State of Filecoin Q1 2023

Key Insights

• Filecoin’s storage market continued to grow in Q1'23, as active deals rose 75% QoQ.
• As storage capacity decreased 13% QoQ, storage utilization grew 105% QoQ.
• Revenue from fees increased 5% in Q1'23 (up 21% in USD terms), driven by a 14% QoQ increase in new storage deals.
• The Filecoin Virtual Machine (FVM) launch brought Ethereum-style smart contracts to enable new use cases, including DeFi, perpetual storage, and decentralized compute.

Primer on Filecoin

Relying on centralized data storage has a major shortcoming: it's hard to systematically verify the integrity of the stored data. The Filecoin storage network is a peer-to-peer version of Amazon S3. It’s built on top of the InterPlanetary File System (IPFS), which serves as the Filecoin network’s distributed data storage and sharing layer. Filecoin regularly verifies the storage of data and uses deals that price the storage based on supply and demand dynamics, instead of a fixed pricing structure.

A storage deal is like a contract with a service level agreement (SLA) — users pay fees to storage providers to store data for a specified duration. To keep data safe, Filecoin uses a cryptoeconomic incentive model that regularly verifies the storage with zero-knowledge proofs.To incentivize storage providers to participate in deals, Filecoin rewards them with FIL, the network's native token. Storage providers are also slashed in the event they either fail to provide reliable uptime or act maliciously against the network.

To retrieve data, Filecoin users pay a retrieval provider to fetch the data. Unlike storage deals, which involve transactions on-chain, retrieval deals use payment channels to settle payments off-chain, resulting in faster retrieval.

The launch of the Filecoin Virtual Machine (FVM) in March 2023 brought Ethereum-style smart contracts to enable new use cases on Filecoin, including DeFi, perpetual storage, and decentralized compute.

Key Metrics

Performance Analysis

The Filecoin blockchain is used by both the demand side (i.e., storage users in need of data storage) and the supply side (i.e., storage providers with excess capacity) of the network. Both storage users and storage providers generate revenue for the protocol.

Revenue

Filecoin's revenue framework is similar to Ethereum's because its gas system is based on EIP-1559. This gas system consists of network fees that are burned to compensate for the resources used.

Protocol Revenue

As per Messari's revenue analysis, Filecoin's protocol revenue represents the sum of:

• Base fees – determined by message congestion and required by any storage proof.
• Batch fees – Used for bundling storage proofs.
• Overestimation fees – Required to optimize gas usage.
• Penalty fees – Collected for storage provider failures.

Protocol revenue from FIL fees increased 5% in Q1'23 to 1.3 million FIL (up 21% in USD terms to $6.9 million). While FIL base fees increased 20% QoQ, penalty fees decreased 17% QoQ. Even so, penalty fees were still ~2x higher than in Q2’22 and Q3’22. This may be explained by the early termination of sectors, potentially due to the FIL/USD price dislocations affecting the profitability of storage providers.

The only portion of FIL fees that isn't burned by the protocol is the “tip” collected by block miners. This mechanism is used to speed-up transactions on the supply-side of the network. Therefore, this “tip” counts as supply-side revenue.

Supply-Side Revenue

Filecoin's supply-side revenue consists of:

• Block rewards disbursed by the network to storage providers.
• Storage deal payments that are anchored via legal contracts.
• “Tips” to speed-up transactions.

Block rewards account for more than 99.9% of supply-side revenue in Q1'23, while “tips” accounted for only a small portion. The minting mechanism of new FIL tokens relies on both:

• An exponential decay model (30% of tokens): block rewards are highest initially to stimulate participation and then decrease exponentially over time.
• A baseline model (70% of tokens): block rewards allocated as storage capacity grows.

Combining these two models helps maintain participation after block reward distribution in the early stages of the network (see exponential decay model). It also helps continuously reward additional value created for the network through increased storage capacity (see baseline model).

Supply-side revenue decreased 5% in Q1’23 to 18.9 million FIL (up 12% in USD terms). The decrease was driven by an overall reduction of FIL reward issuance due to exponential decay as well as the baseline minting model.

Usage

The amount of data stored in active deals between storage users and storage providers gauges the demand for Filecoin storage comes from both Web2- and Web3-clients.

Deals

Near-zero storage fees may have further encouraged data storage via Filecoin deals. Nearly 581 PiBs were stored on average on the Filecoin network through active deals in Q1'23, up 75% QoQ.

Daily new deals grew 14% in Q1’23, largely due to the Filecoin Plus (Fil+) program offering storage providers increased rewards for participating in verified deals. This dynamic incentivizes the onboarding of new storage deals using real data and prevents the gaming of network rewards. It also leads storage providers to undercut the fees of competing providers.

A breakdown of the active storage deals by their industry use cases reveals the industries that leverage Filecoin most:

• Life Sciences (33%)
• Web3 / Crypto (29%)
• Environment (16%)

Utilization vs. Capacity

Filecoin experienced a 13% QoQ decline in average raw byte storage capacity after reaching its all-time high in Q2'22 and plateauing in Q3’22. Simultaneously, the storage utilization relative to the total available storage capacity increased to over 4% in Q1'23, up 105% QoQ.

Retrieval

IPFS gateway requests can serve as a proxy for Filecoin retrieval, since most developer storage tools for Filecoin make data retrieval accessible to the whole IPFS network.

Q1’23 saw a 7% decline in the number of retrieval requests relative to Q4’22, but this level was still 27% higher than in Q3’22. Retrieval requests are a reasonable proxy for measuring the usage of IPFS for retrieval. With the continued development of retrieval markets, new metrics on the type of retrievals will be available for tracking beyond the IPFS gateway.

FVM Usage

The launch of the Filecoin Virtual Machine (FVM) on March 14, 2023, brought Ethereum-style smart contracts to Filecoin. As of March 31, 2023, more than 440 unique contracts have been deployed, generating nearly 44,000 transactions. FVM allows essentially any type of dapp to be deployed on Filecoin, including DeFi, perpetual storage, and decentralized compute apps.

As Filecoin continues to acquire new users and onboard valuable datasets, it may serve as a base for developing FVM-enabled use cases around data that are monetizable in the future. Moreover, since FVM is Ethereum-compatible, existing Ethereum-based apps can be brought to the Filecoin network without requiring significant code changes.

Ecosystem Overview

The Filecoin ecosystem has been actively developing a funnel of developers and builders. It has regularly engaged in activities such as hackathons, accelerators, grants, mentorship, and growth support. The funnel is designed to help early-stage projects and teams develop enough to receive funding and investments from Protocol Labs or affiliated entities. The ecosystem is channeled toward onboarding a large variety of use cases: namely, from data infrastructure, media streaming, metaverse, and gaming.

As of March, 2023, 484 known projects were being developed on Filecoin, IPFS, and the Protocol Labs Network ecosystem, down from the peak of 632 projects in October 2022.

While the Filecoin ecosystem committed a total of $17 million in grant funding in 2022, the grants program focused on a few core initiatives around the adoption of the Filecoin Virtual Machine in Q1’23. As a result, the number of eligible applications has come down, i.e., 62 projects in initial stages March 2023, down from 258 at the peak in October 2022. Simultaneously, March 2023 saw 211 projects originating from accelerators, up from 194 in December 2022. The grants program will remain an integral part of driving ecosystem growth.

Most applications and protocols that leverage Filecoin offer data services:

• Ocean Protocol: Developer tools and platform for data marketplaces.
• Lighthouse: Perpetual data storage service with a one-time payment pricing model.
• Slate: Search engine for handling and sharing personal data.
• Berty: Secure messaging and social media application.
• Dether: Cash on- / off-ramp and diverse financial transactions.

Media and entertainment-focused protocols include:

• MoNA: 3D art gallery in the metaverse.
• NFTwitch: NFT minting platform for Twitch content.
• Huddle01: Decentralized video conferencing.
• Curio: NFT marketplace for entertainment brands profiting off intellectual property.
• OPGames: NFT minting from games.

Several use cases aim to leverage Filecoin’s infrastructure to power highly specific data needs:

• Koios: No-code data DAO platform.
• ZKsig NFTs: Access control to marketplace.
• DataMarket: Data purchase and checkout functionalities.

The introduction of the FVM will likely drive significant growth to the Filecoin ecosystem as developers build apps on the network and externally integrate with it.

Qualitative Analysis

Releases

Filecoin Virtual Machine (FVM)

The incremental rollout of the FVM was completed with the Filecoin EVM runtime being deployed on the Filecoin mainnet through the V18 Hygge network upgrade.

The FVM allows developers to easily develop and deploy Solidity smart contracts. This integration brings the Web3-compatible, WASM-based Filecoin Actor system to the FVM, enabling interaction with other blockchain networks and applications.

Aside from enabling Ethereum compatibility, the FVM leverages the Filecoin network's native token (FIL) for gas fees and smart contract execution and supports Filecoin Improvement Proposals (FIPs), which introduce new features and optimizations to the platform.

Patch Releases

The Venus v1.10 series and the Lotus V1.20 series are patch releases that alleviate performance issues reported by users since the V18 network upgrade.

Key Events

FVM Launch Event

The launch of the FVM took place on March 14 and included an overview of Filecoin’s master plan, the long-term opportunities and unlocked use cases, and how FVM upgrades Web3 capabilities. A recording of the FVM launch can be accessed here.

FVM Testing & Auditing

The Filecoin Foundation announced a bug bounty program (called FVM Bulletproofing Initiative) to test and audit the FVM, its EVM runtime, and other components. The rewards pool is $100,000 paid out in FIL tokens. It aims to source professionals that specialize in WASM, Rust, EVM, and Web3 security.

FVM Space Warp Hackathon

Filecoin hosted its virtual FVM Space Warp Hackathon offering $125,000 in total prizes. Virtual sessions featured Lighthouse.Storage, Fission, and Zondax. Filecoin also hosted brainstorming sessions as well as information sessions regarding the understanding and programming with FVM. Judges, speakers, and mentors include leaders from Secured Finance, Zondax, and Multicoin.

FILVC

The FILVC event brought together 25 Web3 startups to pitch in front of more than 800 leading investors. The selected startups focus on development frameworks, identity solutions, asset licensing, data platforms and pipelines, end-to-end encryption, and decentralized compute.

Starling Lab Partnership

The Starling Lab formed a partnership with Rolling Stone to document alleged war crimes through photojournalism. The photos will be stored in Filecoin’s decentralized storage, marking a historical milestone where images are cryptographically authenticated on Web3 infrastructure.

IPFS Goes to Space

IPFS and Lockheed Martin demonstrated at the World Economic Forum in Davos how IPFS will encourage and facilitate data retrieval in space. While the partnership announcement was made in January 2022, IPFS and Lockheed Martin officially announced the deployment of IPFS on Lockheed Martin’s LM 400 Technology Demonstrator spacecraft in January 2023.

Roadmap

The Q2’23 roadmap includes several network improvements as seen in the following FIPs:

• FIP-0052: Increase max sector commitment to 3.5 years.
• FIP-0057: Update gas charging schedule and system limits for FEVM.
• FIP-0060: Set market deal maintenance interval to 30 days.
• FIP-0061: WindowPoST Grindability fix.
• FIP-0062: Fallback method handler for multisig and payment channel actors.

Down the road, longer-term improvements include L2 capabilities, hierarchical consensus, and Sealing-as-a-Service. Through FVM, Filecoin aims to build new and strengthen existing partnerships to better foster product growth within the data infrastructure community.

Closing Summary

Storage use on Filecoin experienced accelerated growth in Q1’23 with active storage deals increasing by 75% QoQ. While storage capacity decreased 13% QoQ, storage utilization grew 105%. Simultaneously, FIL fee revenue increased 5% in Q1'23 (up 21% in USD terms), driven by a 14% QoQ increase in new storage deals.

While decentralized storage is still in its early days, a successful adoption of the Filecoin Virtual Machine may enable the next generation of apps to move beyond storage. Prominent examples include perpetual storage (similar to Arweave), undercollateralized loans to storage providers, and decentralized computing. Should Filecoin continue to onboard demand, it stands a chance to become a prominent provider of decentralized storage and cloud services for Web3 and traditional applications.

This report was commissioned by the Filecoin Foundation, Inc. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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