Is Filecoin a scam?

This article was first published on January 4, 2021, on the public account: Wu Says Blockchain Real, by special author Bai Ye.
In a highly heated situation, Filecoin mining machines sold for hundreds of billions, with a total market value of less than 7 billion, posing significant loss risks for investors. This article details the history of Filecoin, exclusively disclosing many chaotic phenomena in the industry, and argues that "as long as Filecoin's real storage applications cannot be realized, it is a scam." It listens to critical voices and caters to readers.
The main text is as follows:
On October 15, 2020, after multiple delays, Filecoin finally launched its mainnet.
On Gate.io, FIL opened at $200, then plummeted straight down, stabilizing around $50 by the next afternoon.
On that day, rumors spread that Filecoin had a vulnerability, as someone discovered that testnet nodes' test coins could actually be traded on the secondary market after the mainnet launch, meaning that a large number of test coins directly turned into mainnet coins and were cashed out through the secondary market. The official team vehemently denied this, stating that the direct conversion of test coins to mainnet coins had always been part of the plan.
Two and a half months after the mainnet launch, the price of FIL had dropped to around $20. Most people had long forgotten the "BUG" from the day Filecoin launched. As for how many test coins flowed into the secondary market that day, the official team did not provide a detailed distribution of FIL for clarification. Refer to the article Data Mystery: What is the Real Circulation of Filecoin? How Many Test Coins Were Converted to Real Coins? How Much Wool Was Pulled?
Although the issue of test coins was just an episode, the disputes, interests, and chaos surrounding it seem to encapsulate the essence of Filecoin over the past year.

1. The Ambition of IPFS & Filecoin
   In 2014, Juan Benet, a Mexican graduate of Stanford University, founded a company called Protocol Labs in the United States and initiated a project called "The InterPlanetary File System (IPFS)."
   IPFS is a peer-to-peer distributed network transmission protocol aimed at creating a more open, fast, and secure internet.
   In fact, the main underlying technology of IPFS is P2P, which means peer-to-peer transmission. If you have used BT torrents for downloading, you will be familiar with this technology. The downloading tools we used before, including eMule, BitComet, and the now commonly used Thunder, actually utilize the P2P transmission protocol. IPFS is not a brand new project; it is an improved version of the P2P transmission protocol, adding features like file slicing, hash deduplication, and NAT traversal.
   So why did IPFS become a star project? Because it has capital backing, such as Sequoia Capital, Stanford University Capital, YC Capital, Winklevoss Brothers Fund, and Distributed. The halo of capital, combined with the strong endorsement from domestic mining machine manufacturers, made IPFS a high-profile Web 3.0 foundational protocol, even claiming to "replace the HTTP protocol."
   Currently, it seems that IPFS cannot replace HTTP. The underlying P2P protocol of IPFS mainly corresponds to "cold data," which refers to static data such as videos, images, and documents; in terms of "hot data," such as dynamic web pages, games, and AI intelligence, the P2P protocol does not have any advantages over CDN. Moreover, cold data like videos and software can easily lead to copyright disputes and content review. At the same time, due to the heavy network usage of P2P technology, telecommunications authorities in various countries have imposed varying degrees of restrictions on P2P communication methods.
   So why did the IPFS technology enter China and become widely known? Because of the cryptocurrency Filecoin.
   Filecoin is also a project developed by Protocol Labs, a peer-to-peer, decentralized distributed storage network. To put it simply, Filecoin is a "blockchain (driven by digital currency) + cloud storage" project.
   The initial idea of Filecoin was to create a storage network where all idle hard drives worldwide could connect to this network and provide storage and retrieval services to customers, who would pay for this service in FIL (Filecoin's cryptocurrency). However, due to technical constraints, this idea is difficult to realize. Currently, the configuration and price of Filecoin mining machines are the highest among all mining projects, with significant operational difficulties and power consumption, resulting in the highest overall costs.
   From the current situation, it is very challenging for Filecoin's storage function to be implemented. Filecoin is only suitable for storing cold data and cannot interact with or verify hot data, and the network is currently unstable with frequent bugs. The data stored by miners is essentially generated garbage data, and miners' main income also comes from block rewards.
   On the other hand, Filecoin's TPS is very weak (system throughput, which is the number of transactions processed per second), and network congestion has become the norm, making it temporarily impossible to support large-scale storage application demands of hundreds of thousands of transactions per second.
2. Flowers Blooming Behind the Wall
   In July 2017, Protocol Labs released the Filecoin white paper and conducted an ICO in August of the same year, raising over $200 million with 7.5% of the token share, with payment methods including ETH, BTC, ZEC, USD, and other fiat currencies.
   2017 was a bull year for blockchain cryptocurrencies. That year, Bitcoin's highest price approached $20,000; Ethereum's price broke through $1,000; and many blockchain star projects, including Filecoin, EOS, Tezos, and Hdac, conducted ICOs, with EOS's financing continuing until June of the following year, raising $4 billion.
   By 2018, the bull market had passed, and the best investment opportunities had been lost. The once new retail investors in the cryptocurrency space had turned into seasoned investors, and some had even transformed from retail investors into "investors." Capital was eager to find the next blockchain trend. At this time, Filecoin began to emerge.
   If we look back at the first batch of Filecoin mining machine manufacturers in China, we find that most of them registered their companies between May and August 2018. This means that from that time, the concepts of IPFS & Filecoin were officially introduced to China.
   The main promoters of Filecoin are the mining machine manufacturers. After the release of the Filecoin white paper, someone quickly translated it into Chinese and spread it within the community. Mining machine manufacturers saw this as a great opportunity to sell mining machines and mine for FIL coins. Thus, Filecoin was rapidly packaged by mining machine manufacturers, promoting it on a large scale from various aspects such as technology, prospects, disruptiveness, and wealth, with promoters being referred to as evangelists. The evangelists and those who accepted their preaching gathered together to form a community.
   Since Filecoin was a new thing, there was only an ambiguous white paper at the time, so evangelists often started their promotions from IPFS and Protocol Labs, with investment institutions like Sequoia Capital serving as the best endorsements, and Bitcoin and Ethereum becoming ideal benchmarks.
   Among these evangelists, there is a special group referred to as the "circle," which generally refers to teams involved in "funding schemes, pyramid schemes," etc. These teams frequently switch between various projects, seeking profitable opportunities. The blockchain star project halo surrounding IPFS & Filecoin has a natural appeal to people in this circle. As a result, leaders in these circles became mining machine dealers, promoting through various channels. The curtain on Filecoin began to rise in China.
   On October 29, 2018, a seemingly high-profile conference was held at the Sheraton Hotel in Zhengzhou. The conference was titled "2018 Central Plains Silicon Valley First (International) Innovation Technology Gala and CAI Billionaire Ranking Launch Conference."
   This conference was full of hype, as the organizers (Central Plains Silicon Valley Innovation Technology Industrial Park) invited two heavyweight guests: Hu Run, the founder of the "Hurun Report," and the Semiconductor Research Institute of the Chinese Academy of Sciences. In fact, attendees knew that both Hu Run and the "Semiconductor Research Institute of the Chinese Academy of Sciences" were merely supporting characters in this conference; the real core of the conference was two names that were completely unfamiliar to the outside world at the time: a virtual currency called CAI and a mining machine called "Snail Interstellar Server."
   The organizers promoted that users could mine CAI before the IPFS token Filecoin went live, and after Filecoin launched, users could dynamically switch according to the principle of maximizing returns, forming a dual mining of CAI and Filecoin…
   
   Today, we all know this was a scam, with participants paying a price of 2 billion RMB.
   The Interstellar Snail mining machine is essentially a NAS storage device, costing a few hundred RMB, and does not have the capability to connect to Filecoin mining. However, this type of machine was sold by various mining machine manufacturers as Filecoin mining machines from 2018 to 2019, priced between 4,000 to 7,000 RMB. It is said that a single manufacturer in Shenzhen sold over 10,000 units.
   Under the endorsement of mining machine manufacturers, IPFS was said to replace the HTTP protocol, and Filecoin would disrupt centralized cloud storage represented by Alibaba Cloud, Amazon Cloud, Huawei Cloud, etc. The value of Filecoin was benchmarked against global cloud storage, with unlimited development potential.
   Before the testnet went live in December 2019, Filecoin officials stated that Filecoin mining machines needed to use GPUs for mining, which meant that many NAS mining machines sold previously were rendered completely useless.
   After the testnet went live, mining machine manufacturers rushed to launch their nodes, competing fiercely for node rankings. The higher the ranking, the more it could showcase their strength and make it easier to sell mining machines.
   The competition among mining machine manufacturers was not only reflected in node rankings; to promote their mining machines, more and more manufacturers collaborated with industry media to hold events and forums. Various distributed storage forums became lively, and gradually capital began to enter the scene, making Filecoin a star-level project ecosystem that could be compared to Bitcoin and Ethereum.
   Driven by the trend of distributed storage, more and more people began to purchase Filecoin mining machines. Interestingly, over 95% of Filecoin mining machine manufacturers, investors, customers, and media come from China. In the United States and other Western countries, attention to Filecoin is relatively minimal.
   The promotion of Filecoin in China has been so successful. It is roughly estimated that the mining machines sold by Chinese manufacturers may have reached hundreds of billions of RMB, while the current market value of FILECOIN is less than 7 billion RMB.
3. Mining Machine Manufacturers "Empty-Handed Snatching the White Wolf"
   As of December 29, 2020, there were over 900 active nodes on the Filecoin network, approximately controlled by fewer than 200 mining machine manufacturers, and among these 200 manufacturers, no more than 5 could independently output technology.
   Filecoin mining involves many technical aspects, such as algorithms, scheduling, networks, hardware, storage systems, etc., and the standards for these technologies are still very high. In fact, most mining machine manufacturers are newcomers to the field; they had not invested in technical personnel before the Filecoin testnet and merely relied on marketing strategies to maintain a high-tech company image.
   It wasn't until the testnet went live that more and more customers began to pay attention to node performance, and mining machine manufacturers realized that marketing alone wouldn't work; they had to genuinely compete on technology. However, technology requires accumulation, and it is too late to scramble at the last minute. Some mining machine manufacturers, not believing in evil, tried to do it themselves but found it impossible.
   So what should they do? It's simple: outsource.
   There are two complex technical modules in the entire Filecoin technology stack.
   One is the optimization of blockchain-level code (algorithms), including zero-knowledge proofs, replication proofs, and space-time proofs. The official code is very rough, and if mining machine manufacturers want to use it, they need to perform deep optimizations based on the source code, aiming to improve the packaging speed of data (sectors) and better complete space-time proofs, thereby obtaining more block packaging rights. In the area of zero-knowledge proofs, the vast majority of domestic mining machine manufacturers do not have the capability to complete it independently; this technology is basically outsourced to a few technical teams.
   Another complex technology is the storage system. Few domestic mining machine manufacturers can independently complete large-scale storage clusters. We see online data amounts of several PB or even dozens of PB per node, and it is not an exaggeration to say that most of this is provided by outsourcing and operational services from storage service providers like Alibaba Cloud, Huawei Cloud, Inspur, and Sugon. This is a contradictory behavior; while mining machine manufacturers promote that Filecoin will replace centralized cloud storage, they actively collaborate with centralized cloud storage service providers because they cannot manage distributed storage systems themselves.
   As for mining machine hardware, it is even simpler. Filecoin mining uses general-purpose servers, meaning assembled machines. Anyone can purchase server cases, motherboards, CPUs, GPUs, memory, SSDs, and hard drives to assemble a Filecoin mining machine, which is no different from assembling a desktop computer. Therefore, mining machine manufacturers do not need to produce mining machines themselves; they only need to find suppliers, buy the right components, and assemble and debug them.
   What mining machine manufacturers need to do is maintain an operational team, as the data center still requires on-site maintenance; and design a set of profit-sharing software. Of course, some mining machine manufacturers even skip these and outsource everything.
   Mining machine manufacturers package themselves through marketing; they outsource algorithms, storage, operations, and other technologies; and then find a few hardware suppliers. This forms a Filecoin mining machine company or a distributed storage technology company. Of course, this approach also carries certain risks, such as a company in Hangzhou purchasing patents on Taobao and having their chat records intercepted, causing a huge uproar and damaging their reputation.
   The profits of mining machine manufacturers mainly come from two parts: the price difference of mining machines and technical service fees. A general-purpose configured mining machine on the market is priced at over 200,000 RMB, while the cost may only be 40,000 to 50,000 RMB, with 30%-40% going to distributors, leaving the mining machine manufacturers with a gross profit of 30%-40%. In addition, mining machine manufacturers generally charge a technical service fee of 15%-25%, meaning that 15%-20% of the mining output must be paid to the mining machine manufacturers. With just these two aspects, mining machine manufacturers can make a guaranteed profit.
   To maximize profits, mining machine manufacturers have also put a lot of thought into product design. Since the price of a complete mining machine exceeds 200,000 RMB, which is beyond the purchasing power of most customers, mining machine manufacturers mostly assume that multiple people can jointly purchase one mining machine, distributing FIL earnings according to each person's investment ratio.
   On the other hand, mining machine manufacturers also play some tricks. For example, in terms of hard disk backup, the common technology in the market is erasure coding, which can achieve a backup ratio of 1.5-1.3 or even higher, meaning that in a 1.5TB or 1.3TB storage space, there is 1TB of effective space. However, some mining machine manufacturers promote that they use double or even triple replicas, meaning that in every 2TB of storage space, there is only 1TB of effective space. The final delivery of the mining machine is the effective space; double or triple replicas can deliver much less effective space compared to erasure coding, saving a significant amount of hard disk costs.
   Even worse practices include using second-hand components or overselling mining machines, as customers rarely go to the data center for on-site acceptance; as long as customers see the data in the backend, they are easily fooled.
   Additionally, there are many issues with the distribution of FIL earnings. There are two reference values for FIL earnings: the actual earnings of the node and the average earnings across the network. Node earnings may be higher or lower than the average earnings across the network. Since mining machine manufacturers charge a technical service fee, they should guarantee a certain level of technical performance; the distribution of FIL earnings should not be lower than the average earnings across the network. If node performance is below the average, it should be distributed according to the average; if node performance is above the average, it should be distributed according to the actual earnings of the node.
   However, in reality, mining machine manufacturers either distribute according to earnings below the average or according to the average earnings. So what is the significance of the technical service fee charged by mining machine manufacturers? Even more perplexing is that most mining machine manufacturers do not disclose their nodes, and investors have no idea where their mining machines are or how much actual earnings they have received.
   Some investors cannot afford the staking coins, so theoretically, their mining machines would not participate in mining. However, in reality, their mining machines are still running, and their machines are used by mining machine manufacturers to package data, with the earnings going to the manufacturers; some idle mining machines are also rented out by manufacturers to others for data packaging, while the depreciation costs of these machines are borne by the investors, allowing the manufacturers to profit immensely.
4. The Naive Investors
   "About to replace the HTTP protocol, take over centralized cloud storage, Web 3.0 infrastructure, blockchain star project, the next hundred-fold or thousand-fold coin, quick return on investment with high yields"—in the face of these glorified concepts, those investors educated by the market have no resistance. Many people do not even understand what IPFS and Filecoin are, yet they eagerly purchase mining machines.
   Industry insiders estimate that to date, the sales of Filecoin mining machines in mainland China are no less than 50 billion RMB, with some daring to estimate over 70 billion. However, some conservative estimates place it between 10 billion and 20 billion.
   So have the investors made money? From the current perspective, many have not.
   If Filecoin has made money for anyone, the first place goes to Protocol Labs, followed by mining machine manufacturers, distributors, hardware suppliers, storage service providers, IDC data centers, outsourcing service providers, and industry media, while investors (miners) are at the bottom of this ecological chain.
   Miners participating in Filecoin need to bear several costs: the cost of purchasing mining machines, a 15%-25% technical service fee, custody fees for the mining machines, and staking coins.
   Here, let's focus on the staking coins. To constrain miners to fulfill storage agreements, Filecoin has a staking mechanism: miners need to submit a certain amount of staking coins for the storage space they provide, roughly around 9-10 FIL/TB, which is about 1,800 RMB. The storage lifecycle of Filecoin is generally 540 days; within these 540 days, if there are no issues with the stored data, the system will return the staking coins upon expiration; if there are issues with the data, the system will deduct a corresponding proportion of the staking coins as a penalty.
   Staking coins are a necessary condition for mining. Due to the high cost and the unpredictability of the coin price 540 days later, most mining machine manufacturers are unwilling to risk helping customers stake, so miners have to purchase FIL from the secondary market (exchanges) for staking. This means that many miners are spending money to buy mining machines while simultaneously buying staking coins from exchanges, contributing silently to the cash flow and price stability of the Filecoin ecosystem.
   As the GAS fees for Filecoin continue to rise, it has been heard that some mining machine manufacturers plan to have miners bear the GAS fees themselves. Some manufacturers have also developed FIL lending services, with annual rates lower than those in the market, claiming to help miners, but from another perspective, it seems like they are cutting the miners again after already having taken advantage of them.
   So can miners really recoup their investments? From the current situation, under the premise of fully paying the staking coins, miners can recover their costs after about 100 days. However, due to Filecoin's lock-up mechanism, 75% of the FIL produced during these 100 days must be released linearly within 180 days. The FIL produced on the 100th day can only be fully received on the 280th day, while the invested staking coins can only be returned after 540 days. There is a risk here; no one can predict the situation of FIL coins after 180 days or 540 days. What if the coin price drops to the bottom?
   Moreover, currently, the cost of staking coins plus GAS for storing 1TB of data can reach nearly 20 FIL, about 3,500 RMB. What does this mean? It is equivalent to the GAS burned being close to the FIL produced. If the GAS fees are also to be borne by investors, it would undoubtedly lead to a mining disaster.
5. Is Filecoin a Scam?
   In October 2020, the Filecoin mainnet went live. Can the Filecoin project be realized? Ultimately, it depends on whether it can become a decentralized distributed storage network as stated in the white paper. If this project relies solely on mining machine manufacturers generating garbage data to fill hard drives and obtaining cryptocurrency rewards through high-energy-consuming hardware computations, then it has no real connection to actual storage applications. As long as Filecoin's real storage applications cannot be realized, it is a scam.
   Currently, Filecoin still has several essential issues: from a technical perspective, due to Filecoin's technical characteristics, it is limited to cold data storage; at the same time, its weak TPS and poor code stability make it difficult to handle large-scale concurrent storage transmission demands.
   From an economic model perspective, Filecoin's storage and retrieval transactions are built on FIL, and the price of FIL fluctuates at any time, making it impossible to serve as a price anchor for storage payments. The economic model mechanism of Filecoin also leads to the strong getting stronger and the weak getting weaker, as alliances among a few large miners can control the entire network.
   From a storage cost perspective, Filecoin's storage costs are higher than those of traditional cloud service providers like Alibaba Cloud and Amazon Cloud, and it cannot guarantee the secure and stable preservation of data. In terms of storage security, Filecoin is actually inferior to traditional multi-site disaster recovery backups, making it easier to lose data.
   Of course, Filecoin may one day achieve the vision outlined in the white paper, but it is only just beginning. Currently, the price of Filecoin is maintained by miners (investors), who purchase mining machines while also buying FIL from exchanges for staking, providing the main cash flow for Filecoin.
   At the same time, due to the overselling of Filecoin mining machines, there is a severe surplus of computing power. As more and more investors enter the market, the block rewards are diluted, and the payback period is extended. Once investors' expectations for returns are dashed, it is easy to trigger collective rights protection events, which have already occurred multiple times.
   It is like a game of passing the parcel; if one day there are no new investors buying mining machines and no new miners buying coins, what will happen?