Risks and opportunities in Filecoin market investment: ecology, development and impact

Original title: "Taihe Observation | Dangers and opportunities in Filecoin market investment: ecology, development and impact"

Original source: Taihe Observation

Before the mainnet was launched, Filecoin futures and Filecoin mining machines were about to come. Suddenly, the market seemed to be full of expectations and discussions about the Filecoin project. How should we avoid the pitfalls we have stepped on before? What issues should mining machine manufacturers pay attention to?

Today we will analyze Filecoin mining from a more macro perspective:

1. What should we look at when investigating a mining machine manufacturer?

2. Which mining machine manufacturer has the largest market share?

3. If everyone chooses him, does that mean he is definitely the best choice?

4. Filecoin officials are constantly modifying mining rules and economic models. How should I respond?

5. In addition to mining, what other opportunities does the Filecoin industry currently have? How will the ecosystem develop?

1. High pre-staking, the amount of FIL per 10,000 yuan invested will become the only standard

Who is setting the pace for the industry?

Some time ago, an article stated that "packaging speed per 10,000 yuan" will become the basic indicator for judging a mining machine manufacturer.

But we think the most direct indicator should be how many FILs can be obtained every day for every 10,000 yuan invested.

Let me explain why we make this inference, because the amount of FIL that miners ultimately obtain is determined by many factors besides the hardware ceiling.

Today, the official preliminary pre-mortgage rules have been confirmed in the latest Calibration version, which means that each sector needs to be pledged with a certain amount of FIL in advance before mining can start.

Although there will be adjustments later, the official has released a very important signal that pre-pledge is necessary and the ratio is not low.

Why does the government have to set up a pre-staking? For data security and stability? Then it is completely possible to go for a post-staking.

The official reason for doing this is to lower the entry threshold that is quickly erected by early miners accumulating effective computing power.

1/ The official daily FIL token distribution is based on the proportion of the effective computing power accumulated by miners in the entire network (which can be understood as the distance an athlete runs)

2/ The effective packaging speed of miners determines the growth rate of effective computing power (which can be understood as the running speed of an athlete)

3/ After the mainnet launch gun is fired, all the athletes will run forward desperately. Those who want to participate later will find that they cannot catch up no matter how hard they run. This will cause the problem of insufficient attraction for latecomers.

4/ Therefore, the official designed the pre-staking to slow down the rapid growth of miners’ effective computing power.

Conclusion: In this way, mining manufacturers will not fully utilize their mining machines unless they have enough coins to stake.

Moreover, the mined coins are likely to be used for the subsequent growth (expansion) of effective computing power in order to obtain higher effective computing power to mine higher FIL. Not all of them will necessarily be used for profit. Whether to continue expansion or to make a profit is a strategic issue for mining machine manufacturers.

Therefore, when examining the standards of mining machine manufacturers and cloud computing power, don’t worry about the packaging speed, IDC computer room, or AMD7 series. Directly examining how many FIL it can obtain on average every day will be the most direct profit indicator.

2. Mining machine manufacturers with too large a market share have huge risks

Keeping in mind the idea that "excessive market share of mining machine manufacturers will cause huge risks", let us first understand a concept, which is the official "upper limit of block production rights" - 20%.

Starting from the second phase of the test network, the Filecoin mining algorithm was modified, and the number of nodes that can obtain FIL rewards in each round became 5.

The small blocks of different colors represent the node numbers of miners who receive block rewards in each round.

Why did the official make such a setting?

In fact, during the initial design and the development network stage last year, the official set an average of one block per round. But soon the official and miners discovered a problem, that is, there were too many rounds of empty blocks. Not only was there no block in a single round, but also the time interval between two blocks produced by a single miner was too long.

Therefore, during the second beta test, the official team made a very interesting and clever design to solve this problem. "Up to 5 miners can receive rewards in each round of block production."

This makes the FIL rewards received by miners smoother.

But soon another problem emerged: when your effective computing power is greater than 20%, you can have a share of blocks in every round, and no matter how much you increase the proportion of effective computing power, you cannot increase your coin production.

This is the "20% block generation limit", that is, if the official reward to miners is 440,000 per day, a miner can only get 88,000 FIL at most, which is the upper limit. However, in contrast, cloud computing power or mining machine manufacturers have not set their own subscription limits, but have expanded wildly, with "marketing propaganda" and "occupying the market" everywhere.

FIL mining is very high now, and most people who buy mining machines will choose to continue hosting. This will lead to "selling more computing power or machines will not increase mining efficiency, and the only thing it can do is dilute the FIL mined by the previously purchased machines or computing power." The amount of FIL mined per T of computing power is diluted (reduced), which is the price of market expansion.

In addition, the amount of FIL mined per T of computing power will decrease as the effective computing power of the entire network increases.

1T effective computing power decreases as the proportion of total network computing power increases (Figure)

In addition to these two reasons, Filecoin's block reward distribution adopts a deflationary economic model. The 1.4 billion coins distributed by miners are designed based on the half-life of elements and continue to decay in each round. That is to say, each round of block rewards is less than the FIL rewards obtained in the previous round.

The combination of market expansion dilution, effective computing power growth squeeze, and block reward attenuation has led to a rapid reduction in the effective computing power output per T.

This situation will erupt in a concentrated manner one or two months after the mainnet is launched. The excessively high market share of mining machine manufacturers is laying mines for themselves and poses huge risks.

3. Think from an industry perspective and refuse to focus on mining data

From the development history of the project, we can see that Filecoin mining and even the Filecoin ecosystem exist for the IPFS project, so when we think about the progress of the Filecoin project and Filecoin mining, we still have to consider the long-term prospects of the development of the IPFS ecosystem.

After the Bitcoin system ran for more than five years, a new batch of innovative projects driven by blockchain technology, represented by Ethereum, began to emerge. IPFS was also founded during this period. "Subverting the HTTP protocol" and "making human history recorded forever and never erased", IPFS has a far-reaching vision and great ambition.

A year later, Protocol Labs launched Filecoin, an incentive layer blockchain project that is compatible with the IPFS protocol.

The reason why Protocol Labs has set up an incentive mechanism now is to attract enough users to use IPFS and form a strong IPFS ecosystem. This incentive mechanism can achieve the first phase of Filecoin's mission - that is, to make enough miners willing to provide storage space to meet user storage needs. When a large amount of content exists in the IPFS network, a further ecosystem will be derived, generating the second step of demand, namely the retrieval demand.

From this perspective, it is easy to understand the official intention of setting up pre-mortgage.

IPFS allows participants in the network to store, retrieve and transmit verifiable data to each other. Filecoin is a project based on the IPFS protocol and is an incentive layer on top of IPFS. Its vision is to supplement or replace the centralized storage corresponding to HTTP, aiming to solve node failures on the Internet, increase the resilience of the Internet, and lay the foundation for the web3.0 era.

Filecoin regulates the operations of both the supply and demand sides of storage, as well as the obligations that both parties need to fulfill. Code is the law. Once someone violates the rules, the network's punishment mechanism will be triggered. Of course, those who contribute to the network will be rewarded.

The blockchain storage market created by IPFS is based on a platform. Through the operation of this complex, stable and secure platform, it will gradually replace the fragile centralized storage market. At the same time, through the operation of the platform, it lowers the entry threshold for storage market suppliers. Especially in the later stages of development, the threshold for mining participation has been lowered, and storage nodes have become more dispersed, allowing civilian miners to participate.

From the development history of the project, it can be seen that Filecoin mining and even the Filecoin ecosystem exist for the IPFS project. The official overall consideration of the implementation of the Filecoin project is still based on the long-term prospects of the development of the IPFS ecosystem.

However, current mining machine manufacturers, including some industry media reports, have paid too much attention to the technology and details of FIL mining, thus ignoring Filecoin’s ultimate mission of assisting IPFS in building the storage market, and going further and further in the wrong direction.

We know that Filecoin wants to create a decentralized distributed storage market to allow more idle resources to participate. Then, the current high threshold for miners to participate is obviously contrary to the concept of IPFS, so after the launch of the Filecoin mainnet, the hardware participation standards will be lowered step by step. The official claim that the SDR algorithm will be replaced by the NSE algorithm is a good proof.

This is thinking from the perspective of the industry, and many problems can be easily solved, so mining machine manufacturers should not only keep their heads down and run, but also look up and see the road.

Mining machine manufacturers must not only improve their scalability in mining algorithms, but also in the scalability of mining hardware, the construction of mining systems, and the establishment of cluster mining machine architectures and mining pool architectures, prepare for changes in the mining environment, and think about issues from the perspective of industry development.

Interpretation of the current ecosystem of the Filecoin industry and its future prospects

Right now, Filecoin’s overheating reflects more its profit attributes, and it has not yet reached the level of long-term value attributes.

However, "heat dissipation" also requires a process, because every time a hot spot appears, there is a "heat dissipation" process. The "heat dissipation" process is the process of highlighting long-term value, so we still look at Filecoin and the distributed storage market from the perspective of long-term value.

As far as the popularity of Filecoin is concerned, it is not that IPFS has become this year's market hotspot, but more like the blockchain market needs a hotspot to carry everyone's enthusiasm and hopes.

In the first half of 2020, there has not been any "powerful" hot spot in the cryptocurrency market - the story needs to be big enough, the background needs to be good enough, and the amount of capital needs to be high enough to ignite the enthusiasm of the entire cryptocurrency market and build consensus among everyone. At this time, Filecoin appeared.

The sales data of the IPFS mining machine market has exceeded 10 billion yuan. This data is only conservative and verifiable data. The actual deposit amount may be much larger than this data. The number of participants has also exceeded 300,000, which has become a booster for the popularity of the Filecoin project.

In addition to popularity and funding, the most important thing about Filecoin is that it has "jumped out of the circle", that is, jumped out of the encrypted digital currency circle. Strictly speaking, Bitcoin has not yet entered the mainstream business world, Ethereum is close to simulating and reproducing a mainstream business world, but it has not yet completely "jumped out of the circle", while Filecoin has completely embraced the real business world.

The fact that Filecoin and IPFS can go beyond the circle is also the logic for its future cooperation with traditional enterprises:

Storage itself is a relatively common demand, and we have seen that popular browsers such as Chrome and Netflix have begun to support IPFS.

Filecoin itself is an incentive mechanism, and the official has been adjusting the incentive mechanism. The official is adjusting the incentive weight of effective storage, how to use incentives to maintain its stable operation, and using grants to encourage the community to develop more friendly user terminals and other tools to achieve better feasibility of the entire network. This incentive mechanism is also one of the directions for traditional industries to expand commercial implementation.

Filecoin miners are different from Bitcoin miners. Filecoin miners have strong industrial attributes, not just financial attributes. They are not just mining a coin. They have many data storage demand parties, and how to activate the entire ecosystem through incentive tokens is also a strong reference for traditional fields.

We can use FIL as a means of payment for distributed cloud storage space. According to an industry report in 2019, the global cloud storage market space is currently over 50 billion US dollars, and the annual compound growth rate is 20%. However, it is not clear how much share the distributed storage market can occupy in the cloud storage market. But based on this benchmark, Filecoin has a very big story to tell.

The future market prospects and ecology of Filecoin can be viewed from both horizontal and vertical dimensions.

Horizontally refers to Filecoin's layout in mining-related fields. The main participants in Filecoin now include mining machines, mining farms, mining pools, exchanges, and there may be asset custodians in the future. This industry is also gradually shifting from early technical barriers to capital barriers, thus becoming a capital-intensive industry.

From a vertical perspective, it is mainly a distributed cloud storage service architecture. The technical foundation of distributed cloud storage is definitely the IPFS network itself; the second layer is Filecoin, which is the IPFS incentive layer; the third layer is related to tools, which are some relatively friendly clients and storage technology services; the fourth layer is the distributed storage application itself, which may be combined with some traditional projects. Currently, some browsers or streaming media generally use distributed storage. Their storage needs are relatively large, and they are more supportive of the field of distributed storage.

In the post-Filecoin era, when storage + computing is perfectly realized, Filecoin will become a bridge between the blockchain world and the traditional commercial society through "storage", and a more complex decentralized ecosystem will emerge. Filecoin urgently needs to collaborate with other computing public chains. At this time, Filecoin will also provide more decentralized storage significance.