2.2 Token Incentivization

DePINs are also called Token Incentivized Physical Infrastructure Networks (TiPIN), as many of them require tokenomics to build. Traditional network operators manage the capital expenditures based on their fundraising and (operational) income generation capabilities. In the DePIN or TiPIN sector, such a process is instead managed by the tokenomics of the network. This model effectively solves the chicken-and-egg problem associated with traditional hardware networks. Using token rewards, a protocol can motivate individuals to bootstrap the supply-side of the network to the point where end users find its services attractive enough to use. The particular tokenomics model of a DePIN has to be resilient enough to work with all kinds of market conditions. The amount of rewards and the value of the token must be consistent with the value produced by the network. Whenever a valuation discrepancy happens, the tokenomics model must have a mechanism designed to realign the token valuation with the network valuation, without the risk of any catastrophic failures.

The flywheel below represents the business model of a typical DePIN or TiPIN project

The token incentivization process also needs to be designed and implemented to work with a complex economic model. If we refer to the cost model as described in Section 2.1, token incentivization brings the following impact:

• a. It can reduce the cost of item C via utility token mining. Take decentralized wireless access networks as an example: with token incentivization, network operators do not have to pay things like electricity bills, air condition bills, etc. The miner will bear those costs with the expectation that the token will grow in value according to Metcalfe's law. Essentially, the token functions as a long-term “call” option. The miner paid the premium for that option (the cost to operate the miner) and expects to be profitable when the token value grows.

• b. It can reduce the cost of item K via utility token mining. Using the same example, miners will pay for the mining rig which is typically a network gateway or similar device, and they also provide a free network location, while traditional telcos have to pay both the site acquisition and equipment costs. Again, this is equivalent to the miner paying the premium for that “call” option.

• c. With the reduction in both cost items as specified above, the system could tolerate more interconnection costs and lean towards a more decentralized mesh solution. This will increase the robustness of the network and improve its availability, leading to more users and better return of the token value.

Overall, the token incentivization process does provide a more affordable way for operators to build their networks. The key to the success is to grow the number of users, as this will grow the network value dramatically.

The entire TiPIN economic model can be described as below:

𝑉(𝑡) = 𝑋(𝑡)∗ 𝑝(𝑡)=𝐴∙ 𝑛(𝑁(𝑡),𝑡)² +(𝑅 − 𝑂+𝑂′) ∙ 𝑁(𝑡) +𝑌(𝑁(𝑡𝑡),𝑡) −𝑍(𝑡)

where 𝑿(𝒕) represents the total number of generated and unlocked tokens, 𝒑(𝒕) is the price of the tokens, 𝑂′ is the capitalized operator’s investment, 𝑌(𝑁(𝑡), 𝑡) is the total premium received, as tokens, 𝑂′ is the capitalized operator’s investment, 𝑌(𝑁(𝑡), 𝑡) is the total premium received, as defined by the miners’ / community builder’s investment in terms of mining rigs, operational costs and site acquisition costs, etc. 𝑍(𝑡) is the total amount withdrawn out of the ecosystem.

During a Token Generation Event (TGE), the above formula becomes

𝑋(𝑡)∗ 𝑝(𝑡)=𝐴∙ 𝑛(𝑁(𝑡),𝑡)² +(𝑅 − 𝑂+𝑂′) ∙ 𝑁(𝑡)

The network ecosystem value (𝐴 ∙ 𝑛(𝑁(𝑡), 𝑡)²) , the revenue, and the capitalized investment shall be equivalent to the investment amount by the TGE. These investments shall typically come from the operator itself and its institutional investors. After that, whether the token price can maintain really depends on the speed of on-boarding new users, as represented by the delta between 𝑌(𝑁(𝑡), 𝑡) and 𝑍(𝑡); token generation and unlock speed; and the network growth speed.