Amid the hand-wringing over memecoin mania and crypto’s supposed moral crisis, the rise of DePin networks represents a welcome and powerful reassertion of crypto’s real world utility. The term “DePin,” coined by research firm Messari in 2023, is new but the idea behind it is as old as crypto itself. DePin, short for Decentralized Physical Infrastructure, refers to community-driven networks that coordinate hardware using protocols and token incentives.
Bitcoin, the original blockchain, is the prototypical DePin network. This is because it invited anyone in the world to contribute computing resources towards securing its distributed ledger and rewarded them with “digital gold.” That model was revolutionary, not just for its technology but for its economic implications. Yet, as crypto evolved, it often veered towards abstract speculation and regularly lost touch with its proven capacity to smoothly coordinate physical resources. Today’s DePin networks are more sophisticated, offer a path back to crypto’s origins, and they promise to silence crypto’s critics by promoting more just economic relationships.
A Better Operator Economy
DePin networks create new economic arrangements that improve upon those in the existing operator economy. The operator economy—more commonly termed the “gig” or “sharing” economy—emerged with companies like Uber and Airbnb, which harnessed a vast network of independent operators to coordinate the delivery of valuable services such as ride hailing and home sharing. Their reliance on crowd-sourced labor and physical resources using private company networks proved enormously successful, validating a new service paradigm that could compete with, and even outperform, more traditional business-to-consumer models.
This Web2 operator economy was lucrative for its corporate unicorns and their shareholders. However, it was less positive for other stakeholders, such as workers who are contributing time and resources to the network and early adopters who see the product's long term value. Like much of Bigtech, the operator economy tended to embody an extractive logic, which favored monopolies, created a precarious labor force, and relied on subsidized venture money and unpredictable governance that resulted in platform risk.
DePin improves upon the operator economy by making it more democratic, economically inclusive, and transparent. Much like other blockchain applications that have found product market fit (e.g. DeFi), DePin protocols replace the idle monopolists and rent seekers at the heart of Web2’s operator networks with software and code. As a result, they are able to redistribute the economic value to the participants based on contributions to the network. Consider the ride hailing protocol Teleport. Teleport is very similar to Uber except that it dissolves away the corporation behind the ride sharing marketplace. This means that it can return more value back to drivers and riders in the form of higher wages and lower prices, respectively.
Companies like Uber and Grubhub depend on a class of precarious gig workers stripped of employee benefits. In contrast, DePin networks are specifically designed to reward network participants who invest their hardware and time into the network with tokens through permissionless smart contracts. This means that every contributor to a DePin network could become an economic stakeholder, not merely an input in the corporate spreadsheet. The more inclusive capitalism animating the Web3 operator economy is not just fairer towards network contributors; it also ensures that venture returns are not captured solely by a handful of venture capital firms, but also by the participants spending time and money to grow the network. Making participants owners is good for business too; these original owners become network evangelists, helping to bootstrap the next wave of users.
The more permissionless nature of DePin networks also means that they reduce barriers to entry, draw in a broader range of participants, and expand geographic reach, which makes them ideal for servicing edge cases. On the supply side, they open the ecosystem to all qualified manufacturers, ensuring that a single hardware vendor does not become a monopolist, and that the network offers better products at lower prices.
Finally, the protocol driven nature of DePin networks provides more protection against platform risks and censorship. Code, unlike central actors, is much harder to halt or censor. This means that DePin based hardware services will be harder to disrupt for political or other illegitimate reasons. However, it can also mean that DePin networks will be better at sustaining services that cross legal boundaries, posing challenges in governance and regulation.
The DePin Landscape
Most Web3 operators are honing their craft in a growing range of specific sectors, signaling the maturation of the Web3 operator economy.
Hardware Operators. Hardware operators are the linchpins of the DePin revolution, matching physical assets with user demand. Take io.net, which connects companies needing AI processing power with a network of GPU providers. Helium operates similarly, linking small cell hardware owners with those requiring 5G connectivity. These examples underscore a pivotal trend. In the expanding operator economy, hardware becomes a shared commodity, and every participant plays a dual role as both consumer and provider.
Data operators. Data operators transform raw data into valuable assets. They deploy hardware to collect and process data, creating datasets and APIs for commercial use. Examples like DIMO and Hivemapper illustrate this trend, with operators gathering vehicle data for insurers or capturing street images for real-time street-level mapping. Beyond mere collection, these operators often enhance data before it's wrapped into marketable products. They also play a crucial role in transmitting real-world data across networks, utilizing IoT sensors to not only gather but also deliver services.
Storage Operators. Storage operators form the backbone of data permanence in the Web3 operator economy. Projects like Arweave and Filecoin are pioneering this space, offering decentralized solutions for file storage. They ensure that data is not just saved but also remains accessible for future use. KwilDB, a decentralized database, operates on similar principles. It provides a secure and persistent store for structured data. These platforms are crucial as they safeguard information against loss and obsolescence, enabling a reliable digital legacy.
Computing Operators. Computing operators provide essential processing and communication services. Projects like Aethir showcase the potential of decentralized cloud rendering networks, enabling developers to build a range of decentralized consumer applications and users to tap into a collective pool of computational power. Similarly, Akash offers a marketplace for cloud services, challenging traditional providers like AWS and GCP with a decentralized alternative. These platforms embody the transformative spirit of DePin, as they not only decentralize but also democratize access to computing resources.
Challenges
A Web3 economy powered by DePin faces a number of challenges. First and foremost, DePin projects must effectively navigate the complex regulatory landscape of the real world. For example, data collection services like Hivemapper are required to juggle a patchwork of governance, data management, and safety regulations, each with its own set of stringent compliance requirements. Similarly, 5G networks encounter a patchwork of spectrum licensing laws that vary wildly from one jurisdiction to another. These hurdles introduce significant friction, which slows progress and demands a delicate balance between innovation and compliance.
Second, DePin’s own market dynamics can introduce instability into DePin projects. While tokens can quickly attract more hardware operators, this does not ensure user adoption. A surplus of supply with little demand on the end product leads to an imbalance that can destabilize the network. The design of a token's economic mechanism is crucial; too large an incentive for participation can trigger inflation, eroding the token's value and the network's credibility. If the incentive program is too little then the network takes on the risk of not expanding to meet market demands.
Third and finally, decentralization, while a cornerstone of the Web3 ethos, comes with its own set of challenges. Centralized services benefit from hierarchical coordination and management, which can result in superior performance. Decentralized networks, by contrast, may struggle to match these governance efficiencies as well as technical ones. As an example, the distributed nature of computational sharing can lead to delays in processing machine learning tasks, compared to the concentrated power of a data center. If decentralized systems cannot offer comparable performance, their cost benefits alone may not be enough to sway users from established centralized services.
Conclusion
DePin has the potential to unlock market efficiencies and create a more equitable operator economy. However, its ultimate successes will take still more effort and time, particularly for those projects launching two-sided marketplaces in highly regulated industries. Assuming that DePin can solve its challenges around complex regulatory landscapes, challenging tokenomics models, and comparable performance, then its success could be revolutionary. What is more, it will prove even the most ardent critics wrong about the real world utility of web3.
Special thanks to Ivo Entchev and others for co-authoring and providing insights into this promising space.