This is the tenth post in our research series. In this series, we publish data-driven analysis on specific blockchains, dapps, and market segments. Let’s dig in!

Filecoin is a decentralized peer-to-peer network that allows its users to store and retrieve data on the internet. It is an open platform and a market economy that connects people who have excess storage space with people who want to store data.

This article provides an overview of the project and looks at its historical performance using Token Terminal’s data.

Purpose

Filecoin’s aim is to provide a decentralized alternative to conventional cloud storage services. By using a cryptocurrency to align economic incentives and an efficient peer-to-peer distributed network for data transfer, Filecoin aims to become more efficient and reliable than its current competitors.

Problem

Most cloud storage services are provided by companies that have absolute control over the data stored on their servers. This model requires users to trust the service provider. They must trust the company to not modify the stored data nor censor them by denying access to the service. Furthermore, the users have no way of verifying that the data has not been manipulated since it was uploaded unless they have a copy of the original data.

Solution

Filecoin is a blockchain that incentivizes its miners (i.e., node operators) to store other users’ data in return for block rewards paid in Filecoin (FIL) tokens. The miners store data and have to provide frequent cryptographic proofs for it. Users can verify that their data is stored correctly by looking at the cryptographic proofs on the blockchain.

Filecoin is built on the InterPlanetary File System (IPFS) which is a protocol and a peer-to-peer network for storing and sharing data in a distributed file system. IPFS was developed to address some deficiencies of the modern web built on a client-server model and HTTP. Filecoin adds economic incentives to store files on IPFS.

Why now

Over the previous decade, advances in blockchain technology have enabled applications that were not possible before. By using modern blockchain technology, it is possible to build a large-scale data storage network where it is nearly impossible to modify the stored data without breaking the chain.

There exists a lot of data for which it is important to be able to confirm its authenticity. For example, government documents, laws and other legal documents, scientific data and reports, cultural heritage, etc. Moreover, many people’s trust in institutions, governments, and companies has diminished, creating a demand for trustless ways of storing data.

Market

The global cloud storage market is dominated by large tech companies such as Amazon, Microsoft, and Google. These companies’ cloud infrastructure services’ combined yearly revenue exceeds 100 billion USD, although this number includes both storage and computing.

Competition

Filecoin competes with large tech companies, conventional tech startups, and other blockchain protocols. Its on-chain competitors include Akash Network, Arweave, Siacoin, and Storj. Filecoin is the largest cloud storage service built on blockchain as measured by storage capacity or valuation.

Product

Filecoin has built a decentralized marketplace that connects clients (i.e., users wanting to store their data) with storage providers. Clients and storage providers make deals (i.e., storage agreements) to store or retrieve data using FIL as the medium of exchange. The network is open, meaning that anyone can store data on the network or become a storage provider. The price of storage depends on supply and demand. Since using Filecoin directly requires technical skills, protocols can be built on top of Filecoin and IPFS. These protocols make interacting with the blockchain easier.

Team

Filecoin and IPFS are developed by Protocol Labs which was founded in 2013 by computer scientist Juan Benet. In 2017, Protocol Labs raised over 200 million USD in the initial coin offering of FIL. Filecoin Foundation for the Decentralized Web (FFDW) is a non-profit foundation that supports the growth of the ecosystem around Filecoin.

Business model

Filecoin generates revenue by charging fees for computation, storage, and transactions on the blockchain. The fees are paid in FIL. A fraction of the fees is burned to reduce the supply of FIL and the rest is paid to the miners.

Financials

FIL has a maximum supply of 2 billion out of which 220 million are in circulation. The tokens are distributed to miners, Protocol Labs, investors, and Filecoin Foundation as shown in the figure above. Protocol Labs, investors, and Filecoin Foundation are on a 6-year linear vesting schedule. The miners will receive the tokens allocated to them as block rewards over several decades depending on network usage. The price of FIL, shown in the figure below, peaked in April 2021 and has since fallen near its ICO price.

The figure below shows Filecoin’s circulating market cap (i.e., the amount of FIL in circulation multiplied by its price) and total revenue (i.e., fees paid). Filecoin’s revenue also peaked in April 2022.

Filecoin’s relatively low current revenue is partially explained by a protocol upgrade that increased the blockchain’s throughput by an order of magnitude and by the Chinese authorities’ crackdown on cryptocurrency mining. The network’s storage capacity has also kept growing, increasing the supply of storage and reducing its cost. The figure below shows how the fees are split between the protocol (i.e., FIL tokenholders) and supply-side participants (i.e., miners). Burning a portion of the fees is comparable to a share buyback and thus counted as protocol revenue.

Conclusion

Filecoin is the largest decentralized cloud storage service. Given its funding and first-mover advantage, the project is in a good position to remain the market leader.

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