Satoshi•Fund: Filecoin ICO Report

UPD: At the moment of publication at 17:20 GMT, August 11, Filecoin ICO already raised $187,443,094. The current minimum price is $4.68 USD/FIL. ICO has been temporarily stopped to verify transactions received in the first hour. You can check the current status here or on their Twitter.

Filecoin will be a decentralized network for data storage and retrieval run on its own blockchain. Users will be able to sell their storage and retrieval services to other users in exchange for Filecoin tokens. Users who have active storage space will be able to become Storage miners by depositing a collateral. They will also be able to create new blocks receiving block rewards and transaction fees from the transactions included in the block. Some participation costs for various user groups are not specified yet, other just cannot be predicted in advance. Filecoin has not released a source code yet, but has a strong proof-of-concept whitepaper with a few interesting implementation solutions. The project is developed by the Protocol Labs who are also known as developers of the Inter-Planetary File System. While the pre-ICO price was set at 0.75 USD for 1 filecoin, the investors will be offered a higher price: calculated by a formula, it will start from 1 USD/FIL and will increase with the increase of the current amount raised. Although ICO is capped in terms of tokens, the project may be extremely overfunded. Besides, Pre-ICO and ICO investors will get a small share of the total token supply - 10% against 20% reserved for the team. The system tokens will be distributed only after the network launch. 70% of Filecoin tokens are to be mined after network release. It is not confirmed, but the terms suggest that the distribution can be changed in case not all tokens are sold.

About

Filecoin is a decentralized storage network on its own blockchain. It functions as a market where users called miners can earn rewards by providing their cloud storage to clients or by serving data to clients who wish to retrieve them. Clients pay for these services in the platform’s native token Filecoin; miners earn filecoins by providing these services. Any user with an active storage can become a Storage miner after depositing a collateral in FIL. They can also earn Filecoin tokens by creating blocks whereby their mining power will be proportional to their active storage.The development started in July 2014 and is still ongoing.

Platform use cases

Users can participate in the network in any of the three roles:

• Clients: pay to store or retrieve data in the network adjusting settings for data storage or data retrieval to their needs
• Storage miners: earn tokens by providing their disk space to the network, as well as by creating new blocks in exchange for block rewards
• Retrieval miners: earn tokens by quickly serving data to clients

Market

The main market Filecoin is entering is data storage sector. This market can be divided into various segments, but a general observation found in the most reports is that of a rapid growth of the global storage sector (e.g. check these source: source, source, source, source). The cloud storage market, for instance, is estimated to be grow by $74.94 billions by 2021 at a CAGR of 25.8% from 2016 to 2021 according to this report by http://www.marketsandmarkets.com/. The reports also indicates that the market is highly competitive with an array of storage solutions competing for clients.

At the same time, some give rough estimates that around 50% of the world’ storage is unused while more and more data is created in the world and need to be stored somewhere. Thus, there should be both a demand from clients for best solutions for storing data, and a supply from owners of unused data space. The Filecoin protocol has the potential to help the demand and the supply to meet in case its solution will work and stand out in this competitive environment.

Competitors

Filecoin competes with both centralized and decentralized data storage solutions. The strongest contenders are the three largest centralized cloud storage providers (Amazon Web Services, Microsoft Azure and Google Cloud Platform). The key difference with them is Filecoin’s decentralized nature. The prices for the services will be set on the platform’s internal market by supply and demand forces, instead of being imposed by any business unit of a big corporation. However, next to service prices, the Filecoin network users will also be charged transaction fees. They will vary and will be set by the market. With the network growing, they are unlikely to be higher than the prices set by the centralized providers. If Filecoin delivers a good product, it will be interesting to see it’s competition with the centralized market giants and how it beats them (something that no other blockchain project has succeeded in).

Among decentralized storage solutions a few blockchain-based alternatives to Filecoin have been developed or are in development. In terms of use cases, the closest competitors are Storj and Sia.

Storj is implemented on the Ethereum blockchain is less decentralized than Sia and Filecoin, but will probably end up to be most user-friendly of the three (not clear until we see more of the Filecoin UI). It uses simple protocols to prove the existence of content. Sia is fully decentralized, has its own blockchain and uses it to prove the existence of content. It is slower - at least compared to Storj. Filecoin is going to implement its on own blockchain and introduce the two more complicated proofs - a Proof-of-Spacetime (storage throughout a period of time) and a Proof-of-Replication (existence of a specific number of data replicas in a physical location). In terms of pricing, the prices for clients on Filecoin will be defined by supply and demand on the Retrieval and Storage Markets, while Storj and Sia use a general price list. Of all the three Sia exists the longest time and is most tested.

MaidSafe and Swarm, both currently available in Alpha, have somewhat different use case.MaidSafe is a service for distributed data management. Swarm is a protocol for both storage and content distribution developed specifically as a store for Ethereum's public record, such as Decentralized applications’ code and data, and blockchain data.

Technology

• The Filecoin protocol is built on own blockchain with a native protocol token FIL
• Filecoin as a decentralized storage network (DSN)
  • Filecoin is constructed as a DSN where miners provide clients data storage and data retrieval services without any coordination centre; self-coordination is ensured through multiple protocols governing the functioning of the network
  • Filecoin DSN protocol can be implemented on top of any consensus protocol that allows for verification of the Filecoin’s proofs (more info on proofs below)
• Storage and Retrieval markets
  • Clients submit their ask orders for data storage or retrieval to the Storage and Retrieval markets, while miners submit their bid orders there; after that the orders are matched
  • Both markets are decentralized; clients set prices for the services requested and miners set prices for the services provided; the price tag for services will be defined by supply and demand on the market
  • Miners are rewarded and clients are charged only after the service requested has been successfully provided
  • The Storage market runs on a chain, the Retrieval market runs off-chain using payment channels
  • On Storage market, miners with large storage space or large operation cost advantages benefit most; on Retrieval market miners with low-latency, high-bandwidth connections and those located close to many clients benefit most
• Storage and Retrieval miners
  • Storage Miners have to pledge their storage to the network, that is to commit to store the clients’ data for a specified time
  • To pledge, they have to deposit a collateral for the time they intend to provide the service
  • The collateral will be proportional to their active storage space and is returned if the miner generates proofs of storage for the data they commit to store
  • If some proofs of storage fail, a proportional amount of collateral is lost
  • Retrieval miners do not have to pledge and provide proofs of storage; they can obtain data directly from clients or from the Retrieval market (partially cited from whitepaper)
• Proofs-of-Storage
  • To convince clients that miners have stored data they were paid to store, two novel proof protocols will be used: Proof-of-Replication and Proof-of-Spacetime
  • Miners commit to store N copies (replicas) of some data and the Proof-of-Replication protocol will allow them to prove to users that they has actually stored each of the replicas of the data in its own unique physical storage
  • Proof-of-Spacetime will allow miners to prove users they have actually stored the data throughout a specific period of time; a sequence of Proofs-of-Replications will be created, each at a specific point of time, after which they will be composed in a recursive order to form a short proof
• Creating new blocks
  • Miners can create new blocks for the underlying blockchain, but unlike the Bitcoin Proof-of-Work solution the probability that the network elects a miner to create a new block will be proportional to their active storage space, not computation capacity
  • The intention is to have miners invest in storage, while their computing power is something they will re-use to prove they actually store the data
• Use of smart contracts
  • Filecoin will support the deployment of smart contracts to enable execution of more complex operations than only Get and Put primitives
  • So called File contracts will allow users to program the conditions for which they are offering or providing storage services. For instance, clients can specify in advance which miners they wish to offer the service without participating in the market, or clients can design different reward strategies for the miners, e.g. a contract can pay the miner increasingly higher rewards through time, etc.
  • Other smart contracts will allow users to associate programs to their transactions which are not directly related to the use of storage. Possible applications include decentralized naming systems, asset tracking, and crowdsale platforms
• Integration with other systems
  • Filecoin should be able to support cross-chain interaction in the future to bring the Filecoin functionality to other blockchain-based platforms and vice versa; this work is still in progress
• Filecoin and IPFS
  • IPFS (Inter-Planetary File System), a protocol for distributed permanent storage of files that works similar to the Torrent protocol. Each network node stores only the content it is interested in, and when users look up files, they in fact ask the network to find nodes storing the content behind a unique hash
  • IPFS is another product next to Filecoin developed by Protocol Labs
  • IPFS and Filecoin will complement each other: while IPFS provides storage infrastructure for any data, Filecoin works as an incentive layer on top of IPFS
  • Some platforms already use IPFS to reference and distribute content, and adding Filecoin will enable the storage of IPFS content in exchange for Filecoin tokens

Economics and token

• Filecoin token FIL is the native token of the Filecoin network
• Total supply: 2 Billion FIL that will be released over decades, similar to Bitcoin
• Filecoin will be used in the following ways:
  1. Users wishing to become Storage miners will need FIL to deposit collateral proportional to their active storage space thus confirming their capacity and commitment to provide storage for a specific time period
     • The size of collateral and the calculation mechanism are not specified
  2. FIL will serve to pay for data storage and retrieval services on the network
     • Prices will be set by clients and miners after which their ask and bid orders will be matched on either the Storage or Retrieval market
     • The market price should approach an equilibrium as the network grows
  3. Transaction fees will be paid in filecoins
     • These fees will vary and will be set by the market, but this area is not yet described in details
  4. Similar to Bitcoin, new FIL will be minted as new blocks will be created by Storage miners, and Storage miners will receive block rewards for their work
     • Only Storage miners can create a new block, but any Retrieval miner can act as a Storage miner
     • The larger the active storage space provided by a Storage miner, the higher his chance to create a new block
     • Block rewards will be proportional to the active storage space provided by miners
     • Rewards will be halved each 6 year (Bitcoin uses a 4 year schedule) and sampled every month (Bitcoin is sampled once every four years)

Company

Filecoin is a product of Protocol Labs, Inc. It is a U.S.-based company founded in 2014 by Juan Benet which develops foundational internet infrastructure technology. Protocol Labs operates as a laboratory. Besides Filecoin, it has been working on four other projects all open sourced on Github. Another project of Protocol Labs, a token sale and investment platform CoinList, is used for the first time for the Filecoin ICO. Coinlist is created in partnership with AngelList and aims to bring ICOs in more compliance with the law. According to Crunchbase, prior to a pre-ICO (“Advisor Sale”) Protocol Labs received $3M of venture investments in March, 2016.

Another entity that will participate in the project’s future development is a non-profit Filecoin Foundation which will be responsible for the long-term network governance, partner support, academic grants, public works, community building, etc. No other details on the Foundation have been found, in spite of the fact that it will also get a share of tokens (5%).

Team

The core team of Protocol Labs consists of 12 people. Juan Benet is a founder of both the Filecoin project and the entire Protocol Labs. His background is computer science studies and further research work at Stanford University. Prior to Protocol Labs, he founded two startups, but Protocol Labs is his largest endeavor so far. The best evidence of the developers’ experience is the open source code of their projects that can be found on Github. Next to the core team, Protocol Labs also has a large community of external contributors to their open source projects.

The project’s advisors are unknown. As to partners, there is no information on any except for AngelList who is a partner of Coinlist ICO platform.

ICO

• ICO starts on August 10, 2017 at 19:00 GMT and will last for 4 weeks or until 200M Filecoin tokens are sold out, whichever earlier
• Filecoin token FIL is offered for sale
• ICO was preceded by a sale for already existing investors and advisors of the company (“Advisor Sale”)
  • About 150 large investors participated, $52M was raised
  • Tokens were offered at 0.75 USD per one FIL and are subject to 1 year of vesting beginning at the network launch or a longer vesting period depending on a chosen discount on token price
• ICO will be held through the CoinList platform recently designed by Protocol Labs
• ICO requires accreditation according to US accreditation standards prior to ICO and passing a KYC/AML compliance check: find more detailed here
  • Investing will happen using the instrument called a Simple Agreement for Future Tokens (SAFT) which gives a right to receive units of FIL in the future
• ICO maximum cap: 200M FIL tokens
• Minimum contribution amount: 500$
• Maximum contribution amount: no
• Contributions are accepted in BTC, ETH, ZEC or USD
  • For investments in cryptocurrencies check here the required number of confirmations and expected block time
  • For investments in USD the investment amount should be first allocated to the investor’s AngelList account
  • Fiat investments pre-funded through AngelList will provide the quickest payment confirmation
• ICO token price:
  • Will increase according to the price function below
    
  • Exchange rate and amount of tokens to be received by investor are confirmed after the payment is received
  • As this blog post fairly points out, it is not clear whether the investment amount will influence the amount raised used in price function before or after the price is calculated
  • All investments whose payments are confirmed within the first hour will be averaged so that they all get the same price; the higher the sum of the first-hour investments, the higher the price for each first-hour investor
  • After the first hour the price will be calculated on the first-come first-serve basis, according to the function above
  • Exchange rates will be calculated based on hourly averages from multiple exchanges
• Longer vesting options will be rewarded with higher discounts
  6 month vesting - 0% discount
  1 year vesting - 7.5% discount
  2 year vesting - 15% discount
  3 year vesting - 20% discount
• Token allocation and transferability
  • Tokens will be delivered at the network launch, but their usage will be restricted during the vesting period selected by investors prior to ICO
  • During the vesting period, the use restriction will be lifted at a linear rate and released with each new blockchain block
  • Token economics for different vesting scenarios can be modelled with this tool
• ICO webpage on CoinList: https://coinlist.co/currencies/filecoin
• Terms of Sale are available here
• It is recommended to read other ICO-related documents published on this webpage
• Team’s latest update on token sale available here

Token distribution

• Miners’ tokens
  • Will be distributed to miners as block rewards - for creating a new block, providing data storage and maintaining the blockchain
  • Asymptotic vesting schedule similar to Bitcoin block rewards
• Tokens of Protocol Labs and Filecoin Foundation
  • Distributed at genesis (the network launch)
  • Linear 6 year vesting
• Investors’ tokens
  • Linear vesting, per block (see ICO section for more detail)
• If less than 200M FIL is sold during ICO, the remainder will be spent to cover the rest of the ICO costs. One half of the tokens remaining after that will be sold to public at the network launch, the other half will be spent for providing extra liquidity for FIL by buying and selling it on exchanges. It is not clear whether the team will aim to preserve the proportions of tokens allocated to different groups in this scenario.

Use of proceeds

The team plans to use token sale proceeds for research, development and deployment of the Filecoin network.

Summary

• Filecoin is an interesting alternative to already existing data storage solutions, the whitepaper is a recommended reading
• Filecoin uses such implementation novelties as Proof-of-Spacetime and Proof-of-Replication; it also reforms the Bitcoin Proof-of-Work solution by linking the mining power to a size of the active data storage instead of computational capacity
• For users wishing to use the network’s services, the network transaction fees and the price for the service will be important - both will be defined by the market once the network is launched and rely on the network growth
• For users wishing to become Storage miners, the collateral will be needed: the collateral is proportional to the user’s active storage, but no more details are available at the moment
• No source code is yet available, and the progress since 2014 may look somewhat slow; at the same time, Filecoin is developed by the same team that is working on the promising IPFS protocol, as well as a few other open source projects
• ICO price is significantly higher than the price paid by Advisor sale investors
• Investors only get 10% of the total token supply and this group includes not only ICO investors, but large Advisor sale investors as well; the team gets 20% in total; the other 70% will be mined
• ICO is capped in terms of tokens, but the ICO design implies the project can get extremely overfunded
• The team and investors will get their tokens at the network launch (the planned date is unclear); all these tokens will be subject to use restrictions until the vesting period ends
• The current token distribution may not be final in case not all 200M tokens (ICO cap) are sold; the unsold tokens will be split in three parts and used to cover ICO costs, to be offered for sale at the network launch and to trade on exchanges for extra liquidity
• The team justifies some of their choices in this blog post

Useful links

For more details on the project check the project’s website or whitepaper.
For other useful links, check the project’s profile on Cyber•Fund.

Satoshi•Fund — blockchain investment company that invests only in blockchain assets since 2014.

You can also read this article on Medium.