The team behind Filecoin is at the cutting edge of blockchain technology and is backed by a very strong roster of venture capitalists.
At the end of the day Filecoin will have to compete with current cloud storage providers and that may be a tall order. They will have to meet or exceed competitors on speed, security and reliability. Finding novel solutions to the latency problems that plague any peer-to-peer system will be critical to user adoption.
Filecoin wants to use the power of the blockchain to build a decentralized file storage service using free space on computer hard drives around the world. The idea is backed by prominent venture capitalists and run by a team at the forefront of blockchain technology who have a stellar track record.
However, competitive and technical hurdles to Filecoin challenging the established cloud storage industry are sky high and will require perfect execution and rapid user adoption to have any chance of success. The excessive size of Filecoin’s ICO and lopsided token ownership structure reflect poorly on the management team.
We recommend a wait-and-see approach until the Filecoin ecosystem is fully built out and operating.
Created by employees from the well-respected Protocol Labs, a research, development and deployment lab for network protocols. Protocol Labs is the creator of Coinlist, the standard-bearer for standardizing the process of investing in ICOs (Initial Coin Offerings).
The founder of Protocol labs, Juan Benet, is a successful tech entrepreneur. He created a virtual reality gaming company acquired by Yahoo and is at the cutting edge of decentralized network technology. He graduated from Stanford University with a bachelors in computer science in 2010.
Filecoin has captured the imagination of cryptocurrency and traditional VC investors with Winklevoss Capital, Sequoia Capital, Andreessen Horowitz and Y Combinator all investing in previous seed rounds of financing.
Based on the reputation and successful business ventures of Juan Benet, coupled with the involvement of well-known sophisticated investors, we give the team a high-quality rating.
Proceeds to Founders and Quality of ICO
The way the Filecoin ICO was structured reflects very poorly on the Protocol Labs team. Of the 200m tokens being issued, Protocol Labs and affiliates will receive 1.5x as many tokens as investors. So at issuance, and including the Filecoin foundation’s 50% share of newly minted Filecoins, Protocol Labs will eventually own 66% of coins while investors own only 33%. The lopsided distribution of coins demonstrates that the Filecoin team will likely put their interests ahead of investors in the future. Buyer beware.
Another strike against the offering is that the amount of money raised is excessive. In a Q&A session on the Protocol Labs website, Juan Benet admitted that for only $3.5m, Protocol Labs has been able to operate for three years and create at least three different working prototypes for decentralized network protocols. To turn around and say you now need $250m to finish building Filecoin seems disingenuous to us. The size of the ICO, compared to the deliverables, gives us less confidence in the integrity of the Filecoin team.
The Filecoin ICO was structured to increase in price as more people subscribed for tokens, which incentivized a rush to buy, but was not equitable for investors who were not in the door first, potentially just due to network latency. The explanation for this structure was that later investors have been derisked because of the money raised from earlier investors so later investors should have to pay a higher price. Unfortunately, the Filecoin team has severely misunderstood how a business model is derisked.
As a startup grows and establishes a market position for itself and a stable group of customers, the business risk of the enterprise decreases. The angel investor is taking more risk of business failure compared to the series D investor, so the series D investor should pay a higher price for his shares.
Just because a company with no products and no revenue raises $200m vs $50m, it doesn’t change the risk of the business model being a failure. The team could still squander all the money without building a sustainable product.
The price ratcheting mechanism of the ICO, and the explanation from the Filecoin team reflected poorly on the teams integrity going forward.
Lock-up Expiration: One point to keep in mind as an investor is that 35%-40% of genesis Filecoin tokens will be free from lock-up 1 year after network launch on July 14th. Large-scale selling of tokens after lock-up could negatively affect the market price of Filecoin, and hurt the ability of the network to function effectively.
Coin Owner Protections:
Strategic decisions are voted on by the board of the Filecoin foundation, but investors in the Filecoin token have no say in who is elected to the board and don’t have any board representation.
Quality of White Paper/Company Description:
The Filecoin whitepaper is comprehensive relative to peers and demonstrates the technical proficiency of the founders. There’s a thorough explanation of the different incentive mechanisms that will keep the interaction between people storing data and storage providers running smoothly. No blockchain is 100% safe, but the white paper shows us the team is actively thinking about ways the storage ecosystem could be gamed and is working on provable solutions to these issues.
The Filecoin documents provided around the ICO are brief when it comes to a description of the team, and are also missing concrete details on the expected performance of the Filecoin network. Comments on the competitive landscape are also very weak and do not explain how the company expects to scale up the userbase, which is necessary for the Filecoin storage system to function properly.
There’s still important functionality that needs to be worked out according to the white paper, which lowers our score.
Mechanisms That Need to Be Solved
- How storage providers and storage retrievers will be effectively incented not to act in a malicious way.
- Bridges that operate outside of the blockchain and allow connections between different blockchain technologies will have to be invented so that smart contracts can function on the Filecoin blockchain.
- How we can verify the security of stored data and make sure the storage miner hasn’t decrypted our confidential data during storage.
- A mechanism is needed to confirm our data has been deleted by the storage miner after retrieval so only we have access to it from that point on.
Strength of the Coin Ecosystem/Blockchain
Filecoin is trying to improve the inefficient use of hard drive space and provide a decentralized file storage option to consumers who may not like the concentrated ownership of file storage options among large corporations. There are massive amounts of unused storage space spread all over the world. Filecoin will attempt to incentivize users to lend out this unused space for a fee.
We like the potential of Filecoin’s ecosystem as the opportunity cost of lending out your unused storage is very low. If you’re a typical computer owner, your unused storage is sitting around earning you nothing. Contributing storage space to Filecoin will only cost you some electricity, but if the pricing is right, you can make money by hitting a button and lending out your unused storage space. The incentive for the average Joe to contribute storage to the Filecoin universe is high on paper.
Competition in the cloud storage space is fierce
The largest challenge facing Filecoin is competing against established industry heavyweights like Amazon Web Services, Google Drive, Microsoft and IBM. Consumers choose cloud storage providers based on their preferred mix of cost, speed and reliability (in both storage and retrieval). Filecoin will have to beat competitors on at least two of these metrics to achieve large scale adoption.
Cost – Cloud storage players offer between 5-15 GB of free storage, which already puts Filecoin at a disadvantage as it requires a token fee regardless of the size of the storage request. For the cost of storage to have any chance of being competitive with larger players who are operating at scale, Filecoin will have to grow into a robust ecosystem with millions of users.
For Filecoin to even rank in the bottom 15% of cloud storage players in terms of space, it would have to sign up 15m people to pledge storage to the system! 1
The price volatility of Filecoin will be a huge problem for the system to overcome as well. Storage miners are paid in Filecoin tokens to accept data, so as the price of Filecoin falls, the incentive of users to offer storage falls as well. It also takes time to agree on storage contracts and to transfer and retrieve data. A volatile Filecoin price introduces uncertainty when trying to figure out the ultimate cost to a user and revenue to a storage hub.
Speed – Filecoin must make sure the algorithm that drives token payments is robust to incentivize storage miners and retrieval miners to deliver and accept user storage data as fast as possible. However, even if the system is working flawlessly, the latency in consumer internet connections spread all over the world and differences in bandwidth and network availability will make it very hard for the system speed to rival the corporate players.
Reliability – Probably the most important selling point of cloud storage is that consumers can generally trust their valuable photos, music and pictures won’t be lost or damaged. If a cloud service is losing customer files, regardless of the pricing or speed of the service, customers will take their business elsewhere. Filecoin does not have automatic redundancies built in like cloud storage providers do so a user will have to pay to store multiple copies of their data with various storage miners to guarantee files won’t be lost.
Another potential issue is the availability of data. What if the node you stored your data with happens to be offline, or disappears when it comes time to retrieve your data? For storage and retrieval availability to be adequate, the Filecoin ecosystem has to scale rapidly and run millions of storage nodes. Even the cheapest storage option from Amazon Web Services guarantees that 99.9% of user data will be recovered on request.
There will be demand from some consumers who hate corporations and want a decentralized storage platform. However, a majority of the global population is not so sophisticated, and they care about price, speed and most of all reliability. If Filecoin can’t compete on these measures it will never be more than a niche experiment.
To judge an ICO we look at sustainability of search popularity on Google at times other than when the coin launched as well as followers on Twitter and Facebook compared to the average of other ICOs.
Google search interest for Filecoin is averaging 25% of peak levels post the ICO date (1/5)
19,000 Twitter followers is in the 50% percentile of ICO’s (2/5)
800 Facebook followers is only 6% of the average ICO (1/5)
Taking the weighted average of these three metrics we arrive at a 1/5 for consumer interest
Filecoin did a good job during the ICO structuring the offering in a way that created a sense of urgency among buyers. The first buyer in the door paid less per token than the last, which led to a fully oversubscribed offering.
With the ICO completed the company will have to find new ways to bring users and providers of storage into the Filecoin ecosystem. Neither the white paper nor any supporting documents from the Filecoin team went through a strategy for how the coin and storage will be marketed to the internet.
Even more important than bringing in new users is addressing the shortcomings of the Filecoin storage technology compared to cloud storage peers. As we mentioned in the section on the strength of the coin ecosystem, reliability, speed and cost will have to be in line with Amazon Web Services and others or else Filecoin will never grow to anything more than a niche service for techies. Filecoin hasn’t provided a business plan or informal information on how they will overcome these technical obstacles so we can only assign the marketing section an average rating.
A recent update in early 2018 from the team did include a questionnaire for early customers, demonstrating the team is aware of the shortcomings they will have to overcome.
FileCoin has one of the best technology teams in the blockchain business and is backed by well -known VC firms who have strong track records. Balancing the strong team is the lack of information on how the business model will compete with current cloud storage providers. Though there will be demand from some consumers who hate corporations and want a decentralized storage platform, the majority of the global population is not so sophisticated and care more about price, speed, and most of all, reliability. If Filecoin can’t compete on these measures it will never be more than a niche experiment.
Overall Score: 3.0/5
1 Based on 2TB of storage per capita and an assumption that 50% of this storage space is free. Bottom 15% of cloud storage firms store 15,000 petabytes of data on average. Source: Synergy Research Group and Grizzle Estimates