Messari Report: Filecoin Q1 2023 Status Report

Source: Filecoin Network

Key Data

• The Filecoin storage market continued to grow in the first quarter of 2023, with active storage deal proposals increasing by 75% compared to the same period last year.

• Storage capacity decreased by 13% compared to the same period last year, while storage utilization increased by 105%.

• Fee revenue increased by 5% in the first quarter of 2023 (21% increase in USD terms), driven by a 14% increase in new storage deal proposals compared to the same period last year.

• The release of the Filecoin Virtual Machine brought Ethereum-style smart contracts to Filecoin, facilitating new use cases in areas such as DeFi, perpetual storage, and distributed computing.

Filecoin Basic Information

Relying on centralized data storage has a serious problem: it is difficult to systematically verify the integrity of stored data. Today, the Filecoin network has become a peer-to-peer version of Amazon S3 cloud services. It is built on top of the InterPlanetary File System (IPFS), which serves as the distributed data storage and sharing layer for the Filecoin network. Filecoin regularly verifies the validity of data storage and uses storage deal proposals based on dynamic supply and demand pricing (rather than fixed pricing strategies).

A storage deal proposal is like a contract with a Service Level Agreement (SLA) — users pay storage providers to store data for a specified period. To ensure data security, Filecoin uses a cryptoeconomic incentive model to regularly verify storage with zero-knowledge proofs. To incentivize storage providers to participate in these storage deal proposals, Filecoin rewards them with the network's native token, FIL. If storage providers fail to provide reliable uptime or act maliciously against the network, they will also be penalized (slashed).

To retrieve data, Filecoin users pay retrieval providers for access to the data. Unlike the on-chain transaction method of storage deal proposals, retrieval deal proposals settle fees off-chain, allowing for faster retrieval speeds.

The Filecoin Virtual Machine, released in March 2023, brought Ethereum's smart contracts to Filecoin, facilitating new use cases in areas such as DeFi, perpetual storage, and distributed computing.

Key Metrics

Performance Analysis

The Filecoin blockchain is used simultaneously by the demand side of the network (users needing to store data) and the supply side (storage providers with excess space). Both contribute to revenue for this protocol.

Revenue

The Filecoin revenue framework is quite similar to Ethereum's, as its gas system is based on the EIP-1559 improvement proposal. This gas system consists of network fees that are burned to compensate for the use of system resources.

Protocol Revenue

According to Messari's revenue analysis, Filecoin's protocol revenue includes the following components:

• Base fees — dependent on message congestion, required for any storage proofs.

• Batch fees — used when batch packaging storage proofs.

• Overestimation fees — used to optimize gas usage.

• Penalty fees — imposed when storage providers fail.

FIL fee protocol revenue grew by 5% in the first quarter of 2023, reaching 1.3 million FIL (21% increase in USD terms to $6.9 million). Although FIL base fees increased by 20% compared to the same period last year, penalty fees decreased by 17%. Nevertheless, penalty fees are still twice as high as in the second and third quarters of 2022. This may be due to early termination of sectors — perhaps influenced by fluctuations in the FIL/USD price, affecting the profitability of storage providers.

The only part of FIL fees that is not burned by the protocol is the "tip" fees collected by block miners. This mechanism is used to accelerate transactions on the supply side of the network. Therefore, "tip" fees can be seen as supply-side revenue.

Supply-Side Revenue

Filecoin's supply-side revenue includes:

• Block rewards distributed to storage providers by the network.

• Payments for storage deal proposals anchored by legal contracts.

• "Tips" fees used to accelerate transactions.

In the first quarter of 2023, block rewards accounted for over 99.9% of supply-side revenue, while "tips" made up a small portion. The minting mechanism for new FIL tokens relies on two components:

• Exponential decay model (30% of total): Block rewards are highest in the early stages to encourage participation. Over time, they decay exponentially.

• Baseline model (70% of total): Block rewards allocated as storage capacity increases.

The combination of these two models helps maintain participation after the early distribution phase of block rewards ends (see exponential decay model). It also helps to continuously reward the additional value brought to the network by the increase in storage capacity (see baseline model).

In the first quarter of 2023, supply-side revenue decreased by 5%, totaling 18.9 million FIL (12% increase in USD terms). This decline is related to the overall reduction in FIL rewards issued due to the exponential decay model and baseline minting model.

Usage Status

The data stored through active storage deal proposals between storage users and storage providers can measure the demand for Filecoin storage from Web2 and Web3 clients.

Storage Deal Proposals

Near-zero storage fees may have further encouraged the data processed through Filecoin storage deal proposals. In the first quarter of 2023, an average of nearly 581 PiB of data was stored on the Filecoin network through active storage deal proposals, a 75% increase compared to the same period last year.

In the first quarter of 2023, the daily number of storage deal proposals increased by 14%, primarily due to the Filecoin Plus (Fil+) program offering higher rewards to storage providers participating in verified deals. This new dynamic encourages the use of real data to establish new storage deal proposals, preventing abuse of the network's reward mechanism. It also fosters competition among storage providers, lowering fees.

Utilization vs. Capacity

After reaching a new high in the second quarter of 2022, Filecoin's average raw byte storage capacity decreased by 13% compared to the same period last year, remaining stable in the third quarter of 2022. Meanwhile, in the first quarter of 2023, storage utilization relative to total available storage capacity increased by 4% compared to the same period last year, reaching 105%.

Retrieval

IPFS gateway requests can serve as an indicator of Filecoin retrieval, as most of Filecoin's developer storage tools make data retrieval available across the entire IPFS network.

In terms of the number of retrieval requests, there was a 7% decrease in the first quarter of 2023 compared to the fourth quarter of 2022, but this level is still 27% higher than in the third quarter of 2022. The number of retrieval requests can serve as a measure of the use of IPFS for retrieval. With the ongoing development of the retrieval market, more new metrics will emerge to cover different types of retrieval requests beyond IPFS gateways.

FVM Usage Rate

On March 14, 2023, the Filecoin Virtual Machine (FVM) went live, bringing smart contracts to Filecoin. As of March 31, 2023, over 440 different contracts had been deployed, generating nearly 44,000 transactions. FVM allows any type of dapp to be deployed on Filecoin, including DeFi, perpetual storage, and distributed computing applications. Messari's Filecoin Q2 2023 report will detail some key performance metrics since the launch of the FVM.

As Filecoin continues to attract new users and valuable data sets, it may serve as a foundation for developing applications powered by the FVM that focus on future data monetization. Additionally, since the FVM is compatible with Ethereum, existing Ethereum applications can be brought to the Filecoin network without significant code changes.

Ecosystem Overview

The Filecoin ecosystem has been actively attracting developers and builders. It regularly participates in activities such as hackathons, accelerators, sponsorship programs, mentorship programs, and growth support. These initiatives help early projects and teams grow, with the potential for funding support from Protocol Labs or its affiliated entities. This ecosystem collaborates to introduce diverse use cases: from data infrastructure, streaming, and the metaverse to gaming.

As of March 2023, there are 484 projects developing within the Filecoin, IPFS, and Protocol Labs network ecosystem, a decrease from the peak of 632 projects in October 2022.

In 2022, the Filecoin ecosystem invested $17 million in sponsorship program funding, although the related sponsorship projects primarily focused on several core initiatives to promote the FVM's rollout in the first quarter of 2023. Consequently, the number of eligible early applications decreased from 258 at the peak in October 2022 to 62 in March 2023. Meanwhile, in March 2023, there were 211 projects from accelerators, an increase from 194 in December 2022. These sponsorship programs will be an essential part of driving ecosystem growth.

Here are some applications and protocols utilizing Filecoin to provide data services:

• Ocean Protocol: Developer tools and platforms for data markets.

• Lighthouse: Perpetual data storage service with a one-time payment pricing mechanism.

• Slate: A search engine for processing and sharing personal data.

• Berty: A secure messaging and social media application.

• Dether: Mechanisms for deposits, withdrawals, and diverse financial transactions.

Media and entertainment-related protocols include:

• MoNA: A 3D art gallery in the metaverse.

• NFTwitch: An NFT minting platform for Twitch content.

• Huddle01: Distributed video conferencing.

• Curio: An NFT marketplace allowing entertainment brands to profit from intellectual property.

• OPGames: NFT minting related to gaming.

Use cases aimed at leveraging Filecoin infrastructure to drive data demand in specific fields include:

• Koios: A no-code data DAO platform.

• ZKsig NFTs: Market access control mechanisms.

• DataMarket: Data purchasing and settlement functionalities.

As developers build applications on the network and integrate externally, the launch of the FVM may bring significant growth to the Filecoin ecosystem.

Qualitative Analysis

Release Version

Filecoin Virtual Machine (FVM)

With the deployment of the V18 Hygge network upgrade on the Filecoin mainnet, the FVM has completed its gradual rollout.

FVM allows developers to easily develop and deploy Solidity smart contracts. This integration brings a Web3-compatible, WASM-based Filecoin Actor contract system to the FVM, enabling interaction with other blockchain networks and applications.

In addition to bringing Ethereum compatibility, the FVM utilizes the network's native token (FIL) as gas fees and for executing smart contracts, and it supports Filecoin Improvement Proposals (FIPs), which can introduce new features and optimizations to the platform.

Patch Releases

The Venus v1.10 series and Lotus V1.20 series are upgrade patches that address performance issues reported by users after the V18 network upgrade.

Key Events

FVM Virtual Machine Launch Event

The launch of the FVM virtual machine occurred on March 14, 2023, including an overview of the Filecoin main plan, long-term opportunities, and unlocked use cases, as well as how the FVM can enhance Web3 capabilities. The launch video for the FVM virtual machine can be viewed here.

FVM Virtual Machine Testing and Auditing

The Filecoin Foundation announced a bug bounty program called the FVM Virtual Machine Bulletproofing Initiative to test and audit the FVM, its EVM runtime, and other components. The related reward is $100,000 worth of FIL tokens. It aims to attract experts in WASM, Rust, EVM, and Web3 security.

FVM Space Warp Hackathon

Filecoin hosted its virtual FVM Space Warp hackathon, with prizes totaling $125,000. The virtual event featured Lighthouse.Storage, Fission, and Zondax. Filecoin also held brainstorming and informational sessions aimed at educating participants about the FVM and programming. Judges, speakers, and mentors included members from projects such as Secured Finance, Zondax, and Multicoin.

FILVC

The FILVC event brought together 25 Web3 startups to present their projects to over 800 investors. The selected startups primarily focused on development frameworks, identity solutions, asset licensing, data platforms and pipelines, end-to-end encryption, and distributed computing.

Roadmap

The roadmap for the second quarter of 2023 includes several network improvement plans covered in the following FIP improvement proposals:

• FIP-0052: Extend the maximum block commitment to 3.5 years.

• FIP-0057: Upgrade the gas fee schedule and system limits for the FEVM virtual machine.

• FIP-0060: Set the maintenance period for market deal proposals to 30.

• FIP-0061: Fix for WindowPoST grindability.

• FIP-0062: Fallback mechanism design for multi-signature and payment channel contracts.

Upcoming long-term improvement plans include L2 capabilities, hierarchical consensus, and packaging as a service. Through the FVM, Filecoin aims to build new partnerships and strengthen existing relationships to better promote product growth in the data infrastructure community.

Conclusion

Storage use cases on Filecoin experienced accelerated growth in the first quarter of 2023, with active storage deal proposals increasing by 75% year-over-year. Although storage capacity decreased by 13% compared to the same period last year, storage utilization grew by 105%. Meanwhile, FIL fee revenue increased by 5% in the first quarter of 2023 (21% increase in USD terms), driven by a 14% increase in new storage deal proposals compared to the same period last year.

While distributed storage is still in its early development stage, the successful rollout of the Filecoin Virtual Machine may allow the next generation of applications to extend beyond storage. Some typical examples include perpetual storage (similar to Arweave), low-collateral loans issued to storage providers, and distributed computing. If Filecoin continues to generate demand, it is likely to become a significant provider of distributed storage and cloud services, serving both Web3 and traditional applications.

This report is commissioned by Filecoin Foundation, Inc., and all content is independently produced by the authors and does not necessarily represent the views of Messari, Inc. or the organizations that commissioned the report. The commissioning party does not influence editorial decisions or content. The authors may hold the crypto assets mentioned in this report. This report is for informational purposes only and is not investment advice. You should conduct your own research and consult independent financial, tax, or legal experts before making any investment decisions. Past performance of any asset is not indicative of future performance. Please see our Terms of Service for more information.

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