Creating an open and decentralized market for file storing is now more important than ever. Privacy and price concerns urge us to leverage blockchain technology and allow users to offer personal data storage in a bidding system backed by supply and demand. One protocol that attempts to create such an environment is Filecoin.
Filecoin is a next generation blockchain network designed to allow anyone with a computer and internet access to host files on the internet. Forget DropBox and Mega.nz, the time of centralized cloud storage platforms is long gone. Now is the time to enrich our internet experience with yet another blockchain network.
In today’s article, I’m showing you how the Filecoin tokenomics help the protocol prosper. You will also learn more about the FIL token, its distribution, and use cases. By the end of this article, you should know everything there is to know about this project and its token.
What Is Filecoin?
Filecoin is a next generation blockchain network that facilitates peer-to-peer and decentralized file storage on the internet. Filecoin removes the need for intermediaries – like cloud services – by replacing centralized servers with a network of thousands of nodes owned and operated by individual users.
Data companies have monopolized the cloud market. They have an upper hand by being able to fund expensive operating costs and pay for storage facilities that host centralized servers. But they are now faced by an opponent that offers the completely opposite business model.
Filecoin enables users to lend their computer space to those needing it in return for payments. The payments are transacted over the Filecoin blockchain – directly from one user to another. There are no hidden fees nor does Filecoin take any cut. Additionally, the person asking for storage space can choose between different sellers and seek the cheapest renting contracts.
Filecoin’s decentralization also allows it to protect its users and their data. There is no attack vector because the network consists of thousands of users. So rather than having a large and centralized server farm owned by one entity, Filecoin has a hive of smaller servers hosted by users who are spread all around the world. Such a distribution of servers makes it impossible for hackers to gain access to private user data because there is no attack vector.
There’s one last important factor: Filecoin does not require creating new computer storage spaces. Filecoin relies on existing resources by utilizing the storage space found on the computers of Filecoin’s users. The wonderful thing about this is that it eliminates production costs and reduces the pollution emitted by creating the supply of servers that Filecoin’s demand must meet.
Filecoin Tokenomics Explained
FIL is the main token of the Filecoin ecosystem. The blockchain uses FIL to reward those who provide storage space to buyers. FIL is also the token used to pay for transaction fees. The following two sections describe FIL’s distribution and use cases.
Filecoin’s FIL token has a maximum supply of 2 billions tokens. 10% of this supply was allocated for fundraising. 7.5% of the fundraising amount went to an initial coin offering (ICO) held in 2017, while the remaining 2.5% went towards ecosystem development and future fundraising. The ICO raised $257 million and represents one of the largest ICOs in crypto.
Another 15% was allocated to Protocol Labs, an opens-ource R&D lab working on Filecoin, and another 5% were allocated to the Filecoin Foundation – an independent organization that regulates the governance of the Filecoin ecosystem.
The remaining 70% of the token supply were all allocated as mining rewards to miners. Miners are individuals who provide data storage services, distribute data, run contracts, and maintain the Filecoin blockchain. This portion was subdivided into two parts in order to cover different mining activities. 15% went to a mining reserve while 55% went to the storage mining allocation.
Some FIL tokens are burned to fund on-chain computations and bandwidth as network message fees. Tokens are also burned whenever, maliciously or as a mistake, consensus and storage errors take place. The two burning mechanisms create a long-term deflationary pressure on the token’s supply.
Filecoin Minting Model
Blockchains often incorporate a token minting model in which block rewards have the highest rate during the initial mining phase in combination with low miner participation. This system leads to the blockchain minting a large number of tokens shortly after launch. Emission rates decrease and rapidly fall as the network resumes its functions.
The team recognizes how such a model can negatively impact Filecoin – mainly through inconsistent storage onboarding and short-term storage – and has therefore introduced the concept of a network baseline. Under this model, the minting rate does not depend on elapsed time but on total storage power. The larger the network becomes, the higher the rewards.
Such a model softens the impact of early-day mining but retains the same emission rate of the traditional blockchain model. Once the network reaches a baseline, a network activity the likes of Bitcoin, Ethereum or Solana, Filecoin emissions become identical to the simple exponential decay model.
Filecoin Use Cases
The FIL token has a dominant use case as a payments currency that facilitates storing and retrieving data on a decentralized file storaging network. The network facilitates converting physical resources such as disks and electricity into important online storage services. The conversion takes place with the FIL token.
Users who join Filecoin gain access to a diverse range of data service providers who offer their space at varying rates. Users pay these providers to store or retrieve data using the FIL token. The user can later retrieve his files (if he doesn’t want to host them anymore) by contacting the provider (who acts as the miner).
Once the data is retrieved, the FIL tokens paid to the miner are released from a contract and sent to the miner’s wallet. However, this outcome only takes place if the miner has successfully done his job by storing the data from the moment the contract was signed. Failure to store the data leads to the network punishing the miner.
FIL is basically a utility coin and currency used within the Filecoin ecosystem to store and retrieve data. Miners earn passive income by using their free space to store files. And the users get to store these files for a much cheaper rate than with traditional cloud services. Plus, the files are stored in a decentralized fashion and prevent hackers from obtaining access.
You can think of Filecoin the same way you think of other modern-life alternatives like Airbnb or Uber. You don’t want to pay for a hotel so you go directly to a property owner and arrange a contract that allows you to lease his place for an agreed period of time. Or you want to go from point A to point B and would rather want to use a network of verifiably good drivers rather than the city’s local taxi pool.
The Filecoin blockchain represents an invaluable initiative to decentralize data service providers. The project creates an open market in which anyone can participate and lease digital storage space directly to the customer. The client and miner sign a contract that guarantees the storing of the client’s data. The client submits his payment in the form of FIL tokens to the contract, and once he wishes to retrieve his data, the tokens are released to the miner.
Filecoin features an exciting minting, distribution, and emission model that are unlike anything you have seen in the blockchain industry. FIL has a maximum supply of 2 billion tokens, out of which 70% is dedicated to mining rewards. Mining rewards increase with network adoption, and you also have several burning mechanisms that create a deflationary effect on the token supply.
If you want to read more about Filecoin and similar projects, I recommend giving the following links a read:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.