Understand the economic model and miners' economic behavior of the popular project Filecoin in one article

Written by Qian Bojun, works at HashKey Capital Research

Reviewer: Zou Chuanwei, Chief Economist of Wanxiang Blockchain and PlatON

Source: Lianwen

Editor’s Note: The original title is “HashKey: Understanding the Economic Model and Miners’ Economic Behavior of the Popular Project Filecoin”

As the launch date of Filecoin approaches, it is time to understand the economic mechanism, market and economic behavior of miners in the system. After analyzing the known economic model design principles, we concluded that Filecoin miners tend to hold coins for a long time, and the FIL coin price is the main source of long-term mining income for miners.

We believe that the Filecoin economic model is logically feasible and solves two problems: the first is the serious loss of early miners; the second is the effectiveness of storage capacity. Of course, the Filecoin economic model has not yet announced its governance mechanism and algorithm parameters, and its effectiveness needs further observation and verification.

Understanding Filecoin Mechanism What exactly is Filecoin?

Filecoin is an incentive mechanism and public chain system based on the IPFS (InterPlanetary File System) protocol. The IPFS protocol defines how files are stored, retrieved, and transmitted in a distributed system. It can permanently and decentralizedly save and share files. It is a content-addressable, peer-to-peer distributed protocol. FIL is a token issued by Filecoin, which is used to incentivize the behavior of various roles in the storage and retrieval market in the Filecoin network.

The total issuance of FIL is 2 billion, of which 70% goes to miners as rewards, 15% to Protocol Labs, 10% to public and private investors, and 5% to the foundation for ecological development.

The FIL issuance speed is divided into three parts: 50% of the miner rewards will be issued within six years; the foundation and Protocol Labs will release linearly within six years; and investors will be distributed within one year. Most of the FIL supply will depend on the miner rewards.

Understanding the consensus mechanism

Filecoin adopts a hybrid consensus mechanism: Expected Consensus (EC) is the main mechanism, supplemented by Proof of Replication (PoRep) and Proof of Spacetime (PoSt).

In each round of expected consensus, one or more miners are elected to create new blocks. The probability of a miner winning the election is proportional to the miner's current storage capacity. Expected consensus is fair, unpredictable, and verifiable. Each round of elections is an epoch. The expected consensus mechanism presets an expected value for the Filecoin network to generate blocks. The expected value of each epoch to generate blocks is 1, which means that an epoch may generate empty blocks or multiple blocks. Therefore, in the Filecoin blockchain, each block height corresponds to a block set (Tipset), and each block set contains an indefinite number of blocks. This chain structure is a directed acyclic graph (DAG).

Filecoin assigns a weight to each generated block, and the chain with the largest weight becomes the main chain. The block weight depends on two factors: the number of parent blocks and the storage capacity of the chain. Since Filecoin has a mortgage mechanism, miners tend to mine the chain with the most parent blocks and the highest storage capacity to achieve effective convergence.

Filecoin uses expected consensus for two reasons: first, high transaction efficiency, so miners’ work will not be wasted. Second, it can control forks. Filecoin uses weight and mortgage mechanisms to encourage miners to choose the most effective chain and punish miners who mine multiple chains at the same time.

In the expected consensus, the probability of a miner winning the election is proportional to the miner's current storage capacity. The storage capacity of the miner is proved by Proof of Spacetime (PoSt) and Proof of Replication (PoRep). Proof of Spacetime can use proof chains and timestamps to prove that miners store data for a certain period of time. Even if the verifier is not online, it can be verified in the future that the miner has generated a proof chain during this period, effectively preventing attacks on temporarily generated data.

Replication proof can prove that data has been successfully created in a specific sector. It also prevents three types of attacks: Sybil attack, external data source attack, and generation attack. Replication proof prevents miners from using different methods to store less data than they promised to store in order to get extra rewards.

Understanding the Filecoin Market

There are two major markets in the Filecoin economic model: storage and retrieval markets, with clients and miners in each market. In addition to the above two roles, there are developers and investors in the Filecoin economic model ecosystem. Developers develop new tools, applications, and provide proof-of-concept suggestions to optimize the Filecoin ecosystem and storage retrieval market. Developers can receive foundation subsidies for submitting proposals. Investors provide miner liquidity in the secondary market to increase the value of the Filecoin network. The following introduces the Filecoin storage and retrieval markets respectively.

Storage Market

The Filecoin storage market is a verifiable market that is verified by the blockchain network. In the Filecoin storage market, customers put forward the demand for data storage, and the storage suppliers are storage miners who provide their storage space. A complete storage cycle is as follows:

• First, storage miners provide their own prices and storage requirements to the order book. The order book is public and can be viewed by anyone. The service price of the storage market is determined by the market.

• Second, when the customer's demand price matches the storage miner's order, the transaction is automatically matched.

• Third, the validator verifies whether the miner stores valid data, using zero-knowledge non-interactive proofs for verification to effectively protect privacy.

Storage is not a one-time service, it requires the stability and continuity of miners. Miners can get rewards in three ways:

• One is transaction fees;

• The second is the block reward;

• The third is the Networking Message Transaction Fees. The transaction fee and the Networking Message Transaction Fees are paid by the customer in advance, and the block reward is generated by the system.

Search Market

The Filecoin retrieval market is an off-chain market that provides data needed by clients for retrieval, and retrieval services are provided by retrieval miners. Retrieval miners do not participate in the block generation process and directly obtain corresponding service fees from the client. The data source of retrieval miners can be from other clients, storage miners or IPFS network.

A complete search cycle is as follows: First, the client and miner broadcast the bid and quotation. If an order match is found, a transaction is initiated in the off-chain order book. Second, after the transaction is reached, the two parties establish an off-chain payment and data transmission channel to complete the transaction. Third, after the transaction is completed, the order and transaction are submitted to the blockchain to record and verify the transaction results. The whole process is similar to the Bitcoin Lightning Network.

There are four differences between the storage market and the retrieval market: First, there is no time requirement for retrieval miners to store data, and there is no need to generate storage proofs. Second, any user in the network can provide data retrieval services to customers without staking FIL. Third, retrieval miners have high requirements for broadband bandwidth and need to make payments and data transmission quickly, while storage miners have high requirements for storage capacity. Fourth, storage miners can obtain block rewards, transaction fees and network acceleration fees, while retrieval miners can only obtain retrieval transaction fees.

Analysis of Filecoin’s economic model

Block Rewards

In the storage market, Filecoin miners receive block rewards based on their storage capacity. Storage capacity is measured by how many units of effective storage space a miner provides in the Filecoin network and how long it can be stored. The storage capacity of a miner in Filecoin is equivalent to the computing power of a miner in the Bitcoin network. The block reward a miner receives depends on the proportion of his storage capacity to the total storage capacity of the network. For example, if a miner provides 1 PB of storage computing power when the network size is 100 PB, he will receive 1% of the block reward for the corresponding period of time.

The main difference between Filecoin and the Bitcoin network lies in the nature of the services provided: storage is a long-term service, and Filecoin requires miners to maintain the stability of the network for a long time, rather than the Bitcoin network where miners can enter and exit freely. Therefore, Filecoin adopts the network baseline reward model (Network Baselines) instead of the time exponential decay model. The network baseline model has two mechanisms:

• First, in the long run, block rewards decay exponentially over time.

• Second, each block height will correspond to a network-wide storage capacity standard. If the network-wide storage capacity does not meet the standard when the block reward is generated, some block rewards will be deferred until the network-wide storage capacity reaches the standard, and then the reward will be released.

The network baseline reward model has two benefits for the Filecoin network:

• The first is to link block rewards with the growth of the storage market to prevent miners from exiting the network after receiving large early rewards.

• The second is to smooth the exponential decay model to avoid large-scale changes in the storage capacity of the entire network due to halving of rewards.

Staking Mechanism

The pledge mechanism is a miner penalty mechanism that aims to protect the data of Filecoin storage market customers from being lost. In each storage agreement between a user and a miner, the storage market miners will store the data provided by the customer in the network, which is called a sector. Each sector added by a miner will contain the content of the stored file and the promised storage duration, ensuring that the customer can freely use the data stored within the agreed storage duration. When a miner adds a sector to the Filecoin network, the miner needs to pledge a locked fund.

The locked funds consist of two parts: the miner's own FIL tokens and part of the block reward. If the miner is offline during the promised storage time, he will lose part of the locked funds. If the miner stops storing completely, he may lose all the locked tokens. The locked funds will be unlocked after the miner fulfills the storage agreement, and the miner can recover all the funds after a short lock-up period. There are two benefits of mortgaging part of the block reward: the first is to avoid the shortage of FIL liquidity in the secondary market in the early stage. The second is to reduce the entry cost of miners.

What is the incentive mechanism?

In the Filecoin storage market, all parties operate in a dynamic balance. In the early stages, storage demand and supply cannot be fully matched. When the storage demand of the Filecoin ecosystem is lower than the supply, miners have two choices: one is to idle equipment and wait for customer transactions to arrive; the other is to store useless data to seek block rewards.

Filecoin uses two mechanisms to solve the imbalance between supply and demand in the storage market.

Committed Capacity

Committed capacity is a mechanism that allows miners to avoid idle equipment. When miners have idle equipment due to insufficient customer storage demand, they can provide committed capacity sectors to the Filecoin network. By proving through the Filecoin network that miners have effective storage capacity and can provide storage services to users, miners can obtain block rewards. Then, when customer storage needs arise, the miner's committed capacity sector can be immediately upgraded to a valid storage sector to store customer data and obtain transaction fees. This mechanism can prevent miners from obtaining block rewards by storing invalid data and increase the effective storage capacity of the entire network.

Verified Datasets

The verification database mechanism encourages miners to store and access valid data. The main purpose is to prevent miners from gaining benefits through invalid data attacks and consuming the storage capacity of the entire network. The data stored by the customer becomes valid data after being verified by the Filecoin network. Both miners and customers are motivated to verify the data. Miners can obtain higher block rewards by storing verified valid data, and customers will also increase the priority of miners in processing their own transactions by providing verified data.

In summary, there are three types of miners in the Filecoin storage market: miners with storage capacity; miners who have stored data; and miners who have stored valid data. The first type of miners can get block rewards, the second type of miners can get block rewards and transaction fees, and the third type of miners can get additional block rewards and transaction fees. As can be seen from the previous article, the more third type of miners there are, the healthier the Filecoin ecosystem will be.

There are two factors that affect miners' storage of valid data: the first is the system's ability to distinguish valid data. The second is the proportion of transaction fees to block rewards. Since the cost of miners accessing invalid data is lower than the cost of accessing valid data, including differences in electricity costs and equipment loss. When the cost difference between the two is greater than the transaction fee, miners may ignore the gains brought by accessing valid data, and continue to access invalid data generated by themselves to obtain block rewards, causing the effective storage capacity of the entire network to decline. Filecoin has not yet announced the method of determining valid data. Assuming that the algorithm is not accurate enough or is based on subjective judgment, there is a possibility of fraud by miners in the market.

A complete analysis of FIL prices and miners’ behavior

Storage Market Supply and Demand

The demand for Filecoin storage market mainly comes from users' demand for decentralized storage. Decentralized storage has four advantages over centralized storage:

• The first is data value:

• Second, data security is higher:

• Third, the data backup cost is low:

• Fourth, avoid data loss due to the risk of operator bankruptcy.

The suppliers of Filecoin storage market are storage miners. Traditional centralized operators such as Amazon or Google have significant scale and technical cost advantages, which are difficult for decentralized storage miners such as Filecoin to achieve. According to the market supply and demand theory, miners' quotations need to be lower than centralized storage in order to survive in the storage market. Therefore, we can find two points by combining the supply and demand sides:

• First, in the early stage, there is a distinction between Filecoin storage market customers and centralized storage customers. The Filecoin market demand is mainly small and medium-sized customers with high privacy sensitivity and high cost sensitivity. In the long run, low quotes mean that the demand for Filecoin storage will gradually increase.

• Second, low bids and high costs from miners mean low profit margins or losses, and the source of miners’ profits will shift from transaction fees to rising FIL prices. The optimal strategy for storage miners is to appropriately lower their bids to obtain more storage orders, thereby increasing the probability of obtaining a block opportunity.

Search market supply and demand

In the early days, the demand for Filecoin retrieval market mainly came from blockchain users with valuable information needs. In the early days, the content stored in the IPFS network had not yet been scaled up, and the retrieval service had no advantage over the centralized network. Regardless of whether the miner transaction fee is competitive, the amount of content stored in the system is a key factor in whether the market adopts it. As the IPFS storage market gradually scales up, more and more files are available for users to retrieve, and the importance and income of retrieval miners will gradually increase. The price of FIL has little impact on retrieval miners. The income of retrieval miners is only transaction fees, and does not include block rewards.

The optimal strategy for retrieval miners is to become storage miners at the same time and appropriately lower their bids to obtain more retrieval orders while improving network bandwidth utilization. In this case, retrieval miners can obtain data directly from the client. If there is too much data to be retrieved, they can also retrieve files from other storage miners. The retrieval market is operated off-chain. When the IPFS ecosystem develops to a certain extent, retrieval miners can rely on abundant storage resources to efficiently operate the retrieval market.

FIL Supply and Demand

Since miners need to stake FIL to obtain block rewards, and FIL tokens are released linearly and gradually, the supply side is expected to grow slowly and the growth rate decreases exponentially. On the demand side, due to the gradual increase in service demand, market participants must continue to purchase FIL.

In order to maintain the stability of service prices, the prices of storage and retrieval transaction fees must be anchored to fiat currency or stablecoins regardless of whether FIL rises or falls. When the price of FIL rises, customers will pay fewer FIL units of transaction fees and network acceleration fees, and the proportion of miner block rewards in revenue will increase. When the price of FIL falls, customers will pay higher FIL units of transaction fees and network acceleration fees, and the proportion of miner block rewards in revenue will decrease. Assuming that only service demand factors are considered, when the price of FIL rises, the rate at which customers purchase FIL in the secondary market will slow down, and when the price of FIL falls, the rate at which customers purchase FIL in the secondary market will increase, achieving the function of regulating the secondary market.

In general, the best strategy for miners is to hold FIL for a long time for two reasons: First, mining requires staking FIL, which reduces FIL supply and increases FIL demand. Second, the increase in the price of the currency determines the miners' rate of return, and the transaction fee cannot cover the mining cost.

A brief introduction to the Filecoin application layer

Flexible data backup

Filecoin provides customers with multiple options for data backup. Customers can back up data to different nodes without limit, and can verify the storage status of any node at any time. Compared with the decentralized backup and verification of centralized storage with higher costs, the Filecoin storage protocol is more flexible.

Off-chain data transfer

Filecoin provides a mechanism for off-chain data transfer. Clients can store large files on hard disks and directly put the hard disks on the miners' storage servers in an off-chain manner, and continuously verify whether the files are stored safely. This mechanism can solve the problem of slow and expensive uploads of large files.

Link to this article: https://www.8btc.com/media/600417
Please indicate the source of the article when reprinting