Understanding the Protocol Revenue and Storage Providers’ Profitability on Filecoin
Filecoin is the world’s largest decentralized storage marketplace allowing clients to store their data with its network of storage providers; in place of centralized intermediaries such as AWS. That being said, Filecoin is not simply the decentralized alternative to AWS, as the two operate on very different tenets. While AWS, like other centralized businesses, is revenue-driven, Filecoin is mission-driven towards creating open and community-powered web services.
Filecoin is able to eliminate high storage costs and data insecurity––two factors centralized storage service providers have been criticized for––through leveraging cutting-edge cryptographic technologies, a robust token economy, and collaborating with independent storage providers who have rich, unused storage resources, and are more flexible in providing data services. Instead of being revenue-driven, Filecoin retains only the amount of fees needed to safeguard its stored data and power the network; while allowing its storage providers to profit from its data services to further Filecoin’s mission of decentralization.
With the capability to store, retrieve, and compute data, Filecoin can be a foundation layer for all Web3 protocols and traditional businesses. This will attract more users to the network to drive both its protocol revenue and storage provider revenue.
Understand The Importance Of Protocol Revenue
Unlike centralized clouds that belong to private companies, the Filecoin network is maintained by all of its stakeholders; and aims at building a storage commons for the whole of humanity. The co-governing structure of Filecoin has made its charging model transparent and sustainable. To have more users benefit from its trustless and cost-saving features, Filecoin only collects fees from two aspects: 1. the usage of the network to submit verifications and send messages, and 2. fines or penalties imposed on storage providers’ undesired behaviors.
1. Fees from transacting on the network:
Since Filecoin adopts blockchain technologies to protect its stored data and execute transactions, all network users including clients, storage providers, and token holders have to pay gas when they interact with the Filecoin network. Gas is dynamic on Filecoin, and will be charged based on the network congestion conditions; so that this scarce on-chain computational resource can be allocated to the most necessary transactions.
2. Penalties imposed on undesired behaviors:
Storage providers are required to deposit additional collaterals to financially safeguard clients’ stored data. When they violate Filecoin’s code of conduct, such as by terminating storage sectors before their predetermined expiry, their deposited collaterals will be confiscated in the form of penalties.
Both of the above form Filecoin’s protocol revenue, and both act as deflationary forces to the $FIL circulating supply to further improve the value of $FIL as the network develops.
How Protocol Revenue Grows Over Time
The gas of Filecoin accounts for the majority of protocol revenue. Depending on different scenarios, it will consume various types of gas on Filecoin, which include:
Base Tx Fee; which is applied to every message,
Overestimation Fee; which is applied to message senders when they misestimate gas units consumed, and
Batch Fee; which is charged when sectors are sealed by storage providers in batches.
*For more information on these types, refer to our deep dive into the gas mechanisms of Filecoin.
We have found that the Base Tx Fee, which measures how busy Filecoin is sending on-chain messages, has been significantly reduced after the network’s HyperDrive Upgrade in Jun 2021 (as seen in figure1). The reduction is not due to the Filecoin network becoming less busy, but because of an acceleration of growth in its network capacity, which the HyperDrive Upgrade was implemented to do. In fact, despite decreasing Base Tx Fees, Filecoin’s network RB Capacity has increased by ~150% in less than a year since the upgrade––suggesting more storage resources have been onboarded to Filecoin in a gas-efficient manner.
Figure 1: The Change Of Protocol Revenue Over Time, Monthly,
Figure 2: The Rapid Growth of Network Capacity After The HyperDrive Upgrade,
In addition, the protocol revenue has remained low at the level of <1 M $FIL/month since the HyperDrive Upgrade, suggesting that Filecoin is committing to decreasing gas fees and penalties to develop more healthily. Although another upgrade implemented by the network––the V16 Upgrade in Jul 2022––has caused an increase in gas fees (as seen in figure 1), making it more expensive to transact on Filecoin, Filecoin's growth trajectory has not been impaired.
Since the V16 Upgrade in Jul 2022, the Filecoin storage market has maintained its strong growth momentum to hit >270 PiB in total active deals; while the network capacity remains stable at an impressive amount of 16.6 EiB. These notable achievements imply that Filecoin has put user experience at the core, which is critical for the network to gain an edge over other emerging blockchains, which usually experience skyrocketing gas and network congestion.
Figure 3: The Rapid Growth of the Filecoin Storage Market After The V16 Upgrade,
The penalties on Filecoin have remained low since the beginning of this year. Because penalties will be deducted from storage providers’ deposited initial pledges and deal collaterals when they fail to deliver on data services, a high level of terminations has not been a common sight on Filecoin. While occasional spikes in daily terminations have resulted in daily penalties exceeding 10,000 $FIL from time to time, daily penalties on Filecoin are usually maintained at the low level of <1,000 $FIL, showing a healthy network that provides trustworthy data services.
Figure 4: The Daily Terminations
Figure 5: The Daily Penalties
Understanding The Importance Of SP Revenue
Storage providers’ profitability will define Filecoin as a thriving market that can continuously provide data services to clients in the long run. Therefore, initiatives such as the Filecoin Plus Program have been introduced to allow storage providers to maintain profitability while helping to grow the network in a productive and efficient way.
Storage providers on Filecoin have various revenue streams. This includes 1. Data service fees paid by clients, 2. Compensations rewarded by Filecoin, or block rewards; and 3. Miner tips paid by message-senders.
Data Service Fees: Data service fees measure how much clients are willing to pay for Filecoin’s decentralized data services, and the fees are usually negotiated between clients and storage providers off-chain; as different storage providers will charge different prices for data migration and broadband. Apart from charging services fairly, storage providers need to continuously improve their service quality in order to win clients’ trust and get more deals.
Block rewards: Apart from data service fees, storage providers will be rewarded by the network for their contribution to its network capacity, its storage resources and its bank of valuable data. These rewards are known as block rewards.
Miner Tips: If storage providers are selected as block-producing storage providers, they are further granted the miner tips embedded in that block, which are paid by message-senders to prioritize the execution of their messages.
How SP Revenue Grows Over Time
Among storage providers’ various revenue streams, storage rewards, which usually have a value of 10 M $FIL/month, still account for the main source of storage providers’ revenue; as compared to monthly data service fees and block-producing storage provider tips, which are usually below 1000 $FIL/month.
Figure 6: The Growth of Storage Providers
Figure 7: The Grwoth of Data Services Fees and Miner Tips
The immense storage rewards reaped by Storage Providers imply they have continuously committed to growing Filecoin’s network capacity by bringing more useful and valuable data into the ecosystem. After 2 years of operation, Filecoin has grown to be the largest decentralized storage network on earth, having stored over 270 PiB of valuable data that powers real-world business, science, and human welfare use cases.
These achievements are inseparable from the long-term support of storage providers, whose size has grown to 4830. While storage providers help to further Filecoin’s mission of storing humanity’s important information, they also aim to reap revenue. It can be inferred from the continued growth in the number of storage providers that it remains profitable to be a Filecoin storage provider.
Figure 8: The Growth of Storage Providers
Closing: A Win-Win Scenario For Both Filecoin Network And Storage Providers
Although Filecoin has met remarkable milestones in its network capacity and data deals, there are still many opportunities for the network to tap into. For instance, Filecoin is now working on increasing its user size, while incubating more data services, through the upcoming launch of the Filecoin Virtual Machine (FVM). The FVM will bring smart contract programmability to Filecoin; attracting Web3 users, developers, and investors innovating on Dapps, Data DAOs, and many other use cases. This in turn will provide more revenue streams for storage providers, who will be needed for their abundant storage and computation resources. Filecoin is also working on expanding its current services by adding capabilities of data retrieval and computation to its network, which will enable a permissionless CDN and privacy computation deployed at the edge. All these developments are aimed at attracting a wider range of use cases, that include even traditional businesses, to use Filecoin’s data services.
With more users and use cases on Filecoin in the future, we expect the network to gradually become busier, thereby increasing both protocol revenue and storage provider revenue. More importantly, as the release of storage rewards slows down, and more storage providers join the ecosystem, storage providers will have to shift from purely pursuing storage rewards to improving their reputations and service quality, which are the key to maintaining theirs and Filecoin’s profitability in the long term.