Filecoin introduces the launch of FVM – an ambition beyond just storage

Filecoin is a game-changer in the decentralized storage market, with its sights set on decentralizing the internet. With impressive scalability and security features, plus competitive pricing and robust crypto-economic incentives, Filecoin is leading the way.

Filecoin introduces the launch of FVM – an ambition beyond just storage

Introduction

Catalyzing for significant growth in coming years

Filecoin launched Filecoin Virtual Machine (VFM) last month… so what? But first what is Filecoin?  With a mission to decentralize the internet, Filecoin serves as a complementary protocol built on top of IPFS (Interplanetary File System).  IPFS is a peer-to-peer protocol that allows users to store and access verifiable content-addressed data in which its nodes can be operated by anyone. However, IPFS lacks the necessary mechanisms to incentivize nodes to store data for other people.  In other words, there’s no guarantee that stored data will be available and not deleted by any centralized pinning services for data storage.  Therefore, there is a need for a complimentary protocol like Filecoin to add long-term data persistence using a built-in crypto-economic incentive models for data storage providers.

With the recent launch of Filecoin virtual machine (FVM), the Filecoin network gains smart contract capabilities on top of the existing storage network while allowing developers to define stored data in a trustless manner.  Here are some exciting uses cases and benefits:

· The idea of decentralized computation involves computing data where it is stored, rather than having to move it around; saving both time and cost.

· Smarter storage markets offer additional functionality and automation features, such as auto-renewal of deals and self-repairing deals in case of sector issues by using funds that are stored in smart contracts.

· Data DAOs have a mission to preserve, curate, augment, and promote high-value datasets such as large genomic or research databases. FVM primitives, such as tokenization, DeFi rails, and verifiable storage on Filecoins, allow the implementation of such DAOs.

Tokenomics

Boils down to supply and demand...

The Filecoin economy currently runs on the FIL token, which is used to pay for network fees, pay miner block rewards while also serving as collateral by miners. Despite the recent lack of positive price action, the protocol has seen positive data storage growth thanks to Filecoin plus, a program that incentivizes the storage of “useful” data in the Filecoin Network, offering 10x potential block rewards to storage providers.

Filecoin has a fixed max supply of 2 billion FIL token, but only 422M FIL token is circulating as of May 2023. Unlike Bitcoin, they don't have a fixed release schedule for their tokens. Instead, they are distributed based on how useful the ecosystem is and how much storage capacity is being used. The token price is affected by many things, but generally the rate of token issuance and consumption is important for long-term value.  As mentioned above, Filecoin has managed to get a lot of storage capacity and data onboarded by issuing a bunch of tokens. But now they need to figure out how to keep the demand for storage services high and offset the tapering token issuance. When looking at Filecoin’s total token allocation the token has two dominant sources of inflation: 1) block rewards 2) team/investor vesting

As seen in the chart, Filecoin has allocated 70% of its token supply (1.4 billion tokens) to reward Storage Providers. These tokens are divided into three categories: simple minting rewards (330M), baseline minting rewards (770M), and a mining reserve (300M). Simple minting rewards decrease exponentially over time, while baseline minting rewards are based on network performance and indexed to storage capacity. Block rewards earned by miners also have a vesting period to improve their cash flow. As for the mining reserve, the community will decide how and if they want to distribute these tokens. With these rewards, Filecoin incentivizes storage providers to contribute to the network, making it more robust and sustainable.

In 2022, 105 million FIL token tokens were printed, adding up to a total of 256 million over the lifetime of FIL token. These tokens were worth around $840 million in new issuance to the market at current prices. Additionally, around 100 million tokens were unlocked for investors, totaling $324 million in all. In short, 205 million FIL token became available in 2022 due to inflation and investor unlocks, which amounts to $1.6 billion of supply at current prices. Using the average monthly open price from Jan-Dec 2022, this translates to $2.74 billion of supply for the year. While this may seem like a lot, Ethereum printed around 2 million units at $2,114, or $4.3 billion of supply to the market in 2022.

Additionally, token outflow from Filecoin's circulating supply happens when tokens are locked as collateral for reliable storage or when they are consumed and burnt as transaction fees. Filecoin is a Layer 1 blockchain, which means it leverages demand for block space to accrue value back to the protocol.  Storage providers lock up FIL token as collateral, which incentivizes miners to maintain storage services, and any fees generated on the network are paid in FIL token and burnt. In 2022, about 12.55 million FIL token were removed from circulation through collateral lockup and fees, which is equivalent to around $168 million at 2022 average monthly open prices which accounts for 6% of the incremental supply coming to the market. Currently, around 170 million FIL token tokens are locked or burnt, which is about 8% of the fully diluted supply and in line with Filecoin's initial target of 30% of the minted or vested supply.

The supply of FIL token tokens is dynamic and based on the network's utility. However, the network is expected to taper its rate of token issuance and become more deflationary in the future. It's worth noting that deflationary monetary policy isn't necessary for value accrual, as most Layer 1 blockchains, including Ethereum, have inflationary monetary policies. A majority of the tokens are expected to finish unlocking by Q4 2023, but 250M FIL token will continue to vest until October 2026. As such, it's unlikely for the FIL token to enter a perpetually deflationary regime in the near future, assuming current network trends hold. Over the past 12 months, an average of 530,000 FIL token were burnt per month, whereas quality adjusted power of the network grew by approximately 2% per month over the past year. Assuming the above conditions hold, FIL token can reach a deflationary status by roughly 2026.  At the current rate of token burn and storage onboarding, it is unlikely that FIL token begins to become strictly deflationary in the near term. Even under aggressive assumptions (4x FIL token burnt), it will take approximately 3 years before FIL token reaches its probable maximum effective circulating supply.

Competition

Frankly, there really are no competitors to Filecoin...

Filecoin is unique compared to its competitors in that it isn’t simply aiming to decentralize storage but to also decentralized the entire internet by making web2 cloud services permissionless markets. As mentioned earlier, it also performs as an Layer 1 blockchain since Filecoin makes revenue via demand for block space rather than taking a percentage on service deals.

Compared to other storage protocols (Sia, Arweave and Storj), Filecoin is the most scalable and decentralized service network due to having its own Layer 1 blockchain.  Fully decentralized: Storj, its closest storage competitor, is partially decentralized and relies on a single centralized party i.e. Storj whereas Filecoin is fully decentralized with more transparency and accountability.  Scalable: Arweave, another competitor stores data on-chain and while this lowers the chance of data getting lost, it isn’t the most efficient and scalable approach in supporting internet level scale for storage.  Filecoin uses contracts and cryptoeconomic incentive mechanisms to ensure providers are doing their job; Filecoin’s proof of storage and its consensus algorithm provides a higher level of confidence that files are stored in a secured manner. Computational: Lastly, Filecoin is able to run computational jobs where data is stored whereas other competitors are unlikely to provide such jobs.

Conclusion

Filecoin recent launch of FVM is a game-changer

Filecoin is a game-changer in the decentralized storage market, with its sights set on decentralizing the internet. With impressive scalability and security features, plus competitive pricing and robust crypto-economic incentives, Filecoin is leading the way. As discussed above, the concerns surrounding inflationary pressure may be alleviated by the continuous growth of storage capacity and the launch of the recent Filecoin Virtual Machine.  Also as a Layer 1 blockchain, Filecoin trades at a more attractive valuation compared to its peers, with potential for increased demand and integration with other decentralized applications.

Want to hear more straight from Protocol Labs, creators of IPFS and Filecoin?

If you read this far, I highly recommend you subscribe for free and get insightful crypto analysis straight into your inbox. Thanks for reading.