Explore Filecoin tokenomics and its impact on decentralized storage. Discover the potential of Filecoin mining.
- Since distributed storage network Filecoin released three major project updates in 2023 last week, FIL has consistently broken its own “ceiling.”
- Filecoin’s token economy is designed with this long-term vision in mind and helps incentivize the rapid growth and development of the network.
- The FIL token has many functions that facilitate sustainable development.
Filecoin (FIL) is a cryptocurrency that operates on the Filecoin network, which is a decentralized storage network designed to enable users to store, retrieve, and transfer data in a secure and efficient manner.
The Filecoin “master plan” to execute this vision begins with accumulating a critical mass of hardware resources (storage capacity and compute power). This is important, as the only way web3 infrastructure will credibly subsume (not just compete with) the traditional cloud, is if it can operate at orders of magnitude and scale which exceed current offerings. No web3 protocol has succeeded in achieving this, but Filecoin has made the most significant strides.
Additionally, in order to generate long-term demand for network resources (capacity, retrieval, and compute power), it is essential to bootstrap the network with useful data as well as to create the software and tooling necessary to enable compute and composable services on top of the data. A strong economy built on top of the Filecoin blockchain will ultimately be driven by the demand for these services.
In order to encourage the network’s rapid growth and development, Filecoin’s tokenomics were created with this long-term goal in mind. As a result, the network currently has >16 EiB of committed storage capacity, with an explosion of ecosystem developments driving demand for network resources. The Filecoin community, which consists of a networked group of Storage Clients, Developers, Storage Providers (SPs), Ecosystem Partners, and Token Holders, has been working hard to achieve this growth and ongoing success.
Filecoin the Token
In order to establish an open market for data storage and retrieval, the Filecoin protocol introduces a native token (FIL) and associated consensus mechanisms. Within this context, the FIL token serves multiple functions including:
- being used to purchase storage,
- being “pledged” (akin to staking) as collateral by storage providers,
- being rewarded to storage providers (miners) for their services, and
- being burned via transaction fees or slashing.
Proof of Replication and Proof of Spacetime are the two consensus mechanisms used by Filecoin. PoRep proves that a miner has stored a unique copy of a given piece of data, whereas PoST verifies the data’s continued storage over a given time frame. Both of these systems use zk-SNARKS (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) to cryptographically demonstrate that miners are correctly storing client data both at the start of a deal (PoRep) and throughout the deal’s duration (PoST). Miners (storage providers) must stake or “pledge” collateral in the form of To take part in these consensus mechanisms, FIL is required. Accordingly, miners’ FIL collateral may be reduced if they are unable to successfully present these proofs.
Filecoin’s Token Allocation
The cryptoeconomic design of Filecoin makes it possible to make sure that value creation for users is consistent with the protocol’s long-term usefulness. As a result, Filecoin’s initial distribution at network launch was created to support a protocol that encourages the creation of sustainable value (see below).
A maximum of 2 billion FIL can be produced under the protocol’s current specifications, and of that amount, 70% was set aside for storage and related services (i.e. minting tokens to reward 20% was given to Protocol Labs and the Filecoin Foundation to support network development, adoption, and ecosystem expansion (20% vesting over 6 years, beginning in October 2020). The balance was distributed as FIL to SAFT investors, and the FIL started vesting in October 2020 over terms of between 6 months and 3 years.
2 Billion FIL is the maximum amount that could theoretically be minted and vested. However, it may not be the amount of FIL that enters the network’s circulating supply:
- To tap the 300 million FIL held in the Mining Reserve, a protocol upgrade would be necessary, and the community would then decide how much (if any) of this should be released.
- As the network expands, the token must be used and consumed, which decreases the amount of tokens that are currently in circulation. As of September 2022 end, ~520 Million FIL has been minted or vested; of this, approximately 70% is in circulation since significant amounts of Due to network transaction fees, FIL is either locked as collateral to secure the network and reward dependable storage, or it is burned (permanently removed from circulation). Since Filecoin has finite vesting schedules and a minting model in which emissions are indexed to network growth, the rate of token emissions (vesting and minting) is expected (and was designed) to taper as the network matures.
Understanding Filecoin Circulating Supply
The economic mechanisms embedded in the Filecoin protocol ensure that network activities and stakeholders are fully aligned with the long-term health of the network. Mechanisms such as variable minting based on network growth, vesting structures, token consumption, collateral requirements and more align participant incentives and motivations with the long-term success of the network.
Filecoin as a Utility Token
Filecoin is a utility token that is meant to be used, giving token holders a right to use the network. One can think of Filecoin as an Island Economy where participants come together to produce valuable storage goods and services and export them to the world. On the network, one should expect to see storage providers with their own unique characteristics, smart contracts systems, lending services, a diverse set of use cases and many more. Each of these could become their own unique business. The utility of the network is reflected in the attractiveness of those goods and services that participants produce in the network.
The overarching goal for the whole economy, across miners, developers, researchers, clients, and token holders is to efficiently produce attractive storage-related goods and services that can be exported to the outside world. An economy producing more valuable goods more efficiently will lead to more demand for the goods and more demand for the networkʼs token. An increase in the purchasing power of the participants within the economy will allow them to expand and improve their operations to provide an even better, cheaper service to the world.
Token Minting: Aligning the Miner Minting Curve with Network Utility
As a utility token that aligns participants’ incentives with the long-term goal and vision of the network, Filecoin minting is aligned with the overall provable utility of the network. This means that the majority of Filecoin supply would only be minted if the network achieved some ambitious growth and utility targets.
Unlike most other blockchain networks, Filecoin has innovatively adopted a dual minting model: Simple and Baseline:
- Baseline Minting: Upto 770M FIL tokens, the majority of the Storage Mining Allocation, is minted based on the performance of the network. This creates a strong incentive for the network to collaborate to reach storage capacity targets that would ultimately store a large share of humanity’s most important information. The full release of these tokens would only occur if the Filecoin network reached a Yottabyte of storage capacity in under 20 years. According to some analysts, there is less than a Zettabyte of data stored in data centers today (although growing rapidly), so this goal is 1000x larger than today’s cloud storage estimates.
- Simple Minting: 330M FIL tokens are released on a 6 year half-life based on time. A 6 year half life means that 97% of these tokens will be released in approximately 30 years time. This small but meaningful amount is minted independent of agent actions to provide counter pressure to shocks.
- Mining Reserve: 300M FIL tokens is held back in reserve to incentivize future types of mining. It will be up to the community to decide how these tokens would be released and which sets of stakeholders should be incentivized, but for now this portion of total supply is held back in reserve.
As such, effective token minting from mining is in the hands of the community and falls anywhere between the two lines in Figure 1. Figure 2 provides a sense of how much the network needs to grow to hit maximum minting. While the community may come together to update the baseline of the network, hitting the baseline requires competitive collaboration among all stakeholders, researchers, miners, developers, token holders, ecosystem partners, and storage clients.
Token Vesting: Aligning Stakeholders with Long-Term Behavior
Another core principle and mechanism that incentivizes long-term alignment, steers participants away from short-term speculation, and encourages all stakeholders to work together to make the Filecoin network more useful in the long-term includes stakeholder vesting.
This applies to each of Filecoin’s core stakeholders, including:
- Mining Rewards. All mining rewards undergo some form of vesting to encourage long term network alignment. For example, 75% of block rewards earned by miners vest linearly over 180 days while 25% are made immediately available to improve miner cash flow and profitability. Of course, all earned rewards are subject to slashing throughout the lifetime of a sector as described below. Unreliable storage reduces the utility of the network and hence block rewards earned by these sectors will be slashed and burned.
- SAFT Investors. All SAFT holders received their FIL subject to 6 month, 1 year, 2 year, and 3 year linear vesting terms beginning at network launch. The majority of SAFT tokens purchased are vesting linearly over 3 years:
- 58% of SAFT tokens vest linearly over 3 Years
- 5% of SAFTs tokens vest linearly over 2 Years
- 15% of SAFTs tokens vest linearly over 1 Years
- 22% of SAFTs tokens vest linearly over 6 Months
- Filecoin Foundation. The Filecoin Foundation’s 100M FIL vest linearly over 6 years, beginning at network launch.
- Protocol Labs. Protocol Labs’s 300M FIL vest linearly over 6 years, beginning at network launch. When Protocol Labs encourages ecosystem development through grants with important collaborators, those also typically vest over 6 years
These long-term vesting schedules for token holders help ensure that p
Collateral and Slashing: Aligning Participants with Reliable Storage
Blockchain networks like Filecoin incentivize good behavior with rewards and penalize bad behavior with penalties. The penalties – called slashing – come from collaterals participants must post, or potential rewards participants might have earned. Filecoin has many such mechanisms in order to incentivize high quality, reliable, long-term storage.
From providing storage capacity to the network to meeting storage demand of clients, miners must lock Filecoin tokens for consensus security, storage reliability, and contract guarantees. Filecoin tokens are locked as pledge collateral to bring storage supply to the network and required as deal collateral and payment to meet storage demand.
Read more: How to Calculate Collateral to Mine Filecoin
Naturally, the amount of Filecoin tokens that are locked in collateral and slashed for misbehavior is in the hands of the community:
- On a network level, the amount of pledge collateral locked depends on the amount of storage capacity committed onto the network and the network’s circulating supply at the time of commitment. On an individual level, pledge collateral is determined by projected block rewards that a miner will earn to ensure that pledge collateral is not too prohibitive. There will always be Filecoin tokens locked at any point in time as long as there is storage on Filecoin.
- The amount of tokens locked for deal collateral and payment is the result of a collective effort by all participants in making storage goods and services on Filecoin more attractive.
- Collateral and all earned rewards by miners are subject to slashing throughout the lifetime of a sector. Unreliable storage reduces the utility of the network and hence block rewards earned by these sectors will be slashed and burned.
Filecoin Plus: Aligning Participants with Useful Storage
Filecoin is a global marketplace enabled by blockchain technologies. Without a reliable way to algorithmically distinguish real useful data from generated randomness, the Filecoin Network innovatively and pragmatically introduced a layer of social trust on top of the technical layer, Filecoin Plus. Filecoin Plus puts power in the hands of the storage clients as miners storing deals from these clients, who are notarized by a network of notaries, gain a 10x advantage in storage power and hence 10x their share of the network’s block reward.
This mechanism incentivizes all participants to invest in business development, recruit useful data and use cases, and make Filecoin more useful. When a miner earns 10x the share of the block reward, they are also required to put up 10x the collateral with 10x the penalty to ensure that the incentives are aligned. This is also a big step forward in community governance and decentralized cryptoeconomics as operations and processes are being shaped by the community in public.
Network Transaction Fee: Aligning Token Supply with Network Usage
As long as there is any action or utility on the network, Filecoin tokens will be consumed to compensate for the computation and storage resources on-chain messages consume. Similar to the rate of token minting for miners, the rate of token consumption is also in the hands of the community, as participants compete for on-chain resources.
As of today, Filecoin daily token consumption has climbed as high as 180k FIL per day, which is a sign of a thriving economy.
Token Supply: Sources and Sinks
Token Holders can benefit from an understanding of the sources and sinks that determine token supply over time because it potentially informs their relative purchasing power.
The net inflow or outflow of tokens from the circulating supply is affected by minting, vesting, locking, and burning. The development of Filecoin’s token supply since the mainnet’s launch is shown below.
The network is currently growing; tokens vesting for Protocol Labs and The Filecoin Foundation support ecosystem development and growth, while block rewards for storage providers help pay for the onboarding of deals and storage capacity. Because they can lend to SPs, enabling SPs to more easily access FIL, and because they can share in the resulting network rewards, this offers Token Holders a fantastic opportunity to contribute to the ecosystem’s expansion. In this way, Token Holders can index themselves to token emissions whilst also supporting network growth and advancing Filecoin’s vision.
Ecosystem Roadmap: Implications for Token Holders
At this point in the Filecoin Ecosystem, which will see continued advancements in User Programmability, Data Onboarding, Data Retrievability, Scalability, and Computation over the next four quarters, things are looking very exciting. These initiatives should have positive effects for Token Holders by enabling client demand, opening up different network use cases, and ultimately promoting token usage. Below are some of these significant advancements and their potential economic effects.
Filecoin Virtual Machine (FVM)
The Filecoin Virtual Machine opens up a world of opportunities, from Layer 2 solutions to data-centric Decentralized Autonomous Organizations (DAOs) and programmable storage primitives to cross-chain interoperability bridges. To put it briefly, this indicates that Filecoin will soon support smart contracts and user-programmability! Slated for release in H1 2023, this upgrade to the network should positively impact Token Holders since it may increase FIL’s use cases, and will likely impact the “sinks” component of the circulating supply equation (FIL Burned and Locked).
FVM and “Sinks” to Token Supply
As long as there is action or utility on the network, FIL tokens will be consumed (“burned”) to compensate for the computation and storage resources on-chain messages consume. Introducing smart contract capabilities may increase demand for block space, resulting in increased burnt In order to compete for on-chain resources, network users must consume tokens at a rate that is determined by the community.
The FVM protocol upgrade may also result in more FIL being used and/or locked. At the moment, Storage Provider collateral accounts for the majority of FIL that has been locked on the network. FVM introduces the potential for sizable funds to be locked to support different smart contract applications. Only a small portion of applications that can use Filecoin’s Proof of Useful Work chain include Decentralized Finance (DeFi) protocols. These applications not only increase token burn, but also create new applications for locking and staking FIL.
The FVM is distinctive in that it adds expressivity to the Filecoin network. While you can currently hire a storage provider to store your data, with the FVM you can add extra rules, automation, and composability with other services (such as. DeFi). As other elements of the roadmap (retrieval markets, compute over data, etc.) come online, we anticipate that the FVM will enable more complex offerings that leverage Filecoin’s fundamental building blocks, encouraging wider network adoption.
Note: For a flavor of what might be possible, this tweet thread might help elucidate how one might use smart contracts and the base primitives of Filecoin will be used to create more advanced offerings.
Filecoin Plus and Data Onboarding
To encourage the efficient use of the Filecoin Network, Filecoin Plus (FIL+) was developed as a practical solution. FIL+ added a layer of social trust to the network because it is challenging to distinguish generated randomness from truly useful data using algorithms. Clients who successfully complete the FIL+ program’s verification process are given access to a novel resource called DataCap, which they can use to negotiate storage contracts with SPs. Because FIL+ deals increase the amount of block rewards they receive compared to standard (non-FIL+) deals, SPs are motivated to enter into storage agreements with Clients who spend DataCap or by committing storage capacity to the network. In order to receive these boosted rewards from FIL+, Storage Providers put up more collateral (roughly 10x the collateral for non-FIL+ storage sectors), and lock more tokens on the network.
The amount of data from FIL+ clients has grown significantly so far this year, which shows that more and more useful data is being onboarded.
If this trend continues, it may result in more tokens being locked on the network and less tokens being in circulation. The use and consumption of the token may also increase as the Filecoin network expands in line with its goal of storing useful data.
With the help of Interplanetary Consensus (IPC), a pending network upgrade, Filecoin will be able to support more use cases while also scalability, throughput, and finality are all increased. An exciting blockchain innovation that horizontally scales the chain with subnets (shards), IPC also has some potential cryptoeconomic implications, and may increase the:
- amount of Due to scalability enhancements and FVM utilization, FIL was burned while gas prices for users were reduced.
- amount of Subnets can be secured using FIL locked (or staked) as collateral.
- demand for Shards supporting FIL consumption with specialized on-chain use cases.
Filecoin Use Cases
The primary application for the FIL token is as a payment method that simplifies the process of storing and retrieving data on a decentralized file storage network. Through the network, vital online storage services can be created from physical resources like electricity and disks. Using the FIL token, the conversion takes place.
Joining Filecoin gives users access to a wide range of data service providers who charge different prices for their space. Utilizing the FIL token, users pay these providers to store or retrieve data. By contacting the provider (who serves as the miner), the user can later get his files back if he no longer wants to host them.
The miner’s FIL tokens are released from a contract and sent to the miner’s wallet after the data has been retrieved. This result, however, can only occur if the miner has done his job well by successfully storing the data since the moment the contract was signed. The network penalizes the miner for failing to store the data.
To store and retrieve data, FIL is essentially a utility coin and a form of currency used in the Filecoin ecosystem. By using their free storage space for file storage, miners generate passive income. And compared to using traditional cloud services, users can store these files for a lot less money. Additionally, the files are stored decentralizedly, preventing access by hackers.
You can consider Filecoin in the same way you might consider other contemporary substitutes like Airbnb or Uber. Since you don’t want to pay for a hotel, you approach a landowner directly and negotiate a lease that enables you to occupy his property for the duration of the contract. Another scenario is when you need to get from A to B but prefer to avoid using the city’s public taxi service and instead use a network of trustworthy drivers.
The goal of Filecoin is to build a decentralized, effective, and reliable foundation for information for all of humanity. It is a novel data storage and application network. There are a lot of ongoing, positive developments in the Filecoin ecosystem that support this mission and that may benefit token holders. The protocol’s cryptoeconomics are intended to reward sustained involvement and contribution to the network. Participants in the community can gain from understanding tokenomics, particularly the sources of token inflow and outflow that support the token economy. Future protocol developments may bring about fresh and intriguing use cases for the network and the token, potentially enabling increased Token Holder engagement and favorably influencing the value proposition of this rapidly expanding ecosystem.