By Al Morris

This is part 2/3 in a series on DePIN Economics - Read Part 1 here

The recent collapse of many DePIN launches has exposed a critical flaw in the current approach to building decentralized networks. Many of these projects relied heavily on token and node sales to subsidize pricing and secure B2B contracts, locking themselves into rigid supply models that ignored fundamental economic principles. This shortsightedness led to oversupply, underutilization, and ultimately, the devaluation of their tokens and the crumbling of their networks.

However, a new paradigm is emerging: elastic supply models in decentralized networks. By aligning supply with actual demand, these models offer a sustainable and adaptable path forward in the decentralized landscape.

Drawing from my experiences in economics and decentralized system development, this article explores how Decentralized Physical Infrastructure Networks (DePINs) can become productive assets. We’ll examine the characteristics that make these networks successful and propose a better approach to building them by embracing elastic supply, learning from the sharing economy, and focusing on long-term sustainability.

The Problem with Rigid Supply Models

The Downfall of Fixed Supply Networks

Many decentralized projects adopted a fixed supply model, where the number of nodes or tokens was predetermined and inflexible. This rigidity led to several issues:

  • Oversupply and Underutilization: Without the ability to adjust supply based on demand, networks faced an excess of resources with insufficient usage, leading to inefficiencies and wasted investments.
  • Inability to Adapt to Market Volatility: The crypto space is highly volatile, and rigid networks couldn’t respond effectively to sudden market shifts or technological advancements.
  • High Barriers to Entry: Requiring custom hardware or licenses created significant entry barriers, limiting participation and stifling innovation.

Ignoring Fundamental Economics

By neglecting the basic principles of supply and demand, these projects set themselves up for failure:

  • No Real People: Every time a new token launches, a swarm of bots and airdrop farmers descend, obscuring real data and testing economic mechanisms to the limits.
  • Misaligned Incentives: Fixed supply models often benefited early participants at the expense of the network’s long-term health.
  • Lack of Demand Focus: Emphasis on token sales overshadowed the need to cultivate genuine demand for network services.
  • Financial Strain on Participants: Investors and node operators faced financial losses due to underutilized resources and declining token values.

The Elastic Supply Solution

What Is Elastic Supply?

Elastic supply refers to a model where the number of nodes or tokens in a network can expand or contract in response to actual market demand. This flexibility allows networks to:

  • Adapt to Market Conditions: Scale operations based on usage, ensuring resources match demand.
  • Optimize Resource Allocation: Prevent oversupply by aligning supply with real-time needs.
  • Maintain Economic Balance: Align incentives among participants, promoting network health and sustainability.

Benefits of Elastic Supply

  • Responsiveness to Volatility: Elastic supply models can adjust to market fluctuations, reducing the risk of oversupply or shortages.
  • Encouraging Participation: Lower barriers to entry enable more participants to contribute, fostering diversity and resilience.
  • Facilitating Innovation: Flexibility allows networks to integrate new technologies and adapt to changing market trends.

Lessons from the Sharing Economy

Success Stories: Uber and Airbnb

Platforms like Uber and Airbnb revolutionized their industries by leveraging consumer resources to provide services traditionally offered by commercial entities:

  • Uber: Enables individuals to offer transportation services using their personal vehicles.
  • Airbnb: Allows homeowners to rent out their properties as accommodations.

Key Principles of the Sharing Economy

  • Utilizing Existing Assets: Leveraging underutilized consumer goods reduces costs and increases efficiency.
  • Reducing Barriers to Entry: Minimal requirements for participation encourage widespread involvement.
  • Information Systems: Advanced technology connects supply with demand, reducing information asymmetry and coordinating services effectively.

Applying These Principles to DePINs

DePINs can emulate the sharing economy by:

  • Leveraging Consumer Hardware: Utilizing everyday devices for network operations reduces the need for specialized equipment.
  • Open Participation: Encouraging anyone to contribute promotes decentralization and network robustness.
  • Flexible Adaptation: Embracing new technologies and methods enhances innovation and competitiveness.

The Current Problem with Node Sales

Many current node sale models do the opposite:

  • Requiring Custom Hardware: Mandating specific, often expensive equipment creates high entry barriers.
  • Enforcing Rigid Supply Markets: Fixed supply models prevent networks from adjusting to market demands, leading to inefficiencies.
  • Reducing Selection for End-Customers: Developers and users have fewer options, stifling innovation and adoption.

Building Productive DePINs: A Proposal

1. Embrace Elastic Supply

  • Continuous Competition: Foster an environment where node operators compete to provide the best services efficiently.
  • No Prohibitive Licenses or Fees: Remove unnecessary barriers to entry, allowing participants to join by staking collateral or meeting minimal requirements.
  • Community Growth Reduces Costs: As more participants join, economies of scale can lower operational costs and improve network performance.
  • In-Kind Benefits for Participants: Nodes operating in areas like community AI, gaming, social platforms, or search may receive direct benefits, reducing the incentive to sell tokens and promoting network stability.

2. Implement Adaptive Node Specifications

  • Inclusivity of Devices: Design the network to accommodate a wide range of devices, from personal computers to specialized hardware.
  • Embrace Technological Advancements: Remain open to integrating new technologies like ASICs or AI-optimized nodes to enhance performance.
  • Avoid Dependency on Custom Hardware: Reducing reliance on bespoke equipment lowers costs and encourages broader participation.

3. Develop a Wide Supply Market

  • Diverse Resource Utilization: Allow different network functions to run on various devices, maximizing resource availability and flexibility.
  • Scalability: A broad supply market enables the network to grow organically with demand.
  • Improved Service Selection: A diverse supply market offers end-users and developers more options, enhancing the overall value proposition.

4. Focus on Strategic Funding and Demand Generation

  • Long-Term Vision: Prioritize sustainable growth over short-term gains from token or node sales.
  • Avoid Exploiting Retail Consumers: Shift the perspective of retail purchasers from being the demand source to being part of the supply, contributing to network functionality.
  • Empower Founders and Developers: Encourage the pursuit of real demand by developing valuable services that meet market needs.
  • Standardize Supply Components: Implement standards to ensure interoperability and efficiency across the network.

5. Encourage Patience Among Investors

  • Educate Fund Managers: Shift focus from immediate returns to supporting projects that build genuine value over time.
  • Align Investment Strategies: Support networks that prioritize sustainable models and productive assets.
  • Facilitate Real Demand Creation: Invest in initiatives that foster real-world adoption and demand-side growth.

Creating Productive Assets in DePINs

By adopting these strategies, DePINs can become productive assets that generate real value:

  • Intrinsic Utility: Providing services that fulfill genuine market needs, such as decentralized storage, computing power, or connectivity.
  • Sustainable Economic Models: Aligning incentives to support long-term network health and participant profitability.
  • Efficient Resource Use: Leveraging existing consumer resources optimizes costs and enhances scalability.
  • Adaptability and Innovation: Flexibility allows for the integration of new technologies and responsiveness to market changes.
  • Community Engagement: Open participation fosters a committed and collaborative community.

Conclusion

The failures of recent decentralized projects highlight the necessity for a new approach in building networks that are sustainable, adaptable, and value-driven. By embracing elastic supply models, learning from the successes of the sharing economy, and focusing on long-term strategies, DePINs can become productive assets that contribute meaningful value to the decentralized ecosystem.

Through careful consideration of economic principles and a commitment to innovation and inclusivity, we can pave the way for decentralized networks that not only survive but thrive in the ever-evolving digital landscape.

Disclaimer: This article reflects the views of the author and is intended for informational purposes only. It does not constitute financial advice. Readers are encouraged to conduct their own research and consult with professional advisors before making investment decisions.