Filecoin (FIL)

depin storage Aug 27, 2024

Filecoin, in simple terms

Filecoin is a digital storage network that functions like a marketplace for data storage and retrieval. Here’s a simple breakdown of how it works:

Decentralized Storage: Anyone with extra storage space on their computer can become a storage provider on the Filecoin network. Think of Filecoin as the decentralized alternative to Google Drive or iCloud.
Storage providers are paid in FIL: Storage providers are paid in Filecoin tokens (FIL) for offering their disk space and for reliably storing and returning data when requested.
Marketplace Dynamics: Users who need to store data can pay these providers in Filecoin tokens. Prices can vary based on supply and demand, storage duration, and other factors, much like any marketplace.
Security and Integrity: The network ensures that the data stored is kept safe and unchanged over time. Providers must regularly prove that they are correctly storing the data they are paid to hold, using cryptographic proofs.

In essence, Filecoin aims to make the unused storage on computers around the world accessible to those needing it, securely and economically, all managed via blockchain technology.

Who's Behind Filecoin?

Juan Benet is the founder of Filecoin. He also created the Interplanetary File System and Protocol Labs. Benet is an American computer scientist who studied at Stanford University.

The Protocol Labs team, which is working on Filecoin, comprises experts in cryptography and blockchain, driving innovation in internet infrastructure.

The Filecoin Foundation supports the project's governance and ecosystem development.

The Dangers of Centralized Systems

Filecoin targets a critical problem: the centralized nature of storage solutions.

Centralized solutions, like Amazon Web Services and Google Drive, present risks of censorship and data loss.

Here are some examples of the centralized model failing:

Another example illustrating the necessity of a decentralized model occurred during Catalonia's independence referendum.

During Catalonia's vote for independence, the Spanish government blocked websites that had voting information.

However, decentralized systems like IPFS helped get around these blocks by letting users share the blocked content directly with each other, without needing a central server.

This kind of system is robust because even if one node in the network is shut down, the information remains available through other nodes.

The ability to keep content censorship-resistant is a major benefit of using decentralized storage, which is exactly what Filecoin does.

How Filecoin Works

Filecoin encourages a collaborative environment where:

Clients pay in FIL to store and retrieve data.
Storage Miners earn FIL by providing storage space.
Retrieval Miners facilitate fast data retrieval, earning fees in the process.

Filecoin leverages the Interplanetary File System (IPFS) to distribute data across numerous locations, eliminating a single failure point.

Filecoin employs "proof-of-replication" and "proof-of-spacetime" mechanisms to ensure data integrity and storage:

Proof-of-replication requires miners to prove they're actually storing unique copies of the data they claim to hold, preventing false storage claims.
Proof-of-spacetime ensures that miners continuously verify the ongoing storage of data over the contract term, maintaining data availability and integrity.

Miners are rewarded with FIL tokens for their storage services and data verification efforts, incentivizing a decentralized network where data storage and access is efficiently managed, secured, and verified.

Furthermore, Filecoin launched the Filecoin Virtual Machine, enabling smart contracts to run on Filecoin, effectively making it a layer 1 blockchain similar to Ethereum and Solana.

My Thesis on Filecoin

For Filecoin to increase in value, the demand for FIL needs to increase. There are three ways this can happen:

Increased adoption of the Filecoin blockchain by developers of DeFi applications.
Increase in demand for decentralized storage.
More partnerships and collaborations.

Let's go through each one and see how Filecoin is doing.

1. DeFi Adoption of Filecoin

The Filecoin Virtual Machine has been accepted by the DeFi developers and this is reflected by the increase in total value locked (TVL):

Right now, roughly 65 million FIL is locked up in DeFi applications, worth about $238 Million.

The TVL affects the price of FIL in two ways:

For investors to lock FIL in DeFi applications, they first need to buy it. A rise in TVL therefore means a rise in demand.
Locking away FIL in DeFi applications effectively shrinks the circulating supply, which makes the price more sensitive to increased demand.

Both of these push the price of FIL up. Since the launch of the Filecoin Virtual Machine back in April last year, the TVL has steadily grown to its current levels.

Once the crypto market gets over the current correction, the growth is likely to continue.

2. Increased Demand for Decentralized Storage

The storage business is huge. Corporations like Amazon make tens of billions per quarter providing storage.

Here's a breakdown of the revenue by centralized and decentralized alternatives from Q2 2022:

AWS made more than 1000X the revenue of Filecoin in Q2 2022, illustrating the huge demand that exists for storage.

One way Filecoin can capture more of the market, is by their competitive pricing.

Despite the fees, the cost of storage is extremely low:

To put this in perspective, I calculated the cost of storing all the YouTube videos ever created, which equals roughly 312,000 TB of data, for the next 100 years:

*This is only an illustration of the price difference. It is highly simplified.*

Using Filecoin, it would cost $71 million. Amazon, on the other hand, would charge $8.6 billion.

Given these prices, I think Filecoin will see increased adoption in the coming years.

It's still "new and scary" to go decentralized, but the trend is clear - decentralized alternatives are cheaper and growing in popularity.

3. Filecoin Partnerships

In terms of partnerships, they have some impressive names posted on their website:

*Extended list:* *https://filecoin-explorer.com/expanded-view*

Since anyone can post the logo of a well-known company on their website, I'll check out some of the partnerships to see if it's legit.

Here is a quote from a professor at Berkeley using "The Seal Team", which is a decentralized storage business using Filecoin:

"Nuclear and particle physics experiments have an ever-increasing need to store and access large amounts of critical, unique data. [...] We are excited to work with the Seal team (which uses Filecoin) to address the challenge of data handling for the exponentially increasing data sets produced by next-generation experiments,"

- Professor Gabriel Orebi Gann.

The partnership is indirect but legit. If Filecoin is good enough for a particle physicist professor at Berkeley, it's good enough for me.

Partnerships like this are key to gaining mass adoption, and a great thing to see for crypto investors like you and me when looking for new investments.

Conclusion: my thesis

Due to censorship and the single-poin-of-failure weakness of centralized providers, there is an exponentially growing need for decentralized storage. Filecoin, being the obvious choice, will increase in value as FIL grows in demand.

Why Filcoins is the obvious choice:

Filecoin has growing adoption natively in the crypto market.
Filecoin has much lower prices than centralized and decentralized competitors.
Filecoin has impressive partnerships in academia, the crypto space, and other domains.

This concludes the fundamental analysis.

Let's move on to a technical analysis, and try to speculate on the future price of FIL.

The MC / Rev Ratio

How far might FIL go?

Using Market Cap / Revenue, I'll try to do some extrapolation and arrive at a potential future price:

MC = Market capitalization: The value of all the FIL tokens combined.
Rev (revenue) = The amount of USD generated to either the protocol itself or storage providers and data miners.

In Q1 2024, Filecoin revenue reached $75 million.

Annualized, this equals $75M * 4 = $300M.

The current MC is at $2.2B, which puts the MC/REV ratio at:

$2.2B / $300M = 7.3.

This means that the market cap of Filecoin is 7.3 times the revenue generated by the protocol.

Back in Q2 of 2021, the revenue reached $3 billion. Annualized, this equals $12 Billion.

If we reach the same Rev / MC ratio, Filecoin will reach $12B * 7.3 = $88B.

That's a 40x from the current MC.

In summary, if Filecoin reaches the revenue peak in the previous bull market, and the Rev / MC ratio stays constant, the market cap of FIL will 40x.

However, I do not think that's likely.

Even though the crypto market is booming, the revenue generated is falling:

The revenue in Q4 2023, measured in FIL tokens, is down almost 50% since the previous year.

The current revenue is up in terms of USD, but more or less flat in terms of FIL.

If Filecoin can't generate more revenue, measured in FIL tokens, I doubt it will reach the highs of 2021 again.

Potential Catalysts for Filecoin

For Filecoin to start growing its revenue significantly, a catalyst is required.

It could be either of the following:

Significant growth in TVL and adoption of the Filecoin Virtual Machine.
Partnerships with large and well-known players.
Another boom in the DePIN sector like in Q4 2023 and Q1 2024.

If one or more of these materialize, I think Filecoin will kick off a new bullish run, closing in on the revenue peak of 2021, and a market cap of 80 Billion.

In summary, Filecoin is fundamentally strong, but struggling a bit financially. I really believe in decentralized storage, and Filecoin is the best in the business.

However, the lack of revenue growth is somewhat troubling.

Nevertheless, I see a DePIN run in the future, and I think FIL will catch that wave.