Messari: Detailed explanation of PoPW token distribution mechanism may ignite the next bull market

summary

• Proof of Physical Work (PoPW) is a novel token distribution mechanism that rewards participants for completing verifiable physical work in the real world.

• Many protocols are leveraging the physical proof-of-work framework to incentivize supply-side participation in building hardware networks. These include wireless, mobile, ambient, compute, and storage networks.

• Cryptoeconomic protocols are extremely powerful in incentivizing and coordinating human activity, making them extremely useful for developing real-world decentralized infrastructure and hardware networks.

• Using a physical proof-of-work framework, the protocol can incentivize participants to build its network in a way that users find it attractive.

During the market decline, cryptocurrency critics became active, attacking whether the industry has any real use cases. Their arguments seem to make sense, aside from innovation in capital formation and use cases for non-sovereign currencies, removing middlemen, and breaking up monopolies. But in reality, crypto protocols have been so successful in coordinating activities in the digital sphere that projects have begun using crypto for real-world infrastructure.

Cryptoeconomic protocols can incentivize the development of real-world infrastructure and hardware networks through the coordination capabilities of blockchain technology. Millions of individuals can come together to deploy and operate infrastructure in a trustless, permissionless, and programmatic manner, rather than relying solely on a single centralized entity.

Multicoin Capital calls this mechanism Proof of Physical Work (PoPW). PoPW rewards users for performing verifiable physical work, such as deploying 5G hotspots. The protocol algorithm verifies the state of the device and rewards the owner according to a set of predetermined rules. Many PoPW protocols are already coordinating hundreds of thousands of participants around the world, covering wireless networks, mobility, environment, computing and storage.

Physical Proof of Work

There are two main types of infrastructure networks: fungible and non-fungible. Fungible infrastructure networks use hardware devices that are location-independent. Compute and storage protocols fall into this category because their services do not depend on the hosting location of the server/node. 1 TB of storage space in Hong Kong is exactly the same as 1 TB of storage space in Singapore. The location of wireless hotspots does matter, which makes it a non-fungible infrastructure network.

Many communities are building in the PoPW space, many of which are still in the early stages. Most of these protocols build applications on existing L1. So far, applications in the PoPW track can be divided into the following categories:

• Wireless network

• Logistics Network

• Natural Environment

• Compute and Storage

Wireless network

Helium and Pollen Mobile are two well-known protocols operating in the decentralized wireless (DeWi) space. Helium currently consists of IoT and 5G networks, and Pollen Mobile focuses on 5G. These protocols incentivize supply-side participants (hotspot operators) to provide network coverage in exchange for token rewards. In addition, participants also earn fees for routing data through their hotspot services.

Logistics Network

Logistics networks refer to the industry of transporting people and goods, and two emerging networks within them are Hivemapper and DIMO. Hivemapper is a decentralized map built by participants using dashcams. The protocol rewards supply-side participants (map miners) for driving or using dashcams to move around and contribute to the network map.

DIMO allows users to take ownership of their mobility data to provide services in areas such as car finance , insurance, maintenance, etc. Supply-side participants (data miners) are rewarded for connecting hardware devices to their cars and contributing that data to the network.

Natural Environment

WeatherXM is a decentralized weather network powered by a distributed network of hardware devices. It allows supply-side participants (weather station operators) to earn rewards by deploying small weather stations and providing accurate weather services.
PlanetWatch is a decentralized global air quality sensor network. The protocol rewards supply-side participants (sensor operators) for streaming real-time air quality data back to the network.

Compute and Storage

The Compute and Storage category includes the most mature protocols in the PoPW space in terms of network usage and revenue. Filecoin and Arweave are storage networks with different models. Filecoin uses a contract-based storage model, while Arweave uses a permanent storage model. Both protocols incentivize supply-side participants (storage providers) to dedicate physical storage drives to store data in exchange for token rewards.
Render Network is a distributed GPU rendering platform. Its token economics is designed to reward supply-side participants (node ​​operators) for dedicating GPU hardware to the network and completing rendering work.

Why use blockchain?

Because large physical networks require large capital injections and complex security systems, they usually need large companies to build them. This often results in a small number of companies controlling the pricing structure and conditions for users, making it impossible to form a free market.

Cryptoeconomic protocols completely solve this problem, allowing globally distributed individuals to jointly bootstrap the network in a permissionless and trustless manner. This is a more cost-effective solution by jointly building and maintaining the network and distributing all the benefits to supply-side participants.

Take the decentralized storage platform Filecoin as an example, which demonstrates the benefits of using a decentralized blockchain approach. Compared to centralized infrastructure approaches (such as Amazon S3), storage providers on Filecoin are rewarded with tokens for providing storage capacity to the network, which has grown to more than 17 EiB in two years. In addition, Filecoin does not charge high fixed rates, but allows market participants to set storage prices.

In an article by Evan Conrad, he highlighted how if Filecoin were a centralized entity, it would be inclined to take a cut of the network's revenue. As the network becomes more popular, Filecoin's network effect continues to grow. In the case of Filecoin right now, all value is attributed to the protocol, making it "the cheapest commodity market, with no single middleman taking a cut of it."

The benefits of using encryption for infrastructure

As Multicoin Capital managing partner Tushar Jain describes, using cryptoeconomic protocols for infrastructure networks has two benefits: the ability to quickly scale the network globally, and a system that is collectively owned by participants rather than a small group of shareholders.

Cryptoeconomic protocols allow users around the world to build permissionless networks in parallel. Participants can also focus on deploying infrastructure that meets local market needs. In exchange for building the supply side of the network, participants receive an ownership stake in the network, which incentivizes them to drive the network forward.

While the above protocols allow individuals to contribute to the network and earn passive income, they also open the door to franchise-like businesses. Mike Zajko, co -founder of Lattice Capital, described the entrepreneurial opportunity:

Participating in these networks looks a lot like opening a franchise, where the franchise is a significant portion of the larger economy (more than 10%). You need some startup capital, physical real estate, some operational know-how, and then the community and protocol help take care of the rest.

Hexagon Wireless is one such franchise operating in the DeWi space and is currently leveraging their technical expertise and proprietary relationships to deploy hardware for Helium and Pollen mobile networks, accelerating the growth of DeWi.

Economic Model

Token incentives play a very important role in building real-world infrastructure and solving coordination problems. Helium has proven this theory over the past year or so. It has expanded its IoT network from 30,000 to over 900,000 physical hotspots in 170 countries by providing incentives to hotspot deployers.

To start this economic model, the project must first provide users with rewards for completing verifiable physical activities in the real world:

Supply-side participants are incentivized with inflation tokens targeting specific activities needed to grow the network. These rewards act as a subsidy to supply-side participants. Rewards typically support participants in building the network until the network begins to generate sustainable fees from demand-side usage.

As the network grows, developers and product builders are attracted to the network. In addition, the protocol’s subsidies to its supply-side participants allow them to offer cheaper services, helping to attract more users.

End users begin paying for network services, increasing revenue for supply-side participants and the protocol. This creates a positive feedback loop that attracts more supply-side participants and investors .

Value is usually captured through a (burn-mint) supply equilibrium (BME) model or a work token model. As network utility increases, supply is either burned through the BME model or staked by service providers through a work token model, and the reduction in circulation drives token prices up. Rising token prices re-attract more supply-side participants, creating a virtuous cycle.

The economic model of PoPW fundamentally solves the chicken-and-egg dilemma. Using token rewards, the protocol can incentivize participants to build the supply side of the network to a level that is attractive to users. This is the initial motivation for crypto protocols to compete with Web2 companies.

Final Thoughts

Physical proof of work represents a novel token distribution mechanism. Tushar Jain believes that the new token distribution mechanism may trigger the next bull run.

According to statistics, the time points of changes in token distribution mechanisms include: PoW tokens in 2013, ICOs in 2017, IEOs in 2019, DeFi liquidity mining in 2020, and NFTs in 2021. Each new token distribution mechanism coincides with a bull market. If the argument is correct, the next successful token distribution mechanism may bring a bull market. Considering the success of Proof of Physical Work in various fields and its ability to provide value by building global infrastructure, PoPW is likely to ignite the next bull market.

Original title: "Using Crypto to Build Real-World Infrastructure"

Original article by: Sami Kassab, Messari