Demystifying DePINs and More: Bridging Real-World Infrastructure

8 May 2024

What are DePINs?

Decentralized Physical Infrastructure Networks (DePINs) are real-world infrastructures on-chain. In more depth, DePINs offer a community-driven, cost-effective means of scaling projects without relying on traditional, centralized models. They are platforms where organizations and individuals can benefit from higher levels of control over their data and products through decentralized infrastructure.

As for the term "DePIN,” this gained prominence in 2023 and continues to grow in mention into 2024. Initially, Web3 was used to reference projects focused on networks (replicating Web2 internet networks, but decentralized) but has since expanded to include all crypto or blockchain work, resulting in the need for this specific terminology.

DePIN 101

On a fundamental level, DePINs function as bridges between physical facilities and the blockchain ecosystem. They operate through three main components. These are physical infrastructure controlled by a provider, a middleware connection to the blockchain, and a public ledger. These connections are managed by record-keeping and offering remittances to both the provider and the user.

The physical infrastructure could be a smart agriculture system where farmers use IoT (Internet of Things) devices such as soil moisture sensors, weather stations, and crop health monitors to gather data about their fields. The middleware would then relay this information to the blockchain. Then, based on the data provided by the middleware, the blockchain would distribute rewards to the provider and users in the form of tokens.

Additionally, for DePINs to operate effectively, four distinct parties must be involved in the network. This includes:

  • Hardware (PRNs & DRNs): a physical component connecting networks to the real world
  • Hardware operators (Providers): Contributors buying or lending their hardware to the given network
  • Token: A financial incentive paid out to hardware operators based on data provided by the middleware
  • Users: DePINs need users who are willing to use and pay for the service

The Current DePIN Landscape

DePIN projects operate in six core business niches: compute marketplaces, wireless coverage, wholesale data, services marketplaces, energy services, and vertical ad networks.

At present, there are several existing projects emerging in all six of these business models, including Filecoin, Helium, Hivemapper, Braintrust, Entheos and Sweatcoin.

Out of these six sectors, compute marketplaces are where the most potential is seen, making up the majority of the market capitalization of DePIN crypto projects.

Unpacking a DePIN example

As we can see from the current DePIN landscape, there are many sectors in which DePINs currently operate. One real-world example that makes sense, at its core, is a decentralized energy grid. The basis for this is that traditional energy grids are often centralized, owned, and operated by utility companies, which can lead to inefficiencies and a lack of flexibility in distribution. Contrastingly, a decentralized energy grid built on blockchain technology could enable peer-to-peer energy trading between consumers and producers.

Imagine a scenario where homeowners could sell excess energy to neighbors from their solar panels. This would facilitate more efficient use of renewable energy resources and incentivize individuals and communities to invest in sustainable energy production. By leveraging blockchain and smart contracts, this DePIN could ensure transparent and secure transactions while empowering users to have more control over their energy usage and production.

The Flywheel Effect

The concept of the flywheel effect is crucial to understanding DePINs potential for network growth and scalability. Unlike traditional models that require massive upfront capital investments, DePINs rely on grassroots efforts and community-driven initiatives to scale.

Tokens play their part in these ecosystems by serving as an incentive for the community to contribute to the maintenance of the network. The Flywheel (above) visualizes the different steps involved in this maintenance and also helps to explain how DePIN projects can utilize the flywheel effect to catalyze their network growth.

There are several different ways projects can increase the value of their token. For example, a stake-weighted random selection algorithm can be utilized to increase the value of a token, as providers must stake the project's token to get user deal flow. This adds an added incentive for contributors to continue building out the network. Therefore, the native token will increase in price as the network grows, resulting in more rewards for providers and a higher attraction for investors to invest. Fundamentally, this flywheel creates infrastructure networks that get stronger as they get bigger.

As explained above, the flywheel effect of DePINs offers an alternative approach to traditional business models that fundamentally makes sense. However, we must consider the obstacles DePINs face in their journey to realizing their potential.

The Future of DePINs

By leveraging blockchain technology and tokenomics (The Flywheel Effect), DePINs are expected to disrupt existing IoT business models and enable on-chain communities to build innovative decentralized networks and applications.

However, some limitations are currently holding DePINs back. There are several architectural considerations for scaling DePIN applications on-chain that need to be addressed if DePINs are going to be the bridge between decentralized technology and the real world.

The most significant challenges to overcome are scalability, interoperability, security, and usability issues.

The on-chain infrastructure needs to be able to handle a high volume of transactions and data throughput effectively to support the requirements of decentralized physical networks. To then communicate and exchange this data effectively, seamless interoperability with other blockchain networks and traditional systems is required.

Robust security mechanisms, including encryption and authentication, are vital to safeguarding sensitive information and ensuring the integrity of DePIN networks. On top of this, DePINs must have systems in place, ensuring the security of external data feeds (oracles) used to verify real-world information and the prevention of Sybil attacks, where malicious actors create fake identities to gain undue influence within the network.

A final consideration is that specialized technical knowledge is currently required to participate in a DePIN ecosystem. A more usable interface and intuitive design will be required for further adoption.

The future of DePINs relies heavily on collaboration among stakeholders and ongoing technological innovation to address these challenges and unlock their full potential.