DePINs: A Ponzi Scheme or The New Era of Infrastructure Networks

Introduction

In a time when everything is making the big shift from Web2 to Web3, we see the rise of another blockchain buzzword: DePIN.

The concept of Decentralised Physical Infrastructure Networks (DePIN) is a response to the limitations and drawbacks of traditional infrastructure networks. A shift from centralised infrastructure networks to a more decentralised approach to unlock the opportunities in decentralisation.

Traditional networks are often centralised, and believed to have a number of problems:

• Inefficiency
• Expensive
• Insecure
• Intransparent

Blockchain enthusiasts believe DePIN poses a solution to all these problems through decentralisation. In a DePIN, governance, ownership, and service provision are distributed among an army of rewarded participants. This way efficiency is higher for a lower cost, while security and privacy are even more assured.

You might be thinking “Another decentralised solution?” Well, it sounds good on paper, but does it have real-life application?

This article will explore the concept of DePIN, how it works, its applications, its potential, and its major drawbacks in today’s society.

What is DePIN?

Think of a ridesharing service like Lyft or Uber, where anyone who has a car can sign up to be a driver. The idea is quite similar: you have the resources to provide a service so you join a network of people to offer that service for a lesser price than traditional providers.

A DePIN is a network that creates a distributed and secure ecosystem using the basic principles of the blockchain. Unlike traditional corporations, DePINs are decentralised people-owned networks that give cost-effective and innovative services by eliminating the middlemen and other dismissible structures.

The Role of Blockchain In DePINs

The major difference between DePINs and other community-managed corporations is the blockchain. The blockchain helps DePINs to decentralise governance and to distribute the rewards, the participation, and the control across all users on the network. The blockchain plays the important roles of:

1. Decentralisation: Blockchains help DePINs maintain a properly decentralised system. DePINs operate on a peer-to-peer basis, eliminating the need for a middleman or any centralised corporation to complicate transactions.
2. Ownership and Control: The blockchain ensures that power is not centralised in one entity. The parameters for distribution of power will be clearly stated in a smart contract. Blockchain, through smart contracts, keeps the governance power of a DePIN decentralised, making sure that agreements are only made through a consensus. This ensures that the DePIN doesn’t lose its integrity.
3. Incentive System: Participants are invited to join the network through token-based rewards. The blockchain guarantees that tokens are duly distributed and securely protected. If the project is built on a strong blockchain, this will further enhance the growth of the token through collaboration, exchange, and utility across the blockchain.
4. Transparency: The blockchain provides a public ledger that makes every transactional and operational information available to every participant. Every transaction is transparent and tamper-proof to make sure that the system is trusted, encouraging more participants to come on board.

How DePINs Work

The functionality of DePINs relies on two major pillars; Technical Foundations and Network Architecture.

3 Technical Foundations of DePIN

Blockchain Technology:

The backbone of DePIN. The blockchain is used to create and maintain a decentralised network of nodes. The blockchain also creates a solid infrastructure for secure and transparent operations and transactions of the DePIN. This makes it harder for hackers to tamper with the information.

• Smart Contracts

Smart contracts are automated contracts that are embedded with the consensually agreed terms of the DePIN. The contract can only be modified by a consensus, and they are only executed in situations agreed upon by participants on the network. The automated system of smart contracts ensures that operations are executed without delay, and that no human intermediary influences the flow of operations.

• Tokenomics

This is the system of token distribution and its use in governance. The tokens on a DePIN are usually valuable as they are utility tokens used to facilitate processes on the DePIN and to maintain on-chain relevance. The DePIN also uses tokens to reward contributors, pay for services, and distribute governance rights on the network.

Read this article on Web3 Marketing to explore tokenisation https://medium.com/@La_tunji/web2-to-web3-a-marketing-guide-to-a-perfect-token-launch-736e406f7d08

DePIN Network Architecture

1. Nodes

A DePIN consists of a wide network of participant nodes. The nodes are individual devices or organisations that provide services and operate the decentralised governance on the DePIN. Nodes can have different roles that they perform on the DePIN:

• Validator nodes continually check the integrity of the network security integrity and alert the network if any issues are detected.
• Resource nodes are participant devices that offer services or resources for a reward on the network.
• User/consumer nodes are on the network to purchase the resources provided by the network.

2. Consensus Mechanism

The decentralised consensus mechanism ensures that every node on the network agrees with the terms of the smart contract and also that the network never operates outside these terms. The smart contract is the key pillar of consensus mechanism on the blockchain.

3. Data management

Data management on the DePIN involves storing and managing data in a decentralised system. The decentralised system stores data across multiple nodes, making it difficult for intruders to read or tamper with the data. The decentralised storage solutions encrypt data on the blockchain making it secure yet available whenever it is needed.

Applications of DePINs

DePINs can be applied to many different sectors for real-life use. However, Messari classifies the DePIN industry into two network categories, based on how they apply to real-life scenarios:

• Physical Resource Network (PRN)
• Digital Resource Network (DRN)

Physical Resource Network (PRN)

These are network infrastructures that facilitate the management and utilisation of physical assets. The network is made up of infrastructure systems cutting across various sectors: Healthcare, energy, smart home, logistics, wireless networks and many other everyday sectors. Some examples of existing PRN projects include:

• Hivemapper: This DePIN uses individually owned vehicles as data gathering nodes to build a very well-detailed map of neighbourhoods. The project uses sensors mounted on participant cars to gather visual information on various geographical areas.
• Dimo: This is a mobility-centered infrastructure that allows users to connect their car to a vast network and earn tokens. Users simply grant the platform access to monitor vehicle data that affects transactions like maintenance and insurance.

Digital Resource Network (DRN)

DRNs can be understood as networks that enable the sharing, distribution, and management of digital resources among their participants. They use blockchain technology to effectively allocate resources among users. DRNs include Databases, Storage networks, Computing networks, and Bandwidth networks. Some existing DRN projects include:

• Filecoin: This is a decentralised storage network that is designed to store information across nodes on the platform. It allows individuals to lease out spare storage space on their devices to the network while getting $FIL tokens as incentives.
• Akash Network: This is a cloud computing platform that has set out to revolutionise computing services. The platform enables users to rent out their device’s computing power as a resource for uses like off-chain transactions on the Cosmos blockchain.

Advantages and Drawbacks of DePINs

Like every blockchain project, DePINs are introduced as a solution to the shortcomings of Web2 infrastructure. DePINs approach the existing problems of centralised networks by presenting the beneficial features of the blockchain:

• Efficiency
• Security
• Cost-effectiveness
• Organic network engagement

However, as a new technology in any environment, many drawbacks exist.

• The first major drawback is that DePINs have to compete with prominent legacy companies like Amazon, Google, and Microsoft.
• Also, DePINs take a longer time to build. The network needs to gather a community of users and volunteers and this takes time, especially when the incentive token has no real valuation yet.
• Maintaining token valuation is also a real challenge, considering crypto instability and the cost-effectiveness that DePINs stand to uphold.
• The blockchain might also experience scalability issues when the DePIN begins to attract a large community of users.
• DePINs, especially PRNs, will still need to struggle with existing regulations in their chosen sector of operation.

Conclusion

If you were still wondering; no, DePINs aren’t a ponzi scheme. While we are still new to DePIN technology, it holds immense promise in improving how we interact with digital infrastructure. So far, the DePIN industry has amassed a market cap of $20b and an annual revenue of $15m with functional projects like Helium, Filecoin, and Wynd already making waves.

While crypto has proven how progressive a community-supported project can be, DePINs are designed to be more resilient. By being utility based, DePIN tokens are less prone to fluctuations in the crypto market.DePINs also provide a better method of resource management by increasing the number of resources rather than upgrading individual resource capacity.

Gradually, DePINs are positioned as the backbone of the digital ecosystem by creating a more transparent, effective, and inclusive network infrastructure.

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