Protocol Labs Research
2020-08-27 / Blog
Introducing the Filecoin Economy

“It ain’t pretty in the sense that it’s nice and neat, and many people have tried to get rid of creative solutions that are complex, but society is complex, people are complex. And for us to have simple solutions to complex problems: not a good idea.” – Elinor Ostrom, awarded the 2009 Nobel Memorial Prize in Economic Sciences for her “analysis of economic governance, especially the commons”

The datasphere will grow to 175 zettabytes by 2025, according to IDC estimates. A stack of enough 10-terabyte hard drives to store all that data would literally reach the moon (1 zettabyte equals 1 trillion gigabytes).

Today’s cloud storage solutions provide fast, highly scalable, and relatively inexpensive access to data storage. But the price and offering for storage on these cloud storage platforms is set by the small number of companies that provide the service. And the cost of these storage solutions is bundled with the cost of using the company’s proprietary software, APIs, data infrastructure, and servers. That means storage buyers can’t access storage directly and efficiently, but instead have to pay for a host of additional services and features. By some estimates, companies waste $62 billion each year paying for more storage and services than they need when transacting with big tech platforms for their proprietary cloud storage solutions. And the storage itself is mostly provided in locations where data centers exist or can be built, which may not be close to where the data is generated or used.

There are also relatively few freedoms when choosing a cloud storage provider. A few players with massive networks of data centers and brand recognition make competition very difficult for new entrants. Migrating data from one provider to another can be slow, laborious, and costly, and interoperability is not guaranteed. We envision a future where interfaces are standardized, and anyone can easily participate as a provider in a market for storage.

Filecoin provides a blockchain-based marketplace that promises to revolutionize the global storage economy. The Filecoin marketplace delivers a totally new and secure way for anyone in the world to buy and sell storage. We’re excited to share an overview of how the storage economy works on the Filecoin Network.

An Economy Enabled by Novel Cryptography

Fundamentally, marketplaces are information processing systems that use competitive pricing to allocate resources. Filecoin wants to create the best global marketplace for storage by directly connecting storage clients and providers on a permissionless, decentralized marketplace where storage is commoditized. This distinguishes Filecoin from existing large-scale cloud storage providers.

Online marketplaces were a ground-breaking advance in the way we do business. These marketplaces, like Airbnb, Amazon and eBay, used the technology of the internet to disrupt the brick-and-mortar market by eliminating unnecessary middlemen. For the first time, buyers and sellers could connect with one another from across the globe and trade services and products quickly, simply, efficiently, and easily.

Filecoin was founded on the idea that there is a more affordable and efficient way to store data than on traditional Web 2.0 platforms. As a blockchain-based marketplace, Filecoin is community-driven and decentralized. That means individual storage clients and storage miners compete for transactions based on price, reputation, reliability, retrievability, and latency. And Filecoin’s blockchain ensures that files are stored in a secure and publicly-verifiable way.

But that’s not all. Filecoin’s storage marketplace takes advantage of the world’s underutilized storage assets. With Filecoin, people anywhere in the world can offer their unused storage space to anyone else. This creates a unique sharing economy that has the power to unlock untold amounts of storage and drive an unprecedented economy of scale for pricing storage solutions.

Storage on the Filecoin network decouples hard drive space from many of the commonly bundled additional services provided by other cloud storage providers. The protocol enables buyers and sellers to trade in storage space directly. As a result, clients and miners are free to negotiate prices and features. Filecoin provides the secure network and token that clients and miners can use to enter storage contracts in a peer-to-peer fashion. Unlike traditional storage providers, Filecoin bundles one unique service: cryptographically verifying, every single day, that your data is still there. This verification allows anyone to permissionlessly offer storage in the marketplace while still enabling clients to trust that their data will be stored on the network.

We think Filecoin’s unique storage marketplace represents the future of the storage economy.

What it Means to Participate in the Filecoin Economy

Filecoin’s mission is to create a decentralized, efficient, and robust foundation for humanity’s information. The economic design of the Filecoin network aims to align incentives and pragmatically reward useful and reliable storage with as few rules as possible. The many mechanisms and stimuli of the protocol are designed carefully with a single goal: if the participants in the network’s economy pursue their own self-interests, the network should grow and improve.

In the first iteration of the protocol, storage miners are the core service providers on Filecoin, with other types of mining in the future. Since Filecoin is a global network that everyone can use, the storage mining demographic is diverse – including individuals, organizations, and companies. Storage miners both compete and collaborate in the Filecoin Network; they compete with each other for storage deals and block rewards, and they collaborate with each other by growing the Filecoin Economy and maintaining the blockchain.

Given the permissionless nature of blockchain networks, it is common to see speculative and exploitative behaviors, where short-term selfish behavior causes harm to the network. A sustainable economy starts with a goal. To achieve that goal, it’s necessary to design a set of mechanisms or rules to incentivize, constrain, support, or penalize different activities. These mechanisms are created and parameterized to provide a robust foundation on which participants can build a thriving economy.

Introducing Filecoin Cryptoeconomics

The mechanisms of Filecoin’s cryptoeconomic structure and their implications are detailed in the report, “Engineering Filecoin’s Economy.”

The report outlines how the protocol aligns incentives and pragmatically rewards useful and reliable storage. The action and interaction of each of the mechanisms must be considered during this design process. Other economic structures and product offerings can then emerge from these basic building blocks. This document explains specific incentive mechanisms and economic stimuli provided by the protocol itself. For each fee, reward, or penalty in the protocol, there will be an explanation of how it is intended to contribute to long-term utility of the network.

The report explores:

  • Why the Filecoin Network has a strong value proposition
  • What it means to build an economy and a market from that business model
  • How that market handles data storage
  • The role that storage clients play in that market and the Filecoin Protocol
  • How the protocol retrieves and delivers data
  • The role of the filecoin token as a medium of exchange in the economy
  • The current economic structures and initial parameters of the Filecoin Protocol
  • Key planned improvements that may drive future growth of the network

Download the full report here.

A version of this text was posted on the Filecoin Blog.