Is Filecoin ($FIL) Dead?

This article does not cover what Filecoin ($FIL) is, but discusses the current situation with Filecoin, specifically on why its revenue has stumbled significantly.

To learn more about what Filecoin ($FIL) is, please check out their docs.

TL;DR
Filecoin is a on-chain P2P storage service. Storage providers are rewarded (paid) for offering storage space to the network’s users. It’s revenue has been decreasing despite increasing network activity, this is due to a new product offering: Filecoin Plus.

No it’s not dead, in fact, its pivot can prove to be successful, we shall see.

Data Suggesting Filecoin’s Decline

Looking at Token Terminal’s dashboard, Filecoin is the second highest-earning protocol in the space, with a total of US$1.5bn, right after Uniswap’s US$8.4bn.

Figure 1: Graph of top protocols by cumulative revenue [1]

However, looking closer, Filecoin’s revenue has been relatively non-existent since July 2021. What went wrong?

Figure 2: Graph of Filecoin’s monthly protocol revenue [2]

Just like how DeFi protocols are often ‘abused’ (think $MIM degenbox to Anchor), Filecoin was abused in its early stages. With storage providers self-dealing (hosting their own data) to reap block rewards. This worked well for storage providers (they got paid heftily) and for Filecoin (made the project look quantitatively beautiful).

However, this meant that most of the active storage stored on the Filecoin network is low-quality junk without any use case. Filecoin pays out block rewards to solve the cold start effect, to bootstrap users to the network, which is fairly common in Web3. This comes at a cost of future increasing sell pressure, and it is a trade most protocols (including Filecoin) are willing to take since they believe that the user stickiness would drive in demand that could outweigh the selling pressure. Self-dealing participants are mercenaries and are short-term players, Filecoin had to change its model.

Enter: Filecoin Plus

To counteract non-beneficial activities, Filecoin introduced a new product line, Filecoin Plus. Filecoin Plus is a storage provider (think AWS S3 Deep Archive etc.) that is only accessible by verified users (merchants) and is introduced to increase the network’s storage quality and use case.

Why would non-decentralised-focused users opt for Filecoin Plus compared to AWS’ offerings? It’s free (well, basically free).

Yes, users of Filecoin Plus get to store data on a decentralised network without paying. This is possible because Filecoin incentivised storage providers with massive rewards for providing storage solutions to Filecoin Plus users (est. 10X the normal Filecoin rewards), and caused price competition between providers to win rewards, eventually reaching equilibrium at near-zero prices.

Needless to say, it was successful and shifted Filecoin’s dynamics, with Filecoin Plus currently accounting for more than 99% of the transactions. Filecoin Plus obtained more than 1500 verified clients and increased active deal counts by over 500% YoY [3].

Figure 3: Graph showing Filecoin (Regular) vs Filecoin Plus by transaction count [4]

Due to its non-revenue generating scheme, Filecoin Plus’ success is not reflected in the first two revenue graphs (Token Terminal). In addition to this, the HyperDrive network upgrade allowed the network to scale 10–25x and this caused transaction fees to be even less significant. Resulting in an overall very much decreased revenue for Filecoin.

Figure 4: Graph showing Filecoin active deals and protocol revenue [3]

It is likely that Filecoin Plus will become their flagship product offering for the next 1–3 years while new use cases for decentralised storage are being explored. The current model works for verified users (they get access to free storage), storage providers (they are heavily incentivised through block rewards) and the Filecoin protocol (they get large activity and onboard new high-quality users).

The Problem

There is currently US$760mn worth of $FIL coins being posted as collateral by these storage providers, which represents c.50% of the circulating supply [5, 6]. However, the demand for $FIL coins in the current model is purely driven by storage providers’ collateral and negligible transaction fees. With a lack of use cases, a mass selling of these $FIL coins would crumble the Filecoin Plus scheme as well.

An increasing sell pressure of $FIL coins would lead to a decrease in the price of $FIL coins, which means storage providers are less incentivised and may start charging, this would perform a stress test on users (would they pay for the Filecoin Plus service?). Though a stress test is arguably needed eventually, the current market conditions may not be the best to perform stress tests as regaining the lost trust and storage (liquidity) would be hard amidst this bearish sentiment.

The current model of Filecoin Plus also restricts access to only verified users, and although this is for the good of existing network participants, it goes against one of cryptocurrencies’ values — permissionless.

Next Steps

Filecoin should innovate and focus on building use cases and demands for the $FIL coins to ensure the sustainability of the protocol. They have been continuously working on network-level developments as well as application bootstrapping, which is evidently showing progress.

Figure 5: Graph showing the number of projects building on Filecoin [3]

The development of the Filecoin Virtual Machine (FVM) would provide smart contracts on Filecoin’s storage network, which would most significantly allow permanent storage solutions on Filecoin. Placing Filecoin as a strong contender for Arweave and further solidifying its position in the decentralised storage solutions sector.

Thank you for reading! We shall see how Filecoin turns out. All the best to the team and all believers in Filecoin.

References

[1]https://tokenterminal.com/terminal

[2]https://tokenterminal.com/terminal/projects/filecoin

[3]https://messari.io/article/demystifying-filecoin-s-revenue

[4]https://dashboard.starboard.ventures/dashboard

[5]https://observablehq.com/@starboard/a-primer-to-filecoin-circulating-supply/2

[6] https://www.coingecko.com/en/coins/filecoin