Vertical & Horizontal Dimensions of DePIN

As the DePIN market matures, the ways that projects approach the market are solidifying into three channels.

First is the solution-seeking-problem (SSP) method: DePINs are new and exciting, so someone will come up with an idea for how distributed hardware would make something better, but there’s no clear market for the generated data.

SSPs are upstream of the issues we’ll cover today, which are the vertical and horizontal dimensions of DePIN.

A vertical strategy is an attempt to compete with the current market using the distributed capex opportunity in a DePIN; you basically go head-to-head with current players relying on the advantage of the core team not having to buy and deploy the hardware.

Think of this as the “I’m bringing a faster car to the race track” approach. You’re more likely to win at first because you’re faster, but that doesn’t mean that other teams have less resources or can’t adjust to compete with you, and a faster car doesn’t make much difference in the turns. Physics are physics, and lots of other factors come into play when the track isn’t just a straightway. The race always twists and turns.

The second strategy is horizontal, where a project uses the power of DePIN to build an entirely new layer upon which others can build. You could think of this as bringing a new race track to the market; you’re still in the same sport, and a fast car will still have an advantage, but a race track offers tons of new opportunities for others to come and try their cars, develop new offerings for cars on your track, and build on top of what you provide.

Thinking with this framework opens many opportunities to understand the advantages (and disadvantages) a project may face. For now, we’ll focus on just one dimension of the vertical vs horizontal debate, which is Closed vs Open systems.

Closed Systems

A closed system is one in which the project provides all their own hardware and infrastructure and seeks to capture value from an already existing market. These systems can be built relatively quickly and can be effective at eating market share from their web2 competitors.

Without the giant capex costs of purchasing & deploying hardware and with the opportunity for deploying miners to earn crypto, the value proposition for all is straightforward and clear.

The potential downside here is that the value capture accrues to just one company, and overall system growth isn’t incentivized. A good example of this is GEODnet, where they control the entire system, from hardware production and distribution to selling various value-added services to the data stream generated across their network.

Commercial value accrues to GEODnet, the miners earn tokens, and GEODnet customers have a single source for interacting with a global GNSS including all the additional services GEODnet can build based on a standard set of data streams from all its hardware.

Two major downsides exist in a Closed system. First, no other types of hardware are “allowed”, so if GEODnet wants to update their fleet in response to new GNSS technology, they have to figure out an incentive for the entire fleet to buy new hardware.

Second, because they’re capturing all of the value from the data their system generates, there isn’t as much room to grow. It’s not infrastructure that third parties can build on, it’s a clean source of data customers can consume.

That brings us to the nut of this idea, which is that Closed systems are about value capture, while Open systems are about expansion.

Open Systems

An example of an Open system is Onocoy (typically styled ‘onocoy’ in lowercase, but capitalized here to follow standard US grammar conventions).

Onocoy allows anyone to provide any GNSS station, from lower end units all the way up to government installed, anchored-in-6-feet-of-concrete-on-a-remote-island gold standard reference stations.

Instead of attempting to capture all the value created from a worldwide data set, Onocoy enables anyone to use the data set they’re gathering, building on top of their system and expanding the offerings available. This open access encourages innovation, and innovation is a main drive of net new growth.

Open systems are generally more complex and slower to build, as you’re accepting data streams from many different types of stations rather than having physically identical hardware to get a pre-formatted stream of data.

Hivemapper: What The Market Wants

It’s important here to point out that the Open and Closed models aren’t bad or good, they’re just different ways to capture value for a project.

One example of a closed systems is Hivemapper, a dashcam project collecting imagery for fresh maps which needs standardized image quality.

What you use depends on what your customers want. If Hivemapper customers want consistent imagery everywhere in the world, then hardware has to be standard. This drives the decision to use a closed method along with requiring incentive design that drive sufficient deployment penetration.

GEODnet and Hivemapper have strong revenues for relatively new projects and are capturing existing market share from old school web2 competitors.

Helium: Responding To Customer Demand

The interesting piece here is to have watched Helium go from Closed to Open to Closed to Open (yep, twice), and to see how growth has changed during those phases.

When Helium started their IoT LoRaWAN network, you could only participate by purchasing a Helium Hotspot. They transitioned to a semi-Open method, where approved manufacturers could add in a variety of different LoRaWAN gateways and enjoyed explosive growth, selling almost a million units across the ecosystem and allowing the manufacturers to participate in value capture from hardware sales.

When they launched their Mobile network, they tightened the semi-Open method down to just a few manufacturers willing to supply CBRS radios. As it became apparent that CBRS wasn’t ready for prime-time, Helium moved to WiFi and back to a mostly Closed system, where only by purchasing Helium Hotspots from Helium and one other manufacturer could you onboard onto the system.

These decisions weren’t driven by the philosophical values of Open vs Closed, but by hitting a minimum threshold for miners, which in the end is what customers of the Helium networks need. In the case of Helium, the hardware wasn’t what mattered as much as hitting the minimum threshold combined with providing specific services (IoT vs Mobile connectivity).

Closed growth made it easier to manage scaling a working network because of the standardized hardware. Closed growth slowed new Hotspots onboarded, so Helium opened back up to allow a much wider swath of the WiFi market to onboard their systems to Helium, and faster growth resumed.

Capture Value or Expand?

It remains to be seen if Open or Closed will be decisively victorious. Open systems have far more opportunity for ecosystem growth but less focused value capture.

Closed systems have focused value capture but limit their growth as the incentives for system growth and innovation are really only for one company, and innovation has always responded best to large numbers of innovators experimenting.

The main takeaway for DePIN founders here is to think carefully about the path you want to guide your project along, then lean hard into the benefits either way (or a combination of the two) offers.

Despite seeming like old hat to those of us who’ve been in DePIN since the beginning, it’s still early days and there is no definitive proof yet of a perfect system.

This post was sparked by a long conversation with Onocoy, who is a client of ours. We thought that sharing the ideas with the rest of DePIN would be useful, and so with Onocoy’s permission we wrote this up.

The best moves you can make at this point will be to think deeply about the overall way the network needs to run in order to satisfy the customers, then build structure and incentives to support that.

At Gold Hawks we’re happy to walk you through best practices as well as to innovate with you drawing on our expertise in the space. Reach out if you’d like help!

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