Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
An unhealthy fixation on native tokens, coupled with hardware installed in areas with low demand, means that too many DePIN projects lack sustainability. Decentralized physical infrastructure networks, also known as DePINs for short, are ambitious projects that represent a huge task. They involve much more than launching an instant memecoin with a couple of clicks.
The goal of connecting real-world assets, such as energy networks and transportation networks, to blockchains requires time, resources and scale. For this reason, it is not surprising that The Block Research suggests Funding has now reached a new all-time high of $1.91 billion.
Growing interest in artificial intelligence has given another boost to the burgeoning DePIN sector, but not all projects are created equal, and those that survive in this competitive landscape must overcome significant structural issues to reach their full potential.
Paralyzed by chips
One particular issue relates to the erroneous notion that startups need to launch a native token to be successful. This can be a fatal mistake, as it means that the value of a network is tied to the broader market and macroeconomic events that are completely outside its control.
Helium (HNT) is a good example of what this looks like in practice. This blockchain-based platform was created with the vision of cultivating a people-powered wireless internet network, meaning those operating hotspots would be rewarded with HNT tokens.
But in reality, the success of the project lay in how this digital asset was launched at the right time, right in the middle of a huge bull run that generated FOMO among investors. The huge increases in the value of this token were not a reflection of the resilience of this network or the number of customers it had. This basically reduced HNT to a simple memecoin with little utility.
In fact, when analyzing Helium's annual recurring revenue, a sobering statistic emerges. Even with $1 billion worth of hardware, the Internet of Things would take about 1,000 years to break even.
Other contenders in the space include peaq, a network that claims to host more than 50 DePINs. Healthy scrutiny is needed here, as it is difficult for most blockchains to handle the transaction volumes of a single decentralized physical infrastructure network, let alone 50.
And that brings us to the most important lesson that emerging DePIN brands need to learn: you don't need a token of your own as long as the rewards for users are liquid. We have already seen how these digital assets can even put projects in trouble, with Pollen Mobile <a target="_blank" href="https://news.bloomberglaw.com/litigation/pollen-mobile-sued-for-distributing-useless-crypto-tokens” target=”_blank” rel=”nofollow”>facing lawsuits in the United States after being accused of “minting coins out of thin air” and whipping them to obtain cash.
DePIN offers one of the lowest returns on capital employed of any industry in the world, and its decentralized nature means that the financial burden is transferred to those who invest in a project rather than the founders. And for this sector to truly make an impact, founders should focus on creating demand-driven solutions, directing their efforts toward attracting more customers rather than expanding their networks.
Let's explain what this means in practice. Rather than adopting a “build it and they will come” model, a demand-driven approach would mean hotspots would emerge in areas where there are already paying customers who want them.
India is a prime example of a market where there is insatiable demand for internet connectivity, but 600 million people lack access. By separating ownership from installation, a DePIN investor could purchase hardware that it will then use where it is really needed, in some cases on the other side of the world.
Rethink DePINs
Of course, hardware is a crucial element when creating DePIN, but right now the incentives are not aligned. Too many projects have sold equipment at inflated prices, while becoming dependent on moving more units to increase their revenue. Others have allocated a portion of each purchase to token burning in an attempt to make these digital assets more acceptable. While this may inflate their price in the short term, it means that such cryptocurrencies violate the Howey test, which determines whether an asset is a security. Worse, this often means that investors enter a project for the wrong reasons: putting financial interest first rather than benefiting others.
The “build it and they will come” approach creates an environment where DePIN hardware collects dust and goes unused, but aggrieved investors continue to demand a return. But generous payouts can become unsustainable and create high levels of apathy when rewards decline. Insisting on distributing compensation in the form of a volatile native token may also be exceptionally unpalatable to corporations, who would prefer to be paid in digital dollars.
Going demand first means that the value of a native token is a secondary concern, and the approach can again ensure that a DePIN does the most good. The first step is to find consumers who would benefit from this infrastructure and then ensure that investor-funded hardware reaches those who reach them. This helps generate real income and means a network grows organically. When it comes to rewards, distributing income in the form of stablecoins can make income streams much more transparent and predictable than they are today.
In the old world of infrastructure, careful planning and research is done before a single dollar of capital is spent. Feasibility studies examine whether an ambitious project is feasible, who it would serve, and where it is located. DePINs should follow the same approach and put end users at the center of their strategy.
Blockchain technology and the distribution of financing costs across a broader sector of people can be truly transformative: allowing emerging markets to finally access the technology they need to grow their economies and become more prosperous. But DePIN projects trying to make this happen need to realize that including a native token in the deal for the sake of it risks creating an unnecessary distraction that could ultimately prove detrimental in the long run and lead to endless legal and regulatory headaches.
Sustainability is the name of the game here. Too much supply and too little demand will always spell disaster. But putting demand first and gradually increasing supply along the way is a recipe for success and should serve as a roadmap to help the DePIN sector thrive and change the world.
