapidly.

· 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 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 10 times, and the total market value of DePIN reaches 50% of DeFi, then the total market value of DePIN will reach 500 billion US dollars, and there is at least 20 times of growth space. According to Messari's estimate that the market value of DePIN will reach 3.5 trillion US dollars in 2028, DePIN has a potential growth space of 120 times.

We believe that the DePIN architecture has the following 5 opportunities from bottom to top:

1.DePIN blockchain underlying infrastructure. DePIN blockchain underlying infrastructure acts as the settlement layer of DePIN applications, providing support for transactions and token economic model operations.

2.DePIN middleware. DePIN middleware connects the middleware layer of the underlying infrastructure and upper-layer applications, providing standardized interfaces and tools. This layer is the key hub of the DePIN ecosystem.

3.DePIN upper-layer applications. DePIN upper-layer applications are various applications built on the DePIN infrastructure and middleware layer, providing users with actual services and value. This is the front-end and landing scenario of the DePIN ecosystem.

4. Derivative opportunities: Edge AI. Edge AI is an important extension direction of the DePIN ecosystem, using the DePIN network to deploy edge computing and AI applications, process data locally and provide intelligent services.

5. Derivative opportunities:RWA. Combine DePIN with real world assets (RWA) to create new financial products and services.

Part 02 Opportunities for DePIN underlying facilities

L1/L2 that may benefit from the DePIN ecosystem in the future

· DePIN is the main track of the Solana OPOS (Only Possible On Solana) concept. Benefiting from this positioning, Solana has fought back from the shadow of FTX, and its market value has increased from a minimum of US$3.6 billion to US$89.8 billion, an increase of 25 times. In the future, DePIN will still be an important narrative for Solana. The choice of head projects often represents a trend, and Helium's migration of the main network to Solana has played 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 ecosystems and head applications, such as IoTeX and Peaq.

· The public chain that is closely integrated with the concept of AI will inevitably extend its ecology 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.

General-purpose middleware is the crown jewel of DePIN

It takes powerful middleware to seamlessly connect physical infrastructure with blockchain. At present, trusted hardware is mainly controlled by official authorization, and anti-cheating is achieved through governance and miner management tools.

Difficulties in the development of general-purpose middleware:

· The technical difficulty is relatively high, and it is difficult to prevent cheating and trusted data from being uploaded to the chain by technology alone.

· The overall DePIN market size is limited, resulting in limited market space for middleware.

Once the general middleware breaks through, it will greatly reduce the threshold for DePIN applications and promote ecological prosperity, and the middleware will be a direct beneficiary.

DePIN Miner Service Layer: Miners' Borderless Guild, People's Network

The miner service layer is located at the bottom of the DePIN ecosystem and is an indispensable 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 required 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.

· Hardware operation and maintenance projects help nodes to deploy and operate, and charge a certain service fee. This model will perform well in the later stage of the bull market. Under the DePIN flywheel effect, the token price will rise in the later stage of the 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 rapid production of trusted equipment.

2. The permissionless DePIN node deployment platform will play a role similar to the chain game guild.

3. Look forward to the emergence of better DePIN tool layer projects and capture value. The device data aggregation platform is a high-quality user entrance. At present, DePIN data is still not transparent enough, and some key data for judging the development of the project is difficult to obtain, such as the number of device nodes, miner return comparison, number of demand-side users and income, which makes decision-making difficult, and there are vacant opportunities in the DePIN tool layer.

Part 03 DePIN application value evaluation logic: Find the unchanging law

DePIN Protocol is a two-sided market, the supply side provides services, and the demand side contributes to revenue, so the value should be evaluated from both the supply and demand sides.

Demand-side value judgment

Compared with the division from the concept, industry and supply side, we believe that the judgment of the demand market is more important, so we pay special attention to projects facing the C-end market.

Two judgments on the demand side:

· For applications facing the C-end, there are more high-profit scenarios and greater imagination space.

· Applications facing AI data needs are still in a very early stage.

Bold guess on the end of demand: Web3 mobile phones and new sharing economy

1. Encrypted mobile phones will be the key to breaking through the C-end market

Through customized mobile phones, mobile phones can have built-in DePIN applications and achieve rapid growth 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 is just at 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 shared economy network

Relying on Web3 mobile applications and through effective token incentives, large-scale shared economy/social networks can be realized in the future.

Supply-side value judgment

In the past two decades, the price of hardware equipment has dropped sharply, allowing individuals to act as infrastructure service providers.

Our judgment criteria for the supply market:

· Is the product easy to standardize? The more standardized the product, the easier it is to financialize, for example, computing power is priced according to duration, 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, which we also define 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, and other sub-segments such as 5G and WiFi are non-standard products.

Part04 Analysis of the potential of DePIN application layer

According to Messari statistics, by 2023, there will be more than 650 DePIN applications, 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 track in TAM, and enterprise cloud service revenue will reach US$270 billion in 2023 (Synery Research).

· Demand side: The demand for computing comes from small and medium-sized enterprises and individuals, among which GPU demand is the strongest due to the growth of AI.

· Supply side: Akash has a diversified hardware network including CPU, GPU and storage, and Render has a large number of GPUs. io.net obtains a large number of GPUs from its own network and other platforms.

2 trend judgments in the computing sector:

1. The GPU computing power market is currently the most imaginative 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 soaring demand

2. Resonance with the concept of AI

3. World computing power currency under geopolitical conflicts

The development trend of decentralized GPU platforms is to attract computing power head 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 lies in bypassing the B-end, expanding computing power to the C-end, and building an edge computing network on the supply side, and in closely integrating with downstream demand sides or building their own application scenarios on the demand side.

2. The storage sector will move towards storage and computing integration, becoming a unique Layer1.

After superimposing computing, some large-scale storage DePINs will become unique Layer1s - blockchains that can provide decentralized storage and computing capabilities. Compared with the current blockchain, this unique Layer1 can greatly reduce the storage and computing costs on the chain. 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 in a decentralized manner

Bittensor is a typical model of DePIN AI, which 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 is necessary to pledge a considerable amount of TAO tokens. 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 sector with the most growth potential and driven by AI

Currently, there are few sensor projects, especially those focusing on data, which means more opportunities in the primary market.

Value analysis of the sensor sector:

Is the market space large enough? The scale of the downstream demand market determines the ceiling of the project.

Is the data value high enough? The uniqueness and application scenarios of the data determine the value of sensor-based DePIN applications.

Growth logic of the sensor sector:

1. New sector driven by AI

2. Decentralization is needed from the underlying logic

3. The supply chain of self-contained mining machines 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 use 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 cold start stage of the market).

05 Energy network: the need to use a centralized network to achieve a minimum viable product

The DePIN energy network reduces energy transmission through distributed power supply, improves energy utilization efficiency, and ultimately realizes the 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 the collection of electricity consumption data, and the construction is relatively easy. 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 end of DePIN energy: through the DePIN incentive model, small power supply networks and demand sides are connected to form a virtuous circle, and ultimately realize VPP virtual power plants.

· 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., which promote the sales and high-frequency use of equipment through DePIN incentives.

Features of DePIN + Consumer Products:

· High market size ceiling: 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 users' lives. 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 they can truly integrate into the real world.

· High return expectations promote the transformation of traditional brands Web3: The new Web3 marketing model makes the products not only have use value, but also have profit attributes. This model helps products quickly occupy the market, thereby significantly improving profitability.

Potential risks and shortcomings of consumer-grade DePIN hardware:

Subject to a single token incentive, most users buy hardware for free, rather than users with real needs. Similar to the verification problem between DePIN hardware devices and software, more anti-cheating solutions are needed to overcome it.

Part 05 Two new opportunities derived from DePIN

01 The breakthrough point of the second half of the supply side of DePIN is Edge AI: mobile phones and PCs

Mobile phones and PCs are the most popular hardware devices. They do not require cryptocurrency experience and are an excellent entry point for breaking the circle. There are two ways to join the DePIN network:

· Run the node program and become the control end of DePIN hardware.

· Directly provide sensor data or computing resources.

Opportunities for the rise of encrypted mobile phones: 4 major application scenarios, leveraging the market through potential benefits

· Mobile encrypted apps. The encrypted application 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 encrypted 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 economic returns. For project parties, airdrops to encrypted mobile phones make token holdings highly dispersed, which is conducive to the spread of Meme 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 the competition of 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 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 ground promotion networks will be more likely to gain market access.

· The application ecosystem is the key to the formation of barriers for encrypted mobile phones. Once the network is formed, there will be an opportunity to become the traffic entrance of Web3.

· Other tests: hardware iteration, testing the financial strength and operational capabilities of the project.

The End of Crypto Phones: DePIN + Sharing Economy

In the Web2 era, through the Internet, personal cars and houses are gathered together to form a huge service market, which enables personal assets to be realized.

In the Web3 era, through the token economy, idle and scattered personal hardware devices are organized to form productivity, which enables personal hardware devices to be realized. Software based on Web3 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

Tokenization of DePIN physical hardware:

· Release DePIN hardware liquidity. After the tokenization of DePIN physical hardware, RWA derivative projects such as income separation and mortgage lending can be realized, and 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 traditional financial products similar to the Reits model are issued, such as packaging GPUs on the chain to make GPU Index.

Tokenization of data assets (NFT):

· Standardizing and tokenizing data assets is the key to promoting their flow in the market.

· DePIN data assets empower 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 to 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. The public chain that supports the DePIN ecology in this cycle will get 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 the direct beneficiary of the prosperity.

· Similar to the game guild, the DePIN miner service layer is expected to develop a borderless hardware miner guild. The current potential opportunity is the 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 a new narrative, and traditional storage such as Filecoin and Arweave will be rejuvenated.

· Current status of DePIN AI development: AI large language models led by Bittensor have gradually absorbed many leading projects in the track by taking advantage of their first-mover advantage. At the same time, other large models similar to Fetch.ai are also actively deploying. The competition is fierce and the pattern is unclear. In the future, it will be like the Internet explosion in 2000, ushering in a thousand-model war, and everyone will have a chance.

· Sensors are a potential sector activated by AI. The sales revenue of proprietary equipment will provide more innovation space and risk resistance for sensor projects.

· The model logic of wireless network and energy network is similar. The end of wireless network is to bind large operators, and it is more likely to break through from the third world; the end of energy network is virtual power plant (VPP). At present, the project is exploring from all aspects of VPP, and the track is still in the early stage of development.

· Edge AI based on mobile phones and PCs is the next trend of DePIN development. 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 C-end will gradually emerge.

· DePIN is a new way to issue RWA assets. Combining with on-chain DeFi will release the liquidity of DePIN hardware and data.

Original report: https://docsend.com/v/x2zdt/futureofdepincn

Thanks to DePhy, Exabits, Ora, EthStorage, Hotspotty, IoTeX, 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/Hx4AScWLZf4HrCl1IoumFTq1L 20e3SzF-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

This article is from a contribution and does not represent the views of BlockBeats.

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