A path to demand — Understanding Filecoinʼs Economy, Part I

filecoin Aug 28, 2020

The cloud storage economy is enormous, and the decentralized data storage networks are aimed directly at that big target. In the race to claim it, Filecoin has been far ahead in their thinking about some of the hard problems of decentralized storage. They haven't shied away from tackling those hard problems, putting the importance of building a robust, long-term solution ahead of any race to launch. With the release of, Introducing the Filecoin Economy, we are getting a clear picture about what Filecoin will be at launch and what it will grow to be over the coming years.

Introducing the Filecoin Economy details many of the challenges and design decisions that will get the project to Mainnet. If you have time, we recommend reading the whole paper, as it provides a useful overview and updates on the structures, mechanisms, and design decisions around Filecoin's crypto-economics.  It provides the rationale for engineering decisions made around proofs, parameters, actors, and the core protocol(s), plus it outlines future plans for how to manage the market in a collaborative and sustainable way.

The network has been built by a community – Filecoin will be stronger because it provides participants the opportunity to obtain stake in the networkʼs success. Filecoin participants will benefit by working together to improve the Filecoin Network.

Over the rest of this two-part series, we want to look more deeply at Introducing the Filecoin Economy, and consider its implications in the context of Textile’s work and future plans. In Part I (below), we’ll summarize some of the paper’s key points while providing thoughts on how they relate to our own work at Textile. In Part II (comming soon), we’ll discuss our ideas and approach to making the demand side of the network successful. We will explore what it means to be a Filecoin Client, discuss how the shape and capabilities of the Filecoin Network will influence adoption, and explore the role of Filecoin and Textile in the Internet of the future.

Part I. Community growth → Network growth

As active participants in the Filecoin Community, we are keenly interested in understanding how the network and community will flourish together. We contribute to the core Filecoin code, maintain multiple supporting technologies, regularly contribute to the knowledge-base, and champion new participants. Naturally, we found the link between engineering, incentives, and carefully thought out growth, as outlined in Introducing the Filecoin Economy, fascinating and encouraging.

At Textile, we think the long-term value of Filecoin is obvious, so what interests us most now is how we can make the network successful in the short-term. We are primarily concerned with three requirements of Filecoin for launch:

  1. That it works.
  2. That it is reliable.
  3. That it improves.

All other considerations aside, those requirements are enough to position it to become a long-term viable storage option for the web. So what does it take to achieve these three requirements? Well let’s start with some of the critical challenges outlined in the recently released Introducing the Filecoin Economy paper. These challenges include fostering (new) open markets, careful linking of network utility with incentives, and the right balance of short term network bootstrapping with long term network sustainability. Let’s take a look at how the paper addresses these challenges.

Filecoin is more than a network; the protocol lays the groundwork for a market economy built around a marketplace for the storage and retrieval of data.

Filecoin is predicated on the idea that an open market for data storage and distribution will lead to efficiency gains not possible in centralized systems. At the end of the day, Filecoin is a market for data. An open exchange where storage power can be provided to others in exchange for a fee. The Filecoin Protocol itself provides a specification for pretty much all required market transactions, from proposal of storage deals, to data transfer, to storage proofs, and even data retrieval. A useful way to think about it is as three markets, one network:

  • Storage market — Getting data on the network. Storage miners offer to rent out digital storage that will be verified by the Filecoin Network.
  • Retrieval market — Getting data off the network. Clients pay FIL to retrieval miners to provide them with a copy of some verifiable data.
  • Token exchanges — Getting FIL on or off the network. Exchanges allow participants to trade FIL with or between clients, miners, other token holders, and even other currencies

Filecoin’s launch marks the start of a completely new two-sided market. Two-sided markets are notoriously tricky to engineer successfully. The first problem is that you need both sides to show up (the buyers and the sellers) and the second is that you need the economic incentives that keep both sides active to work. Missteps in the early stages could put the network back significant time, or worse, lead it to never recover.

The challenges to building a successful marketplace are varied, and complex. For example, the last thing the network needs is an abundance of storage capacity with nothing to store, or a abundance of data with nowhere to store it! This is obvious, and mechanisms are in place to disincentivize unmet supply on either side of the market.

An interesting and unique property of the Filecoin protocol is how it directly aligns economic incentives with the mechanics of the network. For example, the act of proving availability of storage (via cryptographic proofs) itself is economically incentivized (see Section 3 of the paper) but the act of storing real data has even stronger incentives, thanks to storage fees and verified client deals (which we’ll discuss further in our next post). Similarly, the very technical act of providing data upon request in a timely and efficient manner is incentivized by the network via block rewards, thereby promoting efficient distribution of data (see Section 5 of the paper). In other words, solutions to technical hurdles are directly incentivized by the network.

There are other hurdles that are harder to design for. An example is that of early participants reaping out-sized early rewards while not contributing to the long-term success of the market. To help guard against this and other risks, Filecoin is adopting a novel minting strategy.  Unlike “classic” blockchain token minting based on a simple exponential decay model, Filecoin takes a two-pronged approach: On the one hand, we have simple exponential decay minting, and on the other:

… Filecoin introduces the concept of a network baseline. Instead of minting tokens based purely on elapsed time, block rewards […] scale up as total storage power on the network increases.

Through this mechanism of baseline minting, Filecoin rewards miners in a way that more closely matches the utility they (and the network as a whole) provides to clients. If our end goal is market efficiency around data storage, this is exactly how it needs to be.

This is where the benefits of creating a whole new blockchain and set of consensus algorithms really shines (and is directly reflected in the value propositions of the network). This type of direct linkage of utility with the core consensus process is not possible without directly baking the utility (storage) into the protocol (proofs/consensus) itself. That’s why the Introducing the Filecoin Economy paper is such an important release — it provides the justifications for many of the techno-social decisions made in the design of the Filecoin protocol and its economy. From brand new Proof-of-Replication (PoRep) algorithms, to new minting strategies, to the design of fees and incentives that directly reflect the usage and utility of the network. It all has to be baked in from the start.

Left off chain

Introducing the Filecoin Economy provides a useful update, but there are a few areas we’re excited to learn more about soon. A clear governance model for this emerging network is one such area. So while Introducing the Filecoin Economy didn’t spell it all out right away, we’re sure that we’ll see a lot more development around this topic in the coming weeks and months. Our team is looking forward to weighing in on those conversations as well. After all, it takes a village to raise a network!

Another important topic whose consequences will take time to fully explore, is how much Filecoin is linked to value stored off-chain; something rare among blockchains. Filecoin is going to store a lot of valuable information off-chain, so the important stuff (like historical data records, personal data, software registries, etc) isn’t being replicated on every full node. Other blockchains, where the primary public ledger encodes the full state of the system, don’t have to deal with this. It will take time for patterns and best practices to emerge and spread among the community.

This means, the Filecoin Community is going to have to work hard to develop shared knowledge systems around Filecoin best practices. These will likely be discovered with time, but it will require a concerted effort. For example, are you hoping to store things with more than one miner, in more than one region? You probably need to encrypt your data! Storing user data in Europe? Start thinking about GDPR and your legal obligations there. Of course, the beauty of an open market is that it enables specialization, so some of these issues are going to be addressed by the market itself. We suspect you’ll see storage providers specializing in encrypted data, specific replication strategies, geographic regions, and much, much more. Where some see problems, other’s see opportunity.

Preparing for launch

Tying things back to Textile's interest in ensuring the network is successful in the short-term, it is important to highlight that the concept of an open network doesn't necessarily mean that "everyone will be running Filecoin on their computer" at the time of launch. At Textile, this means we need to work hard to ensure there are gateways, APIs, and simplified services that allow anyone to take advantage of Filecoin. Our work, and the work of other organizations like Ceramic, Fleek, OWL, OB1, Slate, to name a few, will make the Filecoin ecosystem accessible to everyone, from day one.

We think many more services remain to be built around the concept of verified clients, deal aggregation, and light clients. The core storage and retrieval markets will lead to secondary markets to match service providers with content creators, data aggregators, and internet users. Textile is already exploring some of these ideas. To learn more, look out for Part II's release by following us on Twitter or joining our community Slack.

In the meantime, be sure to read the full Engineering Filecoinʼs Economy.

p.s. we're hiring!

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