What is Filecoin?

Read 5 min

Key Takeaways:
— The current storage landscape is broken. Our data is stored in centralized servers that have limited space, and privacy issues. 

— Filecoin functions as a decentralized storage marketplace on the blockchain, which rewards network participants who help in storing files and retrieving them.

— Built as an incentive layer for IPFS, Filecoin powers a new, decentralized internet where storage is owned and operated by its users. It is censorship-proof, cost-effective, and tamper-resistant.

— In this article, we explore the drawbacks of our current file storage systems and how Filecoin is revolutionizing storage.

Filecoin is the blockchain project that incentivizes regular people to rent out their digital storage space – solving the issue of scarcity, and addressing power imbalance between individuals and global server behemoths, in one fell swoop. Pretty cool, right?

Even though we can’t make our VR selves go to work instead of us (yet), our lives are more digital than we’d like to admit. I mean, it’s difficult to imagine life without your daily morning Instagram scroll, Zoom calls, or relaxing with your favorite songs on Spotify, right?

These digital lifestyles generate data — lots of it.

In fact, our current storage systems are absolutely drowning in data, with 79 zettabytes consumed on the Internet in 2021. That’s 21 zeroes after 79 — roughly about 79 billion laptops, with a 1 TB storage capacity each. 

What’s more: this number is expected to double within 5 years. Now, this begs the question…

Where is all this data being stored?

Even though these numbers paint a picture of an internet too big to fathom, the reality it’s just a handful of companies providing all of the storage, Google, Amazon, Facebook, and IBM, to name a few.  There are a number of reasons why this is not ideal, and it all revolves around our tricky old friend, centralization.

Server Outages Mean Unreliable Storage

For starters, let’s talk outages. Outages are common in Web2. If you were to Google “social media outages and why they happen”, you’ll be greeted with a variety of reasons ranging from technical changes to hacker attacks. Even simple errors can cause an outage: for example, one well-intentioned command from an engineer recently disconnected Facebook from its 3.5 billion users for over 6 hours. Well, that’s what happens when so much data is controlled by a single authority — small mistakes can cause major disruptions to millions of users and businesses.

Centralized Structures Can be Censored

If outages weren’t enough, you also have into the issue of censorship. If a website talks about something controversial that people with big wallets don’t want others to talk about, it can be promptly “dealt” with by the provider, in other words – switched off. Since everyone knows where the data for the site is hosted, it’s easy for governments AND hackers to target such websites.

Digital Storage is a Commodity

And finally, we have the basic issue of supply and demand. With more and more things going digital, internet storage is in limited supply, meaning the price of data storage is likely to inflate. Think that won’t happen for a long time? Google Cloud’s proposed price increase says otherwise.

On the flip side, what if the companies controlling your data decide it’s no longer economically viable to keep their service online? What will happen to your data then? Worse — what if the data you stored is shared without your consent with third parties? 

In short, whether you’re looking at data storage through the prism of cost, control, privacy or simple reliability, the centralized nature of our internet servers has big implications for users like you and me. And that’s why new blockchain-based network Filecoin is so important for offering us an alternative.

What is Filecoin?

In order to understand what the Filecoin blockchain has to offer, we need to take a quick step back and look at its underlying storage system, IPFS.

Filecoin’s blockchain builds on the base technology of its parent project IPFS (which we have covered extensively at Ledger Academy). To summarize, IPFS is a decentralized peer-to-peer file storage system where individuals can run their own nodes and store files anonymously. 

The only problem?

This platform has the potential to benefit millions of us who are seeking decentralized digital storage space – but until now, there was no way of incentivizing individual nodes within IPFS to let other people use their space. There was simply no mechanism to connect buyers and sellers.

Filecoin: Decentralized Digital Storage Marketplace

That’s exactly why Filecoin exists. Its decentralized marketplace enables individuals to monetize their storage space by renting it out in a trustless manner. All data is encrypted and it’s faster than you’d think. Essentially, IPFS provides the foundation, and Filecoin unleashes its full potential.

Let’s take a closer look at how Filecoin provides the infrastructure for a thriving ecosystem of storage providers and clients. 

The Tech Behind Filecoin

The FIL blockchain itself doesn’t store files — it acts as a ledger (…like all blockchains) of all transactions made through its native token, FIL. Along with the transaction, the block also includes the agreement between the miners who store the data and the clients whose data is being stored. 

Although this might look pretty straightforward, how do you guarantee that the miners are storing an accurate version of the requested file? How do you also guarantee that bad actors in the network don’t tamper with your data?

Filecoin solves these issues with two consensus mechanisms: Proof of Replication and Proof of Space Time.

In Proof of Replication, the miner must prove that they have stored client data correctly. This proof is a cryptographic hash denoting the file. The miner ID and this proof are written to the blockchain, confirming the encrypted data storage.

Now, to guarantee that the miners are still holding data at a given time, PoSt is used. PoSt randomly picks miners from the network and demands to see proof of storage at random intervals. If any node cannot produce it, the concept of penalties comes in.

Whenever miners commit space to the network, they must add collateral in FIL tokens to incentivize good behavior. If they do not abide by the storage rules and are unlucky enough to be picked by the PoSt algorithm, they can bid their tokens goodbye. 

How does Filecoin Work? A Closer Look at its Marketplace

In Filecoin’s ecosystem, everyone shares an open market for data storage. Here’s a rundown of how Filecoin’s marketplace works:

Choosing a provider: Suppose you want to store 1 TB of your vacation photos on Filecoin. The first step is to select a Filecoin-based decentralized application such as ChainSafe Files or Estuary. These applications provide a quick and easy interface for you to drag and drop your files, choose a provider, and set the terms of the agreement.

Negotiating the contract: Once you’ve chosen a provider based on your specific needs, you can then proceed to negotiate the price in FIL tokens for storing your data. After an agreement is reached, it’s time to pay the provider to store your tokens. Post that, the transaction and the agreement contract are written to the FIL blockchain.

Retrieving the data: Retrieval is quick and easy if you want to reminisce down the memory lane. Once you send in the request,  the network assigns retrieval miners tasked with retrieving your data as quickly as possible. Naturally, there’s a FIL cost attached to this service. If you’re not in a hurry, the retrieval will cost you next to nothing. However, if you need it within seconds, you’ll need to shell out a considerable sum in FIL for them to prioritize your transaction.

The FIL token fuels the entire Filecoin network. Clients pay in FIL to store their files on the network, while nodes who have committed space to the network are rewarded in FIL. Along with its crucial function as a utility token for the Filecoin marketplace, FIL also acts as a governance token that you can use to vote on the project’s key decisions.

Why should you care about  Filecoin?

The main benefit of Filecoin is that storage will finally be something that we can trust. Blockchain’s transparency and the free-for-all market it enables are not something you’d ever get from centralized entities. And that’s exactly what Filecoin capitalizes on. Thus, the endgame for Protocol labs is to enable one of the main pillars of a fast, decentralized internet — data storage — with IPFS and Filecoin.

With Filecoin, you wouldn’t have to worry about losing your data if an organization fails or jacks up its prices to sky-high levels. You can also earn rewards if you commit your own unused space to the network.

Decentralizing the world’s storage

Decentralizing the world’s storage has a direct impact on all of us. Currently, providers like Google Drive have a lot of the world’s data stored on their servers. Any change in their terms causes a ripple effect on the livelihood of other businesses and the economy as a whole. 

However, if you participate in decentralized storage networks, you can potentially save a lot of money. And with incentives for participating in the system and complete control of your data, what’s not to like?

As the internet and data grow, decentralization will no longer be an option – it’ll be a necessity. And judging by the growth of projects like Filecoin, we’re not far from that reality.

Knowledge is Power.

Blockchain is more than just technology – it’s a system that allows value to flow between individuals, and that gives YOU a whole new world of options.


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