by Nik Hawks & Max Gold
As a business model, DePINs are new. We have not yet completed a cycle where a project has reached escape velocity, moving from crypto experiment to a real world going concern.
We have, however, seen the beginning and probably well past the midpoint of a cycle. While the old proverb goes “You can’t win the next war by preparing for the last”, it’s worth it to take a look at what’s happened.
Let’s start by breaking down what we’ve seen so far. We call these stages Ideation, Nascency, Proliferation, and Re-balancing. The fifth stage, Sustaining Operation, has not yet been achieved by any DePIN project.
These cycles are similar to normal aggregate economic activity, which can be read about here. The two main differences are: The Proliferation phase is explosive, and we don’t know if there will be a Sustaining Operation phase. As much as I love and work in the space, it ain’t a proven thing yet.
We end the commentary on each phase with three sections: What to Get Right, What’s Dangerous, and What’s Next. Our intent here is to help the next round of founders. They will undoubtedly experience something different, and ideally learn as much as possible from the previous cycle.
None of this is gospel. Do your own research and make up your own mind. Ultimately, decentralization is about personal sovereignty, a thing no less important in your ability to assess than your freedom to act.
Stage 1: Ideation
During ideation, a few technologists who understand the basics of capex and the intricacies of their field conclude that a DePIN could offer a novel solution.
The technologists could be drone pilots, LoRaWAN nerds, automotive experts, weather guessers, or anyone with a deep technical expertise where an order of magnitude more data than can currently be acquired has value.
They roughly sketch out what might be done with the enormous amount of information a DePIN can gather. As an example, the Helium network, which is the largest LoRaWAN in the world, has over 350,000 active LoRaWAN gateways globally. Those gateways process data from millions of devices as well as broadcasting information about their own status and the status of gateways around them.
For reference, the Helium Network is about 3 times larger than the next largest fleet in the world (TTN, with 112,000 gateways).
DePINs have serious network power.
In the Ideation phase, the general requirements for hardware are worked out and either produced or bought & tested. Getting the hardware to work is just one aspect of a functioning DePIN project, and it’s usually the one within the founders’ expertise.
One important unanswered question is: What are new value unlocks we get with an order of magnitude (or more) data? The growth may be more fractal than linear.
What To Get Right
In the Ideation phase, make sure your hardware works. It seems painfully obvious, but shipping something that doesn’t work is a terrible way to build a supportive community.
Pick your team carefully. You can start the hardware side with technologists, but keep slots open for other expertise.
You’ll need someone who can run a business, including leadership and strategy. That may be you, but if you’re a technologist it’s probably not.
You’ll need someone to design your incentives. You’ll need someone to make sure the public understands what you’re trying to do. Eventually you’ll need more skills, but to start, make sure you have those.
Thinking the idea is good enough to push you past poor business management, bad messaging, or bad incentives. Look, the world is brimming with good ideas. They are as numerous as octopus hatchlings, and just as likely to succeed. It will take wit, execution, and luck to get a good idea across the finish line. The better your team is at the first two the more likely you are to capitalize on the last.
Locking in an incentives plan early that doesn’t allow your project to flex and change with growth. If you get it right, you’re going to see massive growth. Just like you grow out of baby clothes, you’ll grow out of your first incentive plan. Be ready to change your clothes!
Success is a far more painful cause of failure than just a straight run to failure. The technologists who build the initial network typically lack the skills to manage a larger network, or communicate with a rapidly growing community, or understand how to properly form and re-shape incentives to match network growth and needs.
Yes, technologists are wicked smaht. That doesn’t make them superhuman.
Build a strong team from the beginning, and have a plan that you’re ready and able to change!
Planning for success is far more complex than laying out “go/no-go” criteria for failure, and requires multiple depths of expertise to increase the chance of success.
Lay out the strategy, hardware, incentives, and messaging plans, then start to ship.
Once the hardware is in existence and production units join the network, the second phase begins. Up until now you can just fade away and no one will notice or care. Once you ship hardware and incentives, it gets a lot harder to step off the train.
Stage 2: Nascency
During nascency you see the first hundred to few hundred nodes deploy. Typically the per-node token rewards in this phase are astronomical, but not always. This early stage high token-per-miner distribution is what drives initial growth; for every doubling of network size, rewards halve. It pays to get in early.
A few projects exist where every node earns the same daily amount for the first year. Those projects haven’t made entry into the next and explosive phase of Proliferation.
During nascency the project audience vacillates between jubilation and fear, as more nodes come online and as the inevitable obstacles pop up.
Critical elements to identify during Nascency are the first cheating vectors, what the obstacles to deployment are, and where weaknesses exist in the network infrastructure. Let’s go through those briefly.
First, cheaters are part of human culture. No project should expect to not have cheaters, and every project should have some kind of anti-cheating expertise built in. Remember, if the rewards will get you to phase three (Proliferation), they’re good enough to attract world-class cheaters. Be prepared.
Second, identify the obstacles to deployment. Is the deployment easily to physically execute? Is it understandable by the audience you want to attract? What are the questions they ask, and how can you build the answers in to the deployment process? These are a small subset of the optimization questions you’ll need to answer to capitalize maximally on the Nascency stage.
Third, you’ll be faced with network weaknesses like the fundamental inability of nodes in a decentralized blockchain to process enormous amounts of data. Hivemapper collected data 5x faster than Google; that is not trivial to transfer, store, or process.
Fourth, by their every nature, DePIN project attract participants who won’t sustainably contribute. We’ve covered cheaters, but you’ll also see the “get rich quick” types. There’s nothing you can do about them beyond ignoring their constant clamoring. A statistics nerd would (rudely) refer to them as “noise”.
What To Get Right
Be fast and hard about identifying and eliminating cheat vectors. Allowing cheaters to exist is building on a faulty foundation.
Make your message clear. How does the thing work? How can users win? Why should people want the token, and why would they sell it?
“We’ll figure it out underwater” is the joke divers tell before they roll off the side of the boat. No diver who wants to live does that; they have a plan before they get wet.
Not having a communications plan for what you’ll do when cheating is discovered, or an incentive needs to be changed, or a move needs to be made will gut your momentum.
I get it, all of Silicon Valley thinks it’s cool to move fast and break things. That’s fine, except you’ve got to be equally fast at fixing them and letting your community know what happened.
Hardware that a deployer can’t monitor for earnings & uptime will cause massive frustration. Make it easy for your community to see that they “got it right” and that they’re earning.
Ok, play time is officially over! If you make it through Nascency you’ll have a core following of deployers who know they found a good thing. They’ll be spreading the word through their networks, whether it’s just telling friends and family about a good deal or trying to corner the market on great deployments.
Your speedo is about to peg, and there is nothing you can do. Hope you prepared for this!
Stage 3: Proliferation
During this phase, typically manic, the network growth explodes. During 2022, the Helium network added about 80,000 Hotspots per MONTH. The Proliferation phase is usually what entices the original technologists to consider a DePIN project; what kind of data-hungry entrepreneur wouldn’t want global coverage for their project without having to pay for hardware deployments?
The growth is so fast in this phase that there’s almost no managing it. I know, I know, you’re super smart and you slowly deployed out a network and you’re managing growth well. That’s cool, but you’ve been flying a remote control glider in the day; now you’re about to fly an F117 on a night time bombing run lower than the smoke from burning oil refineries. This is the big time, and no serious player goes in thinking they’ve planned for everything
If you hit Proliferation (and you WANT to hit Proliferation), you’re going to lose control a little. Remember, you’re trying to:
- Cover the entire world. This ain’t a crouton you’re spearing, you’re going for the whole enchilada.
- Beat out large and powerful incumbents who do NOT want you eating their lunch.
- Convince everyone in the space that YOUR project is where they should focus their efforts.
Those aren’t small goals, and this won’t be like riding a county fair pony in a circle.
You’re riding a wild dragon, and the only way you and your team stay on is by guiding the thing to fly and roar and belch fire along a path you’ve already made easy for it.
During Proliferation, if you planned well, the system will grow a new structure as it outgrows itself. Very quickly you’ll have competing interests trying to gain control over the project, and they won’t be under-resourced. If you’re lucky, the incumbents will blow you off long enough to give you an unfair advantage.
What To Get Right
Lead from the front with your team. A founder in the trenches with the community, one who knows about deployment, who can explain why the system works the way it does, who can fix problems, and who is surrounded by a capable team, will be able to guide a community through the inevitable mistakes.
Get buyers now. This is the point of most excitement. Bring buyers of the service (NOT buyers of miners, there’ll be plenty of those) on now while the market fizzes. They’re more willing and able to overlook any mistakes; they’re on the up cycle with you. Lock them into contracts that are good for them and you over the long term. Make sure that those contracts will provide value they can use during the bear market.
Take some of your winnings off the table. You won’t get this exactly right, but all you have to do is get close. Remember, no market goes up forever, and you need to stockpile in the bull to make it through the bear.
Have a long-clock special team. This’ll be one or two people who look ahead to what needs to done in the bear. Have ’em think about this just once or twice a week, it doesn’t need to be a full time gig. This is your contingency team, and you WILL be using them.
It won’t be like this forever. Relying on free work from excited (and well compensated by tokens) community members will build a slow poison into the system. Recognize and reward community members now.
You can’t control the crowd. Thinking you can, or that your community will behave rationally when they see something they’ve never seen before will set you up for failure. Bad incentives will overwhelm good intentions 9 days a week. Make sure your incentives are set up to encourage positive, network-growing behavior.
Every party ends, and most people wake up with a hangover. The ones who don’t are the ones who didn’t drink, who watched and managed and made sure everyone had a good enough time and no one drove home drunk. Be ready for the clean up that comes next.
Stage 4: Re-Balancing
This is where we are now, in late Sept of 2023. Proliferation in the most mature project overshot staying power by a long ways. From a high of almost a million Hotspots, Helium is down to about 300,000 LoRaWAN hotspots and losing about 15,000/month as the nodes deployed with no intent of long term maintenance during Proliferation go offline.
What will hopefully happen (but hasn’t happened yet) is all that latent compute power will be repurposed for some other project.
What To Get Right
Have a clean up plan. Humans who are irrationally exuberant will party hard. You’re going to have extra hardware, extra people, and extra supporting resources to clean up. Start preparing for this as soon as you hit the first take-off point during Proliferation. Hold a lessons learned panel.
Communicate to your community what happened, where you are, and what’s next. While it may not seem like they’re listening and that they don’t care, your core members are still in it. If they see you behaving like a leader who’s going to win, they’ll be willing to continue backing your play.
Have a plan to keep your best talent around, both deployers and employees. This can be with tokens or fiat, but don’t rely on the excitement from Proliferation to take you through the bear. It won’t.
Have a few good surprises at the ready. A token airdrop, a ceremonial deployment, something that takes a long time to plan and that’ll be there when you need it most. Even a dim light shines a long way in the darkness.
During the come-down, the worst thing for your project is inevitable: Apathy. Be prepared for this with a plan of how to use the network.
Your original entrants can turn against you. Their expectations were set in the beginning, and the bar that was set was “the good old days”.
Your own team may lose heart. Having solid leadership with a clear “Here’s where we’re going and here’s how we’re going to get there” will help you get through the Re-Balancing phase, which will ALWAYS happen in the bear market.
No DePIN has yet achieved the next step. Sustainable Operations remain an unknown. That doesn’t mean it won’t happen, and all of the most successful businesses on the planet started out as some form of “That’ll never work.”
Don’t lose heart. Just keep going.
Stage 5: Sustaining Operation
This is the goal of all DePINs, but if they follow the survival rates of normal businesses (which you can find at this Bureau of Labor Statistics table), about half of ’em will be gone in 5 years.
Multiply that 50% by the 2% of DAOs, protocols, and wild PFP schemes that made it so far and you’ve got a good idea of your chances of success. I
Since we’re not yet 2 years past the end of the last bull run (November 2021 peak), it’s hard to say if any DePIN will make it.
Still, it won’t be hard to see when they do. The two things that must both be true are:
First, can the business make money providing the service on an ongoing basis?
Second, is there enough financial incentive from token emissions to keep a critical mass of service-providing nodes deployed?
Projects that meet those two requirements will have sailed between Scylla and Charybdis, and can expect fruitful years as the vanguard of a new way to do business.
Through hard work, victory!
Gold Hawks & Associates LLC is a consultancy specializing in the DePIN space. We have been featured in Forbes, Fortune, and Messari and have worked with all sizes of projects including Nova Labs, Helium Foundation, Hivemapper, IoTeX, Anode Labs, GEODNET, Eclipse Labs.
We assist with strategy, incentive design, and messaging. Whether you are considering starting a DePIN project or you’d like help managing your success, we stand ready to assist. Please reach out if you’d like our expertise applied to your project.
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