A Beginner’s Guide: What Is Filecoin (FIL) and How Does it Work?

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Global file sharing and storage are areas marked by constant innovations. One such innovation is the introduction of Filecoin. You might be asking yourself what Filecoin is. The best way to describe it is as a global decentralized storage system that brings benefits for all participating computer operators. 

With Filecoin, all the data is stored on a peer-to-peer blockchain. Simply put, the Filecoin network is maintained by:

  1. Miners who dedicate their computing power and receive payment for ensuring storage space for users. 
  2. Filecoin users who, on the other hand, can retrieve, distribute or store the data by paying miners a fee.

As the Filecoin network continues to expand (with more miners supplying storage space, and more users placing their trust in it with their data), the value of the underlying cryptocurrency, FIL, is likely to increase. This is because the number of transactions requiring that digital currency will grow. In case enough people adopt Filecoin, it may turn into the fastest and least expensive way to store data on the web. 

As if that’s not enough, the total amount of FIL that will ever be generated is limited to 2 billion tokens, another reason for its value to increase.

Filecoin

What Is Filecoin (FIL)?

The cryptocurrency FIL is the underlying token that powers the Filecoin network. It is used to pay for data storage, data retrieval and any other transactions that may occur within the network.

Since that network does not depend on a centralized server, the data stored on the blockchain cannot be subject to hacker attacks (unlike centralized storage providers). In addition, no government or other body will have the authority to censor file exchange. 

Since all files are broken down into smaller parts by the Filecoin blockchain before being sent to the miners for storage, the security of contents is guaranteed.

The Filecoin network is established on top of the Interplanetary File System (IPFS), which represents a protocol ensuring file storage and sharing in a distributed network (with the process being very similar to file-sharing networks such as RuTracker.org or BitTorrent). While the IPFS is free to use and does not generate revenue for miners, the Filecoin network is paid-for-use and generates revenue. 

In order to ensure data storage and data retrieval on the network, Filecoin miners rent out unused storage space to clients and get paid in FIL.

The two types of miners operate within the network are:

Storage Miners: Those who provide computing resources to clients. These participants usually announce the price of their storage offer, as well as the speed and the redundancy of their computing system on Filecoin’s open market,
Retrieval Miners:  who deliver particular files to clients and get paid for their service in FIL. The price they usually ask depends on the file’s size and the speed of their response (with their bandwidth being a key factor).

Other participants in the network include the so-called “clients.” They use the network to look for a storage miner or a retrieval miner who best suits their needs (price, storage capacity and duration). Once a miner is selected and a final agreement is reached, the “deal” is then added to the blockchain.

We should note that, along with Filecoin, other protocols offer cryptocurrency-powered, decentralized storage and file-sharing systems. These include Siacoin, which already has a 2 petabyte network capacity, and Storj, which already has a more-than100 petabyte network capacity.

Who Created Filecoin?

Being an open-source software, Filecoin was developed by Protocol Labs, a company established by computer scientist Juan Benet. Protocol Labs is also the company behind technologies such as IPFS and libp2p, which aim to replace existing Internet protocols. 

Juan Benet also was the cofounder of game development firm Loki Studios, while he was studying computer science at Stanford. In 2013, Yahoo acquired Loki Studios. Juan Benet then took part in the Y Combinator start-up accelerator to establish Protocol Labs. 

Filecoin’s initial coin offering (ICO), which took place in August and September 2017, raised $257 million, the largest ICO on record at that time.Protocol Labs was backed by investors such as Digital Currency Group, Coinbase cofounder Fred Ehrsam, Stanford University’s startup accelerator StartX, and AngelList founder Naval Ravikant. 

After the ICO, in October 2020, the Filecoin mainnet was launched, while as of November 2020 the Filecoin network already had a storage capacity of more than 1 exbibyte, since more than 70 organizations worked in collaboration with Filecoin.

How Does Filecoin Work?

Users or clients within the Filecoin network, who are willing to store data on that network, have to locate and pay miners who will do it for them. An open market will usually determine the price miners will compete to ask the lowest price for the storage service, which means Filecoin is likely to be much cheaper than centralized data storage providers such as Amazon Web Services

Meanwhile, there is an incentive for miners to provide storage capacity. The Filecoin network will reward them with Filecoin tokens. In other words, the more storage miners make available for the network, the higher the chances are for them to be rewarded. 

Yet, miners are required to execute a few computationally intensive processes, or proofs, to show the network that they are storing the data and are doing so reliably over time. If that is the case, miners will add new blocks to the Filecoin blockchain and receive the reward.

Filecoin Mining

As we’ve already noted, miners are participants who provide storage. Every computer user is able to plug in his/her hard disk drive (HDD), run the Filecoin software and begin providing HDD space in the Storage Market. These miners are the so-called Storage Miners. There are also Retrieval Miners, who are paid by clients to retrieve data and to perform services that aim to accelerate data transmission (for example, caching).

Filecoin Storage Market

The Filecoin network has a market for HDD storage, where users/clients looking to store data are able to bid for available storage that is provided by miners. The latter will be assessed based on their reliability and the prices they ask for HDD storage. It is a market, since participants are able to place bids and ask prices.

Proof-of-Replication (PoRep)

The Filecoin blockchain relies on two mechanisms, or proofs, which help the network verify that miners store the data they claim to hold. 

These two proofs allow other participants to assess whether miners are trustworthy or not.

The Proof-of-Replication indicates that miners have stored the number of copies of data they claim to hold.

Proof-of-Spacetime (PoSt)

The second mechanism, Proof-of-Spacetime, indicates that miners have stored the data over an agreed time period.

Who Are Filecoin’s Clients? 

Participants within the Filecoin ecosystem communicate through secure channels, which they use to gossip (distribute information to the network), transfer information among themselves, and locate other peers.

Filecoin clients (also known as Filecoin Nodes) synchronize the Filecoin blockchain and verify each block’s messages. Clients can manage Filecoin wallets to store FIL and make payments in that cryptocurrency. They can also propose storage and retrieval deals to miners within the network and pay for the service as the deals are executed. 

Filecoin clients are also able to publish and broadcast different messages across the network. One such message, for instance, could be an instruction to send FIL from one address to another.

Filecoin vs. Google Drive

Although Filecoin shares some similar properties with other file storage and distribution systems such as Google Cloud Storage, there are also distinct differences between the two technologies. Let us point out some of them. 

First, Filecoin pricing is determined by a hypercompetitive open market, while Google Cloud pricing is determined by specialized corporate departments. 

Second, the Filecoin network features a multitude of small, independent storage providers, while Google Cloud comprises several large corporate entities.

 Third, there is a low barrier to becoming a storage provider with Filecoin (one needs a PC, an HDD and a reliable Internet connection). In the case of Google Cloud, the barrier for storage providers is quite high (it includes legal agreements, marketing and support staff).

Additionally, Filecoin miners are located anywhere on the globe, while in the case of Google Cloud, the physical location is limited to where the provider’s data centers are positioned.

When it comes to reliability statistics, Filecoin performance is independently checked by the network and publicly verifiable. With Google Cloud, corporate entities self-report their own stats.

Another difference of note is that the Filecoin network has a competitive market for file retrieval. With Google Cloud, retrieval is usually more expensive than file storage.

Last but not least, in case a file is lost, the user will be refunded automatically by the Filecoin network. With Google Cloud, users will be offered credit by companies in the event of a file loss or unavailability.

How FIL Token Derives Its Value

Filecoin is dependent on two mechanisms: proof of replication and spacetime. This assures that its network consists of miners providing a fundamentally useful service, namely HDD storage. 

Additionally, Filecoin creators assure that its storage market will allow users to take advantage of more competitive prices than those offered by centralized storage (cloud) providers such as AWS, HPE and so on. 

If the Filecoin network achieves its objective of providing a decentralized storage service, which will not be easily influenced by governments or corporate entities, its user base will surely grow. This growth may accelerate further if centralized services start losing their clients’ trust. As a result, the value of the FIL token could rise.

And, as we noted earlier in the article, since the total amount of FIL that will ever be available is limited, the token’s value is very likely to increase.

Should You Invest in FIL now?

As with other financial assets, there must be a good reason which warrants an investment in FIL. If you believe that customers’ trust in centralized storage providers could be undermined, then you may consider investing in cryptocurrency. 

Large centralized providers such as Google or Amazon may face pressure from governments or business entities to change, remove, or simply disallow services to particular users. If they indeed do so, this could jeopardize their trustworthiness, which would then benefit decentralized storage services such as Filecoin. 

Another reason to consider an investment in FIL: its marketplace is meant to offer much more competitive prices than those of existing storage providers. The creators of Filecoin state that a huge proportion of global HDD space is currently unused. If the Filecoin network is able to unlock that unused space via cryptography and financial incentives, this could result in even lower storage prices.

Closing Thoughts

In conclusion, Filecoin may be the answer to a number of inefficiencies surrounding global data storage and retrieval. But even more, it allows clients the freedom of choice, making them less dependent on contracts with huge storage providers such as Amazon Web Services, Dell or HPE. In this way, Filecoin may contribute to a more competitive cloud storage market.

The success of the Filecoin network will likely depend on its popularity and usage within the cryptocurrency community, as well as whether it will be able to lure new users to the Web 3.0 field.

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Disclaimer

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