2022 was a challenging year for crypto, to say the least. Chaos started with the collapse of Terra Luna in April, followed by Three Arrows Capital, Voyager, and BlockFi. To top it all off, FTX, Alameda, and crypto Jesus, Sam Bankman-Fried suddenly went bankrupt. The man who was bringing legitimacy to crypto was proven a fraud. The devastating events seemed to confirm the doubts of skeptics who predicted the demise of the industry.
However, it's important to note that the problem with FTX was one of centralization, not decentralization. DeFi protocols continued to function and remain completely transparent throughout these events. Unlike FTX, there is no central authority that can be exploited within decentralized protocols. Protocols like Compound or MakerDAO can't defraud anyone – it's built into the code.
That being said, the next 3-5 years of the industry's focus should be on one thing: getting real people to use this technology. Crypto must expand beyond the realms of crypto Twitter, Venture Capitalists, and promises of easy wealth.
As I mentioned last year, when the primary focal point of crypto is coin speculation and six- to seven-figure cartoon rocks, it's not surprising that people refuse to take the industry seriously. We need real, useful companies that can drive mainstream adoption. Less mania, hype, and speculation. More impact.
As the dust settles in this space, there is a sector that may help lead this chargeCrypto integrated into mainstream physical infrastructure. Decentralized Physical Infrastructure.
This sector goes by many names … Decentralized Wireless (DeWi), Proof of Physical Work, Decentralized Physical Infrastructure, or DePin. To put it simply, Decentralized Physical Infrastructure projects use crypto-economic protocols to incentivize participants to do physical work in the real world.
Most of the innovation in crypto is in the creation of digital communities and digital economies. However, tokens also have the potential to facilitate innovation in the physical realm. Crypto networks can be used to incentivize people to do verifiable work that builds real-world infrastructure. This fundamental breakthrough has the potential to disrupt an array of monopolies.
As Ryan Selkis notes, Legacy cloud infrastructure is a $5 trillion global market cap sector, while DeWi is just a $3 billion market cap sector for crypto players. This is a space with the potential for tremendous growth over the coming years.
What is Decentralized Wireless
DeWi was first pioneered by Helium; a crypto-economic protocol that incentivizes people to build and manage physical telecommunications networks. Helium is constructed and maintained by hosts, who are rewarded with the Helium protocol's native token (HNT) in exchange for providing coverage and facilitating data transfer on the network.
Building and operating wireless networks are typically the domain of large corporations due to the high costs, complex logistics, and regulatory challenges. In the United States, AT&T, Verizon, and T-Mobile hold a combined 98.9% share of the wireless market.
Sami Kassab of Messari notes that these large multinationals go through a strenuous cycle of building new wireless networks every decade. This process involves obtaining funding through the issuance of billions of dollars in debt to cover expenses, purchasing spectrum licenses from the government, working with manufacturers, and more.
The decentralized wireless (DeWi) movement offers an alternative to traditional telecom. It relies on crypto incentives to encourage individuals to build and maintain wireless infrastructure. Rather than a single entity constructing a whole wireless network, DeWi allows for the collective efforts of many individuals to create the network.
The success of this approach is exemplified via Helium, which grew from 15,000 hotspots at the start of 2021 to one million today. For Context, Multicoin Capital indicates that the entire U.S. telecommunications industry has 417,000 cell towers. Helium managed to achieve a similar level of scale in just 30 months through the implementation of powerful incentives that motivate people to contribute to the growth of the network. Through crypto networks, companies can incentivize people to build out infrastructure faster and at a much more cost-effective rate.
Why is this important?
Global internet traffic has grown at a compound annual rate of over 40% for the past 20 years. The telecom value chain in the U.S. alone has a market cap of over one trillion dollars. With the proliferation of IoT devices, electric vehicles, higher internet penetration in emerging markets, and more, the demand for high-quality wireless networks will increase. The traditional method of raising billions of dollars, acquiring hardware, and taking years to build out networks, will not meet the demand.
The success of projects like Helium, which built a wireless network in a matter of months by incentivizing individuals to work towards a common goal, suggests that decentralized wireless infrastructure is a solution. Legacy players may have to join forces with crypto players to keep up with the demand for global, affordable connectivity. Helium’s recent partnership with T-Mobile to build 5G infrastructure builds legitimacy in the space. We will likely see more partnerships of this nature in the coming years.
Challenges
Despite the immense opportunity for crypto networks to merge with real-world infrastructure, there are several challenges to mainstream adoption. For example, the price of miners continues to increase while the return has been minimal. Escape Velocity Fund, a fund dedicated to the DeWi sector, indicates that DeWi token prices fell 90-95% throughout 2022. How do you incentivize hardware buildouts when return horizons are unpredictable? Determining how to build out networks through bear market cycles is yet to be established.
Additionally, real-world usage is not optimized. Of the 1 million Helium LoRaWan devices online, only 8% transfer data on any given day. Escape Velocity indicates that moving up the stack to serve consumers directly may be a solution. Use Cases like Solana Mobile, Helium’s partnership with T-Mobile, and Pollen mobile allow DeWi networks to serve consumers directly. These initiatives optimize the chances of DeWi protocols unlocking real-world use cases that drive organic (non-speculative) protocol revenue.
Moving Forward
Crypto's transformation from the wild west to an industry taken seriously requires building more companies with actual impact. The days of hyperbolic token speculation, meaningless innovation, and 8-figure cartoons being the focal point of crypto are over. How will people adopt this technology? Fortunately, many of the bad actors have left the space permanently. With markets down, reputations destroyed, and actual long-term commitment required, short-term participants are gone. The true pioneers, innovators, and mavericks remain steady in hopes of pushing the industry forward.
Decentralized Physical Infrastructure will be a sector to watch in the coming years. Crypto has just dipped its toes into the $5 trillion global industry. The sector is poised to make a big impact over the next decade. Onward!