The Future Focussed Portfolio – Part VII
Filecoin: Taking on the big guys, one block at a time
In our last two articles, we have covered what we consider the key building blocks of Web 3.0, namely Bitcoin for money, and Ethereum as logic (compute).
The third and final building block we will look at is data, which we believe will be underpinned by the Filecoin protocol.
Now, this may be a coin that you have never heard of, and it’s so much more than a ‘coin’. But before we dive into the details, let’s start from the basics – as we want you to walk away with an appreciation of how varying blockchain/digital assets are, in their scope and utility.
The Magic Internet
When you use the internet today it can seem like magic. You type in a random set of characters and in a few seconds are presented with an ever-expanding amount of data.
While the internet and the cloud make it seem like the internet exists in the ether, it is very much a physical phenomenon. 98% of the world’s data travels along fibre optic cables – a network of computers connected to each other. (Figure 1, below). The internet has developed over decades with immense coordination globally to build infrastructure and define standards about how data is transmitted across the internet.
Figure 1: Global fibre optic cable network
The World Wide Web
The early development of the internet took approximately 20 years, and it was not until 1989 when Sir Timothy Berners-Lee invented the World Wide Web, releasing its enormous potential and changing the way we interact with data and communicate with each other. Positioned on top of the infrastructure that supports the internet, the World Wide Web connects data, for example, the words and pictures that make up a website, using a unique identifier known as a ‘Uniform Resource Locator’. We know this identifier as a s a URL.
Most data travelling across internet infrastructure relies upon a location-based protocol known as the Hypertext Transfer Protocol (HTTP), which acts like an operating system to connect a user request for to a particular website (called an internet protocol or IP address) to the location where the data is being stored, usually a big data centre. As shown in Figure 2 below, the HTTP protocol is asking a server at a specific geographic location to send the requested information to a client. This approach is called ‘location-based addressing’.
Figure 2: The HTTP process
This protocol, for the most part, works ok. The proof? Well, you’re reading this. But it does have its downfalls. Figure 3 below illustrates one of these key issues. By centralising data, the owner of the data storage facility has considerable power to it and to create commercial products to sell back to consumers. This led to the creation of today’s data giants like Amazon, Microsoft, and Google.
Figure 3: The centralisation of data
This stage of technology development, commonly referred to as Web 2.0, required massive infrastructure investment to service the data demand as consumers and businesses shifted online. With access to capital markets, technology leaders that Holon refers to as ‘today’s Mega Caps’, took advantage of these enormous economies of scale to become trillion-dollar giants. As discussed in our previous XY articles, these companies have come to own and dominate the data storage and distribution business.
Reliance on these major providers has come with have unintended consequences. As we’ve seen in recent times, centralisation into just a handful of technology leaders has meant that when service providers go offline, it can take down half the web with it, costing billions of dollars for companies dependent on the internet.
Over the next few decades, the volume of data generated is set to explode as emerging technology platforms like autonomous vehicles, IoT devices and digital payments emerge. Holon estimates that the data generated by just for autonomous vehicles and IoT devices be 1000x larger by 2040 than all the data generated in 2020 alone, as seen in Figure 4, below.
Figure 4: Total annual data created, 2020 – 2040
Which begs the question? Is there a better way?
This is where the opportunity lies for IPFS and Filecoin.
So, What is IPFS?
IPFS, which stands for “Interplanetary File System”, uses an alternate approach than that adopted by HTTP. When a data file is created, the IPFS protocol (or operating system) creates a fingerprint of the file called a content identifier (CD) that is unique to the file itself. When a customer sends off a request for a specific piece of content, it uses the IPFS protocol to search for its unique file CD identifier.
If for example the file was recently viewed by someone in your home city, the request could be accessed from the closest available source rather than a specific geographic location that occurs through HTTP, introducing efficiencies in cost and time for users.
How does Filecoin relate to IPFS?
Filecoin is the native digital asset that powers the IPFS network. Data storage providers offer access to their storage hardware, and use Filecoin collateral (in the form of tokens) to ensure that they protect that data. They receive incentives in the form of Filecoin token payments, as a reward for providing this service. These reward tokens allow them to fund new data storage capacity additions to keep growing their storage infrastructure. This incentive mechanism introduces decentralization of data storage, allowing any individual or company to build out storage capacity on the Filecoin network.
Let’s dig a little deeper
In Figure 5, below, we can see the key difference when comparing how data operates on HTTP vs the Filecoin network. In the left example, users cannot share data directly with each other as the data address is centralised in a data centre. On the right, the introduction of a CD identifier allows IPFS users to search for and share information amongst each other. This minor change has a profound effect at scale.
Figure 5: The internet, with and without IPFS
This has the potential to speed up the internet, while also improving its resilience by reducing our reliance on just a few providers. In addition, a user who requests a known data file, rather than a more general request for data attached to a location address without little knowledge of its content or the presence of any attached viruses, creates a safer internet for all users.
The IPFS innovation, however, is only one part of the solution. It’s simply not enough to have an idea of how the internet could work in a more efficient manner, what’s essential is creating a network effect that brings the world across to use the IPFS solution.
The Filecoin incentive mechanism
Using the unique qualities of cryptocurrencies, Filecoin’s incentive mechanism aims to bring together infrastructure builders to scale out the network across the world. This incentive is larger during its early years of expansion, providing a higher reward for network builders, and paving the way to mainstream adoption. However, as the network scales and more customers shift their data storage needs away from HTTP towards IPFS, the incentive begins to reduce as Filecoin is widely accepted.
These rewards are in the form of FIL tokens and provide an income stream that allows data storage providers to offer incredibly low-cost storage to customers, estimated to be just 1% of the cost of the current data offered by today’s technology giants operating on the HTTP network 1. These subsidies are built-in for a 20-year period, giving Filecoin a long runway to build the utility of its network and attract users across the world.
As the network matures, and the subsidies fall, the challenge for IPFS is to keep drive storage costs across its network down to a level that allows them to compete with AWS, Google, or Azure, without relying upon the incentive token payments.
Filecoin’s vision is to turn data storage and distribution into an open market, a not dissimilar vision to the approach adopted by Uber for ride-hailing services and Airbnb for homestay accommodation. The key difference however is that storage providers and Filecoin holders have full ownership of the network, without the need for a centralised service provider charging a fee for coordinating providers and users.
Filecoin’s success will be determined by whether the value of the network can provide a sufficient incentive for customers and storage providers to shift to the IPFS network. This will take time given the network’s infancy; however, it does offer enormous potential in both price and security, and continues to attract strong demand from developers and customers seeking an alternate data storage solution to that offered today 2.
Filecoin’s potential is enormous given the 1000-fold increase in data generation that is expected over the next 20 years. Interested investors should not view this as the next Amazon, or the next Google, but instead seek to understand its potential to replace HTTP to drive Web 3.0, the internet of the future.
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This article has been prepared by Holon Investments Australia Limited (ABN: 45 648 884 164, AFS Licence No: 532669) (“Holon”). The information provided in this article is general in nature and does not constitute investment advice or personal financial product advice. This information has not taken into account your investment objectives, particular needs or financial situation. Before acting on any information contained in this article, each person should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision on recommendations.
Holon Filecoin Fund: The responsible entity for the Holon Filecoin Fund (ARSN 659 090 614) (the Fund) is Holon Investments Australia Limited (ABN: 45 648 884 164, AFS Licence No: 532669). Holon is the investment manager for the Fund. The content of this article does not constitute an offer or solicitation to subscribe for units in the Fund or an offer to buy or sell any financial product. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund.
Any investment needs to be made in accordance with our Product Disclosure Statement (PDS) and Reference Guide, and investors should consider the PDS and Reference Guide before deciding whether to invest in the Fund or continue to hold units in the Fund. Applications for units in the Fund can only be made pursuant to the application form relevant to the Fund. Distributors of our products must consider our Target Market Determination (TMD). You can access our PDS, Reference Guide and TMD at holon.investments.
Holon Global Innovations Pty Ltd (HGI) and Holon are wholly owned subsidiary of Holon Global Investments Limited. HGI is a FIL Storage Provider and is positioned as a major player in the Filecoin (FIL) decentralised data storage arena for Asia Pacific. FIL Storage Providers are rewarded in FIL for the provision of data storage capacity.
Investing involves risk including the risk of loss of principal. Past performance is not indicative of future performance.
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