Filecoin — How Blockchain is Changing the Game for Marketplaces

Written by Siddharth Choksi, Analyst at Samaipata Ventures.

THE EVER-EVOLVING STATE OF BLOCKCHAIN

The last few months have shown us the astonishing pace at which the global decentralised markets have evolved. Here at Samaipata, we’ve had a close eye on the technology and we acknowledge that the blockchain will change the funding scene, both for venture capitals as for startups.

According to CoinDesk, the global crypto-community has managed to raise an estimated $1,4 billion through ICOs in 2017 alone; a dramatic increase from the estimated $300 million raised between 2014 and 2016. To read all about our view on the role of venture capital in the world of blockchain, be sure to check our last post.

With numerous top institutions, like Goldman Sachs and Barclays, having recently publicly embraced the technology, it’s clear that the blockchain isn’t something to be neglected.

In this post we’ll be exploring how the technology has birthed a new generation of marketplaces, by looking into the case of FileCoin.

HOW DO BLOCKCHAIN-BASED MARKETPLACES WORK?

Much like traditional online marketplaces, e.g. Airbnb and Etsy, blockchain-based marketplaces remove (unnecessary) middlemen in order to offer a more affordable product than its offline, brick-and-mortar counterparts.

However, the key differentiator of a blockchain-based marketplace is the unmatched level of security and transparency it bestows upon its users, considering that all transactions are traceable on a public ledger.

Furthermore, ventures that opt to launch on open-source, blockchain-based platforms like Ethereum, enable their users to digitally write and sign so-called “smart contracts” in order to prevent any form of misdoing.

As a result of the increased levels of confidence and trust in the platform, users are now free to interact and “do business” with one another without any fear that may arise in traditional online marketplaces.

It’s worth mentioning that startups who seek to launch on blockchain tend to release their own cryptocurrency (or “token”), which is basically their personalised, online currency who’s sole purpose is to perform transactions on their blockchain-based platform. Naturally, these so-called “tokens” can later be exchanged the more widely accepted cryptocurrencies like Bitcoin, or for traditional fiat currency.

FILECOIN: WHAT IS IT AND HOW IS IT CHANGING THE GAME?

Filecoin is a blockchain-based marketplace built by the venture-backed Protocol Labs, who’s based in San Francisco, California. Filecoin allows its users to monetise their unused storage space by hosting files for a fee.

Introducing Filecoin, a decentralized storage network ©Protocol Labs

HOW DOES FILECOIN WORK?

How Filecoin Works ©Filecoin

As the image above illustrates, so-called “miners” can offer their unused storage space to host files of other users in return for a certain amount of the platform’s cryptocurrency. Once in possession of the Filecoin currency, users will be given the opportunity to exchange their Filecoins for either more conventional cryptocurrencies like Bitcoin and Ether or flat-out fiat currencies through exchange platforms like Coinbase.

Filecoin strongly ensures its users that the files being shared and transferred on the platform are thoroughly secured through its sound end-to-end encryption. Furthermore, as all asks and bids platform-wide are visible to all users, highly competitive prices are guaranteed.

Moreover, the great sense of security promoted by Filecoin is backed by their promise to offer i.a. proof-of-replication to verify storage of every file transferred onto the platform.

The Filecoin network achieves staggering economies of scale by allowing anyone worldwide to participate as storage providers. It also makes storage resemble a commodity or utility by decoupling hard-drive space from additional services. On this robust global market the price of storage will be driven by supply and demand, not corporate pricing departments, and miners will compete on factors like reputation for reliability as well as price.

This new level of ‘openness’ that blockchain-based projects can offer is reinventing the concept of online marketplaces as we know it.

FILECOIN’S RECENT INITIAL-COIN OFFERING

Following a private “pre-sale” of sorts, and a public initial-coin offering (ICO), Filecoin has managed to raise over $200 million (and growing).

In fact, the response to the launch of their token sale was so overwhelming that they were forced to pause the sale at a few points due to the significant traffic their site garnered.

However, all’s well that ends well, as Filecoin’s Protocol Labs have assured the crypto-community that all transactions during the token sale have safely been received, double-checked, and correctly accounted for.

In a recent interview with TechCrunch, Juan Benet, the founder of Protocol Labs and co-creator of CoinList with AngelList, shared his views on Filecoin and the then upcoming ICO:

TC: And why build this new decentralized storage network, especially given competition from numerous other companies to do the same?
JB: There’s a ton of storage in the world that’s not getting used. Think of it like Airbnb. You had people with rooms weren’t being used; Airbnb built a marketplace for them. We’re also creating a marketplace for storage that’s decentralized so removes third parties, so you can access your information in the future without worrying whether this entity [like an AWS] will continue being around.

It’s worth mentioning that Filecoin’s token sale is what in the crypto-world is known as a “SAFT”, or Simple Agreement for Future Tokens. This basically means that the money raised will be used to build the whole blockchain first, then, once completed, investors will receive their respective tokens, which, after being added to exchanges, they will be able to trade or sell.

BLOCKCHAIN: THE FUTURE OF MARKETPLACES?

There’s no question that blockchain has changed the game for online marketplaces. Following on what Juan Benet touched upon in his interview with TechCrunch, a key selling point for blockchain-based startups is their “decentralised” aspect, allowing its users to remain confident that their data and information will always be left intact, whereas traditional online service providers are far more susceptible to hacking and crashes.

WE’RE IN THE EARLY STAGES

Blockchain-based projects have been undertaking the marketplace business model for several years now, however, considering the technology is still so new to the world, most are yet to be discovered by the average consumer.

As coverage on the technology increases, and consumers worldwide are steadily becoming more aware about the potential of blockchain, it’s safe to presume that projects launched on open-source platforms like Ethereum will gain increasing traction in the coming months.

Whilst Blockchain, or distributed ledger technology, has been around for a number of years, it has only really begun to gain traction in the mainstream in the last 12 months. — Write analysts at Morgan Stanley.

NOT JUST STORAGE

Non-Financial Blockchain Startups ©VentureRadar — [note: the infographic above is from late 2015, and is therefore incomplete. The 2017 blockchain startup ecosystem has developed significantly.]

Needless to say, hundreds of blockchain-based projects have launched over the years in a landscape of different industries, all with the aim of disrupting their respective markets. Logistics, art, fintech, and fashion; these are just some of the many industries that have dipped their toes in the blockchain.

THE END OF ONLINE MARKETPLACES AS WE KNOW IT?

Traditional online marketplaces needn’t to worry in the short run, but in the long run blockchain-based ventures may well pose a threat to centralised platforms.

© Hicham Ezzahid

In an article by Hicham Ezzahid, we see that online marketplaces with the best unit economics are the most prone to being replaced by blockchain-based ventures, as those tend to be the most automated. On the other hand, platforms that require “human touch” (and thus thinner margins) are far harder to displace.


We hope that you now have a better understanding and outlook on blockchain-based marketplaces. As usual, feel free to leave us a comment / send us feedback, we will be more than happy to get back to you!