Filecoin (FIL): Cryptoeconomic and Business Model

Filecoin's Incentive-Based Network

FIL, the native Filecoin asset, plays a pivotal role in the platform’s network economy. The incentive structure of the ecosystem is built through a mining system where network miners, decentralized storage providers, and customers all benefit from each other:

• Storage miners receive coins by providing storage

• Retrieval miners receive coins by serving data

• Clients pay to store and retrieve data

In order to maintain a long-term, sustainable structure, the Filecoin project designed its cryptoeconomics to encourage a fair, resilient, democratic, and adaptable network that provides increased utility for its users as it grows. This vision will continue to develop through a process known as hybrid exponential minting (a combination of the exponential decay and network baseline models) and an equitable coin allocation structure.

Network Baseline and the Exponential Decay Model

It’s quite common for blockchain projects to mint their coins using an exponential decay model, of which halving is the most common. By leveraging this methodology, block rewards are highest in the project’s infancy (when miner participation is typically the lowest). Miners generate more coins per unit in the earliest days of the network, but the number of coins per unit decreases exponentially over time.

After analyzing numerous blockchain-based cryptoeconomics models, it became clear that a simple exponential model would promote early short-term network participation. Ultimately, however, a simple exponential model would have a negative long-term effect on the Filecoin economy by incentivizing decentralized storage miners to leave the network after collecting the high volume of tokenized rewards from the project’s inception period — even if it meant losing critical client data.

An early exodus of miners could have negatively affected the network in two ways: clients could lose data and suffer from reduced access to long-term storage, and miners could lack incentives to continually improve the network. In order to facilitate recurrent storage onboarding and long-term storage, Filecoin introduced the concept of network baseline into its system. Rather than minting coins predicated on how much time has elapsed, block rewards increase as the network’s total decentralized storage power grows, while still preserving the underlying concept of an exponential decay model. This means mining rewards more precisely match the utility that mining provides and the overall value the network delivers to its clients at any given stage of the project.

To achieve the best of both worlds, Filecoin introduced a hybrid exponential minting mechanism, which allocates FIL along the following lines: 

• 30% of decentralized storage mining allocation to simple minting (for simple exponential decay)

• 70% for baseline minting

The two parts of the model compliment each other. Simple minting allocation heavily rewards new miners in the network, and serves as counter-pressure to economic shocks to the system. In turn, baseline minting allocation creates additional coins when more network value is created. Network baseline minting is designed to begin at 1 Exbibyte and increase at an annual rate of 200%. For comparison, 1 Exbibyte is approximately 1,152,921,504 gigabytes, which is about 0.01% of the planet’s entire current storage capacity. The world’s annual cloud storage growth rate is 40%. 

Summarizing Filecoin’s Coin Allocation Metrics

Filecoin’s overall coin allocation is as follows: 

• Storage Mining: 55% 

• Mining Reserve: 15% 

• Protocol Labs: 10% 

• 2017 Filecoin ICO: 7.5% 

• Filecoin Foundation: 5% 

• PL Team Members and Contributors: 4.5% 

• Ecosystem Development: 2.5%

The Filecoin base of 2,000,000,000 coins is the maximum number that will ever exist and is known as FIL_BASE. As noted above, 70% of all FIL coins will be allocated to miners: 

• 55% or 1,100,000,000 (78.6% of mining rewards) of FIL_BASE is allocated to decentralized storage mining

• 15% or 300,000,000 coins (21.4% of mining rewards) is allocated to the Filecoin mining reserve

In general, the three main coin allocation categories are:

• Storage Mining Allocation — 55%: Predominately used to maintain the blockchain with block rewards, run network code, and subsidize reliable and beneficial decentralized storage. This allocation also covers early storage mining rewards. Storage miners are the earliest miners, and are responsible for the main functionality and value of the protocol.

• Mining Reserve Allocation — 15%: This is essential for the Filecoin network to ensure the longevity of the network, and of all types of miners contributing to it. To that end, the system allocates 15% of FIL_BASE to cover retrieval miners, repair miners, and future miner types that have yet to be determined. As the network grows and evolves, it would be up to the community to decide how to distribute many of these coins, through Filecoin improvement proposals (FIPs) and other means.

• Additional Allocation — 30%: 15% of FIL_BASE was allocated to Protocol Labs (with 4.5% for the PL team and it contributors) and 10% of FIL_BASE was allocated for fundraising purposes (7.5% in the Initial Coin Offering (ICO) and 2.5% for ecosystem development). Protocol Labs is a key open-source research & blockchain development project focusing on Filecoin. Finally, the remaining 5% was allocated to the Filecoin Foundation.

Additional FIL will be used to fund on-chain computation and bandwidth in the form of network transaction fees. FIL will also be expended on penalties incurred as a result of decentralized storage faults and consensus faults — helping establish the long-term deflationary pressure needed to maintain the cryptocurrency’s value.

Filecoin’s Incentives Enable a Growth Model

Filecoin’s cryptoeconomics combines an exponential decay model and a network baseline model into a hybrid system meant to ensure the long-lasting viability of the project. This design (along with Filecoin’s innovative coin allocation methodology) ensures the growth of both long-term and short-term network participation, while applying counter-pressure to mitigate FIL supply shocks. With the launch of the Filecoin mainnet on October 15, 2020, Filecoin’s native coin (FIL) was listed on numerous industry-leading exchanges including Gemini, Binance, Houbi, and Kraken.

Looking ahead, Filecoin’s evolution likely will consist of several stages, each with a diverse range of goals and revenue-generating capabilities. As the network evolves, its utility likely will increase. In the course of such a process,  the project’s relationship with the founding tenets of blockchain technology — decentralization, transparency, and immutability — would in turn deepen, and the Filecoin ecosystem would be better balanced and more able to serve the industry.  Filecoin was created to transform the world’s cloud-computing storage capabilities, and the decentralized storage journey has just begun.