What is Filecoin (FIL)? How It Works? Complete Guides 2024

Filecoin is a decentralized digital storage platform hosted on blockchain technology.

It is similar in function to DropBox or WeTransfer, except that data is not stored on a single server but rather on a peer-to-peer network.

Aside from that, Filecoin differs from centralized data storage providers in that it allows users to rent out their excess storage space. Think of it as an Airbnb to lease out the unused space in your computer!

Filecoin offers a more sustainable and affordable alternative to conventional digital storage services.

In creating a larger free market for data storage, storage costs could be driven lower for users. Tapping into millions of computers around the globe instead of building new storage centers helps Filecoin scale more economically.

In addition, a decentralized network means that there is no single point of attack versus the likes of Dropbox and iCloud, both of which have been hacked in the past.

How does Filecoin work?

Filecoin permits users to rent unused hard drive space using a blockchain.

The blockchain serves to record these “rental agreements” to store particular files and transmit FIL, the unit of value account on the network.

Filecoin is built on the InterPlanetary File System (IPFS) blockchain architecture, which uses a hash-addressed content structure to store data.

The Filecoin Protocol interacts with nodes that are either storage providers or retrievers. These participants are then rewarded for contributing resources to maintain the network’s operation.

Just like Bitcoin, the Filecoin Protocol employs a Proof of Work (PoW) consensus mechanism. But unlike most decentralized blockchain initiatives, Filecoin’s participating nodes process data storage instead of cryptocurrencies.

Instead of validating transactions on the blockchain, Filecoin’s PoW mechanism proves that a miner or node has successfully stored data for a specified period of time and replication.

To be specific, Filecoin leverages two sub-types of PoW systems:

1. The first is called the Proof of Replication (PoRep) which validates whether stored data has been reproduc
2. ed,
3. The second is called Proof of Space Time (PoST).
4. Miner proofs create the Filecoin network using three methods: put, get, and manage.
5. As their names suggest, the ‘put’ function is responsible for storing data while the ‘get’ function is in charge of accessing it upon the request of the client. ‘Manage’ has to do with maintaining buyer and seller reputations on the platform.
6. What is the Filecoin (FIL) token?
7. The Filecoin network operates in two different marketplaces, one for data storage and the other for retrieval, and the native token FIL functions as the payment for these activities.
8. Storage miners receive ‘put’ requests and store clients’ data. To do this, they pledge an amount of FIL token commensurate to the client’s data as collateral. This helps provide end-users with a form of assurance.
9. On the other hand, retrieval miners run ‘get’ requests and retrieve clients’ data. They are then compensated in FIL for their contributions to the network.
10. The FIL token can also be used to purchase storage space on the network.
11. Team Background
12. Filecoin was developed by Protocol Lab, which was founded by Juan Benet in 2014.
13. Benet studied Computer Science at Stanford University before working with Silicon Valley companies like StartX and co-founding Loki Studios.
14. He developed the InterPlanetary File System (IPFS) protocol with the goal of making the web faster, safer, and more open.
15. Notable Investors: Blockchain Capital, Boost VC, Digital Currency Group, Galaxy Digital, Genblock Capital, Union Square Ventures, Polychain Capital, Pantera Capital, Winklevoss Capital Management, LLC
16. Token Metrics:
17. Circulating supply: 304.7 million FIL
18. Raised $205 million in ICO in 2017

Filecoin’s key features and the advantages of using Filecoin

Besides its distinct benefits, Filecoin offers a range of advantages over traditional cloud storage providers. To start with the latter, the decentralized architecture allows data to be distributed across a global network of nodes, reducing the risk of data loss and enhancing privacy. The network’s consensus mechanisms ensure the secure storage and retrieval of data, maintaining the integrity of the stored files at all times.  

This stands in contrast to traditional cloud storage providers, which rely on centralized servers that can be vulnerable to security breaches, outages and monopolistic practices. Crucially, in the light of Web3, outages on Web3(-oriented) platforms also under mine trust and user satisfaction and may bring about legal claims. 

Besides, Filecoin’s incentivized participation model encourages users to contribute their unused storage capacity to the network in exchange for FIL tokens. This approach incentivizes network growth, leading to increased storage capacity and highly competitive storage prices.

As a relatively novel solution for data storage, one might wonder whether Filecoin is safe. Naturally, carefully choosing storage providers is crucial, considering factors like reputation, reliability and geographic location. Crucially, centralized storage is cost-effective and easy to manage but remains vulnerable to cyberattacks and data breaches. 

On the other hand, Filecoin offers a decentralized nature and robust consensus mechanisms to ensure high security for stored data. Moreover, Filecoin’s scalability is another key advantage, with the network designed to grow organically as more users join the ecosystem. This ensures that storage capacity remains available even as demand increases.

How to stake FIL

Staking FIL inherently implies participating in the network as a storage miner. The process of staking FIL typically involves several steps. Miners must first acquire FIL tokens by purchasing them on cryptocurrency exchanges (or, of course, by earning them by providing storage capacity to the network). 

Secondly, miners ought to set up a Filecoin node by installing the required software and hardware, configuring their systems to meet the network’s minimum requirements, and connecting their storage devices to said node(s).

Importantly, miners must stake a certain amount of FIL tokens as collateral, with the collateral amount depending on said miners’ storage capacity and other factors, such as the network parameters. After that, miners can begin offering storage and retrieval services to their clients, earning rewards in the form of FIL tokens for their contributions to the network according to the consensus mechanisms mentioned above. 

It is important to note that while Filecoin offers an option for anybody to become a storage or retrieval provider, the network acknowledges that the cost of entry can be prohibitively high. This reality somewhat contrasts with the idea of utilizing otherwise idle storage capacity from users who can rent out extra storage space on their computer’s hardware to others who will pay them with FIL tokens.  

Indeed, it appears that the “democratization of access to the cloud market” argument only really applies to where the demand side is involved. Since FIL mining requires significant investment in FIL collateral and equipment alike, mining and staking FIL is a viable option primarily for those who run data center infrastructures and other stakeholders with plentiful resources.  

Is FIL a good investment?

As a decentralized storage network with a growing user base, FIL can offer long-term value for investors. Those wondering how to buy FIL tokens may refer to supported centralized or decentralized cryptocurrency exchanges. Importantly, to grasp whether FIL is a good investment, prospective buyers should consider fundamentals, market dynamics, competition and risk tolerance before investing.

FIL has a maximum token supply of 2 billion, with a circulating supply of approximately 403 million tokens. Of the total token supply, 70% is earmarked for mining rewards, which are proportional to network adoption. Moreover, the rate of new token issuance will gradually decline over time as the network matures, in theory ensuring the network’s long-term viability.

The current Filecoin system is complex and somewhat challenging to use, which can pose a barrier to adoption and thus growth. The Filecoin development team acknowledges that the network is still in its early stages of development and that there is room for improvement in speed and functionality.  

Nevertheless, the network is actively working to implement additional features, such as smart contracts, to enhance the network’s flexibility and user-friendliness. This latest development has sparked conjecture regarding the potential of Filecoin to offer Web3 services with real-world applications, such as computing and storage, facilitated by its decentralized storage marketplace.

The future of decentralized storage solutions and Filecoin

The current hyperscaler cloud storage market is ripe to be challenged by Filecoin as it poses various concerns, including privacy, outages, censorship and high profit margins. The potential benefits of decentralized data storage solutions, including enhanced security, user control and affordability, have attracted significant attention and investment from a broad range of end-users and investors alike. 

However, their adoption remains a substantial challenge due to their steep learning curve and the required shift in mindset and infrastructure, which may impede their widespread adoption. Decentralized systems are still relatively new and unfamiliar to many users and businesses, making it difficult for them to embrace these technologies fully. As such, the biggest hurdle for decentralized protocols may be their adoption. 

Filecoin’s development efforts focus on several key areas, with numerous proposals dedicated to improving data indexing, delivery, payment models, privacy-preserving data processing and layer-2 scaling solutions. A crucial aspect of Filecoin’s vision is its emphasis on zero-knowledge proofs, central to preserving user privacy and facilitating self-sovereignty. As such, Filecoin is a promising technology that has the potential to revolutionize the world of decentralized data storage.

With its unique features and ambitious roadmap, Filecoin is poised to become a powerful catalyst in the storage space and beyond, challenging established providers and driving innovation in centralized and decentralized storage markets. By offering a secure, affordable and privacy-preserving solution, Filecoin has the potential to revolutionize the world of data storage and seamlessly facilitate the adoption of Web3 as a pleasant by-product. 

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