Filecoin: Decentralized Data Storage

Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.



Understanding decentralized data storage

Launched in October 2020, Filecoin brought one of the latest addition to the growing cryptocurrency industry to the limelight. Since Filecoin mainnet’s launch last year, it has made a considerable buzz among crypto enthusiasts as the FIL token became public across popular exchange platforms. Consequently, securing FIL tokens became more convenient and would take just a few minutes to do.

As we’ll see the whole protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data).  

Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System, Protocol Labs created Filecoin as an effort to provide a blockchain-based unified digital storage and data retrieval mechanism that enables users to lease new and unused hard drive space.

Before its launch, Filecoin’s ICO already raised an estimate of $257 million as early as 2017. As an open-source, public cryptocurrency allowing virtually anyone from all over the globe to be part of the network, Filecoin is set to create a huge source of data storage. Thus, Filecoin holds excellent potential in catering to the increase of demand for file storage as the world is increasingly and gradually shifting to a more digital world.

Value Model

Filecoin offers adaptable data storage solutions to individuals and organizations at a much lower price than established industry competitors’ services. With Filecoin, users can access and opt for a more flexible service plan that enables them to pay a FIL fee that reflects the exact storage space they need. Furthermore, through the Filecoin network, data can be made more accessible and available to users.

Blockchain Model

As pointed out in its White Paper “Filecoin is a decentralized storage network that turns cloud storage into an algorithmic market.” 

The whole protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data).  

Filecoin has its native token, “Filecoin,” which miners can earn as they provide storage to clients. Whereas on a blockchain protocol, like that powering up Bitcoin, mining is a process that helps maintain and ensure consensus. Filecoin’s mining process helps provide the service itself. Therefore, the Filecoin’s protocol incentivizes miners to “amass” and provide as much storage as possible to the network, thus improving the service for final clients. 

Thus, the Filecoin protocol relies on other algorithms like proof-of-storage and proof-of-replication, to prove to the network the availability of new data storage. As highlighted in its White Paper, then the measure of power is given by proofs-of-replication.  

The main algorithm that powers up the network is called Proof-of-Spacetime, where as miners store the data, this helps them create new blocks and get rewarded. 

The workflow is straightforward: 

  1. clients look to store and retrieve data, and thus pay for that.
  2. Storage Miners will earn tokens as they amass and offer storage. 
  3. Retrieval Miners will earn tokens as they serve the data.

The whole protocol is built on top of four main components: 

  • Decentralized Storage Network.
  • Novel Proofs-of-Storage.
  • Verifiable Markets.
  • Useful Proof-of-Work.

Below a representation of how the network functions based on the Filecoin White Paper: 

Image Source: Filecoin White Paper

Therefore, the network consists in two main marketplaces (storage and retrieval). The storage sits on-chain, where storage providers need to prove they stored the client’s data which they got paid to store. This happens via a proof-of-storage (PoS) that the network or the clients verify. Usually proof-of-storage happens via other schemes such as Provable Data Possession (PDP)  and Proof-of-Retrievability (PoR), where the clients can more efficiently check whether the data is stored without having to download it (perhaps by automatically checking a random sample of blocks or transmit small amounts of data to test the storage receiver).

While simple scheme like PDF and PoR work as an initial guarantee, a stronger mechanism is needed to prevent Sybil attack (miners pretend to be storing more data by simply creating multiple sybil identities) , outsourcing attacks (providers pretend to be able to store more data by fetching that data from other storage providers), generation attacks (where miners claim to be storing more data by simply generating on-demand using a small program and taking advantage of the network’s rewards).

To prevent those attacks, Proof-of-Replication kicks in, as a more solid scheme, where to convince the user that the data has been stored, “the data has been replicated to its own uniquely dedicated physical storage.”

As pointed out in the White Paper “Proof-of-Storage schemes allow a user to check if a storage provider is storing the outsourced data at the time of the challenge.” In short, that is the mechanism through which “a verifier can check if a prover is storing her/his outsourced data for a range of time.” 

These schemes are possible because the decentralized storage network (DNS) is auditable, publicly verifiable and designed on incentives. Thus, the client’s cycle looks like that: 

  • A client submits a bid order to the Storage Market (under the Put protocol).
  • This bid order is matched with a ask order from a miner, and once agreed the deal is closed through the Storage Market. 
  • To retrieve the data, clients can pay retrieval miners via Filecoin tokens. 
  • From there retrieval miners will submit a bid order to the Retrieval market, and as the ask order is found, the client receives the data. 
  • The deal is then submitted as the parties sign in. 

It’s important to notice that the retrieval market sits off-chain. Thus, retrieval deals are agreements between clients and retrieval miners (which in some cases might also be storage miners) fulfilled using payment channels (these off-chain transactions are used then to submit bit orders by retrieval miners on-chain to provide the data requested by the client).

More precisely, while the Storage Market is an on-chain protocol consisting of two phases: order matching (where clients and storage miners submit their orders to the storage market) and settlement (where storage miners “seal their sectors” thus generate the proof of storage). 

The Retrieval Market is an off-chain also consisting of order matching (retrieval miners submit their orders and establish a micropayment channel) and settlement kicks in as the retrieval miner sends small pieces of data back to the client who signs them off.

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Read Also:  Proof-of-stakeProof-of-workBitcoin, DogecoinEthereumBlockchainBATMoneroRippleLitecoinStellar, Dogecoin, Bitcoin Cash.

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Related Blockchain Business Frameworks


Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.


The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake


Proof of Activity

Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.


Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).


A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.


An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.


Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.


Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.


In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.


Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.


BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

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