Recently, with the good performance of projects on the sol chain such as honey and mobile in the secondary market, more and more investors are turning their attention to projects on the DePIN track. So what is the business logic of DePIN, a track that claims to be worth trillions of dollars? What are the legal risks that the DePIN project may involve? The author will explain it to you through this article.
DePIN’s business model
DePIN is the abbreviation of Decentralized Physical Infrastructure Networks. Its core is to incentivize users to purchase and use hardware equipment deployed in the project ecosystem through rewarding project tokens, thereby providing real-world goods and services or digital resources. The physical infrastructure mentioned mainly includes two categories: Physical Resource Networks (PRN) and Digital Resource Networks (DRN).
The physical resource network mainly refers to the unique real-world goods and services such as maps, road data, cars, energy data information, wifi, etc. provided by users participating in the project ecosystem through the purchased hardware devices, such as the decentralized map data project honey and the decentralized Internet of Vehicles data project dimo.
The digital resource network mainly refers to the physical infrastructure network in which users participating in the project ecosystem use hardware devices to provide idle broadband networks, GPU computing power, storage space and other digital resources, such as the decentralized GPU computing power project RNDR, the decentralized storage project AR, Filcoin and the decentralized wireless network protocol Helium.
It can be seen that DePIN mainly improves, innovates and reshapes the traditional ICT industry through the model of blockchain and token economy. As we all know, the traditional ICT industry requires a lot of manpower, plant and equipment maintenance costs in the early stage. Through the decentralized model of DePIN, token incentives are used to complete the cold start of the project, making the heavy asset industry lightweight and greatly reducing the initial investment cost of the project.
In addition, some decentralized storage and computing power projects aggregate scattered idle digital resources and provide them to relevant business parties. In this way, users can obtain token incentives from the project by providing idle digital resources. In this way, the project can also obtain digital resources at a lower cost and sell them to the demand side. This is actually a sharing economy model similar to P2P and Didi, which maximizes the use of idle digital resources to create additional market value.
Possible legal risks involved in the DePIN project
1. Is DePIN’s model of incentivizing users through tokens a virtual currency “mining” activity prohibited by domestic regulators?
From the above analysis, it can be seen that DePIN's advantage over traditional industries is that it greatly reduces the initial investment costs, but its way of reducing costs is to motivate users to purchase project hardware equipment and participate in the ecosystem through tokens. After purchasing and installing hardware equipment, users can continue to receive token rewards after providing digital resources such as data information or storage required by the project. Does this method belong to the "mining" activities prohibited by domestic regulations?
In September 2021, the National Development and Reform Commission and other departments issued the "Notice on Regulating Virtual Currency "Mining" Activities" (hereinafter referred to as: "Document No. 1283"), which defines "mining" activities as: Virtual currency "mining" activities refer to the process of calculating and producing virtual currency through dedicated "mining machines". It has large energy consumption and carbon emissions, low contribution to the national economy, and limited driving effect on industrial development, scientific and technological progress, etc. In addition, the risks derived from the production and trading of virtual currencies are becoming increasingly prominent, and its blind and disorderly development has an adverse impact on promoting high-quality economic and social development and energy conservation and emission reduction.
It can be seen from Document No. 1283 that the reason why the regulatory authorities are rectifying domestic "mining" activities is that "mining" activities consume a lot of electricity and emit a lot of carbon, and their contribution to the national economy is low. Secondly, the production and trading of virtual currencies often give rise to some illegal and criminal activities.
In the process of token generation, traditional PoW "mining" is that the mining machines in the mine use a lot of computing power to perform hash operations to package and process transactions on the chain to obtain Bitcoin rewards. However, a large number of DePIN projects may use hardware devices or digital resources such as dashcams, hard disk storage space, routers, etc. to obtain project token rewards.
From the perspective of environmental protection and resource recycling, the DePIN project does not seem to consume a lot of energy and does not have a lot of carbon emissions. However, the core point of the project lies in the market value management of incentive tokens. Only when the incentive tokens are maintained in a good price range and the benefits of participating users are guaranteed, can the project ecology be continuously expanded. This will inevitably include the transaction of virtual currency, and there may be derivative risks mentioned in Document No. 1283. Therefore, there is still a high regulatory risk for the DePIN project in China, and both entrepreneurs and investors need to be cautious.
2. Prevention of criminal risks that may be involved in the DePIN marketing model
Due to its complex model, projects in the DePIN track will involve upstream and downstream roles such as hardware equipment providers and channel agents. In the process of marketing hardware equipment sales, channel agents may use the joint ground promotion team to invite rebates and fission mechanism growth methods to quickly open up the market. In the process of promotion, if the invitation rebate method is adopted, the rebate chain reaches three levels or above, and when attracting users to join, they are required to purchase digital resources of various names or hardware equipment that does not match their own value, and they adopt means such as fabricating and distorting national policies and fabricating and exaggerating the annualized income of participating in the DePIN project, so that channel agents or their offline channels can obtain part of the investment income of fission users. Then this model involves the criminal risk of organizing and leading pyramid schemes.
As the DePIN project develops rapidly, there will definitely be some projects that use the DePIN concept as a gimmick, under the guise of developing the sharing economy and digital economy, and using various online and offline forms of high-yield propaganda to attract investors to invest and join, and establish a capital pool. This may be illegal, public, social, and inducement, thus constituting the crime of illegally absorbing public deposits. If the project party has the subjective intention of illegal possession, it may further constitute the crime of fundraising fraud.
3. Be cautious about data export compliance issues in DePIN projects
The picture shows the distribution of HONEY project map data
In addition, we can see that many projects on the market currently provide overseas demand parties with data information such as maps and vehicles as core resources of the project. At present, domestic regulatory authorities attach great importance to the compliance issues of data outbound. Didi was severely punished by regulatory authorities for data processing issues that seriously affected national security. Some information technology companies were also found to have illegally provided intelligence data to foreign countries because they illegally collected sensitive data in China and provided it to foreign companies. The legal person and sales manager of the company were arrested on suspicion of stealing, spying, buying, and illegally providing state secrets and intelligence for foreign countries. Therefore, entrepreneurs, investors and participating users of the DePIN project must pay attention to data issues, treat them with caution, and never test the law.
Summary and Outlook
Although DePIN may face adverse effects from regulatory, technical, market and other risks during its rapid development, I believe that as long as entrepreneurs are cautious, maintain communication with regulatory authorities, and make timely improvements and optimizations when problems arise, in the near future, with the development and application of blockchain technology and the Internet of Things, the DePIN project will surely expand to more infrastructure areas such as energy management, transportation and logistics systems.
Through DePIN's unique model innovation, these fields are reshaped to make them more efficient, secure, and transparent, providing real-time data analysis and better resource allocation optimization, allowing more users to participate in the ecosystem that combines blockchain technology with the real world.
