Messari: An In-Depth Analysis of the Current Development Status of the Filecoin Ecosystem

Original authors: Mihai Grigore & Sami Kassab, Messari

Compilation: Filecoin Network

Perspective

Filecoin provides distributed storage and cloud services on the open global market. Based on the storage and network capacity that has been utilized, it holds the largest market share.

--- The ecosystem has grown from 40 projects that started in 2021 to over 330 projects. Different use cases have emerged across various fields, including NFTs, Web3, gaming, the metaverse, and audio-video.

--- Filecoin aims to provide the data foundation required for Web3 services through verifiable storage, content retrieval, computation, and upcoming programmable applications.

--- The main challenge facing Filecoin is to prove its reliability over time.

Data Availability and Integrity

Almost every internet user relies on centralized services to store and process data. This presents two major issues: users no longer have complete control over their data, and it is difficult to verify the integrity of the data. To address these issues, a new generation of protocols and peer-to-peer networks has emerged, making distributed storage and cloud services a reality. Filecoin stands out as a leader in this space, ensuring data existence and availability at all times through cryptoeconomics.

In simple terms, Filecoin is a peer-to-peer version of AWS cloud, regularly verifying the availability and integrity of data. This is achieved through transaction agreements in the open market for data services.

Transaction Agreements in the Open Market

Storage transaction agreements function like service level agreements (SLA) executed on the Filecoin blockchain (https://www.cio.com/article/274740/outsourcing-sla-definitions-and-solutions.html). In a storage transaction agreement, users pay storage providers to store data. The terms of the agreement include fees and the duration of the storage agreement.

The mechanism of the open market environment encourages storage providers to offer their storage capacity efficiently, with prices dynamically determined by supply and demand rather than a fixed pricing structure. To incentivize storage providers to participate in transaction agreements, Filecoin rewards them with the network's native FIL Token.

Filecoin employs two features to ensure data security. First, it uses a cryptoeconomics-based mechanism that verifies and ensures data storage through zero-knowledge proofs (https://filecoin.io/blog/posts/zero-knowledge-and-the-filecoin-network/). Second, it employs an economic penalty: if data cannot be retrieved or storage fails, the storage provider's locked collateral is forfeited.

To enforce this, the Filecoin protocol requires storage providers to continuously submit two types of verifiable cryptographic proofs. First, the proof of replication verifies that the data has been fully replicated. After passing an initial check, the storage provider uses a proof of spacetime daily to prove that a random piece of data is still stored and can be retrieved during the storage agreement's lifecycle. Any form of failure incurs penalties.

To retrieve data, users pay retrieval service providers to access the data. Unlike the on-chain processed storage agreements, retrieval agreements may occur off-chain, resulting in a faster data retrieval process.

Technical Insights

Filecoin is built on top of the InterPlanetary File System (IPFS), which serves as the distributed data storage and sharing layer for the Filecoin network. While some people interchangeably use Filecoin and IPFS, there are important distinctions between the two.

In simple terms, IPFS is like an enhanced version of torrent services. Similar to torrent resource trackers, IPFS uses data fingerprints to locate files. However, unlike torrents, IPFS utilizes a single global peer-to-peer network.

IPFS can inform users of the location of their data, but it lacks an incentive mechanism for data storage, which is why Filecoin was developed. Thus, Filecoin complements IPFS's functionality and introduces an open, guaranteed data storage market, effectively making Filecoin the incentive layer for IPFS.

IPFS can be seen as a peer-to-peer HTTP protocol, but it has a significant improvement. Traditional URLs and file paths locate a file through specific geographical locations on servers, while IPFS uses content addressing to store data in a distributed manner. It references a file by its content. The content address is unique, resulting from a hash computation that cryptographically compresses the content into a long string of characters. When retrieving a file, the network only needs to know the file's hash to find the node storing that file's content.

Network Dynamics

Thanks to its open market strategy and incentive mechanisms, Filecoin has attracted significant storage capacity. Regardless of market conditions, the storage capacity committed to the Filecoin network has steadily grown from 2020 to 16,000 PiB, equivalent to 65,000 copies of Wikipedia or 1,600 Netflix movie archives as of March 2022. This network capacity comes from 3,900 storage providers distributed globally.

Demand for Filecoin

Demand for Filecoin arises from storage use cases in both Web2 and Web3. By summing the storage capacity bound in storage transaction agreements, one can quantify the demand for Filecoin. However, when analyzing the underlying content in storage transaction agreements, it becomes challenging to distinguish between useful storage and storage providers abusing the network to generate random content.

To increase the capacity of useful data in Filecoin, the Filecoin Plus incentive program (https://docs.filecoin.io/store/filecoin-plus/) was introduced. This program incentivizes storage providers to participate in verified transaction agreements—achieved by increasing their share of block rewards over time.

The input data for storage transaction agreements increased from 400 TiB in October 2020 to over 7,600 TiB in March 2022, with Filecoin Plus clearly contributing to this growth. Since the fourth quarter of 2021, there has been a trend where unverified data (input data for Filecoin's regular storage transaction agreements) has transitioned to being dominated by data inputs from verified storage agreements through Filecoin Plus.

The storage capacity utilized on the network (such as active storage transaction agreements) has steadily increased from 0.25 PiB (1 PiB = 1024 TiB) in October 2020 to 45 PiB in March 2022. As shown, over 26 PiB of content originates from Filecoin Plus storage transaction agreements, representing 57% of the active storage transaction agreements on the network.

The shift from regular Filecoin storage transaction agreements to Filecoin Plus storage transaction agreements, which began to dominate, marks the normal operation of the incentive mechanism for verifying data. The sudden decline in regular storage proposals in December 2021 was caused by several storage providers going offline (https://github.com/filecoin-project/community/discussions/407).

This loss was absorbed by other storage providers in January 2022, who also contributed to the growth of active Filecoin Plus storage transaction agreements. Thus, the total volume of transaction storage agreements has been restored.

While supply significantly exceeds demand, storage capacity is only one aspect. The amount of utilized storage on the network is equally important. Given that Filecoin's storage capacity is 16,000 PiB and the utilized storage capacity is 45 PiB, the storage utilization rate can be calculated as 0.3%. To understand these network metrics, competitors in the distributed storage space, such as Sia and Storj, have network capacities of 6 PiB and 14 PiB, respectively, with utilized storage of 2.2 PiB and 8.6 PiB each.

From the perspective of storage utilization rates, both Sia and Storj surpass Filecoin, with rates of 36% and 60%, respectively. Although Arweave has 0.05 PiB of data stored, it is negligible compared to other storage networks and is therefore not included—it grows from a smaller base but lacks sufficient network capacity.

The introduction of the Filecoin Plus project marks a significant step forward, and collaborative efforts to nurture new businesses and use cases for Filecoin are underway. The Filecoin ecosystem is introducing a wide range of different use cases: from NFT distributed storage to music and video streaming, as well as the metaverse and gaming.

Developer and Creator Ecosystem

Filecoin has received active support from several organizations, all of which share the common goal of developing the Filecoin ecosystem. These organizations have jointly established the Ecosystem Working Group. The responsibilities of participants in this working group include maintaining and upgrading the underlying protocol, supporting ecosystem growth, and assisting in governance. Notable members of this working group include Protocol Labs, the Filecoin Foundation, and Outercore. The following image shows the main participating organizations.

These organizations have been actively building pathways for developers and creators through hackathons, accelerators, grant programs, mentorship programs, and growth support. This pathway aims to help early projects and teams grow to reach the funding stage. As a result, over 330 projects are being built on Filecoin and IPFS. Below are the details of this pathway, showcasing the evolution of projects grouped by their maturity stages.

The main goal for 2022 is to help as many early projects in the ecosystem grow into mature businesses, such as moving from early stages to Series D and beyond in funding rounds.

Overall, this ecosystem has shown significant growth, including integration with applications and clients, developer tools, and infrastructure. Recently, the Ecosystem Working Group has prioritized simplifying the work for end users and developers to interact with Filecoin. This has led to the development of services such as Textile Powergate, Estuary, and NFT.Storage. All use cases of the Filecoin ecosystem can be viewed here (https://ecosystem.filecoin.io/). A chart of some ecosystem participants is also displayed below.

Information source: Filecoin

In 2022, there are several notable initiatives. The launch of the Filecoin Virtual Machine (https://fvm.filecoin.io/) is one significant event. The FVM aims to unlock programmable storage sources (such as storage bounties and auctions), cross-chain interoperability bridges (linking Ethereum, Solana, and NEAR), data-centric DAOs, and Layer-2 protocols (such as reputation systems, data availability sampling, computation frameworks, and incentive-compatible content distribution networks).

Key Use Cases for Filecoin

The Filecoin ecosystem is vast and rapidly expanding, positioning itself as a pillar of distributed networks. With the increasing demand for cloud storage, Filecoin offers an alternative to popular centralized platforms. Various additional use cases have emerged, with more expected to materialize in the near future. Four categories of use cases are already in high demand: (1) NFT and Web3 storage, (2) perpetual storage and Web2 datasets, (3) the metaverse and gaming, and (4) audio-video.

NFT Storage

In the summer of 2021, NFTs gained mainstream attention. Driven by network effects, NFTs dominated the crypto space in forms such as social media avatars, exquisite artworks, collectibles, and music. Interestingly, many NFTs use off-chain storage locations to store their metadata, as on-chain storage is not practical. Shortly after the frenzy of 2021, it became clear that much of the metadata for NFTs was not stored in a decentralized, tamper-proof manner, jeopardizing the content and value of NFTs. To address this shortcoming, NFT.Storage was born.

NFT.Storage (https://nft.storage/) provides a simple distributed storage solution for NFT content and metadata using Filecoin and IPFS. It offers perpetual redundant storage through dedicated IPFS servers managed by NFT.Storage and Filecoin. After joining the Filecoin Plus incentive program, NFT.Storage can provide unlimited NFT storage space for free.

Since its launch in April 2021, NFT.Storage has supported the permanent storage of 40 million NFT data, totaling over 260 TB in scale. The ease of use of this service allows a wide range of users, including individual artists and large marketplaces (such as OpenSea, MakersPlace, MagicEden, Holaplex, Jigstack, and Galaxy), to utilize perpetual NFT storage.

Web3 Storage

Filecoin aims to become the storage layer for Web3. To achieve this goal, Filecoin has ongoing collaborations with various blockchains and smart contract platforms, as well as building related storage bridges. A recent example is Polygon (https://messari.io/article/polygon-a-multi-sided-approach-to-zk-scaling). This partnership aims to meet the storage and infrastructure needs of developers working on Web3 projects related to gaming and NFTs.

Notably, Polygon developers can easily use Filecoin through the storage bridge. Filecoin has also gained increasing attention within the Solana ecosystem—several protocols and NFT marketplaces provide native support, including Metaplex, MagicEden, and Holaplex.

Information source: Filecoin

To simplify the process of building Web3 apps on Filecoin, the team launched Web3.Storage (https://web3.storage/), allowing developers to directly access and store data on Filecoin without dealing with complex distributed storage networks.

Web3.Storage uses a redundancy mechanism to store data across multiple Filecoin storage providers and globally distributed IPFS nodes. These IPFS nodes are operated by the Web3.Storage team. Additionally, these services provide unlimited storage space indefinitely, facilitated by the economic mechanisms of Filecoin Plus.

Overall, Web3.Storage has experienced steady growth since its launch, increasing from 3 million uploaded projects in August 2021 to 15 million uploaded projects in March 2022.

Perpetual Storage and Web2 Datasets

Similar to Arweave, Lighthouse (https://www.lighthouse.storage/) allows Filecoin users to store files permanently at a fixed price. Moreover, the Filecoin Virtual Machine will support perpetual storage implemented within smart contracts. One important use of perpetual storage is data archiving. Given the scale of Filecoin, the goal is to maximize the cost-effectiveness of archival storage, particularly to reduce costs for developers building applications on Filecoin. This will create and preserve an information layer that serves humanity.

The Shoah Foundation (https://sfi.usc.edu/) is a significant project in archiving survivor testimonies. When it comes to large public datasets, the Internet Archive project (https://archive.org/) uses Filecoin to store websites and documents for public access.

Additionally, Zarr and GainForest store large public datasets aimed at preventing natural disasters caused by climate change. The Zarr project (https://github.com/zarr-developers) enables a wide range of researchers to access climate data for analysis. GainForest (https://www.gainforest.app/) uses satellite imagery to combat the effects of climate change.

Metaverse and Gaming

Next-generation metaverse and gaming use cases are leveraging Filecoin and IPFS technologies. The underlying logic of these use cases is user monetization. In this space, Blockbets (https://blast.gg/) and Gala Games (https://app.gala.games/) support gamers in generating income by paying them. When it comes to monetizing artists, Mona (https://www.mona.gallery/) enables artists to showcase their high-end works in virtual spaces and sell them to collectors. Metaverse AI (https://www.metaverseai.org/) takes human interaction to the next level: it allows gamers to interact with AI-driven virtual humans in games and monetize through interaction.

Audio-Video Applications

Recently, several audio-video applications utilizing Filecoin and IPFS technologies have gained significant attention, such as the Web3 versions of "Spotify or SoundCloud." Audius (https://audius.co/) is a music streaming service that looks and operates like SoundCloud but utilizes IPFS technology. Currents.fm (https://a.currents.fm/) and Inflow Music (https://www.inflowmusic.io/) support communities of music creators and curators. Huddle01 (https://huddle01.com/) could become the next Zoom; it is a low-bandwidth video conferencing platform tailored for remote meetings, focusing on the NFT community.

Ordinary users may not be able to discern whether Audius, Currents.fm, Inflow Music, or Huddle01 are decentralized or utilize Filecoin and IPFS technologies. However, whether users are aware or not, the wave towards Web3 streaming (https://messari.io/article/the-nft-effect-on-the-music-industry) applications has already begun.

As the Filecoin ecosystem matures, more use cases are being discovered. The development of the Filecoin Virtual Machine will unlock previously seemingly impossible use cases, creating a whole new category of use cases.

Conclusion

Although distributed storage is still in its early stages, the Filecoin ecosystem has experienced several years of robust development. Filecoin and IPFS have been adopted across a range of use cases, including NFTs, Web3, gaming, the metaverse, and audio-video. Alongside Filecoin, other solutions like Arweave, Storj, and Sia can also leverage IPFS at scale.

The adoption of distributed storage solutions and the integration of smart contracts may present opportunities for new types of applications. Getting mainstream browsers to adopt IPFS will be an important milestone. Open data initiatives and decentralized computing may lead to the next generation of applications beyond storage.

The primary adjustment facing Filecoin is to prove its role as a foundational support for massive data as a storage provider and Web3 service. Filecoin and IPFS operate at the forefront of the Web3 paradigm, providing the critical infrastructure for Web3 development. Their success relies on the Web3 applications built on these protocols.