What is Filecoin?

Chances are, you have some free storage space on your computer. Empty your recycle bin after your spring clean and you might have even more. Filecoin, a decentralized protocol, allows you to rent out that free space just as you might rent out a room in your house.

The protocol launched its blockchain toward the end of 2020, about three years after the team behind it, Protocol Labs, raised $257 million in an Initial Coin Offering. As of February 2021, the network has a capacity of 2.5 billion gigabytes and the coin was worth about $130 as of March. So how does it work, and what does the coin attached to it do?

What is Filecoin?

Filecoin is an alternative to conventinal storage solutions, whether that be hardware such as SD cards, or cloud storage systems like Dropbox. The key difference is that on Dropbox, you rent server space from the company, which really means that you’re renting harddrives that Dropbox stashes in huge data centres. On Filecoin, you rent out your own storage space and you can set your own price and terms. This unlocks a huge amount of data storage that would otherwise go to waste.

Filecoin is decentralized, meaning that storage on the platform is made up of independent entities renting out space on their computers. There is no one provider of Filecoin storage and anyone can rent out their space. By decentralizing the market, prices for storage are hyper competitive, as every individual provider competes against others to offer the best deal.

The possible benefits of Filecoin

There is also an environmental case for Filecoin. By making use of existing resources, the need to produce more storage units decreases, and data storage should become more efficient. Reducing the need for further production could potentially lower the environmental impact of large data storage.

Another strength of Filecoin is security. Other platforms, such as iCloud and Dropbox, have been hacked in the past and often have to kowtow to governments. By comparison, Filecoin has no central data storage centre, so there’s no way to compromise the entire system. To do that, a hacker would need to compromise every individual storage provider on the system. This makes hacking less enticing.

While trusting your files to someone else may seem risky, Filecoin solves this by splitting up the data into pieces, effectively shredding it between many different data providers. This means no one data provider can work out what file they are hosting, protecting a user’s privacy. A host can’t hack the data files. If they did they would only find meaningless data.

Filecoin’s customers have some flexibility when it comes to choosing their preferred storage provider. While cost is important, a client might also be motivated by speed. Splitting up data too much could result in slow recovery, so providers with a greater amount of spare storage space could be preferable in some cases, even if this does incur higher prices. But the point is that there’s choice; it’s a free market.

This free market also doesn’t really require advertisements. A host’s track record is publicly available, so their history can be judged objectively, without the influence of advertising affecting decision making. This also means miners are incentivized to provide as strong a service as possible, without sifting off value to pay for marketing campaigns.

Filecoin is built on top of IPFS, the InterPlanetary File System. IPFS is a cryptographic file-sharing system that uses blockchain. Filecoin’s innovation on top of this system is to introduce a system of incentives, so users are willing to rent out their space for the purpose of file sharing. These incentives are payments of Filecoin’s cryptocurrency, FIL.

Data storage has developed significantly over the past few decades, from huge server rooms to modern day cloud computing. Most cloud providers today are monolithic entities such as Microsoft and Amazon. But these are walled gardens; by operating a decentralized marketplace, Fileshare enables users a wider range of options and makes it easier to switch to get the best price.

Decentralization helps prevent censorship, too. Because the files are split among multiple parties, there is no way for one central authority to control and delete files.

The two types of Filecoin miners

There are two main types of miners on the Filecoin network. The first, storage miners, provide storage on the Filecoin network using spare space on their computers. The second type are called retrieval miners. These facilitate the retrieval of data from the storage miners, acting as a link between hosts and clients. For this service they are paid in FIL. Protocol Labs plans to implement a third type of miner, called a repair miner, but hasn’t done so yet.

To work out storage fees, Filecoin’s protocol performs something called a Proof-of-Spacetime check every 24 hours. These checks confirm that miners are fulfilling their hosting duties. A miner must submit this check or it will be termed as inactive and face a “fault fee,” which acts as a form of punishment. Provided the Proof-of-Spacetime check is passed, a miner will be paid the agreed storage fee for hosting the files. This transfer occurs automatically.

In the event of faulty file storage, Filecoin has a built in self-healing process that redistributes the files from inactive miners to reliable ones. Files are also easily traceable on the Filecoin network, independent of whether a client is online or offline. This allows easy verification that a file has been handled correctly. This traceability ties into a miner’s track record, as a miner’s entire history can be seen, allowing clients to vet different providers.

Similar to Bitcoin, filecoing can be generated through the creation of new blocks. These block rewards don’t come from clients. They’re created by the network. Every miner on the network can win these block rewards, with the chance of them winning proportional to the amount of storage they are providing on the platform.

There is more complexity to the way that reputation works on Filecoin, too. Clients can become “verified clients.” These verified clients are meant to store “useful data,” as opposed to more simple uses of the platform. Storing this meaningful data results in higher storage fees for miners.

Filecoin is by no means perfect. By splitting up data across multiple storage providers, the service can be slower than more centralized solutions. Transactions are also processed using the Filecoin cryptocurrency, which must be purchased to use the platform. Other services, such as Kyber Network, could be used to solve this problem by easily exchanging between different cryptocurrencies.

In February, 2021, the Filecoin Frontier Accelerator announced it was working with 11 startups, each of which received $20,000 in startup funding. The accelerator shall develop new uses for the Filecoin platform: The companies backed by the accelerator range from gaming to medicine to online learning.

How is Filecoin different than Bitcoin?

Filecoin has a completely different use case than Bitcoin. Bitcoin is a peer-to-peer payments network, which can be used to buy and sell goods online. Bitcoin uses proof-of-work to mint new coins, where computers solve complex mathematical puzzles to protect the validity of the network.

In comparison, Filecoin has a more specific purpose than Bitcoin. It is explicitly intended as a storage solution, a way of using spare storage data and monetizing it. While Filecoin could be used to buy things online, this isn’t what it’s meant for. The cryptocurrency is primarily used to pay miners for storage and retrieval as well as cover network costs. Filecoin doesn’t use proof-of-work to mint new tokens, instead using what it terms proof-of-storage.

Filecoin also provides a different usage for blockchain when compared to Bitcoin. Filecoin combines the idea of a cryptocurrency with decentralized file storage. This is a second usage of blockchain technology, whereas Bitcoin only uses blockchain to create a cryptocurrency.

However, Bitcoin and Filecoin both decentralize network control. For Bitcoin, new Bitcoins are minted automatically based on independent miners. Similarly, independent miners earn Filecoin. Both platforms are accessible to anyone, and have anonymity as a core principle. Bitcoin addresses are anonymous, and files stored on Filecoin servers are divided into tiny pieces, protecting their contents.

How to buy Filecoin?

Filecoin is available on most major cryptocurrency exchanges, such as Binance. This enables Filecoin to not just be used for buying storage space but as a tradeable cryptocurrency as well. To buy a Filecoin, a user needs some kind of cryptocurrency wallet and an account on an exchange. As of March, 2021, a single Filecoin trades for about $130.

Filecoin recommends three different wallets to store the its cryptocurrency (or FIL). These are Lotus, Glif Wallet, and Filfox. Lotus and Glif Wallet both connect to a hardware wallet, so this could be a more secure option for storing significant amounts of Filecoin. Binance does the job, too, though, and using an exchange means that funds are easier to switch out.