We were recently presented with a very complex presentation about Filecoin. It offers a decentralized storage solution for archival data, based on blockchain technology and is also a cryptocurrency. It brings storage providers together to jointly offer enterprise storage at 95 percent lower cost.
Protocol Labs is the organization behind Filecoin and provided a presentation on how Web3 is going to change the world. Filecoin is an example of that, according to this organization. In their presentation they stated it can offer enterprise storage at 95 percent lower cost (compared to Amazon S3 Infrequent Access), which caught our curiosity because we don’t often hear such large cost reductions.
According to Protocal Labs we should think of Filecoin a bit like the Airbnb of enterprise storage. The big hotel chains in this case are AWS, Azure and GCP. Smaller storage providers are brought together to offer enterprise storage collectively at a lower cost.
Protocol Labs is an open source organisation responsible for several projects, including IPFS, Filecoin and Libp2p. It also invests in startups in the IPFS ecosystem that they have created.
IPFS stands for the “Interplanetary File System” and is a peer-to-peer network for sharing files, or rather portions of files. Just as, for example, Napster and Kazaa were back in the day. It is an alternative to HTTP(S), which we now mainly use to visit websites and where the data is basically stored in one location.
IPFS is open source. Anyone can set up projects and use it. In Protocol Labs’ ideal world, IPFS forms the basis of Web3. In this Internet world, data is no longer centrally stored, big tech has less power and users have more control over their data and privacy. With IPFS, you can exchange not only files, but also websites, applications and other data. When you make data available through IPFS, each file is stored with a unique hash in the namespace that connects all IPFS hosts. All hosts and clients connected to IPFS all store a piece of the data within the network.
Then when someone wants to access the data or a website within IPFS, the requester gets the data delivered from multiple sources that may be different at any given time. So the data is stored in a decentralized manner and therefore impossible to block. In some countries, IPFS is used to access Wikipedia, for example, because the regime has blocked that website.
Filecoin is based on IPFS technology. Filecoin also uses the peer-to-peer mechanism. However, Filecoin is an enterprise storage service that also requires payment. Datacenters and providers that have a lot of spare storage can choose to make some of it available on Filecoin. To bring back the comparison to Airbnb, they then become landlords of storage space. Filecoin provides a marketplace where companies looking for storage can rent it. If someone rents storage space then this agreement is registered in the (Filecoin) blockchain with so-called FILs. This is a Filecoin cryptocurrency token. The blockchain that Filecoin uses requires storage hosts to prove that they have stored data, as well as how much storage space they have available. This is done daily through complex algorithms. When companies choose to store data in Filecoin, they can choose to do this at multiple storage vendors, so there are multiple copies of the data.
Where it might starts to look like a kind of ponzi scheme
When storage space is rented, the tenant pays the landlord, however, transactions on Filecoin must also be paid for. Both the provider (landlord) and the user (tenant) pay a small amount to use the network. Once data is stored, as well as when data is retrieved from the network, small amounts are due and paid in FIL tokens.
The storage providers additionally receive a daily reward in the form of FIL tokens for the data they have stored on Filecoin. A complex algorithm will check if the data is still there. If a storage provider has an outage or has data temporarily unavailable, it does not receive FIL tokens but is fined and must pay FIL tokens.
The more storage capacity the landlords offer, the more FIL tokens they get as a reward. For data that is actually stored and verified, they get ten times as many FIL tokens. You should see the FIL tokens they receive as a kind of “subsidy,” because those FIL tokens are convertible into Filecoins, the cryptocurrency. However, the landlords have to wait six months before they can convert FIL tokens into Filecoins, euros or dollars. The storage providers we spoke to receive thousands of dollars a month in FIL tokens.
This “subsidy” is the reason why providers can offer storage at a 95 percent lower cost compared to AWS. The Filecoin algorithm that rewards landlords with FIL tokens is very sophisticated. The amount of FIL tokens they receive depends on the total number of providers, the amount of storage they offer, the amount of storage that is used, but also on the date. In fact, we learned that every six years the amount of FIL tokens that the algorithm hands out on a daily basis will be reduced by 50 percent.
In our view, this also means that the “subsidy” will eventually disappear. When the number of landlords increases and the total number of daily FIL tokens reduces the value will become smaller and smaller and in the end will be almost zero. Protocal Labs has a different view on this, they say that if the number of landlords and tenants increases, the value of the Filecoin cryptocurrency will go up, so landlords need fewer FIL tokens to receive the same value. It is a matter of supply and demand they say.
Theoretically, that can be true. However, the fact is also that the cryptocurrency market is anything but stable. It is dominated by speculation and is anything but stable. Not something a data center can rely on when acting as a landlord.
Purchasing power hyperscalers vs local data center
We think it is impossible for Filecoin to continue to keep a 95 percent discount over the long term. Something they don’t deny either, as it depends on many factors. There is another factor and that is purchasing power. All the storage space offered by data centers eventually has to be purchased. To make it really simple, they have to purchase HDDs. A large data center may be able to strike a deal for a pallet full of HDDs. However, if you start looking at the buying power of the large hyperscalers and certainly Amazon as a retail giant. They can buy a container or perhaps ten containers full of HDDs if they have to. The price per TB the hyperscalers pay will always be much lower than a local data center. This will also put pressure on Filecoin pricing because the playing field is not level. So there will be a need for more “subsidy”.
Performance is slower than a floppy disk
Storing data in Filecoin is anything but fast. Saving a 1MB file takes about 5 to 10 minutes. This is due to the fact that the deal has to be registered on the blockchain and become visible on it, which takes a lot of time. Copying files onto 1.44MB floppy disks is even faster.
Once the file is placed in Filecoin and visible on the chain, the storage process for the storage landlord just begins. This is because it must provide proof that it has actually stored the files. This is called “Proof-of-replication.” This requires a “sealing the sector” process, which requires a lot of compute power. The seal process takes about 1.5 hours for a 32GB sector. In archive storage, 32GB is not a lot. The compute power needed should also not be underestimated, a server needs an Intel Xeon processor with at least 8 cores, 128GB of RAM and some powerful GPUs. The energy costs of running a server like this will not be cheap either.
Retrieving data from Filecoin depends on how the data is stored. If the data is stored sealed, then it must first be unsealed, which takes about 3 hours per 32GB. If the data is stored both sealed and unsealed, then it can be faster. But requires a lot more storage capacity, so it will probably be sealed most of the times.
Supply and demand
About 19.6EB(Exabyte) of storage capacity is currently available on Filecoin. For those who lost track of how much an Exebyte is. 1EB is 1000PB (Petabyte) and 1000 TB (Terabyte) is 1PB. Of that 19.6EB, about 259PB is in use. Filecoin currently has 465 providers that offer the 19.6EB.
Protocol Labs is an open source club with undoubtedly the best intentions to relieve the world of the dominance of big tech. Mainly by making everything decentralized. It also owns 15 percent of all Filecoins out there. So if Filecoin’s value skyrockets, they will be the new billionaires.
We think Filecoin storage is only interesting in the short term, as long as the “subsidy” is high which keep the costs low. But only for data that you never really need again, but still want to keep. After all, the performance to store and receive your data will take almost forever. We see no advantage for a large provider or data center to enter this business. A provider needs to be willing to take a lot of risks and has to rely on the stability and increasing value of a cryptocurrency. It also has to wait for six months before it can cash out. In the end, maybe it sounds more like a very complex ponzi scheme?