Messari Report: Filecoin Q2 2023 Status Report

Author: Filecoin Network

Main Points

• The Filecoin storage market continued to grow in Q2 2023, with active trading volume increasing by 64% quarter-over-quarter.

• Due to a 12% quarter-over-quarter decrease in storage capacity, storage utilization increased from approximately 4% in Q1 2023 to nearly 8% in Q2 2023.

• Driven by a 64% increase in active storage trading volume and a 60% increase in the number of large dataset clients, fees revenue grew by 91% in Q2 2023 (67% increase in USD terms).

• The release of the Filecoin Virtual Machine (FVM) will introduce Ethereum-style smart contracts to Filecoin, facilitating new use cases in areas such as liquid staking, 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 storage network is a peer-to-peer version of Amazon S3, built on the InterPlanetary File System (IPFS). IPFS serves as the distributed data storage and sharing layer for the Filecoin network. Filecoin regularly verifies the validity of data storage and prices storage transactions dynamically based on supply and demand, rather than a fixed pricing strategy.

A storage transaction proposal is akin to a contract with a service level agreement (SLA)—users pay fees to storage providers to store data for a specified period. To ensure data security, Filecoin employs a cryptoeconomic incentive model that regularly verifies storage through zero-knowledge proofs (https://filecoin.io/blog/posts/zero-knowledge-and-the-filecoin-network/). To incentivize storage providers to participate in storage transactions, Filecoin rewards them with the network's native token, FIL. If storage providers fail to provide reliable uptime or engage in malicious behavior, they will face corresponding penalties (slashed).

To retrieve data, Filecoin users pay fees to retrieval providers to access the data. Unlike the on-chain transaction method for storage transaction proposals, retrieval transaction proposals settle fees off-chain, thereby speeding up retrieval.

The Filecoin Virtual Machine released in March 2023 introduces Ethereum-style smart contracts to Filecoin, facilitating new use cases in liquid staking, perpetual storage, and distributed computing.

Key Metrics

Performance Analysis

The Filecoin blockchain is utilized by both the demand side (such as users needing to store data) and the supply side (such as storage providers with excess space), both of which contribute revenue to the protocol.

Revenue

The Filecoin revenue framework is similar to Ethereum's, as its gas system is based on the EIP-1559 improvement proposal (https://filecoin.io/blog/posts/eip-1559-in-filecoin/). This gas system consists of network fees that are consumed to compensate for the use of system resources.

Protocol Revenue

According to Messari's revenue analysis (https://messari.io/article/demystifying-filecoin-s-revenue), Filecoin's protocol revenue includes the following four components:

• Base fees ------ dependent on message congestion, required for any storage proof.

• Batch fees ------ used when batching storage proofs.

• Overestimation fees ------ used for optimizing gas.

• Penalty fees ------ imposed when storage providers fail.

FIL fee protocol revenue grew by 91% in Q2 2023, reaching 2.5 million FIL (67% increase in USD terms to $11.5 million). The growth in protocol revenue aligns with the 64% increase in active storage trading volume and the 60% increase in the number of large dataset clients.

Although FIL base fees increased approximately threefold quarter-over-quarter, penalty fees continued to decline, decreasing by 17% quarter-over-quarter and down 29% compared to the peak of $700,000 in Q4 2022. The previously high levels of penalty fees may have been due to storage providers terminating sectors (the basic unit of storage) before the agreed storage transaction period. One possible explanation is that the FIL/USD price misalignment affected the profitability of storage providers.

The only portion of FIL fees that is not consumed by the protocol is the "tip" fees charged by block miners. This mechanism is used to accelerate transactions on the supply side of the network. Therefore, "tip" fees can be viewed 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 transaction proposals (deals) anchored by legal contracts.

• "Tips" fees used to accelerate transactions.

In Q2 2023, block rewards constituted over 99.9% of supply-side revenue, while "tips" accounted for a small portion. The new FIL token minting mechanism (https://spec.filecoin.io/systems/filecointoken/mintingmodel/#:~:text=Baseline%20minting%20allocation%20mints%20more,of%20minting%20filecoin%20too%20quickly.) 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 are allocated as storage capacity increases.

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

Unlike demand-side revenue, supply-side revenue decreased by 7% in Q2 2023, currently at 17.6 million FIL (16% decrease in USD terms). This decline is related to the overall reduction in FIL rewards issuance due to the exponential decay model and baseline minting model. The reduction in FIL rewards issuance may continue in the coming quarters.

Usage Status

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

Storage Transaction Proposals (Deals)

Near-zero storage fees (https://messari.io/article/demystifying-filecoin-s-revenue) may further encourage users to process data through Filecoin storage transaction proposals. In Q2 2023, nearly 954 PiB of data was stored on the Filecoin network through active transactions, representing a 64% quarter-over-quarter increase.

In Q2 2023, daily transaction volume increased by 47%, primarily due to the Filecoin Plus (Fil+: https://docs.filecoin.io/store/filecoin-plus/) program offering higher rewards to storage providers participating in verified deals. This new dynamic encourages the use of real data to establish new storage transaction proposals, preventing abuse of the network incentive mechanism. It also fosters competition among storage providers, thereby reducing fees.

According to the industry use case segmentation of active storage transactions shown here, the industries utilizing Filecoin the most are technology (41%) and natural resources (31%).

Services

To further encourage usage, Filecoin offers two services—NFT.Storage (https://nft.storage/) and Web3.Storage (https://web3.storage/). They provide end-users with a simple user interface and act as aggregators, bundling and storing data from multiple users with storage providers.

NFT.Storage (https://nft.storage/) provides a simple user interface for storing NFT content and metadata on Filecoin. In contrast, Web3.Storage (https://web3.storage/) simplifies the process of storing and retrieving Web3 data for Filecoin developers and end-users. By participating in the Fil+ rewards program, both services can offer Filecoin storage to end-users for free. Overall, both services saw significant growth in Q2 2023 based on active transaction data, with NFT.Storage increasing by 12% and Web3.Storage by 19%.

Users

According to Messari's guide on distributed storage networks (https://messari.io/report/the-essential-guide-to-decentralized-storage-networks), Filecoin aims to provide cold storage solutions (such as archiving and recovery) for enterprises and developers. Its competitive pricing and accessibility make it an attractive option for Web2 clients seeking cost-effective alternatives for large-scale archival data storage.

As of the end of Q2 2023, a total of 1,750 clients (https://app.periscopedata.com/shared/d33c4430-465c-40ba-956f-76e43880eba9?) have registered datasets on Filecoin. Among these clients, 338 introduced large datasets (e.g., datasets larger than 1000 TiB), a 60% increase from 211 in Q1 2023. These clients include New York City (https://opendata.cityofnewyork.us/), USC Shoah Foundation (https://sfi.usc.edu/), and Web3 platforms like OpenSea. Other entities bringing data into the Filecoin network include:

• UC Berkeley collaborating with Seal Storage for physical research storage (https://www.newswire.ca/news-releases/uc-berkeley-engages-seal-storage-web3-technology-to-advance-innovative-neutrino-physics-research-883282087.html).

• GenRAIT utilizing Estuary to store critical genomic data on Filecoin (https://filecoinfoundation.medium.com/case-study-genrait-leverages-filecoin-network-for-greater-visibility-access-and-storage-of-1d56897a2d73).

• The Starling Lab storing sensitive digital records of human history (https://medium.com/@FFDWeb/announcing-the-starling-lab-4f1ce0204f07).

• Ewesion (the fastest-growing site for photos, illustrations, and vector files in China) using Filecoin for data storage (https://filecoinfoundation.medium.com/storage-company-ewesion-leverages-filecoin-network-for-data-preservation-e36cecc84e0e).

This accelerating trend in usage growth is further reflected in Filecoin's overall utilization rate relative to its storage capacity.

Utilization and Capacity

After reaching a new high in Q2 2022, Filecoin's average raw byte storage capacity decreased by 12% compared to the same period last year, remaining stable in Q3 2022. Meanwhile, the storage utilization rate relative to total available storage capacity increased from 4.1% in Q1 2023 to 7.6% in Q2 2023. This growth is a positive signal for Filecoin adoption.

Retrieval

To meet the demand for storage retrieval, a content delivery network (CDN) for Filecoin and IPFS is currently under development, known as the Saturn project (https://docs.filecoin.io/basics/how-retrieval-works/saturn/). The Saturn project aims to serve the Filecoin retrieval market with fast and low-cost content delivery services, with node operators earning FIL from a monthly funding pool of approximately 30,000 FIL to fulfill retrieval requests.

In terms of performance, the Saturn project aims to match or even surpass the IPFS Gateway (https://docs.ipfs.tech/concepts/ipfs-gateway/#gateway-request-lifecycle), focusing on improving retrieval speed and performance, with most data coming from IPFS mirrors.

In Q2 2023, Saturn retrieval requests reached levels similar to Q1 2023, growing by 58% compared to Q4 2023. As of the end of Q2 2023, there were 3,444 nodes (https://orchestrator.strn.pl/), an increase of 148% from 1,391 nodes at the end of Q1 2023. The node distribution (https://ipinfo.io/tools/map/b7021fa6-9ed1-4cb0-a20b-dd1c24a4ba7b) is as follows: North America (40%), Europe (27%), Asia (24%), and other regions (9%). An overview of Saturn's performance (https://dashboard.saturn.tech/stats) will be detailed in Messari's Q3 2023 Filecoin status report.

FVM Usage Rate

The Filecoin Virtual Machine (FVM) brings Ethereum-style smart contracts to Filecoin, unlocking new ways to help storage providers obtain FIL collateral and supporting use cases including liquid staking, perpetual storage, and distributed computing.

As of June 30, 2023, over 2,300 special contracts (https://dashboard.starboard.ventures/fvm#total-unique-contracts-deployment) have been deployed on FVM, generating over 250,000 transactions (https://dashboard.starboard.ventures/fvm#contract-interactions) and consuming over 7% of Filecoin's gas usage in Q2 (https://dashboard.starboard.ventures/transactions-usage#gas-usage).

Notably, according to DeFi Llama, Filecoin has begun accumulating TVL from liquid staking on FVM (such as GLIF: https://www.glif.io/ and STFIL: https://www.stfil.io/) and DeFi applications. As of June 30, the total contract balance exceeded 2 million FIL, with liquid staking accounting for 80%, DeFi applications for 5%, and other services for 15%. The upcoming quarterly report will provide detailed insights into gas usage, fees, and TVL following the launch of FVM.

As Filecoin continues to attract new users and valuable datasets, it may become a foundation for developing monetizable FVM data use cases. Additionally, because FVM is compatible with Ethereum, existing Ethereum-based applications can be brought into the Filecoin network without significant changes to the code.

Ecosystem Overview

The Filecoin ecosystem (https://ecosystem.filecoin.io/?results=115) has been actively attracting developers and builders, regularly participating in activities such as hackathons, accelerators, sponsorship programs, mentorship programs, and growth support. These initiatives aim to help early projects and teams grow, with the potential for funding support from Protocol Labs or its affiliated entities. The ecosystem is committed to introducing diverse use cases: from data infrastructure, streaming, and the metaverse to gaming.

As of July 2023, there are 391 known projects being developed within the Filecoin, IPFS, and Protocol Labs network ecosystem (https://www.plnetwork.io/). In June 2023, 180 projects came from accelerators, up from 150 in March 2023. Most projects leverage Filecoin's applications and protocols to provide data services:

• Ocean Protocol (https://oceanprotocol.com/): Developer tools and platforms for data marketplaces.

• Lighthouse (https://twitter.com/LighthouseWeb3/status/1477914886621458433): Perpetual data storage service with a one-time payment pricing mechanism.

• Slate (https://slate.host/): A search engine for processing and sharing personal data.

• Berty (https://berty.tech/): A secure messaging and social media application.

• Dether (https://dether.io/): Cash access and diversified financial transaction mechanisms.

• Tableland (https://tableland.xyz/): A distributed cloud database.

Contracts focused on media and entertainment include:

• Mona (https://monaverse.com/): A 3D art gallery in the metaverse.

• NFTwitch (https://www.twitch.tv/): An NFT minting platform for Twitch content.

• Huddle01 (https://huddle01.io/): Distributed video conferencing.

• OPGames (https://www.opgames.org/): NFT minting related to gaming.

• FileMarket (https://filemarket.xyz/): A Web3 store builder and marketplace.

• Xone (https://www.auras-studios.com/): A metaverse solution connecting artists and fans.

The following use cases aim to leverage Filecoin infrastructure to drive data demand in specific fields:

• Koios (https://ethglobal.com/showcase/koios-adm6x): A no-code data DAO platform.

• ZKsig NFTs (https://ethglobal.com/showcase/zksig-nfts-j597n): Market access control mechanisms.

• DataMarket (https://ethglobal.com/showcase/datamarket-instant-data-purchase-pages-zz5z0): Data purchasing and settlement functionalities.

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

Qualitative Analysis

Release Versions

Filecoin Data Tools

To enhance the user experience for data uploads, Filecoin has launched the Filecoin Data Tools (FDT: https://filecoin.io/blog/posts/introducing-filecoin-data-tools-fdt/) project. FDT aims to simplify Filecoin data storage and management, capable of handling large-scale uploads of client data, and is committed to providing a developer experience (DX) comparable to Web2 cloud services.

Interplanetary Consensus (IPC)

Filecoin has publicly deployed the Interplanetary Consensus (IPC: https://ipc.space/) framework for scalability. IPC addresses challenges related to transaction volume and application heterogeneity by creating and executing transactions in layered subnets, also facilitating cross-subnet transactions.

Lassie

In May 2023, Filecoin released Lassie (https://filecoin.io/blog/posts/introducing-lassie---a-retrieval-client-for-filecoin-and-ipfs/), a retrieval client that allows users to retrieve content-addressed data (using CID) from Filecoin or IPFS without running a single node. Developers can also use Lassie as a data retrieval library in their applications.

V19 and V20 Network Upgrades

The V19 network upgrade (Lightning) is the realization of FIP-0060, improving block validation times and overall network performance. This upgrade addresses chain quality degradation and synchronization stability issues reported by network users; the V20 network upgrade (Thunder) is the realization of FIP-0061 (https://github.com/filecoin-project/FIPs/blob/master/FIPS/fip-0052.md), introducing the patch release network upgrade of LotusV1.22 (https://messari.io/intel/event/ac9f09c9-9edd-41ab-87b8-0a2cf7574fa9?assetSlug=filecoin\&from=asset). The activation epoch patch (https://www.notion.so/nv19-nv20-expedited-plan-for-chain-quality-38175731c93a4290a8b953ce5d3b101e) and the implementation of FIP-0052 (https://github.com/filecoin-project/FIPs/blob/master/FIPS/fip-0052.md) will be completed in subsequent network upgrades.

Ecosystem

With the launch of FVM, the Filecoin ecosystem will continue to expand. Notable integrations include Brave Wallet's (https://filecoin.io/blog/posts/brave-announces-automatic-nft-backups-and-enhanced-filecoin-support-in-brave-wallet/) support for Filecoin FVM and IPFS backup NFTs, as well as Spheron's (https://spheron.medium.com/revolutionizing-web3-infrastructure-spheron-integrates-filecoin-fil-as-a-native-payment-method-7e4f73585c5f) integration of Filecoin. Additionally, Axelar and Celer Network have introduced (https://filecoin.io/blog/posts/filecoin-news-64/) bridging support for Filecoin, enabling interoperability with networks like Ethereum, BNB Smart Chain, and Polygon.

Reportedly, as of now, FVM has deployed multiple applications across various fields, including infrastructure tools, storage and cloud services, education, science and public interest, media and entertainment, and Filecoin.

For a list of projects deployed on Filecoin's FVM, please refer to this link (https://filecoin.io/blog/posts/100-days-of-fvm/).

Key Events and Plans

SEC Classifies Filecoin as a Security

In response to the SEC classifying Filecoin as meeting the definition of a security, Protocol Labs issued a statement via Twitter (https://twitter.com/protocollabs/status/1659319891738914817?s=20) stating that Filecoin is a distributed file storage network, not a security.

Hack FS and FVM Dataverse Hackathon

Protocol Labs partnered with EthGlobal to host (https://filecoin.us20.list-manage.com/track/click?u=0bc14cd7b6583be73cea72a5d%5c\&id=63975226c0%5c\&e=e64b38a79e) HackFS 23, offering $125,000 in prizes and awards to participants in the online hackathon. Filecoin also launched the FVM Dataverse hackathon program (https://filecoin.io/blog/posts/filecoin-news-66/) to encourage developers to build applications on FVM.

Bug Bounty Program

Filecoin updated (https://security.filecoin.io/bug-bounty/) its bug bounty program on Immunefi (https://security.filecoin.io/bug-bounty/), increasing rewards for critical issues (up to $500,000). It also expanded the scope of the program to include programmable features.

Roadmap

IPC: The full version of IPC is planned for release (https://ipc.space/#roadmap) in Q3 2022, including development tools and documentation.

Axelar Integration: The Axelar team released details of its integration with the Filecoin Virtual Machine (FVM: https://messari.io/intel/event/fe4ff679-c281-4c54-a40a-f88611f3d593?assetSlug=filecoin\&from=asset), aimed at providing FVM capabilities for application developers in any connected blockchain ecosystem for storage, funding, and validating data and processing fees. This integration aims to use axelar-wrapped assets as a typical representative of bridging assets in the Filecoin ecosystem, thereby enhancing liquidity for FVM DEX and AMM, and will leverage Axelar GMP (https://messari.io/intel/event/c7fd6ca0-3160-4ea7-9c7e-aafe0c505738?assetSlug=axelar\&from=asset) to enable smart contracts on any chain to call Filecoin functionalities.

Long-term Roadmap: Upcoming long-term improvement plans include L2 capabilities, hierarchical consensus (https://research.protocol.ai/blog/2022/scaling-blockchains-with-hierarchical-consensus/), and packaging as a service (https://github.com/filecoin-project/lotus/discussions/9079). Through the FVM virtual machine, Filecoin aims to establish new partnerships and strengthen existing ones to better facilitate product growth in data infrastructure within the community.

Conclusion

Filecoin storage usage accelerated growth in Q2 2023, with active storage trading volume increasing by 64% quarter-over-quarter. Although storage capacity decreased by 12% quarter-over-quarter, storage utilization rose from 4.1% in Q1 2023 to 7.6% in Q2 2023. Meanwhile, driven by a 47% quarter-over-quarter increase in new storage transactions, FIL fee revenue grew by 91% in Q2 2023 (67% increase in USD terms).

While distributed storage is still in its early development stage, there is currently potential for growth momentum. The successful implementation of the Filecoin Virtual Machine may allow the next generation of applications to function 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 expected to become a significant provider of distributed storage and cloud services, serving both Web3 and traditional applications.

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