The rise of the DePIN movement is supporting crypto’s real-world impact
DePINs - short for Decentralized Physical Infrastructure Networks - are on the rise and there is good reason for that. Crypto builders have learned their lesson and those who have remained in the ecosystem during the current bear market are almost exclusively building projects that have tangible real world impact. In parallel, over the past couple years, a number of large industrials, manufacturers and AI technologists have been exploring ways to integrate blockchain technology into their stack to supercharge innovation. For instance, the platform Fetch.ai has gathered partners such as Bosch and Deutsche Telekom around its “decentralized digital economy” vision. The DePIN movement is where these two communities have met to give the blockchain a chance to deeply change the way we build, operate, and maintain infrastructure.
According to Messari : “The DePIN addressable market is currently valued at $2.2 trillion and has the potential to reach $3.5 trillion by 2028.” We are still in very early days but as of March 2024, there were over 200 active DePIN projects with a total market value exceeding $32 billion.
The vision for DePIN is to transform traditional infrastructure by organizing connected devices into decentralized networks and relying on crypto economic incentives for their large-scale coordination. Examples of this can be seen with projects like Filecoin, which has created a new form of distributed storage network and reached a $2Bn market cap. WifiMap is another example, having built a decentralized wireless network connecting over 14 million devices.
Since 2014, stablecoin payments have grown exponentially and have dramatically expanded the usage of internet-native money. Today, stablecoins are powering over ~$1.5T in monthly payment transactions according to CoinTelegraph. Their rapid adoption is shifting the global payments landscape and giving rise to more payment innovation, including just-in-time PayFi (“Payment Financing”) tools.
Traditional global payments are characterized by prohibitive transaction costs and operational delays. As a consequence, programming micropayments between two connected machines is hardly viable within the construct of the traditional payment systems. When payment transactions became virtually free, instantly settled, and programmable on blockchain rails, the idea of enabling thousands or even millions of microtransactions per minute among globally distributed machines, AI agents, and humans suddenly became possible.
DePIN’s most powerful coordination tool is the distribution of digital assets (i.e., native tokens or stablecoins) as a form of reward to network participants. Through these incentive mechanisms, the value created is transferred across the network in real-time to all participants, forming dynamic marketplaces.
The emergence of programmable micropayments on low-cost and highly scalable blockchains fundamentally enabled the creation of DePINs. Today, it's hard to imagine a modern machine economy that would sit completely outside of the blockchain
But a lot more innovation is needed to create seamless, fast and capital-efficient market places across DePINs. Today, the majority of DePINs continue to face significant demand challenges. But let us focus on the supply-side challenges for DePINs that experience strong demand and have found a sustainable model: what could unleash their growth?
In traditional contexts, the centralization of infrastructure is a mechanism used to leverage the power of economies of scale. That is particularly helpful when it comes to raising large sums of capital. By decentralizing infrastructure, DePINs are unlocking new possibilities and allowing broader stakeholder participation in fundraising. But they are also creating new frictions. DePIN projects are typically crowdfunded by large communities which means that more coordination is needed to ensure the capital formation among thousands or even millions of investors is efficient. Additionally, infrastructure tends to require patient capital, especially in the initial phase. But coordinating investor behaviors to attract long term capital can be more difficult in open markets. New financial tools will be needed to ensure that DePINs are not only decentralized but also use efficient and sustainable capital formation mechanisms for growth.
Another driver of centralization for traditional infrastructure is the need for a known entity (typically a company or an SPV) to unequivocally bear responsibilities in the eyes of the law and beneficiaries. Decentralizing infrastructure can unfortunately create a series of accountability gaps. New tools will need to be developed to promote effective risk management and legal contract enforcement in the machine economy.
The native token rewards used to incentivize stakeholders’ participation in DePIN are powerful tools for community engagement, but their volatile nature can lead to some adverse behaviors. While price volatility is appreciated by traders, it can be a hindrance for other investor with less risk appetite. Building on existing DeFi tools to efficiently price and transparently trade these new digital assets will be crucial for DePINs to grow and ensure that value is created and captured in its most suitable form.
Injecting liquidity within DePINs would help unleash their growth. Huma is leveraging the PayFi stack and working with TLay’s “trust layer” to enable the acceleration of the most robust and sustainable DePIN use cases.
The core of PayFi’s value proposition lies in its ability to leverage the value of future on-chain cash flows to provide credit precisely when and where it is needed. In that regard, DePINs have a significant advantage because the cash-flows generated reside natively on chain and the data produced on chain is accessible real time. That makes DePIN the ideal blockchain-native candidate for PayFi’s just-in-time lending solutions.
In DePIN projects, network participants earn digital income based on defined incentive policies that are programmed into smart contracts. These programmable token streams are an excellent opportunity for credit innovation because the transparent and predictable nature of these cash flows make them great candidates to support data-driven and automated underwriting decisions. Huma’s Evaluation Agent is a key element of the PayFi toolkit which consists of smart contracts consuming data on chain to automate underwriting decisions. This new type of underwriting engine needs to be fed with trusted data. Leveraging TLay’s data verification and data-privacy toolkit is key to ensure the robustness and credibility of the automated underwriting engine.
Lending in the machine economy will present both traditional risks such as credit risk and counterparty risk, but also new risks, including on-chain data forgery, algorithm hacking or hardware hacking. The good news is that building these new financing tools on the blockchain will also provide opportunities for innovative risk management approaches. TLay delivers machine-trusted DePIN data by combining root of trust (physical authentication of devices), data on-chain (data directly generated and verified at the hardware level) and privacy protection (promoting real time transparency as well as data protection for sensitive information). The continuous stream of machine-trusted DePIN data from TLay also enables the creation of real-time risk monitoring dashboards. Additionally, smart contract innovations can be leveraged to enable the enforcement of legal contract clauses such as the seniority of an investor in the debt repayment waterfall.
The PayFi toolkit is composable and can integrate with other existing DeFi tools to power lending activity in the machine economy. Leveraging existing token swap DeFi pools could open up new possibilities whereby native tokens could be traded against less volatile assets (e.g., stablecoins) to support the repayment of an outstanding loan’s principal balance. Staking pools could also find a new real world application in DePIN context if tokens issued to incentivize the community are kept in a vault to promote the sustainability of the project.
Together, Huma and TLay are preparing a POC and exploring innovations applied to Green BTC mining. The goal is to leverage the PayFi toolkit in this innovative DePIN use case and enable just-in-time lending. Stay tuned!