DePIN with Connor Lovely

Level 2 - Value Investor

This is a Guest post entirely written by Connor Lovely who is focused on DePIN.

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Hi everyone, welcome back to the #1 paid crypto substack. I’m Connor Lovely and today you’ll be hearing from me on one of crypto’s most exciting new sectors: DePIN (decentralized physical infrastructure networks).

DePIN was the gateway through which I entered crypto back in 2020 and I’ve grown up alongside the sector as it’s emerged and really caught fire over the past four years. In that time, I’ve co-founded two DePIN mining startups and now work at IoTeX, the largest DePIN infrastructure player on the market. There isn’t a single company out there doing more to support the DePIN sector and its builders than IoTeX right now and it’s been an absolute pleasure working with the team there. I also co-host the leading DePIN podcast, Proof of Coverage.

Before I jump into what DePIN is, why it’s important, and the rest of it, I’d like to thank BTB for giving me a platform from which to discuss this with you all and for their writing, tweeting, and memeing over the past 5 years. I’ve been a reader since the account was focused on IB recruiting and in-office politics and it’s been incredibly cool to see the shift in focus towards crypto and ecom over time. This transition reflects my own journey from Boston Consulting Group to crypto startup land and it’s still insane to me how good BTB’s advice has been on both ends of the spectrum.

We’re all here because we have a singular goal (making it) and we want to accomplish that goal as efficiently as possible. As BTB says: Equal opportunity, unequal results. I hope that this primer provides you with the information you need to generate unequal results. With that, let’s begin.

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What’s DePIN?

DePIN stands for Decentralized Physical Infrastructure Network. It’s a new way to build and maintain physical infrastructure in the real world. The idea is to use public blockchains and token incentives to coordinate human behavior towards a productive end goal. In this case, that productive end goal is the creation of useful physical infrastructure (like a wireless network, a file storage network, or a network of EV chargers).

Why is DePIN important?

DePIN is important because it brings innovation to huge, oligopolistic markets like telecom and energy. Telecom and energy are the two largest industries in the world (source). These markets are oligopolies because they have extremely high barriers to entry. These barriers to entry are primarily financial (AT&T was on track to spend $24B in capex in 2022 alone) and logistical (AT&T has ~160,000 employees). Regulatory capture is a factor here too.

Because these markets are oligopolies, there are few “providers” for a good or service. This means competition is limited, innovation is stifled, and consumers have to put up with subpar customer service and overly inflated prices because they don’t have another choice. To illustrate this, the telecom industry consistently has one of the worst net promoter scores (a measure of customer satisfaction) of any industry on the planet (source).

DePINs are looking to break these oligopolies by increasing the number of “providers” for a good or service, increasing competition, innovation, and improving the end user experience. To help overcome the two aforementioned barriers to entry (financial, logistical) DePINs do two things: 1) use the DePIN model as a novel capital formation method, essentially crowdsourcing the cost of network buildout to contributors and 2) use trustless, immutable public blockchains to coordinate the actions of contributors, globally, towards what is best for the network. We’ll explore how these two approaches work in practicality in the next section.

How do DePINs work?

DePINs use blockchains to coordinate and incentivize the buildout of physical infrastructure. They distribute tokens to contributors to incentivize them to deploy hardware that is useful to the network. These tokens usually have immediate financial value, can provide future financial upside when network revenue is properly accrued to the token, and often grant the holder a say in network governance. The three main topics we’ll cover below then are token incentives, token value accrual, and network governance. To illustrate all of this, I’ll use an example.

Token incentives: Helium is one of the oldest and largest DePINs. They struggled for years to build out a global IoT network in a centralized way because it was far too expensive and difficult of a project for them to take on alone. When they adopted a DePIN model (distributing token incentives to contributors to build their network for them, allowing third-party manufacturers to build approved hardware) they quickly scaled to ~400k IoT nodes globally. This created IoT coverage in most populated areas of the world and was dubbed the fastest wireless network rollout in history

Token value accrual: Network revenue consists of data transfer (the network’s primary purpose) and transaction fees including hardware onboarding fees, hardware location assertion fees, payment fees, etc. This revenue is accrued to the $HNT token via the burning of $HNT. A simple explainer can be found here and more detail can be found in the docs.

Network governance: $HNT tokens provide the holder with a say in how the network is governed. More detail can be found in the docs here, but at a high-level, $HNT holders can propose new HIPs (Helium Improvement Proposals) and then vote on those HIPS to implement protocol-level changes

Helium has since made a ton of progress, becoming a Network of wireless networks (IoT, cellular, WiFi) with different tokens for each and launching Helium Mobile (MVNO partnered with T-Mobile and currently at 50k subscribers), but that’s all best addressed in a completely separate post.

In summary, Helium is just an example of the most common way DePINs use token incentives, accrue value to those tokens, and conduct network governance. However, like anything in crypto, there’s lots of variation and experimentation around these topics going on and there are MANY other DePINs you’ll want to be aware of. Now, let’s talk about what the rest of the DePIN industry landscape currently looks like to give you a sense of the broader picture.

DePIN Sector Landscape

I’ll stand on the shoulders of giants here and reuse a graphic created by my colleague Andrew Law (also at IoTeX) to illustrate the breadth of the sector for you. It includes L1, L2, and off-chain infrastructure, but the actual DePINs themselves can generally be subdivided into Physical (PRN) or Digital (DRN) resource networks, depending on the type of service they offer (green and blue boxes). Another nod to my friend Sami Kassab here for coming up with the PRN/DRN designation.

Physical services would be things like decentralized Uber (Teleport) or decentralized manufacturing (3DOS). Digital services would be things like decentralized file storage (Filecoin) or decentralized compute (Render).

On the whole, DePIN now encompasses 700+ projects, ~$41B of market cap, and ~$24M of on-chain ARR. Shoutout to Sal and Mahesh at EV3 for creating DePIN Ninja to track on-chain revenue and my colleagues at IoTeX for creating DePINscan to provide a CoinMarketCap-like explorer specifically for the DePIN space. Check it out here!

How DePIN can help you generate Unequal Results

I’d be remiss if I didn’t include any info about DePIN mining in this primer, as it can be incredibly lucrative (up to single day payback periods on hardware, or 36,000%+ ROI). Generally, DePINs overcompensate their first set of contributors because these contributors are taking the most risk, buying hardware for a tiny startup’s nonexistent network and tinkering with it, working through bugs, etc. This section honestly deserves its own blogpost but a mere mention now should hopefully get you thinking and headed down the right direction.

DePIN mining can be thought of on an active to passive involvement spectrum. Typically, the more active the DePIN asks you to be, the more they should compensate you. After all, there is an opportunity cost of time.

Some of my favorite DePINs to mine currently:

• Helium - buy wireless hardware, deploy it, earn tokens

• Hivemapper - buy dashcam, set it up in car, drive and earn tokens

• DIMO - buy OBD2 port hardware, plug it into car, earn tokens

• Grass - download chrome browser extension, allow them to use <2% of your bandwidth for AI scraping-type jobs, earn points (token launch next 3-6 months likely)

Conclusion

I’d like to wrap things up by reminding you that DePIN, crypto, and all new technologies are experiments. There’s lots of risk involved, many ideas will fail, but the few that come to fruition change the course of history and greatly improve the human experience. I believe DePIN represents one of crypto’s best shots at a killer use case and achieving mainstream adoption.

BTB’s shift in focus from traditional financial markets to crypto mirrors my own, as we have both realized that crypto provides the greatest potential upside (financial, technological, etc.) of any industry on the planet currently. I’m immensely grateful that I found my way into crypto relatively early in my career and I am certain it is where I’m meant to be at the current moment. I have God, my family, and my colleagues and friends to thank for this journey. Long BTB, long crypto, long DePIN, I’m out✌

Sector Resources

• Follow me on Twitter

• Proof of Coverage - best DePIN podcast

• DePINscan - CoinMarketCap for DePINs

• DePIN Ninja - best on-chain revenue tracker for DePINs

• DePIN Hub - news and social sentiment tracker for DePINs

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All questions/comments unrelated to this post will be deleted.

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.

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