What is Filecoin?

Filecoin is built on top of the IPFS network and serves as an additional protocol layer for distributed network storage and data sharing. It was developed by Protocol Labs as a decentralized data storage network. As the incentive layer for IPFS, Filecoin operates the incentive mechanism: users pay with the native FIL token to store and retrieve information on the network, while nodes providing hard drive space for storage and retrieval operations are rewarded.

Before diving deeper into Filecoin, it’s essential to understand what IPFS is.

IPFS

IPFS, or the InterPlanetary File System, is a decentralized peer-to-peer network protocol designed to create a distributed method of sharing data. In today’s internet, data transfer between users and websites is based on HTTP (Hypertext Transfer Protocol). The goal of the IPFS protocol is to replace HTTP and become the primary transmission protocol for the next generation of the Internet.

To better understand IPFS, let’s examine its benefits compared to HTTP:

Access Speed

When files are uploaded to the IPFS system, they are distributed across multiple servers. As a result, when a user downloads a file, the system automatically retrieves it from the nearest servers simultaneously, significantly increasing download speed.

Storage Efficiency

IPFS encrypts each file’s content and assigns it a unique hash. This means that identical files will not be stored multiple times since they have the same hash, saving storage costs. Additionally, any slight modification to a file will result in a completely different hash, ensuring that the original file is not altered.

Security and Censorship Resistance

This unique hash also serves as the file’s address within the network. Unlike HTTP, which locates files based on their position (domain name), IPFS uses content addressing. This method prevents issues like server failures or file relocations from affecting content access.

Moreover, if a website’s server is compromised by natural disasters, malicious attacks, or government censorship, the files remain accessible because they are distributed across many servers worldwide. Users can still download files using content addressing, ensuring continued access. For instance, in 2017, the Turkish government blocked Wikipedia for political reasons. In response, someone uploaded the Turkish version of Wikipedia to the IPFS system. Since the content was distributed globally, and browsers needed only a content address to access it, the Turkish government could not prevent users from accessing the content.

IPFS Storage and Download Process

1. Users upload files to the IPFS network.
2. IPFS breaks the file into chunks and assigns a unique hash (CID, Content Identifier).
3. The file is distributed across different nodes, each maintaining a hash table that records all storage information.
4. When other users request to download the file, nodes locate it through the hash table.
5. Multiple nodes simultaneously transmit different chunks of the file to the user.

Limitations of IPFS

IPFS has a hidden drawback: storage is not permanent. If, at some point in the future, no nodes store a specific file and make it publicly accessible, the file will completely disappear from the IPFS system. As time passes, the likelihood of this issue increases because as nodes storing copies of a particular file clear their cache or go offline, these information files will gradually vanish.

Use Cases

Filecoin is built on top of IPFS, aiming to create a distributed storage market for long-term storage and provide an incentivized permanent storage mechanism for IPFS users. IPFS users can directly store their files on Filecoin. Filecoin (FIL) is the native cryptocurrency of the Filecoin network. When users need to store or send information via IPFS (InterPlanetary File System), they must pay miners in FIL.

Additionally, as storage providers, miners can rent out their storage capacity to users for rewards. They must also provide a certain amount of FIL as collateral to ensure the quality of storage service.

History and Team

Filecoin was developed by Protocol Labs, a company founded by Juan Benet in 2014. Benet and his team built both Filecoin and IPFS, raising several funding rounds. In 2017, the team conducted its largest token sale, raising approximately $200 million.

In March 2019, the testnet began operating, providing access to testers, miners, and certain users.

In December 2019, the public testnet was launched, allowing miners and users to start testing hardware requirements and providing resources for developers to create applications based on Filecoin.

The mainnet was officially launched on October 15, 2020, introducing the file storage network, mining rewards, and distributing FIL to investors.

It’s worth noting that in 2020, Filecoin sparked a wave of speculation in China. Many crypto Key Opinion Leaders (KOLs) promoted it, attracting numerous mining farms, capital, and investors into Filecoin mining. Filecoin was touted as “Blockchain 3.0” or “the next 100x coin.” However, as the bull market waned in 2021, the price of FIL steadily declined, and the hype around Filecoin gradually dissipated.

Investors

Some notable investors and investment institutions are listed below:

• Coinbase co-founder Fred Ehrsam
• Y Combinator president Sam Altman
• a16z Crypto
• zk Capital
• Y combinator
• Union Square Ventures

Roles in the Ecosystem

As a blockchain and cryptocurrency ecosystem with clear, practical applications, Filecoin relies on its incentive mechanism on top of the IPFS network to motivate participating nodes to provide a “more stable and secure storage environment.” The success of the distributed storage network protocol mainly depends on five participants in the Filecoin economy:

• Users:

General users who store and retrieve data and files using websites and applications. This role is very simple but crucial: using FIL tokens to pay for storing and retrieving files. The entire purpose of the Filecoin blockchain’s operation is to meet the storage and retrieval needs of users.

• Developers:

Develop various applications on Filecoin to create or meet users’ diverse storage and retrieval needs.

• Retrieval Services:

Deliver files to users as needed and ensure the efficient use of data stored in Filecoin.

• Storage Miners:

Store files and help maintain and update the Filecoin blockchain. Miners mainly obtain FIL rewards in three ways:

• Transaction Fees: The fees users pay for storing data.
• Block Rewards: Rewards miners receive for providing long-term reliable storage services to the Filecoin blockchain.
• Network Transaction Fees: Additional fees users pay to miners for priority processing.
• Token Holders:

Token holders use FIL as a store of value and a medium of exchange, making FIL a cryptocurrency with circulation value.

Consensus Mechanism and Mining

PoRep and PoSt

Unlike Bitcoin’s consensus mechanism (Proof-of-Work), which requires miners to compete to solve computationally expensive mathematical problems, Filecoin uses two unique consensus mechanisms: PoRep and PoSt:

Source: Filecoin.io

Every miner must prove that they continuously store user data to receive FIL payments and rewards.

1. Proof of Replication (PoRep):
   1. Through a sealing and sequential process, each miner generates unique replica data encoding.
   2. Miners provide public proof that “a file has been physically stored.”
2. Proof of Spacetime (PoSt):
   1. Over time, miners are randomly selected to undergo random data challenges. They read data for verification and compress it into a PoSt proof.
   2. Miners provide public proof that the specific data encoding has been physically stored over a period of time.

Storage and Retrieval Markets

The Filecoin protocol includes two incentive concepts: the storage market and the retrieval market.

Storage miners earn FIL by storing data for clients and “computing cryptographic proofs to demonstrate a certain period of storage.” The probability of a storage miner receiving block rewards and transaction fees is directly proportional to the amount of storage they provide.

Retrieval miners earn FIL by retrieving files for users. Their income depends on the market value of the files, their ability to complete transactions, and the network speed, meaning that network performance impacts their earnings.

Filecoin Virtual Machine (FVM)

The Filecoin Virtual Machine (FVM) introduces general-purpose programmability to the Filecoin storage network, solidifying Filecoin’s position as the premier Layer 1 protocol for the open data economy. By enabling Web3 applications to operate in a manner similar to Web2 applications, FVM combines smart contracts with verifiable storage capabilities. These smart contracts can edit storage space, support low-collateral lending markets for storage providers, and power data DAOs, providing new momentum for the open data economy.

Introduction of Smart Contracts

FVM brings smart contract functionality to the Filecoin network, called smart actors in Filecoin. These smart actors can create dynamic storage solutions that are difficult to achieve with traditional Web2 technologies, such as distributed computing, crowdsourced dataset preservation plans, intelligent storage markets, multi-generational storage, and perpetual hosting.

Combining Computation and Storage

The launch of FVM enhances Filecoin’s storage and computational capabilities. This means the Filecoin network can now run on-chain state computations and off-chain data computations, with the EVM playing a significant role in both directions.

Cross-chain Interoperability

FVM provides a foundation for creating cross-chain interoperability bridges. These bridges allow for the sharing of liquidity and enable the integration of applications deployed on other blockchains, such as Ethereum, NEAR, and Polygon, while leveraging the storage capacity and capabilities of the Filecoin network.

Perpetual Storage and New Storage Market Primitives

FVM allows for the implementation of perpetual storage solutions, where users only need to store data once, and smart contracts can manage subsequent storage deal proposals. It also introduces new storage market primitives such as automated replication, repair bots, and insurance protocols.

Since the launch of FVM, over 1100 unique smart contracts have been deployed on the Filecoin network, with over 80,000 wallets interacting with them, demonstrating significant interest and activity from developers and the community. The Filecoin community continues to plan further development of FVM, focusing on areas such as small storage deals, democratizing storage, building dApps and DAOs, and exploring new frontiers like distributed computing, data markets, and the use of LLMs and generative AI in DAOs, paving the way for decentralized cloud services, data economies, and the Web3 ecosystem.

Filecoin V21 Upgrade

The Filecoin V21 upgrade, also known as the Watermelon upgrade, is a network upgrade that occurs at a specific epoch. This upgrade includes enhancements to storage provider operations, improvements to the Filecoin Virtual Machine, and protocol bug fixes.

Improved Performance and Efficiency

The V21 upgrade optimizes Filecoin’s underlying protocol, improving the overall performance and efficiency of the network. This includes reducing the time required for state transitions, increasing block verification speed, and lowering resource consumption for node operators when handling large amounts of data.

Enhanced Storage Provider Operations

The upgrade specifically addresses the needs of storage providers, introducing features to improve storage efficiency and reduce operational costs. This may involve improving data storage and retrieval processes, and providing more flexible storage deal options.

Coordination of Network Upgrades

The V21 upgrade showcases the Filecoin community’s ability to coordinate network upgrades. During the upgrade, node operators, miners, developers, and users need to work together to ensure a smooth implementation. This coordination is essential for maintaining the network’s stability and trust.

The Filecoin V21 upgrade demonstrates the network’s commitment to continuous innovation and improvement, aiming to provide users with a more efficient, stable, and user-friendly decentralized storage solution. It not only addresses current needs but also lays the foundation for future upgrades and expansions of the Filecoin network, providing the necessary technical readiness to support new features and improvements.

Token Distribution

The maximum supply of FIL tokens is capped at 2 billion, distributed as follows: \

• Miners: 70%
• Protocol Labs (including company and individual contributors): 15%
• Investors: 7.5%
• Future fundraising and ecosystem development: 2.5%
• Filecoin Foundation: 5%

Applications

Numerous online services have already adopted the Filecoin and IPFS protocols. Here are a few examples:

• Akasha: A social networking platform built on the Ethereum blockchain and IPFS, where data and identities are decentralized.
• PeerPad: A real-time online P2P file collaboration editor that allows users to write, edit, collaborate, and export files directly in a web browser.
• DTube: A decentralized video platform built on a blockchain that uses IPFS to store videos and offers a creator reward mechanism.
• arXiv: A well-known academic website that collects preprints of physics, mathematics, computer science, biology, and other papers. It houses over a million preprints, storing data using the IPFS protocol to reduce costs and improve security.
• Arbore: A free file-sharing software that allows users to send various files to others, transferring them directly to recipients via the IPFS protocol.
• Brave: The first web browser to deeply integrate IPFS, enabling users to access content from decentralized networks using the IPFS protocol.

In addition to these examples, the NFT market, which experienced rapid growth from 2021 to 2022, has begun extensively utilizing IPFS as a storage solution for NFT images, text, and other types of data, ensuring the permanence and fairness of NFT content. With the continuous iteration and updating of cryptographic technologies and the development of various applications on Web3, Filecoin and IPFS are expected to continue playing a significant role.