An unhealthy fixation on native tokens, coupled with hardware installed in areas with low demand, means far too many DePIN projects lack sustainability. Decentralized physical infrastructure networks—otherwise known as DePINs for short—are ambitious projects that represent a huge undertaking. They involve so much more than launching a flash-in-the-pan memecoin in a couple of clicks.

The goal of connecting real-world assets, such as energy grids and transport networks, to blockchains is one that takes time, resources, and scale. Because of this, it’s little wonder that The Block Research suggests funding has now hit a new all-time high of $1.91 billion.

Deepening interest in artificial intelligence has given the burgeoning DePIN sector another boost—but not all projects are born equal, and those that survive in this competitive landscape need to overcome sizable structural issues to reach their full potential. 

Transfixed on tokens

One particular issue relates to the mistaken notion that startups need to launch a native token to be successful. This can be a fatal error, as it means the value of a network is tied to the wider market and macroeconomic events that are completely out of its control. 

Helium (HNT) is a good example of what this looks like in practice. This blockchain-based platform was created with the vision of cultivating a people-powered wireless internet network, meaning those who operate hotspots would be rewarded with HNT tokens.

But in reality, the project’s success lay in how this digital asset launched at an opportune time—right in the middle of a huge bull run that generated FOMO among investors. Huge rises in this token’s value weren’t a reflection of this network’s resilience or how many clients it had. This essentially stripped HNT back to a mere memecoin with little utility.

In fact, when you look at Helium’s annual recurring revenue, a sobering statistic emerges. Even with $1 billion worth of hardware, it would take the Internet of Things close to 1,000 years to break even. 

Other contenders in the space include peaq, a network that says it’s home to more than 50 DePINs. Healthy scrutiny is needed here, as it’s difficult for most blockchains to handle the transaction volumes of a single decentralized physical infrastructure network, let alone 50.

And that brings us to the biggest lesson that up-and-coming DePIN brands need to learn: you don’t need a token of your own as long as rewards for users are liquid. We’ve already seen how such digital assets can even land projects in hot water, with Pollen Mobile facing lawsuits in the US after being accused of “minting coins from thin air” and flogging them for cash.

DePIN delivers one of the poorest returns on capital employed across any industry on Earth—and its decentralized nature means that the financial burden is passed on to those who invest in a project rather than the founders. And for this sector to really make an impact, founders should be focusing on creating demand-driven solutions, shifting their efforts to attracting more clients rather than making their networks bigger.

Let’s explain what this means in practice. Instead of adopting a “build it and they will come” model, a demand-driven approach would mean hotspots pop up in the areas where there are already paying customers who want them.

India is a prime example of a market where there’s an insatiable demand for internet connectivity, but 600 million people lack access. By severing ownership from installation, a DePIN investor could purchase hardware that it is then put to use where it is actually needed—in some cases halfway around the world.

Rethinking DePINs

Of course, hardware is a crucial element when creating DePINs—but right now, the incentives are misaligned. Too many projects have sold equipment at inflated prices, all while becoming reliant on shifting more units to bolster their revenues. Others have allocated a share of each purchase to token burning in an attempt to make these digital assets more palatable. While this may inflate their price in the short run, it means such cryptocurrencies violate the Howey Test, which determines whether an asset is a security. Worse still, it often means that investors enter a project for all the wrong reasons—putting financial interest first instead of benefiting others.

The “build it and they will come” method creates an environment where DePIN hardware lies gathering dust and unused, but aggrieved investors continue to demand a return. But generous payouts can prove unsustainable, creating high levels of apathy when rewards dwindle. Insisting on distributing compensation in the form of a volatile native token can also be exceptionally off putting to corporations, who would prefer to be paid using digital dollars instead.

Going demand first means that a native token’s value is of secondary concern, and the focus can rightly return to ensuring that a DePIN does the most good. The first step is to find consumers who would benefit from this infrastructure and then ensure that hardware funded by investors goes to those who reach them. This helps generate actual revenue and means a network grows organically. When it comes to rewards, distributing revenue in the form of stablecoins can make income streams far more transparent and predictable than they are today.

In the old-fashioned world of infrastructure, careful planning and research are performed before a single dollar of capital is spent. Feasibility studies examine whether an ambitious project is achievable, who it would serve, and where they are based. DePINs should follow the same approach—and put end-users at the heart of their strategy. 

Blockchain technology and spreading funding costs across a broader cross-section of people can be truly transformative—enabling emerging markets to finally access the technology they need to grow their economies and become more prosperous. But the DePIN projects trying to make this happen need to realize that throwing a native token into the bargain for the sake of it risks creating an unnecessary distraction that could ultimately prove harmful in the long run—and spark no end of legal and regulatory headaches.

Sustainability is the name of the game here. Too much supply and too little demand will always spell disaster. But putting demand first and incrementally increasing supply along the way is a recipe for success—and should serve as the roadmap for helping the DePIN sector thrive and change the world.

Mike James is a co-founder and CTO of DFLX. He plays a pivotal role in building DFLX as a go-to platform for listing and investing in fixed-income NFTs tied to real world hard assets. Mike began his career at BAE Systems in the Mobile Sentry Division, providing technical expertise and development proposals for land-based radar systems, subsequently rolled into the Unmanned Air Systems department. In 2022, Mike co-founded DeFli Networks, where he was responsible for its evolving business model, directly managing 4 line reports alongside providing technical expertise. He is passionate about the integration of TradFi and DeFi to unlock the full potential of both industries.