DePIN: Evaluating Real-World Impact and Scalability in a Crowded Space

Decentralized physical infrastructure networks (DePINs) represent a particularly intriguing development because, unlike other crypto projects centered around tokens, DePIN integrates blockchain technology with physical infrastructure. This offers a fresh use case by leveraging blockchain to manage and interact with tangible resources.

As the crypto market continues to expand, venture capital (VC) firms face the daunting task of identifying promising startups amidst a vast pool of contenders. With the surging influx of crypto projects, VCs must adopt a highly strategic and rigorous approach to evaluating the viability, market value, and team strength behind each idea—a crucial step in light of how quickly some projects can either combust or be unmasked as fraudulent. This holds especially true for novel projects operating within emerging industry spaces, such as decentralized physical infrastructure networks (DePINs).

Unlike standard crypto projects that revolve around tokens, DePINs integrate blockchain technology with tangible infrastructure, presenting a fresh use case by employing blockchain to manage and interact with physical resources. While both types of projects are assessed based on common factors like technology and market demand, DePIN projects shift the emphasis towards practical application and operational feasibility rather than the speculative potential of trading and staking digital assets. Ultimately, any developer can conceive an idea with potential, but the real challenge for an investor lies in moving beyond the hype to uncover genuine use cases that provide tangible benefits to the crypto community and beyond.

DePINs offer the strategic potential to disrupt traditional industries by providing decentralized alternatives to conventional infrastructure management. Some DePIN projects have garnered attention for presenting use cases that extend beyond the digital realm, aiding those less familiar with crypto in understanding how these technologies can be applied in day-to-day scenarios. For instance, the peaq network is a Layer-1 blockchain designed to power DePINs and real-world assets, aiming to create a people-powered network that fosters a decentralized economy. Simultaneously, it provides the infrastructure for communities and individuals to collectively govern and earn through interconnected systems.

However, investing in DePIN projects comes with its share of challenges. While the concepts may sound compelling and could have considerable disruptive potential, many of these ideas still lack proven models, making it difficult to predict which projects will succeed. As a result, investors have opted to tread cautiously with DePIN projects, carefully evaluating each initiative's practicality, viability, and business model.

Furthermore, developing a DePIN project demands significant time, effort, and resources, necessitating a substantial upfront capital investment that most early-stage crypto projects don't have. For example, Helium raised over $360 million, and Filecoin secured $205 million to develop its protocol. The high costs and lengthy timelines stem from the need for extensive research, specialized skills, and funding for technology prototyping and infrastructure development.

Launching a DePIN project is about more than just creating a token; the process requires specialized expertise, advanced hardware, and logistical coordination, all contributing to the elevated initial costs that most crypto projects don't demand. While many DePIN projects are entering this burgeoning blockchain niche, specific qualities differentiate a project worthy of a substantial investment from those just riding the momentum of a new trend.

A worthy investment addresses real-world challenges—such as decentralized connectivity, storage, or energy management—and shows genuine growth potential. Some DePIN projects have effectively addressed GPU shortages in AI by providing flexible and cost-effective alternatives. Using token rewards to encourage data centers, businesses, and individuals to contribute to their excess GPU resources creates an on-demand hardware supply for developers.

Render Network exemplifies this adaptability. Initially focused on GPU powering for rendering graphics, it has expanded its offerings to include AI computing tasks, ranging from Neutral Reflectance Field (NeRF) applications to generative AI, utilizing generative AI software tools like Stable Diffusion. This evolution highlights the platform's adaptability and the growing demand for decentralized computing resources for AI builders.

Another solution, Gensyn, is a machine learning compute protocol designed for deep learning models. It connects all machine learning-capable compute hardware globally, including both GPUs and CPUs, providing on-demand access to a global pool of resources that would otherwise be underutilized.

While both projects are enhancing efficiency and scalability in the field, the DePIN space is becoming increasingly crowded. It's crucial to evaluate whether some projects are building solutions to address real problems and how critical addressing these problems is. The question VCs should consider is: Are developers serving their interests rather than the end users’?

While projects may claim to enhance decentralized connectivity or optimize resource distribution, the path to implementation and user adoption may present challenges. This highlights the need to assess the technology and the ecosystem surrounding projects in addition to considerations like regulatory concerns and scalability.

The investor and developer are responsible for developing a more transparent and accountable environment for DePIN projects. Investors must ask hard questions and conduct due diligence beyond surface-level metrics. Simultaneously, developers must focus on building solutions that enrich a niche market rather than chasing a funding opportunity that will become increasingly more challenging to come by. By prioritizing practical applications, the emerging DEPIN sector can facilitate innovative solutions that enhance physical infrastructure's efficiency and resilience, benefiting communities beyond crypto.