Filecoin Cryptoeconomic Structure

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Public chains need to combine cryptography and incentive mechanisms to enable a system to operate without centralized control. Cryptography makes many malicious behaviors almost impossible, while game theory makes some behaviors irrational. Cryptoeconomics focuses on analyzing this set of operating mechanisms. A reasonable cryptoeconomic structure plays a decisive role in whether the network is valuable, self-sustaining, or difficult to operate.

Filecoin's mission is to lay a distributed, efficient, and powerful foundation for human society's information. To achieve this goal, we have created a distributed storage network that allows anyone in the world to store or retrieve files. We hope that Filecoin will reduce storage costs and improve reliability by helping small and medium-sized players compete with well-known centralized services, providing a universal interface for providers of all sizes, and reducing migration and transaction costs.

Today, we are proud to provide you with an overview of the cryptoeconomic structures that will lay a good foundation for achieving Filecoin's goals. Filecoin combines existing and new cryptoeconomic structures to meet the unique needs of the network. If you are interested in the long-term development and success of Filecoin as a storage market, you should be encouraged by this mechanism. Although we are still conducting a lot of testing and derivation to confirm the final parameters, we are happy to share some of the logic and details about how this system works.

Overview of Filecoin's economic structure

There are five major players in the Filecoin economy:

• Users, who store and retrieve data through the application;

• Developers, who develop applications on the protocol;

• Retrieval services that deliver files to users on demand;

• Storage miners, who store files and help maintain and update the Filecoin blockchain;

• Token holders make Filecoin a token with circulation value by using Filecoin as a medium of storage and transaction.

The role of users in the Filecoin economy is simple but critical: they use Filecoin tokens to pay for file storage and retrieval. Filecoin's crypto-economic operating mechanism is ultimately designed to meet users' file storage and retrieval needs.

Developers are the bridge between users and the Filecoin network. They build applications to improve the user experience of accessing the Filecoin storage and retrieval market.

The retrieval service is used as a content delivery network layer or cache layer to ensure that files stored on Filecoin are efficiently available. Users can pay for the retrieval service through payment channels.

Storage miners earn Filecoin for their services in three main ways:

• Transaction fees, which are direct fees paid by users for storing data.

• Block rewards are subsidies provided by the Filecoin protocol to storage miners for participating in the Filecoin consensus algorithm (maintaining and updating the blockchain) and providing long-term and reliable storage services.

• Network transaction fees are fees paid by users to encourage miners to prioritize their transactions.

The Filecoin crypto-economic structure is primarily designed to ensure that storage miners and the Filecoin network itself can reliably and sustainably meet user needs.

Token holders bridge the Filecoin economy with other markets. They provide liquidity for miners and users, and make it easier to implement real businesses on Filecoin.

Cryptoeconomic Principles

Block Rewards

Filecoin storage miners receive block rewards based on their storage computing power . Storage computing power is a measure of how much effective storage a Filecoin storage miner can provide to the network. In general, miners receive files from users, publicly promise to store them for a certain period of time, and repeatedly prove that they have indeed stored them for a certain period of time to obtain storage computing power.

Economically speaking, you can think of storage power as being similar to hash rate in proof-of-work like Bitcoin. The block reward a miner receives is proportional to her storage power out of the total storage power provided by all miners. For example, a miner providing 1PiB of storage power in a network size of 100PiB will receive 1% of the block reward for that period of time.

Filecoin’s unique innovation in block rewards

Filecoin needs to be a long-term reliable and sustainable protocol. In traditional proof-of-work, it doesn't matter if a miner is offline for a short period of time (or even forever), because any other miner can add new blocks to the chain. On top of this, Filecoin miners also provide users with available services that cannot be replaced at will, so users need strong guarantees that each storage miner can continue to operate for a period of time. Therefore, Filecoin includes many mechanisms to make providing high-quality services an economically rational choice for storage miners, and encourage storage miners to promote the long-term health of the network.

Network Benchmarks

Many block reward models are based on a simple exponential decay model, where the block reward is highest at the beginning but miner participation is lowest, so the number of tokens mined per unit of work is very high early in the network life cycle, and then decays rapidly.

In many cryptoeconomic simulations, it is clear that a simple exponential decay model will encourage short-term bad behavior at network startup. Specifically, it will encourage storage miners to over-invest in hardware equipment during the packaging phase of mining to store it as quickly as possible. Since the rewards per unit of storage space in the early days of the Filecoin network are relatively large, we predict that it is profitable to exit the network after consuming these early rewards, even if doing so will result in the loss of user data. This will harm the network: users lose data and cannot perform long-term storage, and miners have less incentive to improve the network's service.

In order to encourage storage implementation and investment in long-term storage rather than just fast packaging, Filecoin introduces the concept of a network baseline . Instead of simply generating tokens based on time, block rewards are increased as the total storage computing power on the network increases. This preserves the prototype of the exponential decay model, but slows it down in the early stages of the network when the total storage is too low. Once the network reaches the benchmark, the total block rewards given are the same as the simple exponential decay model, but some block rewards will be delayed when the network's computing power is relatively small. The overall result is that Filecoin's rewards to miners match the utility and value they and the entire network provide to users.

Block Rewards as Collateral

Storage miners add a fixed amount of new data to the network through sectors . When a miner adds a sector, she commits to storing it for a certain amount of time, which increases the certainty that the stored data will be available to users within the corresponding amount of time.

In certain specific cases, miners may agree to a storage order and then give up due to increased costs or other market fluctuations. Users need reliable storage. If storage miners in the system can give up storing files arbitrarily or at low cost at any time, it will lead to serious data loss and poor service quality, causing users to leave Filecoin.

Filecoin miners are partners of users in the two-way data market. In order to ensure that the incentive mechanism in the cooperation is properly implemented, Filecoin will punish miners who fail to complete the storage commitment period. The fine comes from the locked tokens provided by each storage miner in Filecoin's collateral pool. The locked tokens include a small amount of pre-collateral and a portion of the tokens in the block reward.

If a miner is offline for a day, she will lose a small portion of her locked tokens. If a miner stops storing completely, she may lose all locked tokens. If the miner completes all storage contracts within the corresponding time, she can get all locked tokens back after a short lock-up period.

Using blockchain rewards to collateralize miners is a new improvement in our cryptoeconomic simulation. Early structures required miners to provide a large amount of collateral for their storage upfront, but this caused a shortage of Filecoin at launch when the total supply of tokens was low and many miners were planning to join the network. By shifting some of the upfront costs to later block rewards, we can lower the cost of entry for miners.

Make storing valid data a rational choice

Filecoin users and storage miners operate in a dynamic system. At any given time, it is difficult for storage supply and demand to be fully matched. The early Filecoin architecture forced miners to choose between two undesirable options: waiting for user orders (which means that miners' hardware equipment is idle), or storing useless data to obtain block rewards (reducing the network's ability to store valid data). Filecoin introduces multiple mechanisms to ensure that miners who store user data can maximize token revenue.

Committed capacity

Instead of leaving their hardware idle when a miner finds themselves without user data to store, the miner can offer committed capacity sectors to the network. These are proven but empty sectors that show the miner is ready to offer storage for users. Committed capacity sectors prove that the miner has space to store user data, but can upgrade sectors to store user data at any time. This mechanism eliminates the need for a miner to choose between block rewards and storing user data - she can store committed capacity sectors to start earning block rewards, and then upgrade to store user data to earn storage order fees.

Verify data

Committed capacity sectors can increase miners' motivation to store user data, but they cannot completely solve the problem. Storing real user data will increase miners' operating costs. In some cases, for example, when miners feel that the block rewards they receive are much higher than the storage order fees they receive, then miners may still choose to ignore user data and choose to only store data they generate in order to increase their storage computing power as quickly as possible to obtain block rewards. This will reduce the practicality of Filecoin and affect users' ability to store data on the network.

Filecoin solves this problem by introducing the concept of verified data . Compared with sectors without verified data, sectors with verified data will receive more storage computing power and thus more block rewards, which provides additional motivation for storage miners to store user data.

Verified data is data stored by verified users who have been verified by a decentralized network of validators . Getting verification is not difficult - anyone who wants to store real data on Filecoin can get it very easily. Even if validators relax the threshold for verifying data to simplify the process, which may lead to some abuse, the overall effect should be to significantly increase the proportion of valid data on Filecoin.

Demand Drivers

A distributed storage network that enables anyone in the world to store and retrieve files is an amazing tool. However, the Filecoin network is only useful if applications are built on it. The good news is that there are already many amazing applications built on Filecoin, and there will be more to come between now and the launch of the mainnet.

reliability

Filecoin has been committed to reliably and efficiently storing the world's most important data since its inception. To improve reliability, the protocol provides users with unlimited flexibility to perform redundant storage at different miners and verify that the copies stored by each miner are unique. Unlike centralized cloud storage services, where users cannot change or verify backup data, Filecoin allows users to choose between reliability and cost.

Effectiveness

Filecoin’s offline data transfer mechanism is another example of how the protocol can support different user needs. Many datasets are so large that transferring them over the internet is slow and expensive. For example, if you store 2.5PB of the Landsat 8 open source geographic imagery dataset on centralized cloud storage, it would take you more than 7 months and cost you $125,000 to transfer it over the internet with a Gigabit-class dedicated line. Filecoin’s offline transaction protocol allows you to store huge amounts of data on hard drives and ship the hard drives to miners, who can then continuously verify that the files are being stored securely.

As the Filecoin mainnet launch approaches, you can expect to hear more about applications that are already using the network’s unique features to store large amounts of important data.

A solid foundation for the launch of the Filecoin mainnet

Filecoin's cryptoeconomic structure is designed to ensure that the network can meet the long-term needs of users. After thousands of hours of discussion, simulation, and experimentation, we believe that these mechanisms will lay a solid foundation for the launch of the Filecoin mainnet. The results of these efforts, combined with other excellent work by the Filecoin R&D team, will create a public chain supported by efficient work, reliable cloud storage, and a thriving decentralized economy.

In the coming weeks, we will conduct final simulations to determine the final parameters. We look forward to independent analysis from other teams, as well as contributions from the community to continuously improve the usability and value of the Filecoin network.