State of Sia Q1 2023

Key Insights

• The Sia Foundation approved two grants: $120,000 for Messari (data analysis and research) and $2,400 for Alphaday (dashboard aggregator).
• Sia published the beta version of its “renterd” application on GitHub. The renterd app is a more user-friendly and efficient system for storage consumers.
• Sia launched its first public testnet, called Zen, in January 2023. The Zen testnet is a universal playground that lets developers interact with a test environment that closely resembles Sia’s production environment.
• Active storage contracts, which impact most metrics of the Sia network, fell by ~88% QoQ. This was largely a result of problems with third-party interfaces, specifically the shutdown of Skynet Labs and halting of storage uploads to Sia by Filebase.

Primer on Sia

Sia is a decentralized cloud storage network that combines a Proof-of-Work blockchain with a contract-based storage model. Storage contracts are used to uphold storage agreements between hosts and renters. Renters define the amount of data to be stored, the timeframe for storage, and the price.

As users and storage providers enter into storage contracts, they each deposit the native asset — Siacoin (SC) — into an escrow account. Storage providers cryptographically prove they are hosting the required data. At contract expiry, the storage provider receives the majority of the escrowed funds, with a small portion going to holders of Siafund (SF) tokens. Siafunds are security tokens that accrue SC to the SF holder from finished contracts on Sia.

Sia facilitates a global data storage marketplace by connecting storage providers (hosts) with underutilized hard drive capacity to storage consumers (renters). Siacoin can be used to pay for gas on the Sia blockchain and as the medium of exchange for the storage market. The costs associated with storage contracts are listed below.

• Contract Formation — Gas for creating a contract on the Sia blockchain.
• Storage Price — SC per TB per month of data stored.
• Bandwidth — SC per TB of data uploaded (added) or downloaded (retrieved).
• Collateral — Posted by the host, collateral is slashed if the host does not uphold the contract agreement.
• Siafund Fees — Fees that accrue to Siafund (SF) tokenholders. Consists of 3.9% of storage, bandwidth, and collateral, all paid by the renter. SF holders can claim fees when contracts are completed.

Files stored on the Sia network are encrypted via ChaCha20 and stored redundantly via Reed–Soloman Erasure Coding. The encryption aspect ensures that uploaded files remain private, and redundancy ensures security by sharding files. Files uploaded to Sia are split into 30 chunks, or shards, and sent to various hosts. Only 10 shards are required to rebuild the file, and their copies are re-duplicated to new hosts whenever one is offline.

Sia was conceived at HackMIT in 2013 and launched in 2015 by Nebulous Inc., which later split into two entities: the Sia Foundation and Skynet Labs. The Sia Foundation launched after a successful hardfork of the Sia blockchain, which introduced an SC token subsidy to fund the foundation. In April 2021, Nebulous announced its full rebrand to Skynet Labs. It started to reduce its services in August 2022, shutting down its portals in early November 2022 due to a lack of funding. Despite the shutdown of Skynet Labs, Sia continues to operate and implement new developments.

Key Metrics

Bear Market Blues

Unfavorable market conditions aside, Sia’s degradation in network usage was primarily a result of the shutdown of Skynet Labs and of Filebase halting storage uploads to the network. Starting in Q4’22, the number of daily active storage contracts began to plummet, taking an even rougher turn in Q1’23 with an 88% QoQ decline. Active contracts impact all aspects of Sia: network revenue, blockchain transactions, storage agreements, Siafunds, and the general activity of its network.

In Q1’23, several key metrics declined significantly quarter-over-quarter: network revenue (-83%), transactions (-81%), storage used (-57%), and SC claimed by Siafund holders (-80%). Sia’s best-performing metric was the Siacoin price, which increased 26% QoQ. Regardless, the Sia community continued to develop applications for renters, hosts, and Sia asset holders.

Performance Analysis

Active Contracts

Storage contracts on Sia enable users (called renters) to enter into agreements with storage providers (called hosts). When a contract is active, it means that storage is being provided and the contract is automatically facilitating the agreed-upon value exchange.

Over the last five quarters, the number of active contracts peaked in late October 2022. Since then, active contracts have been declining. The average number of active contracts decreased by ~88% QoQ and fell by ~85% during Q1’23.

The collapse in active contracts in Q4’22 was largely due to problems with third-party interfaces that created storage contracts for their users. Filebase was responsible for a majority of storage contracts before it stopped uploading new files to Sia due to technical issues in late September 2022. The shutdown of Skynet Labs and the Skynet application in November 2022 also compounded this problem.

Without reliable and user-friendly interfaces, Sia experienced a severe decline in the creation of storage contracts. The Sia Foundation is addressing this issue as it continues to build the renterd application, an interface for users to create Sia storage contracts, which is currently in beta.

Transactions

Transactions on Sia account for all activity related to storage contracts, peer-to-peer transfers, and trades of the asset.

Sia blockchain transactions fell ~81% QoQ. This was likely driven by the ~88% QoQ decrease in active storage contracts, given that creating a new contract requires a transaction on Sia. Additionally, the contracts facilitate payments held in escrow, adding to Sia’s transaction volume. Hence, the movement in active contracts tends to be reflected in transactions.

When active contracts peaked in October 2022, it led to a 52% increase in active contracts in Q4’22. From there, active contracts began to steadily decline into Q1’23. Following active contracts (-88%), transactions fell by 81%. Both metrics’ declines were likely due to the problems that third-party interfaces experienced, which lowered access to the creation of storage contracts via simple user interfaces.

Storage Utilization

The capacity of a storage network helps highlight its current scale, and its utilization rate reveals the demand for the type of storage it optimizes for.

Sia uses a Stake-for-Access (SFA) token model to capture value and provide storage. In this model, utilized storage is achieved through active contracts. As active contracts decreased QoQ, the total storage capacity and utilization also fell QoQ. In Q1’23, capacity dropped ~19%, nominal utilization dropped ~57%, and the utilization rate fell by ~17%.

Storage Prices

Renters that enter into a storage contract on Sia pay multiple fees to set up and maintain the contract. Storage fees are a function of the amount of data uploaded, the length of time of the contract, and the price in SC per TB per month.

In times of oversupply, market dynamics should lead prices to fall, and the reverse would be true as well. Compared to the previous quarter, Q1’23 prices rose both in SC and USD terms while the storage utilization rate decreased from 36% to 17% QoQ. The storage price in SC marginally increased by 3% QoQ. The 29% QoQ rise in USD terms can be attributed to the 26% increase in SC’s USD value QoQ.

Bandwidth Costs

Storage providers offload the costs of uploading and downloading the renter’s data to the individual renter. Users seeking to initially store data on Sia pay upload fees to hosts. Users seeking to retrieve uploaded data pay download fees to hosts. In both cases, bandwidth is priced per TB.

Because renters pay bandwidth fees in SC to hosts, dramatic changes in the USD value of SC affect the price of fees paid in SC. Both Q2’22 and Q3’22 saw the sharpest increases in bandwidth prices in SC: +30% and +31% for uploads, respectively, and +72% and +83% for downloads, respectively. These changes followed a 34% and 43% decline in the USD value of SC in those same quarters.

Oddly, bandwidth prices reacted differently in Q4’22. As the USD value of SC dropped by 31%, both upload and download prices also decreased. The drop in SC may have been an anticipation of the increase in the USD value of SC. In Q1’23, the SC price rose by 26% and was followed by a 4% fall in upload prices and a 10% fall in download prices.

The USD price to upload data on Sia followed the same pattern as the USD value of SC — hosts modestly increased upload prices in SC. However, download prices moved counter to the value change of SC in Q2’22 and Q3’22. In this case, hosts may have initially overcharged for downloads to compensate for the volatility of the asset and to discourage retrievals within the bear market.

Siafund Claims

In 2019, the SEC designated the SF token as a security. The SEC also reviewed the SC token but did not designate it as a security. The designation was based on the purpose of SF tokens, which allowed holders to claim any accrued SC from finished contracts on Sia. As such, the number of SC claims helps measure the profitability of Sia and the amount accrued to SF holders.

Initially, ~11.6% (1,160 SF) of all SF were sold to 46 investors, with Skynet Labs holding the other 88.4%. A later sale further distributed SF, dropping the Skynet holdings to ~86% and leaving a total of ~1,400 SF for other investors. Although Skynet Labs shut down its operations, it still exists as a legal entity. Hence, most SC is claimed by Skynet. Since the official SF sales, a total of 174 addresses hold SF, as of April 1, 2023.

Despite Sia activity rising throughout the early part of 2022, SC’s price fell, leading to claims valued at lower USD amounts. The ~80% dropoff in SC claimed for Q1’23 reflects the depressed activity on Siacoin.

SC Burns

Hosts must post collateral in storage contracts. The collateral is subject to slashing if the hosts fail to meet the contract terms: storing renters' data for the contract length and maintaining uptime. Burns include, but are not limited to, slashed collateral. Users can also simply send SC to the burn address on an ad-hoc basis.

The 1,060% increase in burns in Q4’22 largely came from a random user sending 3.25 million SC to the burn address in November 2022. The opaque area on the chart represents this unexpected event. Excluding that outlier transaction, burns only decreased by 15% QoQ in SC terms and increased by 8% QoQ in USD terms.

Although burns are generally meant to be deflationary, SC burns tend to be outshone by Sia block rewards. Miners have seen at least $1 million in inflationary block rewards in each of the last five quarters for a total of ~$11.28 million. Alternatively, at least $1,400 has been burned each of the last five quarters for a total of ~$22,000. This comes out to 0.19% of the $11.28 million rewarded, meaning it has a negligible impact on supply.

Transaction Fees

As a Proof-of-Work blockchain, transaction fees on Sia are paid to miners that maintain the blockchain’s state and approve new transactions.

Total fees collected took a severe decline near the middle of Q4’22 that carried into Q1’23 for a QoQ decrease of 76%. This could be attributed to the drop in active contracts, which led to fewer transactions and, hence, fewer fees for miners. The 22% QoQ increase in the price of average daily transaction fees in Q1’23 may be a response to reconcile the nominal lack of collected fees from the fall in activity.

Network Revenue

Sia produces revenue for multiple parties: hosts, miners, and Siafund (SF) holders. Its network revenue is the sum of payouts to hosts, Siafund fees, miner fees, and burned collateral. Burned collateral is included in revenue because, theoretically, burning SC would make it more scarce and accrue value to SC holders.

Total network revenue declined ~83% QoQ, largely driven by the  ~88% QoQ decrease in active storage contracts. All aspects of revenue are affected by the number of active contracts on Sia. Hosts are paid based on the contents of each contract, SF fees are a percentage of contract fees and collateral specified within the contract, miner fees come from all transactions (many of which come from contract-related transactions), and burned collateral can only result from a failed contract.

Block Rewards in USD

Siacoin has an unlimited maximum supply; its current supply is over 51 billion SC. Siacoin inflates at 30,000 SC per block mined. In 2022, that equated to an annual inflation of ~6.3%. Over time, this rate will approach but never reach 0%. Because some SC is required to be locked up in storage contracts, Siacoin’s inflation works to maintain liquidity.

The number of blocks mined decreased by ~2% QoQ. However, following a 26% increase in SC price, inflationary block rewards increased by ~24% QoQ. In total, block rewards added ~$1.4 million to miners’ income in Q1’23.

Percentage of Blocks Mined by Pool

The percentage of blocks mined by each mining pool shows how responsible certain entities are for creating new blocks on Sia.

At the end of Q1’22, the mining pool distribution was more well-balanced: three pools each accounted for roughly 30% of the blocks mined, with SiaMining taking the final 10%. Throughout the past five quarters, F2Pool has increased its share of mining to ~52%, and Luxor, once the leader in blocks mined, fell to ~16%.

Market Cap & Price

Sia’s SFA model requires hosts and renters to lock up SC in order to accept storage deals. The more SC hosts lock up, the more data they can store. The resulting dynamic forces storage providers to increase their collateral as they store more data, thus increasing demand for the network’s native asset. In theory, the price of the asset should increase with the amount of data stored on the network, and vice versa.

The opposite happened in Q1’23. As Sia’s storage utilization decreased by 57% QoQ, Siacoin’s price and market cap rose by 26% QoQ. For perspective,  the value of the total crypto market increased by 49% in Q1’23. Given that the growth in Siacoin’s USD value lagged behind the total market, Sia’s decrease in the amount of data stored on the network may have factored into the lower demand for SC compared to the broader crypto market.

Qualitative Analysis

Grants

The Sia Foundation approved two grants that accounted for $122,400 in Q1’23. Since its inception, the grant program has approved ~$600,000 for projects spanning from development to research. The grants committee meets bi-weekly and consists of six members: three employees of the Sia Foundation and three Sia community members. The two approved grants from Q1’23 are detailed below.

Messari – $120,000

The Sia Foundation approved $120,000 for Messari to provide Sia with in-depth data analytics and research. (Aave and Maker DAO have invested in similar services outside of Messari, spending $1.5 million and $1.3 million a year, respectively.) Messari commits substantial resources to its research with data engineers dedicated to pulling on-chain data, analysts researching and editing the analyses, and a global distribution network for publishing the end-product. The reports produced by Messari are then available to anyone interested in the Sia ecosystem.

Alphaday – $2,400

The Sia Foundation approved $2,400 for Alphaday to build a dashboard that aggregates news, on-chain data, social media, Web3 services, and more into a customizable user interface. Alphaday was Sia’s first grantee to fully complete its proposed product.

Development Roadmap

Sia has had a functional blockchain and storage network since 2015, and in the past eight years, it has undergone many network developments. The most recent wave of developments largely focused on giving network participants a better user experience. Key roadmap items from Q1’23 are listed below.

Zen Testnet (completed)

Sia launched its first public testnet, called Zen, in January 2023. Before Zen, developers had to set up local testnets. Depending on how the developer established a local testnet, it could be prone to functioning dissimilar to Sia’s mainnet. In other words, the operations in testing may fail in production. The Zen testnet is a universal playground that enables developers to interact in a test environment that more closely resembles Sia’s production environment.

renterd (in beta)

Access layers such as Filebase (for Sia) abstract away the complexities of interacting with the underlying storage provider. The Sia Foundation is building its own native solution called renterd. The application will offer retail users a simple interface for storing and retrieving their data on Sia. It will also include an API that developers can use to build applications on Sia. All in all, renterd will make Sia more accessible to everyday users.

hostd (in alpha)

Similar to renterd, the Sia Foundation is creating a better interface for hosts to provide storage on the network, called hostd. In addition to improving performance, hostd will offer monitoring tools that will enable hosts to provide better service and make more informed decisions about pricing, storage allocations, and other contract parameters. The Sia Foundation plans to release a beta version of hostd in Q2’23.

walletd (in progress)

The Sia Foundation is building a new wallet interface called walletd. The walletd application will allow users to interact with Sia assets like SC and SF tokens on both hot and cold wallets. It will also support multi-signatures and hardware wallet integrations. The Sia Foundation plans to release an alpha version of walletd in Q2’23.

Utreexo (in progress)

Utreexo is a scalability solution for UTXO (unspent transaction output) blockchains, originally designed for the Bitcoin network. It is a hash-based accumulator that makes managing and verifying a UTXO set more efficient. Full nodes only need to store the Merkle root and a proof representing each UTXO set, significantly reducing full node requirements.

The Sia Foundation is focused on adapting Utreexo to the Sia blockchain, aiming to increase performance, scalability, and functionality. To implement Utreexo, the Sia Foundation must change Sia’s block and transaction formats, which have not been altered since Sia’s launch. The Sia Foundation continued to update core libraries throughout Q1’23 to ease the future transition to Utreexo.

Closing Summary

Sia has maintained a functional, low-cost, and decentralized Proof-of-Work blockchain and storage network since 2015. It has pushed through multiple crypto cycles and continues to iterate, making Sia a more usable and efficient protocol. Its Q1’23 performance is largely a reflection of the effects of widely used third-party interfaces either shutting down or halting new activity on Sia. In turn, fewer storage contracts were created, causing ripples throughout the rest of Sia’s metrics (transactions, revenue, storage utilization, etc.).

Regardless, the Sia Foundation and community seem unfazed. Grant applications keep flowing into the forums and the Foundation keeps building. One of Sia’s biggest strengths is also one of its biggest criticisms: it’s built for developers. As the primary aim is now to develop resources that enhance the user experience for all network participants, it is possible that these improvements will enable Sia to emerge from the bear market more appealing than before.

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