FIL has been advancing by leaps and bounds. What hidden information is there in the token economy behind it?

Since the distributed storage network Filecoin released three major project updates for 2023 last week (FVM, data computing, and retrieval market), FIL has continued to break its own "ceiling" in the past week. The latest price of FIL has exceeded 9 USDT, with a 24-hour increase of 21.35%. Next, Odaily Planet Daily will take you to understand the impact of Filecoin token economy on token holders and the future ecology.

Introduction to Filecoin

The Filecoin network was launched in October 2020, introducing an incentive layer for the IPFS protocol and enabling open services for data. Today, the Filecoin network is known primarily as storage as an open service. However, an early article summarizing the direction of the network proposed a larger vision for Filecoin, which also includes "infrastructure for storing, distributing, and transforming data."

Filecoin’s “main plan” to execute this vision begins with amassing a massive amount of hardware resources (storage capacity and computing power). This is important because the only way Web3 infrastructure can reliably replace (or even compete with) traditional cloud storage is if it can operate at an order of magnitude and scale that exceeds current offerings. While no Web3 protocol has yet achieved this, some progress has been made.

Furthermore, in order to drive long-term demand for network resources (capacity, retrieval, and computational power), it is critical to bootstrap the network with valid data and develop software and tools to enable computation and composable services on top of the data. Ultimately, demand for these services will become the foundation for a strong economy on top of the Filecoin blockchain.

Filecoin's token economics were designed with this long-term vision in mind and help incentivize rapid growth and development of the network. To date, the network has over 16 EiB of committed storage capacity, and the explosive growth of the ecosystem has driven demand for network resources. This growth and continued success is due to the efforts of the Filecoin community, an interconnected network of storage clients, developers, storage providers (SPs), ecosystem partners, and token holders.

Filecoin Token

This global digital economy also requires a single effective currency for transactions. Since Filecoin is a permissionless marketplace with cryptographically verifiable goods, the design limits the limits to only being able to trade through the native utility token Filecoin. The FIL token has multiple functions:

1. Pay for on-chain messages.

2. As collateral. Create economic incentives for long-term reliable data storage and ensure the security of the blockchain and the subnets or shards after Interplanetary Consensus (IPC: Consensus Lab flagship project) takes effect.

3. Burning is used to regulate a shared resource (block space).

Unlike other storage networks, the Filecoin token is primarily focused on incentivizing reliable services and promoting on-chain economics. The storage market exists off-chain, but messages containing cryptographic proofs of storage are anchored on-chain. Most critically, this means that tokens can increase in value without placing undue pressure on users of the network's various services (storage, retrieval, computation, etc.), while token holders can still benefit from FIL consumption due to increased utilization (i.e. demand for block space).

Token Economics for Token Holders

Filecoin Token Distribution

Filecoin’s cryptoeconomic structure helps ensure that the value added to participants is aligned with the long-term utility of the protocol. Therefore, Filecoin’s initial allocation at network launch is intended to support a protocol that incentivizes sustainable value creation.

Source: Filecoin Spec.

According to the current protocol specification, a maximum of 2 billion FIL will be created. Of these, 70% are allocated to storage and related services (i.e., tokens are minted to reward storage providers), and 20% (starting in October 2020, vested over 6 years) are allocated to Protocol Labs and the Filecoin Foundation to support network development, adoption, and ecosystem growth. The remaining FIL is allocated to SAFT investors, vesting starting in October 2020, with terms ranging from 6 months to 3 years.

2 billion FIL is the maximum amount that can theoretically be minted and awarded. However, this may not be the amount of FIL that ultimately enters the network’s circulating supply:

1. The 300 million FIL held as a mining reserve requires a protocol upgrade before they can be mined, which means it is up to the community to decide how much should be released.

2. The growth of the network requires the use and consumption of tokens, which reduces the available token supply. As of the end of September 2022, approximately 520 million FIL have been minted or vested. Of this, approximately 70% is in circulation, as a large amount of FIL is burned (permanently removed from circulation) due to network transaction fees, or locked as collateral to ensure network security and incentivize reliable storage. As the network matures, the token emission rate (vesting and minting) is expected to gradually decrease, as Filecoin has a finite vesting schedule and a minting model where emission is tied to network growth.

Token Supply: Net Inflow or Outflow

Understanding the net inflows or outflows that determine the token supply will help token holders understand the relative purchasing power of the token.

In simple terms, minting, vesting, locking, and burning contribute to the net inflow or outflow of tokens in the circulating supply. Below is the evolution of Filecoin token supply since the launch of the mainnet.

Source: Starboard Ventures. Data as of September 30, 2022. This chart represents historical data only. Because Filecoin’s circulating supply is subject to market inputs, it cannot be accurately predicted.

Currently, the network is expanding. Filecoin Foundation and Protocol Labs token vesting supports the development and growth of the ecosystem, while storage provider block rewards reward transactions and storage capacity on-line. This provides a great opportunity for token holders to participate in the growth of the ecosystem, as they can lend to storage providers (SPs), promote storage providers' demand for FIL, and share the resulting network rewards. In this way, token holders can retrieve token emissions while supporting network growth and advancing the Filecoin vision.

Filecoin Ecosystem Roadmap: Implications for Token Holders

In the Filecoin ecosystem, continued improvements in user programmability, data logging, data retrievability, scalability, and computation will be achieved over the next 3 quarters. These initiatives should have a positive impact on token holders by supporting client needs, unlocking a variety of network use cases, and ultimately driving token usage. Some of these important improvements and their potential economic impact are discussed below.

Filecoin Virtual Machine (FVM)

The Filecoin virtual machine unlocks endless possibilities, from programmable storage primitives, to cross-chain interoperability bridges, to data-centric decentralized autonomous organizations DAOs and Layer 2 solutions. In short, this means smart contracts and user programmability are coming to Filecoin. Expected to be released in the first half of 2023, this network upgrade should have a positive impact on token holders as it may increase FIL's use cases and may affect the "outflow" component of the circulating supply equation (FIL locks and burns).

FVM and the Outflows in Token Supply

As long as there is operation or utility on the network, FIL tokens will be consumed (burned) to compensate for the computational and storage resources consumed by chain messages. The introduction of smart contract functionality may increase the demand for block space, resulting in an increase in burned FIL. As network participants compete for on-chain resources, the token consumption rate is in the hands of the community.

Additionally, the FVM protocol upgrade increases the amount of FIL put into use and/or locked. Currently, the majority of FIL locked on the network comes from storage provider collateral. FVM introduces the possibility of locking up a large amount of funds to support a variety of smart contract applications. DeFi protocols are just a subset of applications that can leverage Filecoin's efficient proof-of-work chain, which not only increases token consumption, but also generates new use cases for locking/locking FIL.

What’s unique about FVM is that it brings new dynamics to the Filecoin network. While today you can contract with a storage provider to store your data, with FVM, additional rules, automation, and composability with other services (such as DeFi) can be added. As other components of the Filecoin roadmap (retrieval market, data computation, etc.) are implemented, we hope that FVM will be able to leverage Filecoin’s infrastructure to facilitate the implementation of more complex products, thereby promoting broader network adoption.

Filecoin Plus and Data Onboarding

Filecoin Plus (FIL+) is a practical solution that aims to incentivize efficient use of the Filecoin network. Since it is difficult to distinguish algorithmically between real useful data and randomly generated data, FIL+ introduces a social trust layer to the network. In the FIL+ program, clients that pass the verification process are awarded a new resource, DataCap, which they can use to trade storage with storage providers (SPs). SPs are incentivized to enter into storage agreements with clients using DataCap because FIL+ transactions increase the number of block rewards they receive compared to regular (non-FIL+) transactions, or by submitting storage capacity to the network. In order to receive these additional rewards from FIL+, storage providers post more collateral (approximately 10 times the collateral of non-FIL+ storage sectors) and lock more tokens on the network.

So far, we have seen strong growth in data from FIL+ customers, indicating that the amount of effective onboarded data is increasing.

Source: Starboard Ventures. Data as of September 30, 2022.

From a token economics perspective, a continuation of this trend is likely to increase the number of tokens locked on the network and reduce the circulating supply of tokens. More importantly, as the Filecoin network moves toward its mission of storing efficient data, the consumption and utilization of tokens will also grow.

Interplanetary Consensus Upgrade (IPC: ConsensusLab Flagship Project)

IPC is an upcoming network upgrade that aims to increase the use cases that Filecoin can support while improving the scalability, throughput, and finality of the network. It is an exciting blockchain innovation. IPC also has potential implications for the crypto economy by horizontally scaling the chain through subnets (shards) and may increase:

• The burning of FIL also reduces gas fees for users due to increased scalability and FVM utilization.

• The amount of FIL locked (or staked) as collateral to secure the subnet.

• Support FIL consumption requirements of shards for custom on-chain use cases.

Summarize

As a new type of data storage and application network, Filecoin's mission is to create a decentralized, efficient, and robust foundation for society's information. The number of developments in the Filecoin ecosystem that support this mission is large and will have a positive impact on token holders. The purpose of the protocol's token economy is to reward long-term participation and contribution to the network. Community participants can improve their returns by understanding the token economy, especially the sources of token inflows and outflows, which support the token economy. Looking ahead, continued improvements to the protocol may lead to new and exciting use cases for the network and tokens, potentially further driving token holder participation and actively promoting the value proposition of this rapidly growing ecosystem.