Understanding DePIN: Distributed Physical Infrastructure Network

Authors: Wang Puyu, Zou Chuanwei @ HashKey Tokenisation

If we buy a standardized small device (such as a wireless router) at a very low cost, it can communicate with similar peripheral devices, or even with devices purchased by residents of other countries and regions, and form a network. A huge physical infrastructure network (such as storage network, communication network, data network, etc.), what kind of changes will this bring to the industry? Because of having a standardized small device, everyone becomes a co-builder of the network, and at the same time has the right to profit and governance of the network. For users, these networks or data services can be used anytime, anywhere and without permission at a very low cost. The frequent use of network or data services by users can bring continuous passive income to network builders. Without the coordination of centralized institutions and complicated approval processes, a huge infrastructure network has been built. It seems difficult to achieve, but it is happening rapidly around us. This kind of economic activity has a new term called Decentralized Physical Infrastructure Network (DePIN for short).

1. What is DePIN?

**DePIN is a new Web3 term derived from the physical workload proof PoPW, MachineFi, etc. DePIN (distributed physical infrastructure network) refers to the use of token economics to motivate and coordinate community members to complete various physical The construction of the infrastructure network follows the principle of “the more contributions, the more benefits”. **Messari divides the **DePIN track into four major sections: service network, wireless network, sensor network and energy network. **

Figure 1: DePIN ecological distribution map Source:

2. Why DePIN?

In terms of digital infrastructure construction, DePIN has given full play to the advantages of the encryption economy in distributed organizations, and achieved rapid network expansion in a bottom-up, low-cost, and high-efficiency organizational manner, changing the previous top-to-bottom high expenditure and low effectiveness problem.

1. Traditional centralized physical infrastructure network CePIN

Infrastructure network construction is a costly and time-consuming task. Taking the construction of 5G base stations in China as an example, from 2017 to the end of 2021, a total of 1.425 million 5G base stations have been built and opened, costing 184.9 billion yuan.

2. DePIN (Decentralized Physical Infrastructure Network)

Helium adopts a distributed method, deploying 833,000 small base stations (hot spots) in only 31 months, covering 175 countries, and maintaining a growth rate of 30,000 units per month for a long time. And compared with CePIN, the initial construction cost of DePIN can be ignored.

Figure 2: Helium small cells (hot spots) distribution map Source:

Without judging the success of Helium’s business model, Helium has maintained a growth rate of 30,000 hotspots per month for a long time in the past 3 years, proving the feasibility of the DePIN paradigm with almost negligible operating costs.

3. How to layout DePIN?

We try to explore how to deploy DePIN from two aspects: the components of the DePIN ecosystem and the economic model.

(1) Elements of DePIN economy

**DePIN ecosystem consists of 6 elements: physical hardware DU, incentive mechanism, consensus agreement, contributors, Token and DAO community. **

1. Physical hardware DU

DePIN Unit (DU for short), usually an IoT device, is the basic unit that connects the physical world and the digital world in the DePIN network. Take the fast-growing projects in the market as an example. The DU of the distributed street view map Hivemapper is a standardized driving recorder, the DU of the low-power wide area network Helium is a network mining machine (hot spot), and the DU of the renewable energy network Arkreen is a solar photovoltaic panel. wait. In order to ensure that under the distributed organization, contributors from different regions, different backgrounds, and different cognitions can participate in the construction of DePIN without friction, DU needs to meet the following conditions as much as possible:

• DU is standardized and can be plug and play
• Contributors do not need to maintain DU frequently
• The DU cost is inversely proportional to the network scale, so the DU cost should be reduced as much as possible. Currently, the DU unit price of different projects in the market is controlled between 200-500 US dollars.

2. Incentive mechanism

The incentive mechanism is the key to the orderly development of the DePIN project. The project community needs to skillfully apply the incentive mechanism to align the behavioral goals of the contributors in order to achieve the large-scale development of the infrastructure network. In addition, the project community first needs to formulate behavioral reward standards suitable for its large-scale development according to the type of infrastructure. For example, in order to expand the network coverage of Helium, areas with low network coverage density will receive higher rewards than areas with high density; in order to prevent people from doing evil, rewards cannot be obtained for areas with too low coverage density; in summary, for more With high income, rational miners usually choose to place Helium mining machines in areas with moderate density. Similarly, Arkreen motivates contributors based on their power generation capacity. For rational contributors, the mining machines will be installed in places with ideal lighting. Overall, the design of the incentive mechanism generally needs to follow the following principles:

• The project has clear overall goals and sub-goals. There is only one overall goal, and there can be multiple sub-goals. However, every additional sub-objective will increase the difficulty of understanding the project exponentially
• Different contributors must have definite behaviors, that is, the mining reward standard (X to Earn). There should not be too many types of contributors. Each additional X to Earn will increase the complexity of the system
• Incentives are also a way of Token distribution. The number of distributions needs to be designed according to the total market circulation, so as to avoid the price of tokens from falling due to over-issuance of Tokens.

3. Consensus mechanism

CePIN is deployed and developed under the absolute control of a centralized organization. However, DePIN is distributed, trustless and anonymous, and there is no organizational coordination of a centralized organization. Therefore, one or more consensus mechanisms need to be used to help all participants reach consensus while ensuring network security and sustainable development. The network security and sustainability we talk about includes two meanings. The first meaning is the security and sustainability of the infrastructure network formed by different equipment, that is, the equipment can form an infrastructure network and ensure safe and normal operation. Operation, which is a technical issue, requires the project party to make a full assessment before the launch of the DePIN project; the second meaning is the security and sustainability of network development at the level of economic activities on the blockchain, including verifying the authenticity of DU in the physical world And verify the reliability of DU data on the chain. As shown in Figure 3, the economic activity data on the blockchain can only be guaranteed to be tamper-resistant after being uploaded to the chain, but the authenticity of the data on the chain cannot be guaranteed. For example, if the data is attacked and tampered on the device side, after the data is uploaded to the chain, it can only guarantee that the data will not be tampered with twice, but there is no guarantee that the data is true. Therefore, we need to verify the authenticity of the data through the consensus algorithm before the device data is uploaded to the chain; only the data approved by all contributors can be uploaded to the chain, so as to ensure the sustainable development of the ecology.

Figure 3: Blockchain Boundary and Consensus Boundary Source: “What Blockchain Can and Can’t Do” Xu Zhong, Zou Chuanwei

In this part, we discuss the consensus mechanism only for the second level, that is, network security and sustainability at the level of blockchain economic activities. It is divided into two aspects: first, the fairness and accuracy of on-chain accounting, which is to The basis and lifeline of decentralized collaboration; secondly, the authenticity of various nodes or data on the network, so as to prevent perpetrators from changing the location of nodes or sending false data to defraud ecological rewards. The former is an issue that project parties need to consider when preparing to build their own blockchain, such as consensus mechanisms such as PoW or PoS; the latter is that all DePIN project parties need to consider how to design consensus mechanisms from the perspective of technology and algorithms. For example, the Arkreen project adopts the Proof of Green-Energy Generation (PoGG) consensus mechanism. The general process is as follows: First, all DUs sample PoGG data every 5 minutes and cache them locally, and report 12 pieces of data to the Arkreen Network every hour. Record. Secondly, after the end of the previous reward cycle, Arkreen Network uses the VRF (Verifiable Random Function) method to generate a random value, combined with the DU attribute of the current cycle, to screen out miners who have the opportunity to receive rewards in this cycle. Then, Arkreen Network verifies the credibility of PoGG data and will eliminate DUs judged to be fake data. Finally, the rewards in the current cycle are distributed according to the weight of qualified DUs. Arkreen guarantees the authenticity and reliability of network data through the above-mentioned PoGG method. Overall, the design of the DePIN consensus mechanism needs to follow the following principles:

• The DePIN consensus mechanism design follows the Proof of Physical Works principle.
• Proof is the way of consensus, Physical Works is the object of consensus, such as Helium’s Physical Work is Coverage, Filecoin’s Physical Work is Replication and Spacetime.
• In order to achieve system self-organization and maintain system sustainability, it is necessary to repeatedly demonstrate which Physical Works the DePIN project requires.
• There is no optimal solution for Proof design. It needs to be designed from two levels of technology and algorithm, and requires long-term iterative verification of the Physical Works method.
• All consensus rules are embedded in the DU chip, and the consensus process is completed automatically without any operation by the DU owner, but the authenticity and reliability of the consensus process can be checked by anyone.

4. Contributors

Contributors generally fall into the following 6 categories:

• **DePIN project initiator: **Usually DePIN has an organization or several people as project initiators, who are responsible for early DU technology development, system development, on-chain contract deployment, and DePIN community development, etc. In Token distribution, the initiator of the DePIN project will keep a certain percentage of Token in return.
• **DU owner: **DU is a standardized small device purchased through channels designated by the community, and DU owners are also known as miners. According to the common goal, DU owners can participate in network construction by installing the equipment in a position with higher current profits. This process is called DePIN mining.
• **DU authenticity verifier: **In a trustless environment, it is guaranteed that the equipment owned by different miners operates normally according to the system rules, which has a very important impact on the stability of the physical infrastructure network. If the device data is directly uploaded to the chain, it can only guarantee that the data on the chain cannot be tampered with, but cannot guarantee the authenticity of the data on the chain. Therefore, the emergence of the verifier role is needed, and they participate in the verification of the authenticity of device data with special rules.
• **Community Manager: **In the process of distributed collaboration, fairness, openness, and transparency are very important in governance. In order to prevent the governor from doing evil, the governor usually needs to pledge a certain number of Tokens. The governance right is related to the pledged amount and duration of the Token, so as to realize the strong binding relationship between the governor and the ecological interests.
• **Project investors: **Like traditional businesses, in the early stage of the project before tokens are issued, it is still necessary to rely on external investment institutions to support project sponsors in technology and business expenditures. Investment institutions will usually be rewarded with the main equity of the DePIN project sponsor or the allocation of DePIN project tokens. If the main equity is used, the investment institution needs to wait until the DePIN project sponsor exits after the IPO, or the DePIN project party withdraws through STO tokenization with future income or equity tokenization. If project tokens are allocated, the tokens will usually be unlocked linearly in 2-4 years.
• Others: The project party usually reserves 3-5% of the tokens to reward ecological consultants, or institutions or individuals who discover technical loopholes in the reward system. Depending on the type of project, the type of contributor will vary.

5. Token

If consensus is the foundation of on-chain projects, then Token is the blood of the economic system. The value from Web3 project idea to technology development, to post-operation, ecological development and community will be reflected in Token. Use Dr. Xiao Feng’s “Three Token Model” to understand the DePIN project. NFT is the digital proof of DU, functional Token represents the right to use DePIN, and security Token represents the equity of the entity enterprise (founding institution, DU production enterprise or others). In the DePIN project, one or two functional tokens are generally used to capture ecological value. This type of token has the following characteristics:

• Tokens are usually distributed to contributors for free in the form of rewards or airdrops;
• Token issuance speed needs to match the growth rate of total economic activity;
• Token will be used as a payment tool or governance certificate in the ecosystem;
• Tokens are returned as transaction fees or repurchased by the founding team, and part of the returned Tokens are burned according to the rules, so that the total amount will continue to decrease, so as to realize the deflation of the economic system;
• The value captured by Token comes from real-world assets (RWA), and the price will change due to the impact of high-frequency transactions in the secondary market. In order to allow participants to focus on economic activities themselves, Token’s asset function and currency function are usually separated to isolate the impact of price fluctuations on the market application side; the typical practice is to anchor the US dollar currency to cast payment-type stable coins, and this stable Coins can only be obtained by burning functional tokens with asset functions.

6. DAO Community

Under the decentralized self-organizing DAO model, anyone can initiate various proposals for the development of the DePIN project or participate in decision-making voting on various matters anytime, anywhere. In order to prevent governance attacks, the interests of the governors participating in the proposal or voting are usually strongly bound to the DePIN project, that is, any losses caused by negative governance need to be borne by the governors. The typical method is to decide according to the number of pledged functional Tokens and the duration of the pledge the rights of governors.

The DePIN DAO community usually needs to govern the contents including but not limited to the following:

• Qualified DU supplier list voting;
• DePIN technology implementation proposal and voting;
• Various parameter proposals and votes that affect the DePIN economic model;
• Economic model iterative proposal and voting.

(2) Economic Model

In the Internet platform economy, people are accustomed to discussing business models, but few discuss economic models, and some even confuse the concepts of business models and economic models. But in the Web3 economic system, we can see the essential difference between the two concepts, because each Web3 project has its own currency system. In the Web3 project, the business model describes how the project creates, delivers and acquires value, while the economic model describes the supply and demand model and monetary policy model of Token itself. The Web3 economic model and business model are not independent, because the economic model needs to be carried by the business model, and the business model determines how to adjust the economic model. Dr. Zou Chuanwei, Chief Economist of Wanxiang Blockchain, divides the design of the economic model into the following steps:

• Think about economic stories;
• Refining the “scaffolding” of the economic model;
• Determine the objects and usage scenarios of Tokenization, including payment tools;
• Determine the investment and financing mechanism of public goods;
• Formulate incentives for all participants in a decentralized and trustless environment;
• Determine the effectiveness of value capture;
• Select the secondary market of Token and evaluate its impact;
• According to user needs and risk control, improve the details of the economic model and continue to iterate.

In the design of the DePIN economic model, the following nine questions help project parties and professional practitioners think about how to design an economic model:

• What is the roadmap of the project?
• What commodities are supported on the Internet?
• Who are the suppliers and demanders of the relevant goods? What is their profit maximization goal?
• What is the role of Token in commodity circulation?
• How is Token issued? How to embody the principle of Proof of Physical Work?
• What are the uses of Token? and how to reflow?
• How are you going to motivate early contributors?
• What goals are planned to be achieved through DAO?
• What are the unstable factors in the network?

4. Summary

DePIN captures the physical infrastructure value of real-world assets (RWA) through Token. In a bottom-up self-organizing manner, users are attracted through economic mechanisms, and the scale utility of the distributed economy is fully utilized. In comparison, DePIN is still in a very early stage, and its business model and economic model are undergoing rapid iteration. Although DePIN allows us to see many possibilities, it is not a panacea. Through research on early projects such as Helium and Filecoin, we can find that there are still boundaries in business and technology, and it is not suitable for all scenarios. A brief summary is as follows: The following aspects:

**1. DePIN is applicable to a single infrastructure scenario, avoiding multi-scenario iterations, that is, avoiding “necessary and necessary”. **Because DePIN involves the interaction between devices in the physical world, the project goals and participation rules should be simplified as much as possible to lower the threshold of project cognition and avoid contributors’ understanding deviation due to complex rules, and the behavior of contributors deviates from the overall goal of the project Case.

**2. In the establishment of physical infrastructure network, if there is human management and operation, the DePIN mode is not applicable. ** From the perspective of the four flows of the supply chain (business flow, logistics, capital flow, and information flow), only when DU buying and selling links involve logistics, other links can be completed on the chain, so that the construction of distributed physical infrastructure networks can be reduced. of various frictions. Every time an additional off-chain activity is added, such frictions need to be resolved in a centralized way in DePIN economic activities, and the scale effect of distributed commerce may also be weakened.

**3. In the initial stage of project development, it is difficult to show the scale effect of the distributed economy. Only when the network exceeds a certain scale (called “key scale”) can it reflect the advantages relative to centralized commercial organizations. ** As shown in Figure 4, the advantages of distributed organizations in terms of scale expansion and value creation are not realized until the critical scale (where the two lines intersect for the second time) is reached. Therefore, before the DePIN project reaches a critical scale, it still needs to rely on the core team to deploy DePIN nodes and advance the network in a weakly centralized manner. After reaching a critical scale, the core team will usually withdraw, and the network governance will also be handed over to the community to improve the network effect through a distributed approach.

Figure 4: The J-Curve of Distributed Commerce

In addition, the development of DePIN at this stage is only in the stage of network construction, and has not yet opened up the general application on the demand side. In the future, it is still necessary to observe the various problems and bottlenecks encountered in the progress of the DePIN project on the demand side, in order to truly open up the business and economic closed loop of the DePIN ecology.