The Force Research | Things about Filecoin Gas Fee Economics

Recently, the computing power of the Filecoin network has accelerated, with more than 1 million new messages in 24 hours, causing the entire network to be overcrowded, which in turn affected the surge in gas fees. This time we will talk about the nature of gas fees, market impact, and whether we can learn from Ethereum's EIP 1559 proposal to optimize the Filecoin network. The main content discussed below is:

• How does gas fee burning affect market trends?

• What is the economic significance behind Gas Fees?

• How to learn from Ethereum to optimize Filecoin’s gas fee?

1. Looking at the supply and demand of Filecoin from the perspective of monetary policy: Does gas fee destruction mean buying?

As we all know, monetary policy is the government's way of regulating the exchange rate of legal tender by controlling the relationship between currency, output and inflation, thereby achieving the stability of legal tender. Based on this, we understand the daily release and destruction of Filecoin as variables of stored currency, and the token economy and other mechanisms as macroeconomic control policies, and then analyze its daily supply and demand relationship.

BTC Buy and Sell Orders

Simply put, a currency system can be divided into buying (purchasing power) and selling (market supply). From the perspective of Bitcoin, the destruction of Bitcoin is not large, so it can be ignored for the time being. Bitcoin mining can release 900 Bitcoins per day (which can be understood as selling orders). If Grayscale Investments buys 900 Bitcoins per day (which can be understood as buying orders), temporarily ignoring the time difference factor in the market, the above behavior can be regarded as long-short offset, and other external market buying or selling behaviors will cause fluctuations in the Bitcoin market price. In short, Grayscale Investments has been digesting the Bitcoin selling orders from miners/the market in recent years, plus some external buying orders, the market performance is oversold, and the price rises.

So what are the buying and selling orders for Filecoin? Filecoin is more complicated than the Bitcoin market.

Filecoin Buy and Sell Orders

Buying may include the following behaviors: destruction + miner computing power growth mortgage, maintenance + secondary market buying. The following is an explanation:

• Recently, the daily destruction of buying orders exceeds 50,000/day. Destruction can be understood as a large hoarder who only takes in but does not take out coins, which can be indirectly regarded as buying orders. According to the 24-hour destruction fee on the morning of November 30, it was about 56,000 FIL, of which ProveCommitSector, PreCommitSector and SubmitWindowedPoSt accounted for about 98.2% of the total fee, and nearly 100% of the fees of the above three were destroyed. The tip given to the miners can be ignored and there is no rush. The tentative destruction is planned to be 55,000 FIL;

• Miners purchase more than 200,000 FIL every day. The FIL used by miners every day is the FIL used by miners to mortgage computing power growth and maintenance. Because the following text regards all miners' income as selling orders, this part of miners is regarded as buying orders. With the recent 20PiB/day computing power growth, 250,000 FIL buying orders are required per day (including 55,000 FIL handling fees);

• Secondary market buying is an unknown factor, which is mainly based on market heat and user awareness, and there is a lot of uncertainty.

Selling may include the following behaviors: linear release + direct release + investor release + secondary market selling. The following is an explanation:

• About 50,000 to 70,000 FILs are released linearly every day. The linear release has different benefits before and after the activation of the FIP-4 proposal. Currently, the daily FIL release mainly includes the 180-day linear release of rewards (before FIP-4) + the 180-day linear release of 75% of rewards (after FIP-4). The total block reward is about 14.4 million, and the 25% direct release after the use of FIP-4 is reduced to about 2 million. The remaining 12.4 million will be released linearly (ignoring the previously released part for the time being), and the daily release is about 12.4 million/180 days = 70,000;

• About 50,000 FIL will be directly released every day. Direct release means 25% of the total blockchain rewards will be directly released every day, which is about 200,000*25%=50,000/day;

• According to previous announcements and calculations, investors release approximately 350,000 FIL per day;

• Secondary market selling is also an unknown factor, which is mainly affected by the market panic index.

Through the above comparison, buying = 305,000 FIL + secondary market buying, selling = 470,000 FIL + secondary market selling, the selling will be about 165,000 FIL more than the buying.

Although there are more sell orders than buy orders, the surplus mainly belongs to investors, who will use it for mortgage loans or hoarding coins. It is unlikely that all of them will be sold at present. At the same time, there is great uncertainty in the secondary market buying and selling orders. Currently, there are also many users or miners buying coins for value investment or mortgage backup.

In summary, the FIL trend analysis is as follows:

• The recent FIL market trend is relatively stable, and the buying and selling orders are relatively balanced;

• Because there is not a large amount of loosely circulated FIL at present, once investors sell a large number of FIL, miners are likely to buy more coins to use as collateral for computing power reserves;

• The entire cryptocurrency market is greatly affected by the sentiment of Bitcoin, and the panic sentiment of the Bitcoin market is likely to affect the trend of FIL.

2. Gas fee burning = tax?

In Filecoin EIP 1559, transaction fees are divided into BASEFEE and TIP, of which BASEFEE will be directly burned and destroyed, and currently this part accounts for a larger proportion; TIP accounts for a smaller proportion and is used as a tip for miners.

The main function of taxation is to regulate social demand, that is, to adjust market transactions. Macroeconomic regulation of taxation is to stimulate or inhibit market transactions to a certain extent through taxation. In this regard, the consumption of gas fees can regulate the information transactions and transfer behaviors of the Filecoin network to a certain extent (the growth of miners' computing power and the maintenance of transactions that require information). The following is an analysis of gas fees based on tax economics:

Tax economics and Filecoin gas fees, source: IPFS Force Zone, 2020-12-01

At present, the taxation of the Filecoin network will inhibit trading behavior in the market to a certain extent. From the above, we can conclude the impact of gas fees on the Filecoin network:

• Fewer transactions and slower computing power growth. After the introduction of the tax, the tax demand will decrease, which means that there will be fewer transactions in the market, which is intuitively manifested as slower computing power growth;

• The surplus value created by the Filecoin network decreases. The reduction in transfers in the market will lead to a significant reduction in producer surplus and consumer surplus, that is, the profits that producers (miners) can obtain and the costs that consumers (transfer demanders) can save are reduced from the original A+B+C+D+E+F to A+D, so the transaction value created by the Filecoin network decreases;

• The difference between Filecoin Gas destruction mechanism and government taxation and Ethereum Gas destruction. B+C is the tax scale (BASEFEE), which will be destroyed directly. This part is different from government taxation and Ethereum. The taxes collected by the government will be redistributed to the society after macro-control, but the Filecoin network will not; Ethereum does not have a fixed total circulation, and mining release will gradually make up for this part of the destruction, while Filecoin is fixed at 2 billion FIL. Although Protocol Labs mentioned before that it is possible to redistribute the destroyed BASEFEE, this part has not yet been determined and is temporarily regarded as non-recyclable FIL;

• The Filecoin Gas mechanism will lead to deadweight losses. Tax policies will lead to a certain degree of deadweight losses, which is E+F. Deadweight losses are that the transaction demander/miner will not take action due to the collection of gas fees and will switch to other alternative methods. For example, the transaction demander can replace the Filecoin transfer transaction with other transfer methods with lower fees.

So as demand grows, how will prices, BASEFEE destruction scale, and Gas fee scale change?

Relationship between transaction demand and price, BASEFEE destruction scale, and Gas fee scale, source: IPFS Force Zone, 2020-12-01

• As the demand for orders increases, the gas fee of Filecoin will increase exponentially. The more congested the order demand is, the more expensive it is. Recently, the network was more congested on November 30 than on November 29, and the handling fee increased from more than 50,000 FIL (November 29) to more than 80,000 FIL (November 30);

• Too high a fee will lead to less network activity, and neither burning nor miners will gain any benefits. As order demand increases and transaction prices rise, BASEFEE will reach a maximum critical value. Too high a price will lead to less transaction activity, and then it will return to 0;

• When the transaction price is too high, the market will avoid transactions due to the high price (computing power growth), resulting in a gradual reduction in the scale of gas fees.

3. Thoughts from Ethereum EIP 1559

We all know that Ethereum's EIP 1559 is also in the process of continuous optimization. There are some thoughts worth referring to:

Optimization plan thinking, source: IPFS Force Zone, 2020-12-01

• Right: When the network demand orders reach a certain number, the transaction price can be set to a fixed value or the package transaction of the block can be prohibited;

• Left picture: The overall standard of transaction fees is lowered, but this action is only a temporary solution and does not address the root cause. With the demand for transaction orders, the price may still surge.

In addition to thinking about some ways to reduce gas fees, increasing revenue is also a way to promote the positive development of the network. Drawing on the concept of uncle blocks in Ethereum, orphan block rewards are given to miners. The operation method is: in Ethereum, fixed blocks among orphan blocks will be selected as uncle blocks and given rewards. The reason why Ethereum makes such adjustments is that the transaction information of orphan blocks is valuable in itself and a high orphan block rate will affect the enthusiasm of miners (the orphan block rate of Filecoin and ETH is about 8%).

PS: This article is for research reference only and is not investment advice.