Demand and supply of the filecoin token
Network Baseline
Many blockchains mint tokens based on a simple exponential decay model. Under this model, block rewards are highest in the beginning, and miner participation is often the lowest, so mining generates many tokens per unit of work early in the networkʼs life, then rapidly decreases.
Over many cryptoeconomic simulations, it became clear that the simple exponential decay model would encourage short-term behavior around network launch with an unhealthy effect on the Filecoin Economy. Specifically, it would incentivize storage miners to over-invest in hardware for the sealing stage of mining to onboard storage as quickly as possible. It would be profitable to exit the network after exhausting these early rewards, even if it resulted in losing client data. This would harm the network: clients would lose data and have less access to long-term storage, and miners would have few incentives to contribute to improving the network. Additionally, this would result in the majority of network subsidies being paid based wholly on timing, rather than actual storage (and hence value) provided to the network.
To encourage consistent storage onboarding and investment in long-term storage, not just rapid sealing, Filecoin introduces the concept of a network baseline. Instead of minting tokens based purely on elapsed time, block rewards instead scale up as total storage power on the network increases. This preserves the shape of the original exponential decay model, but softens it in the earliest days of the network. Once the network reaches the baseline, the cumulative block reward issued is identical to a simple exponential decay model, but if the network does not pass the pre-established threshold, a portion of block rewards are deferred. The overall result is that Filecoin rewards to miners more closely match the utility they, and the network as a whole, provide to clients.
Specifically, a hybrid exponential minting mechanism is introduced with a proportion of the reward coming from simple exponential decay, “Simple Minting” and the other proportion from network baseline, “Baseline Minting”. The total reward per epoch will be the sum of the two rewards. Mining Filecoin should be even more profitable with this mechanism. Simple minting allocation disproportionately rewards early miners and provides counter pressure to shocks. Baseline minting allocation mints more tokens when more value for the network has been created. More tokens are minted to facilitate greater trade when the network can unlock a greater potential. This should lead to increased creation of value for the network and lower risk of minting filecoin too quickly.
The protocol allocates 30% of Storage Mining Allocation in Simple Minting and the remaining 70% in Baseline Minting. 30% of Simple Minting can provide counter forces in the event of shocks. Baseline capacity can start from a smaller percentage of worldʼs storage today, grow at a rapid rate, and catch up to a higher but still reasonable percentage of worldʼs storage in the future. As such, the network baseline will start from 1EiB (which is less than 0.01% of the worldʼs storage today) and grow at an annual rate of 200% (higher than the usual world storage annual growth rate at 40%). The community can come together to slow down the rate of growth when the network is providing 1–10% of the worldʼs storage.
There are many features that will make passing the baseline more efficient and economical and unleash a greater share of baseline minting. The community can come together to collectively achieve these goals:
● More performant Proof of Replication algorithms, with lower on chain footprint, faster verification time, cheaper hardware requirement, different security assumptions, resulting in sectors with longer lifetime and enabling sector upgrades without reseal.
● A more scalable consensus algorithm that can provide greater throughput and handle larger volume with shorter finality.
● More deal functionalities that allow sectors to last for longer.
●Lastly, it is important to note that while the block reward incentivizes participation, it cannot be treated as a resource to be exploited. It is a common pool of subsidies that seeds and grows the network to benefit the economy and participants. An example of different stages of the economy and different sources of subsidies is illustrated in Figure 12.
Different stages of the economy with different emphases and revenue drivers.
Token Allocation
Filecoinʼs token distribution is broken down as follows. A maximum of 2,000,000,000 filecoin will ever be created, referred to as FIL_BASE. Of the Filecoin genesis block allocation, 10% of FIL_BASE were allocated for fundraising, of which 7.5% were sold in the 2017 token sale, and the 2.5% remaining were allocated for ecosystem development, future fundraising, and/or other uses described in 2017. 15% of FIL_BASE were allocated to Protocol Labs (including 4.5% for the PL team & contributors), and 5% were allocated to the Filecoin Foundation. The other 70% of all tokens were allocated to miners, as mining rewards, “for providing data storage service, maintaining the blockchain, distributing data, running contracts, and more.” There are multiple types of mining that these rewards will support over time; therefore, this allocation has been subdivided to cover different mining activities. A pie chart reflecting the allocations is shown in Figure 13.
Storage Mining allocation. At network launch, the only mining group with allocated incentives will be storage miners. This is the earliest group of miners, and the one responsible for maintaining the core functionality of the protocol. Therefore, this group has been allocated the largest amount of mining rewards. 55% of FIL_BASE (78.6% of mining rewards) is allocated to storage mining. This will cover primarily block rewards, which reward maintaining the blockchain, running actor code, and subsidizing reliable and useful storage. This amount will also cover early storage mining rewards, such as rewards in the SpaceRace competition and other potential types of storage miner initialization, such as faucets.
Mining Reserve. The Filecoin ecosystem must ensure incentives exist for all types of miners (e.g. retrieval miners, repair miners, and including future unknown types of miners) to support a robust economy. In order to ensure the network can provide incentives for these other types of miners, 15% of FIL_BASE (21.4% of mining rewards) have been set aside as a Mining Reserve. It will be up to the community to determine in the future how to distribute those tokens, through Filecoin improvement proposals (FIPs) or similar decentralized decision making processes. For example, the community might decide to create rewards for retrieval mining or other types of mining-related activities. The Filecoin Network, like all blockchain networks and open source projects, will continue to evolve, adapt, and overcome challenges for many years. Reserving these tokens provides future flexibility for miners and the ecosystem as a whole. Other types of mining, like retrieval mining, are not yet subsidized and yet are very important to the Filecoin Economy; Arguably, those uses may need a larger percentage of mining rewards. As years pass and the network evolves, it will be up to the community to decide whether this reserve is enough, or whether to make adjustments with unmined tokens.
Note that exact values of parameters above are subject to changes and readers could find the most up-to-date value in the codebase.
Market Cap. Various communities estimate the size of cryptocurrency and token networks using different analogous measures of market capitalization. The most sensible token supply for such calculations is FIL_CirculatingSupply, because unmined, unvested, locked, and burnt funds are not circulating or tradeable in the economy. Any calculations using larger measures such as FIL_BASE are likely to be erroneously inflated and not to be believed.
TotalBurntFunds. Some filecoin are burned to fund on-chain computations and bandwidth as network transaction fees, in addition to those burned in penalties for storage faults and consensus faults, creating long-term deflationary pressure on the token. Accompanying the network transaction fees is the priority fee that is not burned, but goes to the block-producing miners for including a transaction.
Initial parameter recommendation
Economic analyses and models were developed to design, validate, and parameterize the mechanisms described in the previous sections. Cryptoeconomics is a young field, where global expertise is both sparse and shallow. As such, designing mechanisms like this requires a level of intellectual depth typical of scientific research, in conjunction with a scale of “engineering in the large” typical of aerospace. Developing these recommendations is advancing the state of the art, not only of decentralized storage networks, but also of cryptoeconomic mechanism design as a whole discipline. A lot of advances have been made but this work continues. The following table summarizes initial parameter recommendations. These will continue to evolve and adapt through testing and validation during incentivized testnet, leading up to Mainnet launch and beyond.
Why have baseline minting? Filecoin tokens are a limited resource. The rate at which tokens are deployed into the network should be controlled to maximize their net benefit to the community, just like the consumption of any exhaustible common-pool resource. The purposes of baseline minting are (a) to reward participants more proportionately for the storage they provide rather than exponentially more based on the time when they join the network, (b) and to adjust minting rate based on approximated network utility to maintain a relatively steady flow of block rewards for longer.
Why have an initial pledge? First, an initial pledge gives storage miners something to lose if they renege on their sector commitments, even before they have earned any block rewards. Second, requiring a pledge of stake in the network supports the security of the consensus mechanism.
Why have block-reward vesting? To reduce the initial pledge requirement of a sector, the network considers all vesting block rewards as collateral. However, tracking block rewards on a per-sector level is not scalable. Instead, the protocol tracks rewards at a per-miner level and linearly vests block rewards over a fixed duration.
Why have a minimum sector lifetime? Committing a sector to the Filecoin Network currently requires a moderately computationally-expensive “sealing” operation up-front, whose amortized cost is lower if the sectorʼs lifetime is longer. In addition, a sector commitment will involve on-chain transactions, for which gas fees will be paid. The net effect of these transaction costs will be subsidized by the block reward, but only for sectors that will contribute to the network and earn rewards for a sufficiently long duration. Under current constraints, short-lived sectors would reduce the overall capacity of the network to deliver useful storage over time.
Why have a sector fault fee? If stored sectors are withdrawn from the network only temporarily, a substantial fraction of those sectorsʼ value may be recovered in case the data storage is quickly restored to normal operation — so the network need not levy a termination fee immediately. However, even temporary interruptions can be disruptive, and also damage confidence about whether the sector is recoverable or permanently lost. So the network charges a much smaller fee per day that a sector is not being proven as promised (until enough days have passed that the network writes off that sector as terminated).
Why have a sector fault detection fee? If a sector is temporarily damaged, storage miners are expected to proactively detect, report, and repair the fault. An unannounced interruption in service is both more disruptive for clients and more of a signal that the fault may not have been caught early enough to fully recover. Finally, dishonest storage miners may have some chance of briefly evading detection and earning rewards despite being out of service. For all these reasons, a higher penalty is assessed when the network detects an undeclared fault.
Why have a sector termination fee? The ultimate goal of the Filecoin Network is to provide useful data storage. Use-cases for unreliable data storage, which may vanish without warning,are much rarer than use-cases for reliabled at a storage,which is guaranteed in advance to be maintained for a given duration. So to the extent that committed sectors disappear from the network, most of the value provided by those sectors is canceled out, in most cases. If storage miners had little to lose by terminating active sectors compared to their realized gains, then this would be a negative externality that fails to be effectively managed by the storage market; termination fees internalize this cost.
