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  • Tiena Sekharan

What is Filecoin

Updated: Apr 15, 2021

Image Source - Filecoin

One of the biggest criticisms of cryptocurrencies is that they don’t have real-world use. Bitcoin is simply wasting electricity for currency creation. Ether runs smart contracts but most of their products are financial in nature and designed to make cryptocurrencies easier to value and trade, or gambling which is probably not the healthiest activity and hence not an ideal representative for cryptos.

Presenting “Filecoin”, a blockchain-based product with an indisputable real-world use.

Filecoin is a decentralized P2P cloud storage marketplace that aims to compete with the likes of Amazon Web Services (AWS). It stores data among a decentralized pool of Storage Miners who are economically incentivized to store data reliably. 

Founder Juan Benet describes Filecoin as the AirBNB of data storage. Anyone with spare disk capacity can (theoretically) rent it out to anyone looking for storage space.

Let's start with some background about the technology

Filecoin is built on top of the InterPlanetary File System (IPFS) which also happens to be the brainchild of Juan Benet. IPFS is a P2P storage protocol that could one day replace HyperText Transfer Protocol  (HTTP). IPFS has 2 cool distinguishing features:

1. Content addressing - In traditional storage, you find content by going to the location where it is stored (URL). In the case of IPFS, you find content based on the content. Content has its own address wherever it might be stored.

2. Decentralisation- In traditional storage, data is stored in centralized servers. There are several issues with this including excessive power in the hands of centralized agencies, single points of failure and, inefficient bandwidth usage as the central server might be located far away from the user. In the case of IPFS, data storage is decentralized resulting in a more resilient internet, more secure data, reduction in censorship, reduction in Denial of Service (DDoS) attacks, and more efficient use of bandwidth as files can be retrieved from nearby.

How does Filecoin work? 

Filecoin is an open market for storing and retrieving files. Users wishing to have their files stored submit bids in FIL, the native token of Filecoin. Storage providers wishing to store data submit their best storage price. Filecoin matches the bids and offers and a record of the agreed contract is stored in the blockchain.

The marketplace has the following participants:

1. Users - Those looking for storage space get to choose the best storage provider that meets their needs after factoring in cost, speed, and latency. All storage providers follow the same protocol and hence a different API is not needed when choosing or changing providers.

2. Storage Miners - are the storage providers. Anyone from large-scale data centers to local entrepreneurs with mining rigs that cover last-mile get to sell storage space in an open market.

=> A lot of literature on Filecoin mentions that anyone with spare disk space can participate as a miner but that is not exactly true as storage mining is a fairly technical task. Storage miners have to stake FIL as collateral for providing reliable storage and anyone who violates storage contracts with users will see their stakes slashed. Having said that, I’d predict that eventually, a technically unsophisticated individual with spare disk capacity might be able to participate by joining storage mining pools.

So why are storage providers called miners?

Because they have to submit proofs similar to miners in other protocols. However, the proofs they submit are not wasteful like Proof-of-Work.

Storage miners must prove that:

A. They are storing the data submitted- They do this by submitting a Proof-of-Replication (PoRep) which demonstrates that miners have received data and encoded it in a manner unique to them

B. They are storing data throughout the lifetime of the deal - They do this by submitting Proof-of-Spacetime (PoSt) which demonstrates that they continue to reliably store the files that they agreed to store.

3. Retrieval Miners - Traditional storage providers make it cheap to store data but expensive to retrieve it. Filecoin has created a separate market for data retrieval, thus giving users better retrieval prices as well. Retrieval miners are usually well-located computers with good network connections who may pre-fetch popular files and distribute them to nearby users.

Now that you know what the product it, let's talk about money

Filecoin raised $205million in an ICO in 2017 and an additional $52mn from pre-sales to investors like Sequoia and Andreessen Horowitz. 

The native currency of Filecoin is FIL. The total supply of FIL is capped at 2bn. Half of this (1bn tokens) will get released by year 4.

30% of tokens have been allocated to the genesis block which goes to developers and initial investors. 70% is allocated to miners for providing storage services and maintaining the blockchain.

* Advisors were offered a price of $0.75/FIL. Discounts ranged from 0 to 30% depending on the vesting schedule which ranged from 1 to 3years.

* Investors got a discount of 0 to 20% depending on a vesting schedule of 6 months to 3 years.

* Protocol Labs and the Filecoin Foundation have a linear vesting schedule of 6 years

=> The above indicates that initial participants are incentivized to work towards the long-term viability of the project and not exit after making a quick buck.

Controversial Token Launch

FIL started trading in Oct’2020 and was immediately gripped in controversy. There were rumors (unfounded in my opinion) that the storage providers had gone on strike. 

It is true that storage capacity dropped. For example, Zhihu, one of the top 5 storage miners with 8,000+ IPFS storage devices only had 267 devices online. The reason however was not any strike. The reason was the economic model. 

The incentive mechanism is so designed that storage miners have to stake a sizeable number of FIL as “Initial Pledge Collateral”. However, initially they do not have sufficient FIL to match their storage capacity. The 2 ways for them to acquire FIL is:

1. Earn FIL (by providing storage) - However, the FIL paid by users is released to the miners slowly over 6 months and very little is immediately available to miners to stake back into the protocol.

2. Buy FIL (from an exchange) - However, many consider the token overpriced and hence risky to buy. Miners have already spent a fortune on storage equipment and now need to arrange more funds to buy FIL?

Unable to provide the initial collateral, storage miners have had to keep storage capacity idle.

Filecoin is dealing with the situation by paying 25% of rewards immediately on block creation. According to one of their key miners, this move should bring 80% of their mining capacity online. The threat of losing their FIL stake I believe already incentivizes miners to store reliably. Therefore, I don’t see much value in not vesting more earnings upfront.

Final Thoughts

Filecoin made very little noise post ICO. It kept its head down and got to work building its product. IPFS was already storing 5 billion files at the time of the ICO and is a credible product. In a blockchain universe where projects attract millions based on whitepapers heavy on optimism and little else, Filecoin is a legitimate product and one I'd keep an eye on.


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