DePIN Economic Models: The Good, The Bad, The Ugly (And The Alternative)
Unpacking the drawbacks of current DePIN Tokenomic models, with a primer on "Stake and Stable" - a new approach proposed by Parameter Research
DePIN’s economic model drives one of its key competitive advantages— bootstrapping and incentivizing supply to meet demand while democratizing value creation across network participants. Two primary approaches have emerged as the methods for capturing and distributing value in these networks:
1. Burn & Mint Equilibrium
Buyback And Burn
Exact implementation specifics vary, but by and large, here’s an overview on how these models works:
Burn and Mint Equilibrium:
When a customer purchases 10 units of a resource generated by a DePIN, tokens representing the value of those 10 units, priced in an external currency (e.g., fiat), are burned (removed from circulation) and minted (distributed) to supply-side participants.
Buyback and Burn:
Revenue generated from the DePIN network is used to purchase and remove tokens from supply. Unlike Burn and Mint, the mechanism for issuing rewards to supply participants varies across projects.
Despite their prevalence, these models aren’t flawless. DePIN participants are growing increasingly aware of the challenges facing DePIN token economic models today, primarily:
Inflation risks
Network tokens serving different functions for multiple stakeholders, which changes dynamically based on the maturity of the network
Resulting in long-term sustainability uncertainty and challenges impacting valuation models.
Before unpacking the specific issues stemming from these approaches, it’s important to contextualize DePIN networks today while considering what they might look like in the future, specifically around their different stages of growth, how demand value capture occurs, and the role of tokens across these stages and stakeholders.
Level Setting the State of DePIN Networks Today
DePIN networks in their current state (and likely for the foreseeable future) have 2 primary phases of growth:
Pre-revenue supply participation
Fiat based revenue generation enabled by supply participants
One of the most compelling aspects of DePIN is its focus on massive TAMs, largely comprised of Web2 customers paying to access these networks with fiat. Given the nature of these customers, it's reasonable to expect fiat-based revenue will remain the dominant form of value capture for the next 5 to 10 years.
On Tokens:
DePIN tokens should be used to align incentives. The challenge is incentives differ across network stakeholders at different stages of network growth. This becomes exceptionally hard to balance when a single network token functions as a medium of exchange, unit of account and store of value.
On Token Value and Network Valuations:
The relationship between token/network valuations and tokenomic models are deeply intertwined.
Because tokens serve as more than just a medium of exchange, in order for a network’s value to grow, participants need a genuine reason to hold the token, over and above clever financial engineering mechanisms which force that behavior.
There are two primary primary drivers behind why someone would hold a network token, both of which are directly impacted by tokenomics
1. The market has underpriced the value of a network
2. There will be future value accrual to the token
These factors are certainly related, but evaluated independently given that tokenomic dynamics vary across projects.
Network Valuations:
In traditional financial markets, we have well understood frameworks for valuing different asset classes. Tokens are not stock, but to some degree, a project's market cap should reflect a combination of current and future value generated by the network, which can be used to derive the price of an individual token, (while considering their additional roles as a medium of exchange and unit of account). Evaluating whether or not the market has mispriced a network does require a new type of valuation framework, however, despite the exact approach used, a tokenomics model must enable straightforward forecasting of key data points—such as tokens outstanding at various revenue targets across all growth stages—that serve as inputs for potential valuation models.
Token Value Accrual:
Even if a DePIN project has a “reasonably priced market cap”, token economics directly impact individual token value accrual which affects holding incentives. For example, a network’s market cap may represent a fair value today, but holders can independently expect token price appreciation over time even if market cap growth stagnates, due to specific burn mechanisms, providing a strong reason to hold.
For those interested in DePIN token valuations, the Parameter Research team is developing a framework for assessing token value, starting with the introduction of the DePIN Discounted Rate.
The Problems With Today’s Models
Burn and Mint Equilibrium:
Assuming true equilibrium exists, the burn and mint model works moderately well once a DePIN network has demand, as tokens emitted to reward supply participants are directly proportional to what customers pay for resources on the network. This 1-1 relationship creates a quasi-quantifiable emission schedule (where token price variability impacts how many tokens are burned/emitted), but with a direct financial relationship between tokens and network revenue that can be used to reasonably forecast and estimate token value.
Emissions and Inflation Issues:
To incentivize supply participants before demand is established (e.g., in pre-revenue stages or early revenue phases with insufficient demand), networks must emit tokens that cannot be burned, leading to perpetual inflation.
Since revenue-based token burns are the only way to reduce emissions, all tokens generated outside of demand capture are effectively an externality as they impact the price, which impacts marginal token burn.
While some inflation may be acceptable to bootstrap the network (and can be “priced in” to valuation models), estimating the target inflation rate ahead of sufficient demand is a significant assumption that will rarely be accurate. This has led many networks to adopt fluid mechanisms for issuing early-stage supply rewards, increasing runaway inflation risks and complicating forecasting due to a lack of token float change rate assurances.
Buyback and Burn:
The Buyback and Burn model faces even greater risks of runaway inflation and highly variable forecasting.
Emissions and Inflation:
For the Buy and Burn model to be sustainable long-term, there must eventually be near equilibrium between the fiat-denominated value of emitted tokens and the revenue captured by the network. Otherwise, inflation will continuously erode token value.
This means if early-stage token rewards exceed the revenue they generate, the network must eventually issue rewards at a fiat-denominated rate lower than the revenue generated to avoid perpetual inflation. Balancing this relationship is additionally dicey when tokens ideally represent some combination of current and future value accrual.
Fixed Resource Denominated Reward Emissions:
Networks with a fixed reward rate tied to resources provided by supply participants are particularly vulnerable to runaway inflation, as these reward-rates must be continually evaluated and adjusted based on token price.
For example, if a network issues 1 token per unit of resource over a fixed 1-year period, and has a current token price of $1.50 with USD-denominated revenues of $1 per unit, achieving inflation equilibrium requires eventually emitting a proportional number of tokens at a USD-denominated value of $0.50 (assuming 100% of revenue is used to buyback and burn tokens). Now, if the token price rises to $3 during the year, the equivalent number of tokens must be emitted at a USD-denominated value of $0.25 to maintain parity.
This introduces a significant amount of counter-party risk that is exceptionally prone to short-term decision making
Runaway inflation can be mitigated to some degree, by using a fixed reward pool divided amongst supply participants based on their proportional contribution, however, long-term value accrual risks to individual tokens still persist.
Valuations:
Beyond inflation risks, the Buyback and Burn model complicates valuations (even when a network’s emission rate is predictable) as multiple assumptions are required for network forecasting and modeling the delta in individual token price over time.
This is because emissions and revenue are independent from one another, with token burns serving as the sole value driver, and given token price and the ability to burn are inversely correlated, the number of tokens removed from supply in the future is an independent variable, affecting token price.
It’s worth noting that burn and mint networks which emit tokens independently from demand face similar challenges.
From an analyst’s perspective, this forces one of two trade-offs: assume the market is always perfectly efficient (where future token burn is commensurate to a fair market cap based on expected revenue), or attempt to account for potential “market-pricing inefficiencies" with variable token burn rates based on expected vs actual value while simultaneously modeling potential revenue growth over time.
Requirements For Developing An Alternative Model:
DePIN networks need a mechanism to reward supply side participants independently from how Demand is “represented” on the network , while maintaining a financial relationship between the two.
Core tenants of a great model:
Decouple the direct emission relationship between supply and demand for both token creation and removal while preserving a quantifiable link between the two.
Ensure controlled, predictable emissions that incentivize supply-side participants in both pre-revenue and post-revenue stages, without introducing perpetual inflation or externalities
Proposed Idea: “Stake & Stable”:
Supply side emissions are programmatic, similar to Bitcoin, and issued as a reward pool per epoch. Supply emissions should decrease logarithmically over time.
Reward pool emissions are distributed to node operators differently, based on the state of the network. This could be thought of as KPI based emissions, where the KPI used to determine when the reward distribution mechanism changes is revenue, creating two stages of rewards for nodes:
Pre-revenue: network nodes earn tokens emitted per epoch, based on their “contribution” to the network. E.g., with 100 nodes online, 1 node would earn 1% of an epoch reward pool (assuming all nodes are equal).
At the transition point between these two stages of the network, some percent the tokens previously emitted to supply side participants must be staked for nodes to continue participating in the network. For example, 80% of the median number of tokens distributed during this time might be required for continued participation.
This increases the incentive to hold, while ensuring that willing node participants have the ability to continue running the network
Post-revenue: Nodes earn tokens from the epoch reward pool based on their contribution to revenue generation. For example, a node generating 10% of the network’s revenue earns 10% of the epoch emissions.
Introducing some type of UBI or PoC rewards is still possible with this approach, where a fixed percentage of rewards are distributed to all online nodes per epoch. Projects can also use earning multipliers to incentivize nodes based on location or other relevant factors from this fixed reward pool.
As demand enters the network, fiat-revenue is issued as a type of stable coin, and placed into its own “pool”.
A fixed percentage of this pool (e.g., 5%) is distributed to node operators on a pro-rata basis based on their staked tokens, incentivizing nodes to earn and stake more tokens by providing resources. This distribution occurs on a fixed schedule, such as every epoch.
Token holders can also choose to burn their tokens in exchange for a pro-rata share of the stable pool.
What is accomplished with this approach:
Supply emissions are separate from Demand capture, but a programmatic and financial relationship persists.
Early participants are incentivized without the uncontrolled emission or externality issues that exist with current models.
The stable pool serves as collateral for the network token which is issued programmatically, enabling straightforward valuations using existing models (e.g. discounted cash flow/gordon growth model) by providing:
Known emissions and token float at all stages of the network
Simplified demand value capture forecasting
Fixed distributions to staked tokens
As demand grows, the price of the network token increases exponentially, given emissions are reduced over time.
Even if demand plateaus (assuming the network’s market cap is fairly valued), the token price should still appreciate over time because net-new emissions continually decrease. Given a token’s value is computed by tokens outstanding divided by the book value of the stable pool + future rewards, the denominator will outpace numerator growth ensuring price appreciation in this case.
If demand ceases, token holders can burn tokens to access the pro-rata “book value” of the stable pool.
It’s worth noting that as long as participants believe future demand capture is likely, few will burn tokens, ensuring tokens trade at some multiple of fundamentals.
What is missing from this approach:
Although most value in DePIN networks will likely continue to be captured in fiat for now, it's important to consider the impact if demand-side users begin spending the native protocol token, instead of using fiat within the network. A burn and mint style model could work here because:
Previously emitted tokens are, and continue to be collateralized by a growing stable pool
Which ensures that any tokens minted through this mechanism are proportional to the value removed from the network by demand side participants
Drawbacks:
Implementing a hybrid “Stake and Stable” + Burn and Mint emission mechanism would be technically complicated and will likely require some novel implementation approach
Potential implementation complexity for networks who generate and sell data
Perception challenges around Fully Diluted Market Cap Vs Market Cap
Many people in the DePIN space view token float reduction as a key indicator of value, necessitating a shift in how value is perceived to focus on other key indicators
Potential regulatory challenges
Conclusion:
The "Stake and Stable" model offers a potential alternative to traditional DePIN tokenomics, tackling inflation risks and valuation challenges inherent in current approaches. Continued innovation in tokenomic design will be essential to ensure long-term sustainability and unlock DePIN’s full potential in capturing massive Web2 markets as the ecosystem evolves.