Written by: Huma Finance
The rise of DePIN is driving crypto’s real-world impact
There are deep reasons behind the rise of DePIN (decentralized physical infrastructure network). After the baptism of the bear market, developers who remain in the crypto ecosystem are almost all focused on projects that have an impact on the real world. At the same time, in the past few years, many large industrial companies, manufacturers, and artificial intelligence technology experts have also been exploring how to integrate blockchain technology into their systems to accelerate innovation. For example, the Fetch.ai platform has brought together partners such as Bosch and Deutsche Telekom to jointly promote the vision of a "decentralized digital economy." The DePIN movement is where these two groups intersect, providing blockchain with an opportunity to profoundly change the way we build, operate, and maintain infrastructure.
According to a Messari report: "The addressable market for DePIN is currently valued at $2.2 trillion and is expected to reach $3.5 trillion by 2028." We are still in the very early stages, but as of March 2024, there are more than 200 active DePIN projects with a total market value of more than $32 billion.
DePIN's vision is to enable large-scale collaboration based on crypto-economic incentives, linking devices to decentralized networks, and thus revolutionizing traditional infrastructure construction. Projects like Filecoin have created a new distributed storage network and reached a market value of $2 billion. Another project, WifiMap, has built a decentralized wireless network that connects more than 14 million devices.
DePIN is an innovation derived from blockchain payment
Since 2014, the use of stablecoin payments has grown exponentially, greatly expanding the use of Internet-native currencies. According to CoinTelegraph, stablecoins now drive more than $1.5 trillion in payment transactions per month. Their rapid adoption is changing the global payment landscape and spawning more payment innovations, such as instant payment financing (PayFi) tools.
The traditional global payment system is characterized by high transaction costs and operational delays. Therefore, programmable micropayments between two connected machines are almost impossible under the framework of the traditional payment system. When blockchain-based payment transactions become almost free, instantly settled, and programmable, thousands or even millions of microtransactions per minute between globally distributed machines, AI agents, and humans become possible.
DePIN's most powerful collaboration tool is the distribution of digital assets (such as native tokens or stablecoins) as a form of reward for network participants. These incentive mechanisms enable value to be transferred in real time between all participants in the network and form a dynamic market.
The advent of programmable micropayments on low-cost and highly scalable blockchains fundamentally drives the creation of DePIN. Today, it is difficult to imagine a modern machine economy that is completely separate from blockchain.
DePIN faces growing pains
Although the potential of DePIN is huge, more innovation is needed to create a seamless, fast and efficient market in DePIN. Today, most DePIN projects still face significant demand-side challenges. For those DePIN projects that have found a sustainable model and have strong demand, how to unleash their growth potential is a key issue.
Traditionally, centralized infrastructure construction is a mechanism that embodies economies of scale, especially useful when raising large amounts of capital. By decentralizing infrastructure, DePINs unlock new possibilities, allowing more stakeholders to participate in fundraising. But this also brings new frictions. DePIN projects are often crowdfunded through large communities, which means more coordination is required to ensure that capital collaboration between thousands or even millions of investors is efficient. In addition, infrastructure often requires patient capital, especially in the early stages. In open markets, it can be more challenging to coordinate investor behavior to attract long-term capital. DePINs need new financial tools to ensure that a capital formation mechanism that is both decentralized, efficient, and sustainable can be achieved to promote their growth.
Another driver of the centralization of traditional infrastructure is the need for legal and beneficiary requirements to clearly identify an entity that assumes responsibility (usually a company or special purpose vehicle). Unfortunately, decentralized infrastructure may introduce a series of responsibility gaps, requiring the invention of new tools to facilitate effective risk management and enforcement of legal contracts in the machine economy.
The native token rewards used to incentivize different stakeholders to participate in DePIN are a powerful tool to promote community participation, but their volatility may generate some adverse behaviors. While price volatility may be attractive to traders, it may be a barrier for investors with lower risk appetite. Based on existing DeFi tools, efficiently pricing and transparently trading digital assets to ensure that asset value can be created and captured in the best form will be the key to DePIN's growth.
Huma and TLay collaborate to innovate PayFi, stimulating new growth momentum for DePIN
Infusing DePINs with liquidity will help unlock their growth potential. Huma is applying the PayFi stack and combining it with TLay’s “trust layer” to accelerate the most powerful and sustainable DePIN use cases.
Providing instant financing
PayFi's core value proposition lies in its ability to leverage the value of future on-chain cash flows to provide credit when needed. In this regard, DePIN has a significant advantage because the cash flows generated are inherently on-chain and the data generated on-chain is accessible in real-time. This makes DePIN a perfect blockchain-native candidate for PayFi's instant loan solution.
Building a new automated underwriting engine
In the DePIN project, DePIN network participants earn digital income based on incentives programmed into smart contracts. These programmable token income streams are a great opportunity for credit innovation, as the transparency and predictability of these cash flows make them ideal for supporting data-driven and automated underwriting. Huma’s Assessment Agent is a key element of the PayFi toolkit, which consists of smart contracts that consume on-chain data to automate underwriting decisions. This new type of decision engine requires the support of trusted data. Leveraging TLay’s data verification and data privacy toolkit is key to ensuring the robustness and trustworthiness of the automated underwriting engine.
Providing innovative risk management tools for the machine economy
Lending in the machine economy is not only subject to traditional risks, such as credit risk and counterparty risk, but also to new risks, including on-chain data falsification, algorithmic attacks, or hardware attacks. The good news is that building these new financing instruments on the blockchain will also provide innovative risk management methods. TLay provides machine-trusted DePIN data by combining root of trust (physical authentication of the device), on-chain data (data generated and verified directly at the hardware level), and privacy protection (facilitating both real-time transparency and data protection of sensitive information). TLay's continuous flow of machine-trusted DePIN data can also facilitate the creation of real-time risk monitoring dashboards. In addition, smart contract innovations can be used to enforce legal contract terms, such as investor priority in the order of debt repayment.
A more extensive DeFi toolkit
The PayFi toolkit is composable and can be integrated with other existing DeFi tools to drive lending activity in the machine economy. Leveraging existing token swap DeFi pools can open up new possibilities to support repayment of outstanding loan principal by trading native tokens for less volatile assets such as stablecoins. In the context of DePIN, staking pools may also find new real-world applications if tokens issued to incentivize the community are kept in a vault to promote project sustainability.
Huma and TLay are developing a proof of concept and exploring its innovative application in green Bitcoin mining. The goal is to leverage the PayFi toolkit to enable instant loans in this innovative DePIN use case. Stay tuned!
