FILECOIN

InterPlanetary File System

To understand Filecoin, it’s necessary to first understand the InterPlanetary File System (IPFS). 

The philosophy around IPFS starts with the observation that the current way we store and retrieve data on the internet today is suboptimal, and a result of path dependency, largely influenced by the hardware we had available at the time. This suboptimal architecture manifests in several ways: data is centralized on specific servers that can fail or disappear, content is referenced through unreliable "soft" links (names) rather than cryptographic hashes, and data must be moved to central locations for processing instead of allowing computation to occur where the data resides, increasing costs. IPFS addresses these problems, and could enable a more bandwidth-efficient, decentralized, and verifiable alternative. 

The Interplanetary File System is a distributed, P2P layer for storing and retrieving files & data. Unlike HTTP’s location-based addressing where we access our data via URLs that point to where data is stored, IPFS uses content-based addressing, where data is identified by its contents rather than its location. IPFS stores and retrieves data based on a content hash fingerprint for that piece of data, instead of following the path of a URL to a particular part of a particular server. By moving from location-based addressing to content-based addressing, and enabling cryptographic verifiability, IPFS enhances resource efficiency and censorship resistance on the internet. 

Resource efficiency: IPFS’s content-based addressing system can reduce network load and increase bandwidth efficiency. When you request content on IPFS, IPFS locates the nearest available copy instead of pulling from a central server. For instance, if several people need the same large file, only one person needs to download it initially, and others can then retrieve it locally. This P2P approach not only reduces bandwidth costs but also improves download speeds since content can be fetched from the nearest and optimal node in terms of retrieval time, rather than a distant server where the data resides. 

Censorship resistance: The distributed nature of IPFS makes it inherently resistant to censorship and centralized control. Since content isn't stored on centralized servers but spread across a network of independent nodes, there's no single point that can be blocked or controlled to prevent access. If one path to content is blocked, implementations of IPFS can automatically find alternative routes through other nodes in the network. This is in stark contrast to our highly centralized cloud system today, where three to five internet giants control nearly all of the internet’s infrastructure. We think this is highly valuable in a world where large internet organizations are coordinating with governments to censor and deplatform individuals, exerting immense control over a critical modern resource. 

IPFS is amassing data and serving select end markets today. As of this writing, IPFS is one of the most popular destinations for NFT storage data today, capturing an estimated 50% of total NFT storage 2022.

The Incentive Layer

You can think of Filecoin as the incentive layer for provisioning storage resources to IPFS. IPFS seeks to enable cheap, reliable, and decentralized P2P storage, and the FIL token and economic system that ensures storage resources are readily available and accessible. 

FIL is the native gas, utility, and staking token of the Filecoin network. To provide storage resources and earn FIL, Storage Providers (SPs hereout) must stake FIL tokens as collateral (about 5k FIL per PiB today), which is at risk of being slashed if they do not maintain reliable service. SPs, through a process called sealing, compress files into a highly provable format, then submit daily cryptographic proofs onchain to verify they are keeping their storage commitments and earn “power” based on the amount of data they store. The more powerful an SP, the higher likelihood of receiving FIL block rewards. The combination of the Filecoin Network’s incentive design and content-addressable storage like IPFS power a decentralized storage layer for the internet, powered by crypto economics and secured by cryptographic guarantees. 

Filecoin’s Master Plan

The long-term vision of the Filecoin community is to bring trustlessness to cloud services through verifiability - a state where you don't have to trust AWS to store your data. Instead, your data and cloud services are cryptographically verifiable and censorship resistant. Where DeFi wants verifiability of our financial tools and transactions, Filecoin seeks to bring verifiability to file storage and the cloud.

What sets Filecoin apart is its unique combination of programmability and data-centric architecture. Smart contracts paired with IPFS Content Identifiers (CIDs) enable entirely new storage paradigms - for instance, automated systems that maintain guaranteed numbers of data replicas or parallel retrieval systems that fetch data from multiple providers simultaneously.

According to the Filecoin Master Plan, the project is executing a three-part strategy: first, to build the world's largest decentralized storage network; second, to onboard and safeguard humanity's data (progressing with over 215 PiB stored and 2 PiB added daily); and finally, to build out decentralized retrieval and compute capabilities. This last phase introduces the Filecoin Virtual Machine (FVM) and compute-over-data functionality, bringing computation directly to where data is stored rather than moving large datasets around. Together, these capabilities will enable fully decentralized web applications and data pipelines that can scale to meet web2-level demands.

HISTORICAL IMPEDIMENTS

The Filecoin network historically has suffered from a number of shortcomings that have prevented broader adoption beyond a handful of niche Web3-native use cases. 

Enterprise Functionality Gap. The Filecoin protocol provides a critically important verifiability and incentive layer for decentralized storage, and the proof generation system necessary for this base layer to function is extremely complex. As a result of that complexity, many features that enterprises expect for storage - encryption, admin features, file sharing, access controls, retrievability, storage tiers - simply weren’t built into the protocol. 

Filecoin has historically lacked dev tooling and gateways that enterprises are used to. Enterprise clients see the cost and efficiency benefits of decentralized file storage, but current decentralized storage services are not backwards compatible with existing enterprise workflows, and often add additional complexity that outweighs the cost benefit. 

Critically, the Filecoin protocol has historically lacked both hot storage and retrievability, two critical features of a basic cloud storage service. The lack of retrievability is due to the absence of a known retrievability proof, while hot storage has been missing because block rewards are not tied to proving SPs indeed have hot copies of data. As a consequence, the Filecoin base layer only offers archival/cold storage, and enterprise-grade Filecoin customers have had to instead rely on legal contracts to ensure data would be delivered when requested. This lack of hot storage and retrievability has been a deal breaker for enterprises and has greatly limited the TAM of Filecoin, as archival storage is a subset of total cloud storage demand. 

No user programmable smart contracts. Filecoin has lacked a programmability layer enabling smart contract developers to deploy custom logic to the Filecoin network. As a result, for most of its history Filecoin’s flexibility in creating new types of markets for storage, retrieval, and compute has been severely limited. Only a single, inflexible built-in storage market smart contract existed for Filecoin prior to the launch of the FEVM.

No DeFi ecosystem. Given that blockchains are inherently financial systems, the lack of user programmable smart contracts has led to a lack of an onchain DeFi economy, with no ability to secure financing or issue tokens onchain. Running a Filecoin SP has meaningful capex, which necessitates meaningful financing. As we look at the Filecoin ecosystem since inception, the SP function has been limited to sophisticated data center operators, which have lacked a DeFi ecosystem for raising debt capital, forcing SPs to take on financial risk via equity financing or debt financing via centralized financial institutions, which lost popularity after the crash of FTX. Some SPs bought FIL themselves and are forced to endure the financial volatility associated with FIL staking. 

INFLECTION POINT

We’ve spent weeks chatting with builders in the Filecoin ecosystem, and we believe the network is at a potential inflection point. 

The Filecoin Virtual Machine (FEVM), enabling EVM-compatible smart contracts, and InterPlanetary Consensus (IPC), enabling Filecoin sidechains and L2s, are both up and running. As a consequence, Filecoin-natives are building and leveraging this new programmability, building out critical DeFi primitives, enterprise-friendly SDKs & gateways, SP-specific CRM applications and higher-order cloud services like hot storage and retrieval markets. The founders we’ve engaged with signal a meaningful change in the ecosystem’s orientation from a sole focus on perfecting the cryptography at the Filecoin base layer, to building the startups and products that enable AWS S3 feature parity on Filecoin. 

Enabling Retrieval, Countering Farming

Proof of Data Possession (PDP) is a new Filecoin feature that proves storage providers maintain easy access to unsealed data, enabling efficient retrieval. It works through a system of "data containers" and requires providers to both initially commit their data and periodically prove they still have access to it. While PDP can't guarantee that data will actually be delivered, it proves that quick retrieval is technically possible, which is valuable for client who need access to their data at a frequency higher than archival storage.

Spark is a set of smart contracts on the FEVM that leverages PDP to facilitate data retrieval. Before Spark, there was no reliable way to ensure that SPs were maintaining readily accessible copies of data, despite programs like FIL+. Spark solves this through a decentralized network of checker nodes that anyone can run to earn rewards by performing high-redundancy checks for retrieval verification, enabling Spark as the first proof-of-retrievability protocol on Filecoin.

Spark shines a light on retrievability by building retrievability success rate scores per SP and at the network level. The data that Spark Checkers creates is available onchain and powers community dashboards. We envision a world where SP retrievability scores can power DeFi FIL loans to SPs. The higher the retrievability score, the more likely you are to secure loaned FIL, and therefore mine FIL rewards, incentivizing greater retrievability at the network level. 

Since its implementation in Q1 of this year, Spark has driven major improvements in retrievability over the past 12 months, with over 60 Storage Providers achieving greater than 90% retrieval success rates and some reaching >99%. We should note that a small number of Filecoin SPs are reaching 99.99% retrievability or better, which is approaching AWS’ SLA of 99.9999% (four nines). 

Eliminating Frictions in Data Onboarding 

Lighthouse provides a sophisticated suite of tools including its flagship SDK, DataDAO SDK, and encryption SDK, which allow devs to build on IPFS and Filecoin via popular Python and Javascript frameworks. The protocol solves several key challenges in the Filecoin ecosystem, including handling data batching for Filecoin's 32GB storage requirements, ensuring data replication, and providing advanced encryption features for private data storage, a capability not natively available on the Filecoin base layer protocol. Lighthouse allows users to pay with various methods including stripe, stablecoins, or FIL tokens, via its devEx-friendly native web app. Lighthouse is seeing meaningful traction - there are over 2,000 integrations leveraging the Lighthouse SDK and CLI today, with projects like NFT.Storage, Singularity, Cardano, and Aethir on its customer list.

Storacha has built a hot storage layer on top of Filecoin. The platform brings near-S3 feature parity to Web3 services, like NFT storage. The features include access controls and dev-friendly IPFS and Filecoin compatibility. What makes it particularly interesting is its ability to enable Filecoin SPs to run as hot storage nodes, incentivizing unsealed data storage and fast retrievals. Storacha is already being used by leading Web3 companies such as Magic Eden and OpenSea. 

Akave is leveraging IPC as a Filecoin L2 to provide a hybrid storage solution that combines the security and cost benefits of Filecoin with the accessibility of hot storage enterprises are used to. The platform offers an S3-compatible interface that allows integration with existing enterprise applications while utilizing a data management layer that includes both hot and cold storage tiers, priced at $10-15 per TB per month, compared to over $23 per month on S3. Importantly, the Akave network is free from data egress fees, which cloud providers charge to facilitate vendor lock-in, and can range from $50-100 per TB. By leveraging Filecoin's base layer as a cold storage tier and implementing Akave’s own hot tier for performant retrievals, Akave eliminates these punitive egress fees. DePINs and DataDAOs are likely first customers here, as these projects typically require a reliable hot storage layer, and may have a dev team or communities with an ideological bias toward decentralized data services. 

CID Gravity offers an enterprise-grade gateway for data storage on the Filecoin network, eliminating the need for direct Filecoin expertise. With 180 Storage Providers utilizing their platform and competitive pricing at $5 per terabyte, they've positioned themselves as a bridge between traditional storage needs and decentralized infrastructure. Their technology stack includes WebDev backend integration, enabling partnerships with major platforms like Next Cloud and Synology, two significant distribution channels for a Filecoin-native business. While they currently focus on hot storage rather than S3 compatibility, CID Gravity simplifies Filecoin integration for web3-native clients who seek streamlined storage solutions without managing complex Filecoin interactions.

Improving SP Economics

Ramo has hyper-optimized the SP experience on Filecoin and is creating a two-sided marketplace that separates capital and hardware, and enables retail participation in Filecoin via the provision of storage resources. To optimize the SP experience, through their Ramo Computer daemon, Ramo has separated storage work from computationally intensive tasks like sealing, making the SP service more efficient, profitable, and accessible. By separating SNARK generation and file storage, Ramo allows retail hardware to participate in Filecoin storage, as consumer grade Macbooks, for example, are fine for storage but unable to execute Filecoin SNARKs. 

Ramo has taken the view that stakers and the worker/miner, which are typically intertwined and overlap, are in fact separate entities with separate interests. Miners want to extract short-term rewards, whereas stakers want long-term exposure to the token. Ramo separates these functions, allowing stakers to allocate FIL optimally across SPs to maximize rewards. Ramo's staking protocol efficiently channels Filecoin block rewards to stakers, resulting in attractive yields that have helped secure over $180M in institutional staking commitments. Ramo plans to implement this marketplace across DePIN protocols, serving as a launchpad and node operating platform for various DePINs.

Enabling DeFi

We’re in the very early innings of DeFi on Filecoin, where new primitives are only just starting to emerge - including liquid staking, LSTs, borrow/lend, and stablecoins. 

GLIF is emerging as Filecoin’s foundational DeFi protocol, offering borrow/lend, staking, and an LST - iFIL. Collateral is the lifeblood of a storage deal on Filecoin. Before GLIF's launch, the Filecoin network faced significant capital inefficiencies that limited its growth potential - financing was done via equity or offchain loan syndicates from registered investment managers in a permissioned setting. SPs require substantial amounts of FIL tokens as collateral for mining operations, but lacked efficient and permissionless channels to access FIL tokens, a stark disadvantage compared to competing DePINs and crypto ecosystems. This financing bottleneck restricted network expansion, leaving some SPs unable to secure the FIL required to scale their operations as demand scaled. 

Similar to liquid staking solutions like Lido or Rocket Pool, GLIF enables FIL holders to earn sustainable rewards by lending their tokens while allowing SPs to permissionlessly borrow FIL as mining collateral. GLIF is a set of smart contracts on the FEVM that allows for a trustless borrow/lend market, where lenders receive iFIL LST tokens to maintain liquidity, de-risking FIL staking. 

Secured Finance is a multi-chain DeFi protocol focused on peer-to-peer, fixed-rate lending. In November 2024, they introduced USDFC, a stablecoin specifically designed for the Filecoin ecosystem. USDFC is a FIL-backed stablecoin that allows Filecoin holders and SPs to access USD-denominated liquidity without having to sell their FIL holdings. This is particularly important for the Filecoin ecosystem because SPs often need to pay operational costs (like hardware and electricity) in USD, but previously had to sell their FIL to cover these expenses, acting as unnecessary natural sell pressure for the FIL token. USDFC is designed similarly to DAI - users collateralize their FIL to mint USDFC, thereby maintaining their FIL holdings and leveraging a FIL-based CDP. The stablecoin uses over-collateralization and an insurance pool for hedging to manage risks associated with a single-asset collateral pool.

THE CASE FOR FILECOIN

Builder-DeFi Flywheel

We think the introduction of DeFi & stablecoins, combined with the focus of bringing paid deals to Filecoin, has the potential to start a Filecoin flywheel. Here, product-oriented founders attract more capital, serve customers, generate revenue and launch tokens, which attracts more builders, which attracts more capital, and so on and so forth. This simply was not possible prior to the FEVM and IPC layers. 

Further, DeFi and stablecoins allow the Filecoin ecosystem to tackle the myth of low network revenues. Since inception, profitable Filecoin SPs have engaged in offchain paid storage deals as Filecoin lacked on-chain flexibility through user programmable smart contracts. Stabelcoins enable SPs to take paid deal flow in USD denominated tokens (rather than FIL), while showcasing onchain fundamentals and deal flow to the broader crypto community. Onchain paid deal flow could further attract capital and builders, accelerating the flywheel mentioned above. 

Unique Fundamentals & Entry Point

Filecoin’s fundamental value drivers are starkly different from the vast majority of crypto projects. This dynamic may make select Filecoin projects uniquely attractive to TradFi investors, who control far more capital than crypto natives. 

The cloud storage market is projected to grow to over $300B by 2029, and, with cloud services solidified as the backbone of the internet for its cost and scale advantage, this revenue stream is very stable and uncorrelated with the highly reflexive fundamentals of traditional crypto protocols. In contrast to its peers in crypto, select Filecoin startups may have a more stable revenue profile, and, given DeFi token dynamics, maintain the higher upside typically associated with tokens issued on permissionless blockchain rails. 

Further, we believe that, in a nascent ecosystem, it is advantageous to invest into bottlenecks, and to invest when capital is scarce. Today, capital on Filecoin is indeed scarce, and there are a number of bottlenecks preventing Filecoin from reaching its full potential - CDNs, SP efficiency, client-side layers & relationship management, and asset issuance protocols are all either in their infancy or non-existent. With product-oriented teams emerging, the Filecoin ecosystem is slowly derisking, this is potentially an attractive entry point for the ecosystem.

RISKS

We see a number of unique risks to the Filecoin ecosystem story. 

Technical risk. The Filecoin ecosystem is unwaveringly focused on decentralized applications, which require advances in advanced cryptography to build products at web2 scale. Without taking shortcuts on decentralization, many decentralized cloud services are not possible in the near-term. Additionally, these advancements may fail to materialize or may take much longer than anticipated. 

No degens. One thing about the Filecoin ecosystem you’ll notice is the lack of degens. Filecoin founders are mission-driven and publicly dissuade degen activity. This could be a positive for the right investor, but historically, crypto economies are powered by high risk capital, specifically, degen risk capital. Eschewing this investor and builder base could limit the ecosystem’s ability to grow via speculation. 

FIL token design. Historically, the Filecoin ecosystem has had challenges with incentivizing the average SP to store customer data and earn paid storage deal flow. Many SPs store random public data to simply mine and sell the FIL block reward, without regard to end customer demand to pay for the storage or retrieval of that data. We believe that nearly half of SPs still simply mine FIL rewards, with no intention of servicing real end customers. This problem was partially mitigated with FIL+, but still persists today.

Final Thoughts

We believe the recent combination of FEVM and IPC programmability, the emerging DeFi ecosystem, and product-oriented founders on Filecoin make for a potential inflection point in the Filecoin ecosystem today. A number of investable bottlenecks still exist, with the opportunity to sell into ideologically aligned Web3 startups and cost-conscious enterprises, which is becoming increasingly practical now that certain Filecoin verticals are nearing S3 feature-parity and a service standard strong enough to attract paid deals. The increased capital efficiency and permissionless access to financing through the emerging DeFi ecosystem could help break the historical shortage of FIL liquidity that has constrained ecosystem growth. Given the low valuation relative to the size of the cloud storage market and the improving fundamentals, this could represent an attractive entry point for investors.