FIL

Most recent update: [June 26, 2023]  

What Is Filecoin? 

The Filecoin network is an open-source, decentralized, and peer-to-peer digital storage marketplace that aims to let anyone store, retrieve, and host digital information. Built upon the InterPlanetary File System (IPFS), it allows users to rent their unused hard disk space and earn Filecoin tokens (FIL) in return. It functions similarly to traditional cloud storage but, rather than trusting a single provider with your data, it is split up and served by a global network of computers. 

By allowing anyone in the globe to contribute to the network, Filecoin can create a huge source of data storage. As our world increasingly becomes digitized, it aims to satisfy the demand for storage that will eventually arise. Filecoin’s founders claim that if enough people adopt it, the network could eventually become the fastest and cheapest way to store data on the internet. Even further, as it is completely decentralized, the exchange of its data is not subject to censure by governments or other authorities. 

History of Filecoin 

The Filecoin concept was first introduced in 2014 when Juan Benet released the whitepaper Filecoin: A Cryptocurrency Operated File Storage Network. The concept envisioned a blockchain network similar to Bitcoin, but the nodes in the network instead stored data and was guaranteed by a proof-of-retrievability component. 

Eventually being developed by Protocol Labs (founded by Benet), Filecoin raised over US$250 million in their 2017 ICO – a record at the time, Protocol Labs had previously received funding from notable investors like Digital Currency Group, Stanford University’s startup accelerator StartX, Coinbase co-founder Fred Erhsam, and Angel List founder Naval Ravikant. During their ICO, they received investment from venture capital firms like Sequoia Capital, Andreessen Horowitz, and Union Square Ventures.  

Benet and Protocol Labs had also developed the IPFS, releasing the protocol in February 2015. Filecoin would eventually use IPFS as the basis for its technology, sometimes being called the IPFS’ incentive layer. 

The Filecoin mainnet was launched in October 2020. 

How Does Filecoin Work? 

Characteristics 

Filecoin’s infrastructure is a distributed, peer-to-peer network that provides a new way for organizations and individuals to store data around the world. Anyone that has free storage on their computer can become storage miners, who are responsible for storing the data on the Filecoin network. Clients that utilize the network pay FIL to both store and retrieve data. How much users pay is determined on the open market; miners compete to offer the lowest price for storage. Filecoin claims that this makes the market “hypercompetitive,” ensuring that it will always be cheaper than centralized data storages like Amazon Web Services or Dropbox.  

Filecoin’s users have flexibility when choosing their storage provider. For example, splitting data too much would result in a slower recovery, so users that value a quicker exchange may want to target a provider that has more storage space – even if it is more costly. Even further, a host’s track record is publicly viewable (as it is on the blockchain), so their history can be taken into account by a user without the influence of advertising or astroturfing. This creates an environment where miners are incentivized to provide the best service possible. 

Blockchains generally rely on mechanisms called ‘proofs’ to ensure that all users of a network can agree on transactions. Bitcoin, as you know, utilizes a proof-of-work system where a miner must show it has performed the number of calculations needed to earn the right to add more transactions to the blockchain, being rewarded Bitcoin as a result.  

Filecoin instead uses two types of proofs to verify that miners are storing the data they hold. Proof-of-Replication shows that a miner has stored the number of copies of data it claims to hold. Proof-of-spacetime shows that a miner has stored the amount of data claimed over an agreed period. 

There are several advantages that Filecoin has over traditional, centralized storage options. For one it is more cost-effective as there is a larger free market for data storage, the scale is dependent on the number of users the network has, meaning the bigger the network, the more storage that is available. Filecoin also makes use of existing resources, so instead of creating more computers for storage, we can utilize the storage that people already have. Lastly, because Filecoin is a decentralized network, there is no single point of attack, making it harder to compromise.  

Technology 

Filecoin is based on Protocol Labs’ existing InterPlanetary File System protocol. Where IPFS is a free service, Filecoin can be seen as its incentivized version. IPFS allows users to host and receive content in a peer-to-peer network, similar to BitTorrent. User-operators hold a portion of the overall data, creating a resilient system of file storage and sharing.  

When data is sent and stored on the Filecoin network, the blockchain essentially ‘shreds’ that data into a multitude of smaller pieces of data. In the process, that data is encrypted, with only the network knowing how to piece it all back together into the original state. This means that, even if a user was holding somebody else’s data on their computer, they would not be able to view or use it, only finding a stream of meaningless data.  

This security marks one of the biggest advantages that Filecoin has over centralized storage options.  

Filecoin’s Incentive Model 

The Filecoin network is unique in that the entire network is dependent on its incentive model. This is powered by the three main types of users on the network: 

• Storage miners: In exchange for FIL rewards, storage miners (providers) make their resources available for the client. Storage miners can set the price of their storage offering on the open market, along with other features like their computer speed, so that clients can decide which fits their needs best. 

• Retrieval miners: These miners retrieve specific files for their clients in exchange for FIL. The cost of their services is based on the size of the file they are retrieving as well as the speed of their response, which is dependent on bandwidth. 
• Clients: Clients use the Filecoin network to find the miner that is most suitable for their needs (storage capacity, duration of storage, and price). Once a miner is chosen, an agreement is made that determines the necessary amount of FIL. The finalized agreement (the ‘deal’) is published back to the blockchain, and the miner is then paid incrementally is it progresses. 

A third type of miner, the repair miner, is planned for implementation. 

As data is stored, the proof-of-spacetime protocol checks every 24 hours to ensure that the host is keeping to the deal. If a miner fails this check, they are termed inactive and face a “fault fee,” a form of punishment that further incentivizes hosts to have a good track record. If the proof-of-spacetime check is successful, then the fees are automatically paid out to the miner. 

In the event of faulty file storage, Filecoin has a built-in recovery process that redistributes data files from inactive miners to reliable hosts. These files are easily traceable on the Filecoin network and are independent of whether a client is online. This allows easy verification that a file has been handled directly, this traceability ties into the miner’s record, contributing to their reliability history that users are able to view. 

To summarize, storage miners earn Filecoin by storing client data and providing proof of the storage over time. Retrieval miners, on the other hand, earn Filecoin by bidding and charging mining fees for a particular file, determined by the market price.  

Usage 

Because Filecoin is decentralized, it is a promising alternative to other providers such as Amazon, Microsoft, or Google, as centralized clouds are subject to pressure from corporations or governments to modify, remove, or deny service to certain users. Along with the fact that AWS and Dropbox have already had an exorbitant number of users hacked on their platforms, Filecoin could be a trustworthy service due to its inherent security. 

Another use case that Filecoin sees over said centralized providers is the market that it operates. As a user can choose how much storage they need at a specific price point, Filecoin essentially undercuts their centralized competitors and can do so consistently. As a large amount of storage space in the globe is unused, Filecoin has the potential to tap into that unused storage and drive prices down even further.  

While the network can be used to store general data, some important documents that it could potentially have permanent, secure storage for include encyclopedias, historical documents, historical works of literature, and academic papers. Blockchain-based applications can also use Filecoin to store ledgers, supply chains, and provide storage for said dApps.  

Since its launch in October 2020, Filecoin has already been at the center of a multitude of major applications. Truffle Suite was one of the first to utilize the Filecoin platform, allowing its users to build dApps at 100% uptime. A collaboration with ConsenSys saw Filecoin’s distributed marketplace integrated into the ConsenSys Ethereum-based product stack, serving millions of users. 

Over 70 organizations have built on or collaborated with Filecoin, and the network passed 2.5 exbibytes (2.5 million GB) in February 2021. 

Risks 

One of the primary downsides that the Filecoin network can experience is the increase in gas fees. As the coin picks up popularity, the more transactions that are happening in the network. Although the network itself can vary in speed depending on which storage provider a user chooses, as the network continues to grow, the fees will continue to rise as well, albeit, potentially still much cheaper than traditional centralized storage providers. 

When compared to current cloud storage providers, Filecoin currently does not command the same level of trust, they need to meet or exceed their competitors on speed, security, and reliability. As a peer-to-peer network, they are naturally susceptible to latency issues that arise from having to bounce data from each node. Finding a solution to address these issues is a challenge that Filecoin will have to work toward to see mass adoption.  

Related articles 

Still curious about how Filecoin works? Check out these articles we’ve compiled for a deeper look into how Filecoin operates: 

Filecoin on Binance Academy: https://academy.binance.com/en/articles/what-is-filecoin-fil 

Filecoin on Kraken: https://www.kraken.com/learn/what-is-filecoin-fil 

Filecoin on Coinbase: https://www.coinbase.com/price/filecoin 

Filecoin on Decrypt: https://decrypt.co/resources/filecoin 

Filecoin on Wealthsimple: https://www.wealthsimple.com/en-ca/learn/what-is-filecoin#how_to_buy_filecoin 

Filecoin on BitcoinSuisse: https://www.bitcoinsuisse.com/fundamentals/what-is-filecoin 

Due Diligence  

Prior to listing Filecoin on the VirgoCX Platform, VirgoCX performed due diligence on Filecoin and determined that Filecoin is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:  

• The creation, governance, and location of Filecoin and/or its primary development team; 
• The supply, demand, maturity and liquidity of Filecoin; and 
• Legal and regulatory risks associated with Filecoin.  

Statutory Rights under Securities Legislation 

VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.