FIL Collateral

FIL collateral refers to the practice of using Filecoin (FIL) cryptocurrency as collateral to secure a loan or leverage trading in a decentralized finance (DeFi) setting.

At the core of any blockchain network is a consensus protocol for participants to come to an algorithmically defined agreement without a human arbiter. To bolster good economic behavior, it is common among many blockchain networks to require an initial investment by participants. This “stake” investment ensures that participants act in good faith; otherwise, their stake is punitively reduced by the network. This initial investment by storage providers on the Filecoin network is FIL, the native token of the Filecoin network, which is dubbed the “initial sector pledge” or “collateral.” It means exactly what it sounds like. When that storage provider (known as a “miner”) commits their storage capacity to the network, in the form of discrete units of storage capacity (known as “sectors”), the stake serves as the miner’s promise that they will keep such sectors online for the benefit of the network and future storage users. And if the miner breaches that promise? The network will take the miner’s collateral away. (This mechanism of incentivizing a miner’s good behavior is similar to the hotly anticipated consensus protocol upgrade for the Ethereum blockchain: Proof-of-Stake.)

On the Filecoin network, the lifetime of a sector ranges from 180 to 540 days. During that lifespan, the network will autonomously check for the continued existence and reliability of the miner’s sector(s), an audit process called “WindowPoSt” (which is one of Filecoin’s implementations of Proof of Spacetime, to be discussed in a future blog). If the sectors are not properly maintained and the miner’s committed capacity fails to pass WindowPoSt for (2) consecutive days, a slash will occur, where the network will penalize the miner by forcing them to forfeit a portion of their locked rewards until such faults are remediated. If the sector is ultimately unrecoverable (for example, the egregious mistake of losing the actual data itself), then the miner will automatically incur sector termination fees that are worth up to 90 days worth of one sector’s block rewards. (This extremely punitive design incentivizes good, high-quality storage service by miners and strongly disincentives negligent or malicious miner behavior).

If a miner’s sector(s) prove to be reliable throughout its lifetime, the initial pledged collateral will be returned in full at the end of its lifespan (i.e., 180-540 days). This also strongly benefits the network users that store their data with these miners, as the miners have a very strong incentive to properly maintain their storage users’ data.

Read more: How to Calculate Collateral to Mine Filecoin

Types of Collateral 

To satisfy the varied collateral needs of storage providers in a minimally burdensome way, Filecoin includes three different collateral mechanisms:

  • Initial pledge collateral, an initial commitment of Fil that a miner must provide with each sector.
  • Block rewards as collateral, a mechanism to reduce the initial token commitment by vesting block rewards over time.
  • Storage deal provider collateral, which aligns incentives between storage provider and client, and can allow storage providers to differentiate themselves in the market.

When a storage provider fails to answer to the WindowsPoSt challenges within the 30 minute deadline, storage is taken offline, or any storage deal rules are broken, the provider is penalized against the provided collateral. This penalty is called slashing and means that a portion of the pledged collateral is forfeited to the f099 address from your locked or available rewards and your storage power is reduced. The f099 address is the address where all burned FIL goes.

How Much Collateral? 

The amount of required collateral depends on the amount of storage pledged to the Filecoin network. The bigger volume you store, the more collateral is required. Additionally, Filecoin Plus uses a QAP multiplier to increase the collateral requirement. 

The formula for the required collateral is:

Collateral needed for X TiBs = (Current Sector Initial Pledge) x (32) x (X TiBs)

So for instance for 100TiB at a 0.20FIL / 32GiB sector this means:

0.20FIL x 32 x 100 = 640 FIL

The “Current Sector Initial Pledge” can be found on blockchain explorers like Filfox and Filscout.

FIL Lending Programs 

The ecosystem does have FIL Lenders who can provide you FIL (with interest) to get you started, which you can pay back over time and with the help of earned block rewards. Every lender, though, will still require you to supply up to 20% of the required collateral. The Filecoin Virtual Machine, introduced in March 2023, enables the creation of new lending mechanisms via smart contracts.