State of Filecoin Q2 2023

Key Insights

• Filecoin’s storage market continued to grow in Q2'23, as active deals rose 64% QoQ.
• As storage capacity decreased 12% QoQ, storage utilization grew from approximately 4% in Q1’23 to nearly 8% in Q2’23.
• Revenue from fees increased 91% in Q2'23 (up 67% in USD terms), driven by a 64% QoQ increase in active storage deals and a 60% increase in the number of large dataset clients.
• The Filecoin Virtual Machine (FVM) brought Ethereum-style smart contracts to enable new use cases, including liquid staking, 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 liquid staking, perpetual storage, and decentralized compute.

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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 91% in Q2'23 to 2.5 million FIL (up 67% in USD terms to $11.5 million). This growth in protocol revenue is in line with the 64% growth in active storage deals and the 60% increase in the number of clients that have onboarded large datasets.

While FIL base fees increased ~3x QoQ, penalty fees continued to decrease, down 17% QoQ and down 29% relative to the peak of $0.7 million in Q4’22. The elevated levels of penalty fees in the past may be explained by sectors (i.e., the basic units of storage) being terminated by storage providers before the agreed storage deal duration. A potential explanation is 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 Q2'23, 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 are allocated as storage capacity grows.

Combining these two models helps Filecoin 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).

Unlike demand-side revenue, supply-side revenue decreased 7% in Q2'23 to 17.6 million FIL (down 16% in USD terms). The decrease was driven by an overall reduction of FIL reward issuance due to the exponential decay model and the baseline minting model. The decrease in FIL reward issuance will likely continue in the next quarters.

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

Storage providers charging near-zero storage fees may have further encouraged users to store data via Filecoin deals. Nearly 954 PiBs were stored on the Filecoin network through active deals in Q2'23, up 64% QoQ.

Daily new deals grew 47% in Q2'23, largely due to the Filecoin Plus (Fil+) program. It offers storage providers increased rewards for participating in deals that require data to be verified (i.e., Fil+  verified deals). This dynamic incentivizes the onboarding of new storage deals using real data and prevents the gaming of network rewards. It also encourages 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 are Technology (41%) and Natural Resources (31%).

Services

To further encourage usage, Filecoin offers two services — NFT.Storage and Web3.Storage. They provide simple user interfaces to end users and act as aggregators where data from multiple users is bundled and stored with a storage provider.

The NFT.Storage service provides a simple user interface for storing NFT content and metadata on Filecoin. Conversely, Web3.Storage simplifies storing and retrieving Web3 data for Filecoin developers and end users. By participating in the Fil+ incentive program, both services can offer Filecoin storage at no additional charge to end users. Overall, both services experienced significant growth in terms of active deal data in Q2’23. NFT.Storage grew 12% QoQ, while Web3.Storage was up 19%.

Clients

As per Messari’s guide on decentralized storage networks, Filecoin is geared towards providing cold storage solutions (e.g., archival and recovery) for enterprises and developers. Its competitive pricing and ease of access make it an appealing choice for Web2 clients seeking cost-effective alternatives for storing large amounts of archival data.

As of the end of Q2'23, a total of 1,750 clients have onboarded datasets on Filecoin. Of those clients, 338 onboarded large datasets (e.g., datasets that exceed 1,000 TiB in storage size), up 60% from 211 in Q1’23. The clients range from New York City and the USC Shoah Foundation to Web3 platforms such as OpenSea. Further notable efforts to onboard data into the Filecoin network include:

• UC Berkeley collaborating with Seal Storage for storing physics research
• GenRAIT leveraging Estuary to store critical genomics data on Filecoin
• The research center Starling Lab storing sensitive digital records of human history
• Ewesion (China's fastest-growing host of photographs, illustrations, and vector files) using Filecoin for data preservation.

This accelerated trend in usage growth is further reflected in Filecoin's overall utilization relative to its storage capacity.

Utilization vs. Capacity

Filecoin experienced a 12% 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 7.6% in Q2'23, up from 4.1% in Q1’23. The increase is a positive sign in terms of Filecoin’s adoption.

Retrievals

To serve storage retrieval needs, a content delivery network (CDN) for Filecoin and IPFS – called Project Saturn – is currently being developed. Saturn aims to serve Filecoin’s retrieval market through fast and low-cost content delivery. Its node operators are incentivized to fulfill retrieval requests by earning FIL from a monthly pool of approximately 30,000 FIL.

In terms of performance, the goal of Saturn is to be on par with and surpass IPFS Gateway. It’s focused on improving the speed and performance of retrievals, with the majority of data being mirrored from IPFS.

Q2’23 saw Saturn retrieval requests reaching similar levels as Q1’23, up 58% from Q4’23. As of the end of Q2’23, there were 3,444 nodes, up 148% from 1,391 nodes at the end of Q1’23. The nodes are distributed as follows: North America (40%), Europe (27%), Asia (24%), and the rest (9%). An overview of Saturn’s performance will be provided in Messari’s State of Filecoin Q3 2023 report.

FVM Usage

The Filecoin Virtual Machine (FVM) brought Ethereum-style smart contracts to Filecoin. FVM unlocks new ways to help storage providers access FIL for collateral, enabling use cases including liquid staking, perpetual storage, and decentralized compute.

As of June 30, 2023, more than 2,300 unique contracts have been deployed on FVM. They generated over 250,000 transactions that consumed over 7% of Filecoin’s gas usage in Q2’23. Notably, according to DeFi Llama, Filecoin has started accumulating TVL from liquid staking (such as GLIF and STFIL) and DeFi apps on the FVM. Based on the total contract balance of over 2 million FIL as of June 30, 2023, liquid staking accounts for 80%, DeFi apps for 5%, and other services make the rest of 15%. A detailed overview of gas usage, fees, and TVL post FVM launch will be provided in the upcoming quarterly reports.

As Filecoin continues to acquire new users and onboard valuable datasets, it may serve as a base for developing monetizable FVM-enabled use cases around data. 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 July 2023, 391 known projects were being developed on Filecoin, IPFS, and the Protocol Labs Network ecosystems combined. June 2023 saw 180 projects originate from accelerators, up from 150 in March 2023. 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.
• Tableland: Decentralized cloud database.

Media and entertainment-focused protocols include:

• Mona: 3D art gallery in the metaverse.
• NFTwitch: NFT minting platform for Twitch content.
• Huddle01: Decentralized video conferencing.
• OP Games: NFT minting from games.
• FileMarket: Web3 shop builder and marketplace
• Xone: Metaverse solution that connects artists and fans.

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 the marketplace.
• DataMarket: Data purchase and checkout functionalities.

The Filecoin Virtual Machine is expected to further drive growth to the Filecoin ecosystem as developers build apps on the network and externally integrate with it.

Qualitative Analysis

Releases

Filecoin Data Tools

To enhance users’ experience with data onboarding, Filecoin has introduced the Filecoin Data Tools (FDT) project. FDT is a suite of technologies designed to simplify the storage and management of data on Filecoin. FDT can handle the large-scale onboarding of customer data and aims to provide a practical cloud developer experience (DX) comparable to Web2 cloud.

Interplanetary Consensus (IPC)

Filecoin launched the first public deployment of the Interplanetary Consensus (IPC) framework for scaling. IPC addresses challenges with transaction volume and application heterogeneity by enabling the creation of hierarchical subnets that execute transactions in parallel. It also facilitates cross-subnet transactions.

Lassie

In May 2023, Filecoin released Lassie, a retrieval client that enables users to retrieve content-addressed data (using CIDs) from Filecoin or IPFS without having to run individual nodes. Developers can also leverage Lassie as a data retrieval library from within their applications.

V19 and V20 Network Upgrades

The V19 Network Upgrade (Lightning) is an implementation of FIP-0060 that improved block validation times and overall network performance. This upgrade addressed degraded chain quality and sync stability issues reported by network users. The V20 Network Upgrade (Thunder) is an implementation of FIP-0061 that introduced a patch release network upgrade to Lotus V1.22. The implementation of the activation epoch fixes and FIP-0052 will be completed with a later network upgrade.

Ecosystem

The Filecoin ecosystem continues to expand with the launch of the FVM. Notable integrations include Brave wallet support for Filecoin FVM and IPFS backup for NFTs, and Spheron’s Filecoin integration. Notably, Axelar and Celer Network launched bridge support for Filecoin, making it interoperable with networks such as Ethereum, BNB Smart Chain, and Polygon.

To date, there are several applications that have reportedly deployed on the FVM across several sectors such as infrastructure tools, storage and cloud services, education, science & public goods, media and entertainment, and Filecoin.

A list of projects deployed on Filecoin’s FVM to date can be viewed here.

Key Events and Initiatives

SEC States Filecoin is a Security

In response to SEC’s categorization of Filecoin as meeting the definition of a security, Protocol Labs released a statement via Twitter stating that Filecoin is a decentralized file storage network, not a security.

Hack FS and FVM Dataverse Hackathon

Protocol Labs in collaboration with EthGlobal hosted HackFS 23, offering $125,000 plus prizes to participants of the online hackathon. Filecoin also launched the FVM Dataverse Hackathon program to encourage developers to build applications on the FVM.

Bug Bounty Program

Filecoin updated its bug bounty program on Immunefi, featuring increased rewards for critical issues (up to $500,000). It also expanded the scope of the program to include programmability features.

Roadmap

IPC: A full release of the IPC is planned for Q3’22, including developer tooling and documentation.

Axelar Integration: The Axelar team released details on its integration with the Filecoin Virtual Machine (FVM). It aims to provide application developers across any connected blockchain ecosystem with access to FVM functionality for storing, funding, and verifying data as well as handling fees. This integration aims to increase liquidity on FVM DEXs and AMMs using Axelar-wrapped assets as the canonical representations of bridged assets in the Filecoin ecosystem. It will also utilize Axelar GMP to enable smart contracts on any chain to call Filecoin functions.

Longer-term roadmap: 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 Q2'23 with active storage deals increasing by 64% QoQ. While storage capacity decreased 12% QoQ, storage utilization grew from 4.1 in Q1’23 to 7.6% in Q2’23. Simultaneously, FIL fee revenue increased 91% in Q2'23 (up 67% in USD terms), driven by a 47% QoQ increase in new storage deals.

While decentralized storage is still in its early days, there are already signs of potential growth. For example, the 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 at becoming a prominent provider of decentralized storage and cloud services for Web3 and traditional applications.

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This report was commissioned by Filecoin Foundation. 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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