What is Filecoin? (FIL)
The Beginner’s Guide
Filecoin is a cryptocurrency that aims to incentivize a global network of computer operators to provide a file sharing and storage service.
Project founders claim that if enough people adopt it, it could become the fastest and cheapest way to store data on the internet. What’s more, it would not rely on a central authority, meaning the exchange of its files could not be censored by governments or other actors.
This is because Filecoin is maintained by miners who dedicate computing power to providing the computation that makes it work. Filecoin miners get paid for making storage space available to users. Filecoin users, in turn, must pay miners for storage, retrieval or distribution of this data.
The Filecoin network operates atop another protocol for decentralized file handling called the Interplanetary File System (IPFS). The two systems share many similarities, though the main difference is that while IPFS is free to use, it won’t earn miners any money. Filecoin costs money to use, but could also generate revenue.
Still, investors and traders should note Filecoin is not the only protocol that claims to offer a decentralized storage and file sharing system powered by cryptocurrency.
However, Filecoin may be the most widely anticipated of these cryptocurrencies, having raised $257 million in an initial coin offering in 2017, one of the industry’s largest funding rounds.
As of July 2020, Filecoin is in testing, with a formal launch expected by the end of August 2020.
Who created Filecoin?
Filecoin is an open-source software that was created by Protocol Labs, the same firm that created technologies like IPFS and Libp2p aimed at replacing existing internet protocols.
For example, IPFS is a system that could replace the Web’s hypertext protocol, which specifies that web addresses must begin with the prefix http://.
Protocol Labs was founded by Juan Benet, who co-founded a game developer called Loki Studios while studying computer science at Stanford. The company was acquired by Yahoo in 2013. Benet then participated in the Y Combinator startup accelerator to start Protocol Labs.
Protocol Labs has received funding from notable investors like Digital Currency Group, Stanford University’s startup accelerator StartX, Coinbase co-founder Fred Erhsam and AngelList founder Naval Ravikant.
Filecoin’s initial coin offering, which ran from August to September 2017, further raised $257 million from a cast of noted venture capital firms like Sequoia Capital, Andreessen Horowitz and Union Square Ventures. The Filecoin offering was the largest of its kind at the time.
How does Filecoin work?
Filecoin is a little like Dropbox, but powered by blockchains. Users who want to store some data on the Filecoin network must pay a miner to do so.
How much they pay is determined by an open market where miners compete with one another to offer the lowest price for storage. Filecoin claims this market will be “hypercompetitive” and thus be cheaper than centralized data storage such as Amazon Web Services.
Miners, in turn, have an incentive to provide storage because they stand a chance to receive rewards from the network in the form of Filecoin tokens. The more storage they offer the network, the better their chances of receiving a reward.
But these rewards aren’t free. Miners must perform several computationally intensive processes (called proofs) to prove to the network that they are storing the data they claim to be storing, and that they’re doing so reliably over a period of time.
If they do so reliably and provide enough storage, then they can create new blocks on the Filecoin blockchain and receive the network reward and the transaction fees.
Proof-of-Replication and Proof-of-Spacetime
Blockchains rely on mechanisms called proofs to ensure that all users of the network can agree on new transactions. The Bitcoin blockchain, for example, relies on a proof-of-work, where a miner must show it has performed a massive number of calculations to earn the right to add new transactions to the blockchain and claim newly minted Bitcoin.
Filecoin uses two new proofs to verify that miners are actually storing the data they claim to hold. Proof-of-Replication shows that a miner has truly stored the number of copies of data it claims to hold. Proof-of-Spacetime shows that a miner has stored the data over an agreed period of time.
Together, these proofs allow users to trust that miners indeed hold the data they claim to hold.
Filecoin Storage Markets
Using these technologies, Filecoin will offer a market for disk storage where users who wish to store data can bid on available storage offered by miners who offer disk-space.
Miners who supply disk-space will also be judged based on their reliability as well as the prices of storage they are offering. Filecoin’s Storage Market will be similar to a financial market, where users can make bids and offer asks.
Generally speaking, Filecoin miners are users who offer storage. This means any user can plug in a hard-disk, run the Filecoin software, and start to offer disk-space in the Storage Market. These miners are known as Storage Miners.
But there is one more category of Filecoin miners, known as Retrieval Miners and Services.
These miners are paid by users to retrieve data and to perform services that speed up the transmission of data, such as caching or participating as a node in a content delivery network.
Why does FIL have value?
Filecoin’s cryptocurrency, FIL, is the native token powering its network. That means FIL is used to pay for storage and retrieval, and for any other transactions on the network.
Because Filecoin relies on proofs of storage and spacetime, it claims its network is composed of miners who are providing a fundamentally useful service, that is, disk storage.
Filecoin claims that its Storage Market will provide lower prices than the prices offered by centralized competitors like Amazon Web Services.
Should Filecoin be able to successfully offer decentralized storage service that can’t be easily tampered with by corporations or governments, it could also gain more users, especially if centralized services begin to lose the trust of their customers.
Like Bitcoin, the total amount of FIL that will ever be created is also limited, in this case, to 2 billion tokens.
If the Filecoin network grows and more users trust it with their data, and more miners supply disk-space, then the amount of transactions requiring FIL should grow. The price of FIL should rise since the amount of FIL available is limited.
Kraken's Crypto Guides
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- What is Dogecoin? (DOGE)
- What is Tether? (USDT)
- What is Dai? (DAI)
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Why use FIL?
You should consider FIL if you think existing centralized storage providers could lose the trust of their customers.
Centralized providers such as Amazon, Microsoft or Google could be subject to pressure from corporations or governments to modify, remove or deny service to certain users. This could lead to a perception that centralized storage is untrustworthy.
In this scenario, Filecoin and its competitors, such as Storj, Siacoin and Arweave, could stand to benefit. Their decentralized design would offer an alternative to centralized services.
Another argument in favor of FIL is the belief its marketplace could offer prices that undercut existing providers. For instance, Filecoin claims that a significant proportion of the world’s disk space is currently unused. If it can unlock that unused disk space through financial incentives and cryptography, it could drive storage prices down even further.
A combination of lower prices and a loss of trust in centralized providers are reasons to consider using FIL.
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