Filecoin crashed as soon as it went online, and it wasn’t just the price that collapsed | Research report

Author | Hash Party - LucyCheng

Article word count: about 5600 words Reading time: about 5 minutes

1. Overview

Unfortunately, Filecoin got off to a bad start. As soon as it was launched, it was hit with negative news. The project token FIL fell instead of rising. In less than five days, the price dropped from $200 to $30. In addition, there were rumors in the relevant market that miners stopped protesting, officials were suspected of selling off the market, and multiple teams wanted to take the opportunity to fork the project. In this article, Hashipai will analyze Filecoin and observe the development difficulties faced by the project after its launch.

2. After three years of preparation, participants are waiting for a price drop of more than 85%

Some exchanges that have launched FIL futures

(Note: Fil 6 represents June futures, Fil 1 represents January futures, and delivery will be made on a monthly basis after the mainnet goes online)

According to data from BiShiJie, since Filecoin launched its second-phase test network in May 2020, the total daily transaction volume of its tokens has gradually increased, reaching 300 million yuan per day in mid-July. At the same time, FIL has also successfully broken the long-standing sideways trend. The token price has been rising steadily since July, and continued to climb to US$30 a month before the launch of the project's main network, an increase of nearly 300 percentage points compared to the beginning of the year.

Changes in FIL prices and daily market trading volume since 2017 (data source: BiShiJie)

Riding on the market's enthusiasm, on the day when Filecoin's mainnet was launched, FIL's price once again showed an upward trend, reaching a new high of $208.95 on Coingecko. However, this wave of growth did not last long. On the 16th of the next day, FIL's price quickly turned around and began to plummet. In the following week, it continued to decline to around $30, and fell to a low of $20, a drop of nearly 67% from the highest point. Although the price decline has basically stopped at this stage, the price of FIL tokens has fallen back to the level of around $35 three months before the mainnet was launched.

Price changes after Filecoin went online (data source: CoinGecko)

Filecoin's performance of opening high and closing low is not only reflected in the price level, but also in the effective computing power of the entire network. According to the data statistics of the block browser filscout.io, the computing power growth rate has gradually slowed down after the main network of the project was launched. The current effective computing power of the entire network is about 656.96 PiB, with a weekly increase of 6.9%, and the growth rate has dropped by more than 22 percentage points month-on-month. Moreover, according to the analysis of Bibi News, it can be seen that half of the nodes of Filecoin's TOP10 miners have almost zero growth in computing power in the past seven days; on the other hand, the maximum computing power growth rate of the TOP 20 miners has fallen to one-tenth of the historical high.

The growth of effective computing power of the entire network after the launch of Filecoin mainnet (data source: filscout.io)

Filecoin mainnet related data (data source: filfox.info; deadline: October 27, 2020)

While the growth rate of effective computing power of the top miners has slowed down, their mining efficiency has also declined rapidly. Among the top 20 mining nodes in terms of computing power, the lowest mining efficiency is 0.20 FIL/TiB, and the highest is only 0.27 FIL/TiB. Taking the Spacetime Cloud & Lingdong f02770, which has the highest computing power share, as an example, the current mining efficiency of this node is 0.23 FIL/TiB. Compared with the 0.6 FIL/TiB at the end of the first round of Filecoin's space race on September 14, the relevant data has dropped by more than 61.7%. In theory, a significant reduction in mining efficiency means that many miners who should have produced blocks did not produce blocks; so we have reason to speculate that a large number of mining machines in the current network are in a semi-powered or even powered off state.

3. The new storage method is highly anticipated, and the ecosystem has taken shape before it goes online

Timeline of some important events of Filecoin (Source: Internet)

In essence, Filecoin exists as the incentive layer of the IPFS protocol; IPFS is a peer-to-peer distributed file system released by the Internet technology company Protocol Labs in 2015, which aims to replace HTTP as the next-generation network basic protocol. Unlike the request-response mode of the traditional HTTP protocol server and client, IPFS is based on content addressing rather than domain name addressing. For this reason, it can connect all computers using its file system, activate global idle bandwidth and hard disks through sharing, and provide users with a network experience with faster transmission speeds, stronger privacy, less bandwidth resources, and better content protection.

Part of the IPFS ecosystem (Source: Internet)

As society moves towards Web3.0, IPFS has attracted more and more attention from all walks of life in recent years. At present, many traditional technology giants at home and abroad, including Google, Microsoft, and JD Cloud, universities, research institutions, and leading public chain projects such as Ethereum have begun to explore the application direction of this decentralized protocol. With a huge potential market as a bottom line, Filecoin has been placed in a high position in the field before the main network was launched, and attracted a large amount of entry funds and ecological layout in the project preparation stage.

In August 2017, the Filecoin team conducted an ICO through CoinList and raised $257 million in public and private offerings, setting a record for early blockchain project financing in the world during that period. Investors included top institutions such as Sequoia Capital, Y Combinator, Winklevoss Brothers, and Union Square Ventures. Based on the calculation that only 10% of the tokens were sold, Filecoin’s valuation before it went online had reached $2.57 billion, enough to rank in the top five in the market value rankings of mainstream cryptocurrencies at the time.

At the beginning of August 2017, the market capitalization ranking of the cryptocurrency market (data source: Coinmarketcap)

What’s worse is that less than two months after Filecoin completed its financing, Gate.io and LBank have already launched futures trading of its token FIL; the project has not yet announced the governance mechanism and mining algorithm, but mining machine manufacturers and cloud computing platforms have already started selling related mining products. In the past three years, the market has never stopped, such as the shortage of mining machines, the rush to buy cloud computing power, and the speculation in the secondary market.

4. There were many farces during the preparation stage, but market expectations were not affected

Before the Filecoin mainnet was launched, there was a large price difference between FIL quotations in various exchanges (data source: feixiaohao)

In the environment of "no currency but market" at that time, there were multiple price differences between FIL prices among various exchanges, and most of the platforms that launched related futures transactions did not clarify their delivery sources. Even so, a large amount of funds still poured into the market, and every time there was new progress in the project, the market trading volume and price of FIL would fluctuate to varying degrees. Taking the first two months of the project launch as an example, when the team missed the deadline again in August and announced the delay of the mainnet launch, the price of FIL continued to decline from US$35 to US$14 within two weeks, with a cumulative decline of 60%; in September, the project party clarified that the mainnet launch time would be after October 15, and FIL began to turn from falling to rising, gradually recovering the previous decline, and rose back to the level of US$35 before the mainnet launch.

Seeing the market's pursuit of Filecoin, and taking advantage of the fact that the project's rules are not yet perfect and there are many vague sectors, many scammers and Ponzi schemes have begun to gather in the Filecoin community. On the eve of the launch of Filecoin on October 14, 2020, fake FIL tokens forged with ERC20 contracts appeared in the market again. Criminals quickly established a trading pool on Uniswap through airdrops and transfers, attracting investors who did not understand the FIL issuance method. Although Beijing Lian'an's detection system issued an alarm in time, judging from the blockchain browser data, a small number of investors have fallen into the trap and started to participate in transactions.

FIL counterfeit tokens forged with ERC20 contracts (data source: etherscan)

However, compared with the secondary market, the scams in the Filecoin mining market are more serious. From 2018 to 2019, hundreds of miners entered the market, under the banner of IPFS mining machines, and began to sell mining machines with the selling point of one machine for multiple mining. Huang Zhengjie, the coin boy who previously threw money on the streets of Hong Kong, is one of them. In July 2018, he sold Filecoin mining machines worth more than 20 million Hong Kong dollars through an offline salon. In the same year, Zhongyuan Silicon Valley also recruited mining machine agents in the name of IPFS mining, coupled with the temptation of 10% to 30% rebate, and sold nearly 300,000 Snail Star servers to more than 7,000 people, attracting more than 2 billion yuan in five months.

As mentioned above, the official mining mechanism was not mature at that time, and many parameters were not finalized. Most of the mining machines sold were just stacked hard disks, with extremely low manufacturing costs, and there was great uncertainty as to whether they could mine coins. On the other hand, the so-called "one machine for multiple mining" was even more empty talk. In fact, it was a fund game that fixed the coins in the background according to the number of units purchased, and had nothing to do with mining. In the end, they were all labeled as fraud and pyramid schemes.

This sales chaos without technical support continued until the launch of the Filecoin test network in December 2019. With the release of test data, the standards for reference and evaluation of mining machine performance gradually became clear, mining machine scams were exposed, manufacturers and related funds ran away one after another, leaving a mess in the market, which to some extent had a significant negative impact on Filecoin's reputation. As a result, the project and IPFS were once equated with pyramid schemes and fraud.

Information on some cloud computing products on the market (Source: Deepchain Finance)

Although the basic parameters of the project have become clearer after the test network was launched, it should be noted that the mining equipment and cloud computing products that appeared later also have uncertainties and risks in terms of whether they can make a short-term profit and whether they can be redeemed as scheduled after the official launch of Filecoin. However, the exposure of the scam and the long-term market chaos did not dampen the enthusiasm of the participants, and the rush to buy mining products continued. Cloud computing products including Renren Mining Pool, BKEX, Golden Computing Cloud, Mars Cloud Mine, etc. were all sold out as soon as they were launched.

5. The project went online and the conflict between the project owner and the miners escalated

Distribution of Filecoin miner nodes around the world (data source: filscan.io)

In addition, according to the data of Google Trend and Baidu Index, it is not difficult to find that the domestic market's attention to Filecoin has never diminished in the past few years; on the contrary, the enthusiasm of other countries for the project has been gradually exhausted during the repeated delays in the launch of its main network. Even if the Filecoin main network is officially launched, its search popularity is not as high as that of the 1C0 period. However, in the domestic market, compared with the underlying technology of IPFS and the performance of the Filecoin main network, participants are more concerned about the wealth effect that can be brought after the project is launched.

Filecoin’s search index in recent years (data source: Google Trend)

Filecoin's search index in China in recent years (data source: Baidu Index)

For ordinary investors, the most important thing is the price return after the project is officially launched; and for miners, what they are more looking forward to is the huge profits that will be brought by grabbing the first mine. Combined with the reaction of the mining market before Filecoin went online, this is also one of the reasons why the project can maintain its popularity for a long time. However, contrary to expectations, the price of FIL did not soar as expected after its release. After briefly touching a new high of $200, it quickly fell back to around $30 and has been sideways ever since. In addition, due to the restrictions of the rules such as pre-mortgage, slow unlocking of block rewards, and penalty mechanisms formulated by the project party, miners cannot imitate the DeFi project's "mining, withdrawing and selling" money-making strategy, which greatly reduces their mining income.

According to the official statement of the project, in order to prevent miners from using malicious means to obtain system rewards, the network has set up a blockchain reward mortgage and pre-mortgage mechanism. Specifically, miners participating in mining need to provide FIL for pre-mortgage before packaging sectors, and the rewards obtained from mining will be released and unlocked linearly within 180 days. From the perspective of the Filecoin project, these special settings will help the entire network develop in a conscientious direction, but it is also easy to have insufficient FIL liquidity in the early stage. In the absence of FIL, mining machines cannot perform at their full capacity, the increase in the effective computing power of the network will slow down, and the payback period for miners will be greatly extended.

Screenshot source: Pledge Computer

According to the Filecoin mining pledge/income calculator provided by Guazi Power, if the purchase price of cloud computing power is 2,500 yuan per 1T/year and the pledge ratio is 6.2240 FIL/1T, under the premise of full-speed mining, 1T computing power can produce about 0.2356 FIL in 24 hours, equivalent to RMB 38.18, and the estimated payback period is 65.5 days; if the pledge cost is added, it will be extended to 91.9 days, about three months. However, this is the most ideal income situation. There are many uncertainties in the actual mining process. Once the mining machine has technical or network problems, not only will the income be reduced, but the network will also deduct the pledged tokens according to the penalty mechanism.

As a star project that the crypto community has been waiting for three years, the Filecoin mainnet has been delayed for many times and has already consumed a lot of market confidence and patience. The sudden announcement of switching to GPU mining before the launch of the test network last year also aroused dissatisfaction among those who had planned ahead. However, with high expectations for the project's market support and money-making effect, miners and miners have not stopped and are still betting big on the market; however, this thick star filter could not be maintained after the launch of the Filecoin mainnet, and was finally completely shattered when the mining income was far below market expectations.

An unknown account received 1.5 million FIL tokens on October 15, and then transferred 800,000 FIL to Huobi (data source: filfox.info)

Considering the pressure of pre-mortgage, the Filecoin team has actively introduced corresponding relief measures. It not only compensated miner nodes with negative available balances with 100 FIL, but also cooperated with third-party platforms to launch lending services for miners; but miners are not buying it. On the one hand, some miners who participated in the space race and received token rewards had already cashed out a large amount of FIL when the price skyrocketed at the beginning of the project's launch. Later, due to the lack of pledged tokens and unwillingness to purchase them on their own, they fell into the embarrassing situation of mining without coins. On the other hand, under the restrictions of various rules, the miners' attempts to get rich quickly were cut off. Small miners were unable to enter the mining market due to insufficient foundation. Miners and cloud computing platforms were trapped by the market status of low mining income and slow release time, and they also had to worry about the subsequent repayment issues.

Driven by many factors, profit-oriented miners exposed their dissatisfaction and began to resist. In the first week of the mainnet launch, strikes and forks took place. At the same time, the Filecoin team became a market manager, unlocking 1.5 million FIL and transferring 800,000 of them to Huobi, explaining that the main purpose was to increase early market liquidity and maintain currency price stability. For a time, the two forces collided with each other, and the market formed a game between the project owners and the miners.

The trend of the computing power increase of the top five Filecoin miners (data source: filfox.info)

Although Filecoin officials finally compromised and implemented the FIP0004 proposal on October 23, directly releasing 25% of the storage miner block rewards, and the remaining 75% continued to be released linearly according to the 180-day period to alleviate the miners' urgent needs; however, this plan did not fundamentally meet the miners' speculative needs to quickly recover their investment. Judging from the current mining efficiency of about 0.20 FIL/TiB for most miner nodes, a large number of mining machines are still in a shutdown state; the stagnation of the top miners' computing power has not improved, and there are even signs of decline; at the same time, the public opinion in the field about modifying the economic model and forking Filecoin continues.

VI. Conclusion