Each new bull market cycle in the cryptocurrency ecosystem offers the chance to get positioned at the forefront of technological innovation, as past cycles have led to the emergence of blockchain-based finance, non-fungible tokens (NFTs), and the metaverse. 

While the original hype around some of these concepts, such as the metaverse, failed to live up to expectations thus far, the arc of technological development is long, and sometimes, the pieces needed for certain concepts to succeed take a little longer to be released – but ultimately serve as a world-changing developments. 

One of the promising themes of the current bull market cycle is decentralized physical infrastructure networks (DePINs), a novel approach to establishing a network that combines the core principles of decentralization and the token economy, central to blockchain technology, with the intent to create a more efficient, equitable and community-driven ecosystem. 

To get an insider perspective on DePIN and the future of blockchain, Kitco Crypto spoke with Steven Waterhouse, co-founder and CEO of Orchid Labs, an open-sourced, decentralized marketplace for internet services that aims to provide the building blocks for a better, freer internet.

“We started off in 2017 focusing on decentralized VPNs,” Waterhouse said. “We launched our network in 2019, directly on Coinbase, and now we trade everywhere.”

After establishing itself as a decentralized VPN network that “allows people to create their own private circuits to communicate over the internet,” Waterhouse said Orchid recently added a storage component to the network, which “puts them more into the generalized DePIN category.” 

“DePIN, as a basic idea, is pretty good,” he said. “The way I look at it, DePIN is the rollup of a variety of things that no one is quite sure what they mean because they’re so different from regular things in the crypto universe. It kind of looks like the combination of a bunch of misfits.” 

“We’re used to DeFi and NFTs and then infrastructure,” he added. “There’s always more infrastructure. We need a lot more infrastructure to serve the needs of the crypto ecosystem.”

Waterhouse said that DePIN “comes in from a slightly different angle” based on lessons learned from the physical infrastructure that exists, like Amazon web services, and looks to create a decentralized system that is just as effective but is not controlled by one large, centralized operator. 

“With the advent of being able to provision, manage, pay for, and prove that certain resources exist thanks to the technologies of blockchain, crypto, and web3, this allows you to potentially decentralize these ideas and decide to employ these resources,” he said. “And they can incentivize different groups. Individuals or small groups can start little companies where they put a data silo somewhere that can serve the network and earn a bit of extra money.” 

“This idea of decentralizing these architectures is starting to take hold, and people are experimenting with a lot of different ideas, figuring out the use cases, and most importantly, where these things are most applicable,” he said. 

Waterhouse cited the recent release of Celestia (TIA), a modular blockchain network that enables anyone to easily deploy their own blockchain with minimal overhead, as an example of a project that has arisen to fit the needs of a decentralized network of applications. 

“We have Celestia now with the modularity trend, and I can write any state,” he said. “The software becomes modular and then it centralizes again and becomes monolithic. And the same goes for network architectures. The Internet started in a decentralized way. The original ARPANET defense advanced research privacy agency was designed to withstand nuclear attacks. So it was decentralized by design.” 

“Then, over time, the web became more centralized,” he said. “You went from being connected to a mail server or gopher server to having access to websites. A lot of it had to do with the economic power and business models of companies like Amazon, who just centralized data and centralized resources to monetize them in different ways.” 

“That’s when we brought blockchains into the equation, so now we are back on the move away from centralization towards decentralization,” Waterhouse said. “There’s a natural kind of movement of things as we figure out new business models and new ways to do things. And the fact of the matter is that while decentralization is a nice concept, some applications just don’t work that well when you throw them out to the winds.” 

He gave the example of video services, which “work really well when we put it on a fast, centralized machine. If we had it scattered all over the internet, it would be kind of annoying. It would work, but not so well.”

Problems caused by decentralization

Touching briefly on the potential headwinds faced by the emergence of decentralized networks and platforms, Waterhouse cited the launch of tokenized uranium, which can now be purchased on decentralized exchanges like Uniswap.  

“It makes me question how they will manage things like Know Your Customer checks,” he said. “This is a case where we should care about KYC. Normally, I hate KYC, but I think I want to make sure they know who their customers are when selling physical delivery of uranium.”

“This development happened more rapidly than we realized it would because commodity trading is a very unregulated, tightly controlled market. So if those guys see a benefit to doing this, they can just turn on a dime,” he said. “It’s not like they’ve got to get SEC approval to list tokenized assets they are already approved to sell.” 

He noted that one of the goals of DePIN is to help move away from large, centralized gatekeepers that run many of the systems people use in their daily lives. 

“There have been a lot of concerns about who owns the data. ‘Facebook owns the data; they’re really bad. Instagram; they’re just monetizing your data, they hold everything, and you’re the product.’ These narratives have grown into a larger movement, and we are part of that work at Orchid,” he said. 

Waterhouse said that while the trend of companies like Instagram using your data to get to know you better in order to present you with better ads “is scary,” It “is not as scary as many have made it out to be.” When you add things like OpenAI and ChatGPT into the mix, “that’s when things get really dangerous,” he said.  

“With ChatGPT, I want to give it my data. I want to give it everything I have. I want to give it the chat records, this recording of this conversation… I just want to give it everything because the more I give it, the better it is and the better job it does,” he said. “For me, that’s really dangerous, because all of a sudden, you’ve got this one company owning everything about everybody.”

“And they don’t even have to do it in some weird, surreptitious way, like how Instagram and Facebook do by putting cookies all over the internet,” he added. “You just give it to them. That’s where you get the real danger – with these very powerful centralized services that could one day run your life. And if they are controlled by one company, then that company runs your life. That is why the DePIN narrative is important.” 

DePIN and AI

Touching on the integration of DePIN and artificial intelligence (AI), Waterhouse said that he is currently in the process of starting a new fund in Portugal that has a focus on both areas, “and specifically the intersection of these two things because they are emerging as important areas of development moving forward.” 

Commenting on the outlook by some that each person will eventually have their own blockchain that stores their personal data and gives them control over who has access to that data, Waterhouse said he sees some form of this happening, but said it would “kind of be like your own little AI, and part of it is a blockchain.” 

“There’ll be components of blockchain and crypto, you’ll have resources, you’ll have licensed keys that open doors, locks, and whatnot,” he said. “This will be a digital collection of resources you own and so on.” 

“I think a lot of this stuff is in the works and being rolled out right now,” he said. “AI will be influential in the world of DePIN because all the data and information that is being collected is massive and difficult to interpret if you don’t have an intelligent system that can help you organize it or pull data from it, which is what the AI is.”  

Waterhouse cited developments related to decentralized social networking platforms like Filecaster and Lens as an example of blockchain-related developments being rolled out currently. 

“One of my predictions from last year was that we’re going to see decentralized social, decentralized identity and similar applications roll out where the engagement of consumers doesn’t appear to be a crypto thing but is blockchain-based in the background,” he said. “People don’t have to go to Coinbase to buy some weird token to trade on Uniswap just to gain access. Setups like that may seem like a prudent concept, but they are not going to get many people interested.” 

Platforms like Filecaster and Lens have the potential to “rise out of nowhere, and then suddenly, everyone is using it,” he said. “And I think that AI and some of the agent-based architecture will be growth drivers for these types of platforms over the next year or so.” 

Digital resource networks

One specific application that applies to DePIN is digital resource networks, Waterhouse noted. 

“You’ve got the resources themselves that are forming a network, and the challenge is figuring out how to let individuals or businesses that need to access those resources do so,” he said. 

In the example of AI, “If you’ve got a collection of data you want to do computations on, you will need a bunch of GPUs,” he said. “Where are you going to get the GPUs from? And you want them to execute a certain kind of application because it’s not just the raw GPU power you’re looking for, you’re looking for them to do a certain calculation on a certain piece of data, or execute a certain set of weights.”

Then comes the matter of accessing these resources, he noted. “How do you address them? How do you pay for them? How do you provision them? How do you make sure that they’re real?  These aspects all go into Digital Rights Management (DRM), which forms part of the DePIN framework.”

“So you want to have some kind of network, which is what digital resource networks offer,” he said. “They allow people to access the services they need in a distributed way.”

The future of DePIN

Bitcoin and the crypto ecosystem as a whole achieved a new level of legitimacy in 2024 with the launch of the first spot BTC ETFs in the U.S. markets, and Waterhouse thinks this is just the beginning of the adoption the asset class will see in the years to come. 

“I’ve been in crypto for 11 years, building things, investing in things, building things, investing in things, going back and forth. I believe that we are right at the edge of some very major breakthroughs in adoption,” he said. “And I don’t just mean people getting accounts on exchanges. I mean people using blockchain in their daily lives, the customers for crypto companies not being crypto companies but businesses that work in unrelated sectors.”  

People need to remember that “the internet was just cat videos initially,” he said. “I just remember that. Just cat images. It was crap. YouTube was all cat videos. Now you can watch movies, sports, and just about anything.” 

“I feel like we are on the precipice of a major breakthrough in development and adoption,” he concluded.