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Why DePIN Matters: Powering The Crypto Economy | Jon Victor

By Lightspeed

Published on 2024-03-26

Explore the world of Decentralized Physical Infrastructure Networks (DePIN) and how Filecoin is revolutionizing data storage and retrieval in the crypto economy.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

In the ever-evolving landscape of blockchain technology and cryptocurrency, a new frontier is emerging that promises to reshape how we think about digital infrastructure. Decentralized Physical Infrastructure Networks, or DePIN, are at the forefront of this revolution, offering a bridge between the digital and physical worlds while leveraging the power of blockchain technology. In a recent episode of the Lightspeed podcast, host Dan Smythe sat down with Jon Victor, co-founder of Ansa Research, to delve deep into the world of DePIN and explore its potential to transform the crypto economy.

What is DePIN?

DePIN, or Decentralized Physical Infrastructure Networks, represents a paradigm shift in how we approach digital services and real-world infrastructure. At its core, DePIN aims to use blockchain technology as a coordinating mechanism to aggregate resources such as storage, bandwidth, Wi-Fi, and compute power. These resources are then resold back into the real world, creating a new economic model that bridges the gap between crypto and traditional markets.

Jon Victor explains the concept succinctly: "My one-liner is, how are we building real services that the crypto economy can export outside to the rest of the world?" This approach sets DePIN apart from other areas of cryptocurrency that focus primarily on internal economies. By offering tangible services to the broader market, DePIN has the potential to drive significant capital inflows into the crypto economy, making everything built so far "an order of magnitude more meaningful."

The Importance of DePIN in the Crypto Ecosystem

The significance of DePIN extends beyond its technical innovations. It represents a crucial step in the maturation of the cryptocurrency industry. While meme coins and speculative assets may capture headlines, Victor argues that the long-term success of crypto hinges on building services that "either directly or indirectly benefit people's day-to-day lives."

DePIN projects are working to solve real-world problems and create value in ways that traditional centralized systems cannot. By decentralizing physical infrastructure, these networks can potentially offer more resilient, efficient, and cost-effective solutions for data storage, computation, and other essential services.

Categories Within the DePIN Sector

The DePIN sector encompasses a wide range of projects and initiatives, each targeting different aspects of physical and digital infrastructure. Some of the key categories include:

  1. Data Collection and Mapping: Projects like Hivemapper are creating networks of drivers to collect real-world data that can be sold to other entities.

  2. Cloud Services: Teams working on decentralized alternatives to traditional cloud storage and computing services.

  3. Sensor Networks: Projects focused on collecting and monetizing data from various types of sensors.

  4. Decentralized Storage: Networks like Filecoin that aim to create a global, decentralized storage market.

  5. Compute Networks: Initiatives to harness distributed computing power for various applications, including AI and scientific research.

Victor notes that these categories often overlap and intersect, creating a rich ecosystem of interconnected services and technologies.

Filecoin: A Deep Dive into Decentralized Storage

A significant portion of the discussion focused on Filecoin, one of the most prominent projects in the DePIN space. Filecoin aims to create a decentralized storage network that can compete with traditional cloud storage providers like Amazon Web Services (AWS) and Google Cloud.

How Filecoin Works

Filecoin builds upon the foundation laid by the InterPlanetary File System (IPFS), a protocol designed to create a content-addressed, peer-to-peer network for storing and sharing data. While IPFS provides the framework for how data is addressed and retrieved, Filecoin adds an economic layer that incentivizes users to store and serve data reliably.

The Filecoin network consists of storage providers who offer their hard drive space to the network. These providers are required to prove that they are storing the data they claim to be holding through a system of cryptographic proofs. Victor explains, "Filecoin has done a lot of really cool stuff with like proofs. This gets into some of like the specific bets that Filecoin is made as an ecosystem, but it gives you this ability to say, if I store a piece of data with some number of providers on the network, they are contractually bound through as like, they call them actors on the Filecoin network, but effectively a smart contract, they're contractually bound to prove to the network, they're holding on to this piece of data by submitting a zero-knowledge proof."

This system of proofs ensures that data is being stored reliably and can be retrieved when needed. If storage providers fail to prove they are holding the data, they can be penalized by having their collateral "slashed," creating a strong incentive for honest behavior.

The Economics of Filecoin

The economic model of Filecoin is designed to create a competitive market for storage. Storage providers set their own prices, and users can choose providers based on factors such as cost, reliability, and geographic location. This market-driven approach aims to drive down storage costs over time while ensuring high-quality service.

Victor notes that Filecoin storage providers often have multiple revenue streams: "Think of Filecoin storage providers as having multiple businesses bundled together. So like consensus so like securing the Filecoin blockchain now that the FVM is there like securing effectively like the DeFi economy and so on. That's like one service that they're running. Storage is another service which they might get paid for by a client. They might like offer as like a loss leader for other services things like that."

This diversification of income sources allows storage providers to potentially offer more competitive pricing for storage services, as they can offset costs with other revenue streams.

Filecoin Virtual Machine (FVM) and Programmability

A significant development in the Filecoin ecosystem is the introduction of the Filecoin Virtual Machine (FVM). The FVM brings programmability to the Filecoin network, allowing for the creation of smart contracts and more complex applications built on top of the storage network.

Victor highlights the importance of this development: "The FVM itself is built like a hypervisor uh all that means is like it's built so that you could design or deploy many different VMs on top so like the first one is the FVM but like in theory you could have like a MooseVM or like the agoric VM or like a WASM VM sitting on top."

This flexibility opens up new possibilities for developers and users of the Filecoin network. For example, it enables the creation of more sophisticated financial instruments for storage providers, such as improved borrowing and lending mechanisms. It also allows for the development of applications that can automatically manage data storage, retrieval, and replication across the network.

Filecoin's Competitive Edge in the Cloud Storage Market

One of the key questions surrounding Filecoin and other decentralized storage solutions is how they can compete with established cloud storage providers like AWS, Google Cloud, and Microsoft Azure. Victor argues that Filecoin has several advantages:

  1. Scale: Filecoin is already operating at an exabyte scale, with ambitions to reach zettabyte and yottabyte levels in the future. This massive scale could potentially allow Filecoin to offer more competitive pricing than traditional providers.

  2. Decentralization: By distributing storage across a global network of providers, Filecoin can offer increased resilience and redundancy compared to centralized solutions.

  3. Cryptographic Guarantees: The proof system used by Filecoin provides strong assurances about data integrity and availability, which can be particularly valuable for certain use cases.

  4. Programmability: With the introduction of the FVM, Filecoin can offer more flexible and customizable storage solutions that integrate directly with blockchain-based applications.

Challenges and Opportunities for DePIN and Filecoin

Despite the promising potential of DePIN and Filecoin, there are still challenges to overcome. One of the primary hurdles is onboarding traditional Web2 companies and users onto these new decentralized systems. Victor acknowledges this challenge and suggests that the key lies in simplifying the user experience and meeting enterprise requirements:

"In order to sell to Web2, on the retail side, I think it's really about simplicity. It's like make the best developer experience you can. Make it super simple. Make it like throwing data over walls or enterprise. The pipeline there looks a lot more like, how do you build up the feature set that makes this look comparable to Web2. You make it really easy for them to just say like, oh yeah, I'm just putting it on this thing and I just happen to see a cheaper cost, but it still ticks all of my enterprise boxes."

This approach involves building layers of abstraction that make interacting with decentralized networks as seamless as using traditional cloud services, while still leveraging the benefits of blockchain technology behind the scenes.

The Intersection of AI and DePIN

An exciting area of potential growth for DePIN and Filecoin is the intersection with artificial intelligence (AI). As AI models become more sophisticated and data-hungry, the need for vast amounts of storage and compute power is increasing exponentially. Victor sees this as a significant opportunity for decentralized infrastructure networks:

"I think verifiability is such an important primitive that like crypto brings to the table AI needs and also like this idea of like let's imagine you have an autonomous agent as a thing right like how is that agent going to run any service if it can't spend its own money?"

He envisions a future where AI agents have their own blockchain wallets and can autonomously pay for services like compute and storage. This could enable a new ecosystem of AI-powered applications that leverage decentralized infrastructure in novel ways.

Moreover, the democratization of content creation through AI tools like text-to-video generators could drive massive demand for affordable compute and storage resources. Victor suggests that crypto-based solutions like Filecoin could be well-positioned to meet this demand by offering cost-effective services at scale.

The Role of Solana in the DePIN Ecosystem

While the discussion primarily focused on Filecoin and general DePIN concepts, it's worth noting the potential role that high-performance blockchains like Solana could play in this ecosystem. Solana's high throughput and low transaction costs make it an ideal platform for building decentralized applications that require frequent interactions with physical infrastructure.

For example, Solana's speed could be particularly valuable for DePIN projects that need to process large amounts of sensor data in real-time or manage complex networks of IoT devices. Additionally, Solana's growing DeFi ecosystem could provide the financial infrastructure needed to support innovative tokenomics models for DePIN projects.

The Future of DePIN and Its Impact on the Crypto Economy

As the DePIN sector continues to evolve, it has the potential to significantly reshape the crypto economy and its relationship with the broader world. By creating tangible, real-world value through decentralized infrastructure, DePIN projects could drive mainstream adoption of blockchain technology and cryptocurrencies.

Victor emphasizes the long-term vision of DePIN: "The reason I think this is super interesting and the reason that this is different from the rest of crypto is it isn't focused internally on our own economy. When we think about DeFi, we're talking about how do we make it more efficient for people to do things like trade asset A for asset B or NFTs? How do we represent something as an NFT and trade it around? What makes DePIN as a sector really fascinating is this is the opportunity for crypto to actually sell real services, which means capital inflows into the crypto economy, which makes everything else that we've built so far, in order of magnitude more meaningful."

This perspective highlights the potential for DePIN to bridge the gap between the crypto world and traditional industries, creating new economic models and opportunities for growth.

Conclusion: The Promise of DePIN and Filecoin

As we look to the future of blockchain technology and cryptocurrency, it's clear that projects like Filecoin and the broader DePIN sector will play a crucial role in shaping the digital landscape. By creating decentralized alternatives to essential infrastructure services, these initiatives are not only pushing the boundaries of what's possible with blockchain technology but also addressing real-world needs in innovative ways.

The success of DePIN projects like Filecoin could lead to a more resilient, efficient, and democratized digital infrastructure. As these networks scale and mature, they have the potential to compete with and potentially surpass traditional centralized services in terms of cost, performance, and reliability.

For investors, developers, and users in the crypto space, keeping a close eye on the DePIN sector could prove invaluable. As Jon Victor and the team at Ansa Research continue to analyze and report on these developments, we can expect to see exciting innovations and opportunities emerge in the coming years.

The journey of DePIN and Filecoin is just beginning, but it's already clear that they represent a significant evolution in how we think about and interact with digital infrastructure. As these technologies continue to develop and integrate with emerging fields like AI, we may be witnessing the early stages of a fundamental shift in the global digital economy.

Facts + Figures

  • Filecoin is currently operating at an exabyte scale of storage capacity.
  • There are approximately 3,000 storage providers on the Filecoin network.
  • The current utilization of Filecoin's storage capacity is around 20%, which has increased significantly from previous periods.
  • Filecoin's storage growth in 2023 was up about 400% compared to the previous year.
  • The Filecoin Virtual Machine (FVM) allows for the deployment of multiple types of virtual machines on top of the Filecoin network.
  • Filecoin storage providers often have multiple revenue streams, including consensus rewards, storage fees, and potentially compute services.
  • The cost of storage on Filecoin is approximately a couple of dollars per terabyte per month.
  • About 40% of clients using Filecoin are storing over 100 terabytes of data.
  • Filecoin's roadmap includes plans to scale from exabyte to zettabyte and potentially yottabyte levels of storage.
  • The InterPlanetary File System (IPFS), which Filecoin builds upon, was conceptualized as early as 2016-2017.
  • Filecoin storage providers are required to submit proofs of storage to the network every 24 hours.
  • The Filecoin network uses a hybrid Proof of Work and Proof of Space-Time consensus mechanism.
  • Filecoin's subnets feature allows for the creation of customized blockchain environments with different properties and security models.
  • The convergence of AI and crypto technologies is seen as a significant opportunity for DePIN projects like Filecoin.

Questions Answered

What is DePIN and why is it important for the crypto economy?

DePIN stands for Decentralized Physical Infrastructure Networks. It's important because it represents the crypto economy's ability to export real services to the outside world. DePIN projects aim to aggregate resources like storage, bandwidth, and compute power using blockchain technology, then resell these services back into the real world. This creates capital inflows into the crypto economy, making all previous crypto developments more meaningful and potentially driving mainstream adoption.

How does Filecoin work as a decentralized storage network?

Filecoin works by creating a market for storage where providers offer their hard drive space to the network. These providers are required to prove they are storing data through cryptographic proofs submitted to the network. Users can choose storage providers based on factors like cost and reliability. The network uses a system of incentives and penalties to ensure honest behavior, with providers receiving rewards for storing data and facing potential slashing of their collateral if they fail to prove storage.

What is the Filecoin Virtual Machine (FVM) and why is it significant?

The Filecoin Virtual Machine (FVM) is a programmable layer added to the Filecoin network that allows for the creation and deployment of smart contracts. It's significant because it enables more complex applications to be built on top of Filecoin's storage infrastructure. The FVM brings programmability to Filecoin, allowing for the development of sophisticated financial instruments for storage providers, automated data management systems, and integration with other blockchain networks. This flexibility greatly expands the potential use cases and value of the Filecoin network.

How does Filecoin aim to compete with traditional cloud storage providers?

Filecoin aims to compete with traditional cloud storage providers through several key advantages. First, it operates at a massive scale, already at exabyte levels with ambitions to reach zettabyte and yottabyte capacities. This scale could potentially allow for more competitive pricing. Second, its decentralized nature provides increased resilience and redundancy. Third, Filecoin offers strong cryptographic guarantees about data integrity and availability. Lastly, with the introduction of the FVM, Filecoin can offer more flexible and customizable storage solutions that integrate directly with blockchain-based applications.

What is the relationship between AI and DePIN projects like Filecoin?

The relationship between AI and DePIN projects like Filecoin is becoming increasingly important. As AI models grow more sophisticated and data-hungry, they require vast amounts of storage and compute power. DePIN projects can potentially provide this infrastructure in a more cost-effective and decentralized manner. Additionally, there's a vision of AI agents having their own blockchain wallets, allowing them to autonomously pay for services like compute and storage. The democratization of content creation through AI tools could also drive massive demand for affordable compute and storage resources, which DePIN projects are well-positioned to provide.

How is Filecoin addressing the challenge of onboarding traditional Web2 companies?

Filecoin is addressing the challenge of onboarding traditional Web2 companies by focusing on simplicity and meeting enterprise requirements. For retail users, the emphasis is on creating the best developer experience possible, making it as simple as "throwing data over walls." For enterprise clients, Filecoin is building up feature sets comparable to Web2 solutions while offering the benefits of decentralization. This involves creating layers of abstraction that make interacting with the decentralized network as seamless as using traditional cloud services, while still leveraging the benefits of blockchain technology behind the scenes.

What are Filecoin subnets and how do they enhance the network's capabilities?

Filecoin subnets are customizable blockchain environments that can be created within the Filecoin ecosystem. They allow for the deployment of specialized chains with different properties, consensus mechanisms, and security models. Subnets can be configured as roll-ups, sidechains, or even single-node environments, depending on the specific use case. This flexibility enables developers to create optimized environments for different applications, such as high-performance content delivery networks or secure data processing pipelines. Subnets enhance Filecoin's capabilities by allowing for greater scalability, customization, and integration with other blockchain networks and services.

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