Utility tokens are a type of cryptocurrency that is surging in popularity because they benefit both users and investors. In this article, we will go through some frameworks that will help us evaluate one type of token, the FIL, the cryptocurrency that underpins the Filecoin network.
The Token Economics of Filecoin
Like many digital assets, FIL fundamentally has value because of the forces of supply and demand, which makes it similar to a commodity. We look at the forces of supply and demand for Filecoin below.
Two key players for Filecoin demand
Storage miners — who earn Filecoin by storing data for their customers — provide the infrastructure for the Filecoin ecosystem. To ensure that incentives remain consistent over time, the Filecoin system forces storage miners to provide collateral in FIL.
Using the current collateral requirements and making some assumptions about the growth of the network, we can estimate the number of FILs that storage miners will lock up.
Logically, the demand for FILs should and will come from customers. Customers who want to use the filecoin storage (and at a later date, Filecoin retrieval) system will need access to FIL to pay for their storage contracts.
Filecoin provides a unique value proposition for users (outside of a centralized incumbent). And thanks to heavily subsidized contracts, the cost is greatly reduced. This makes it the best choice for cheap, long-term storage (file storage). For example, Filecoin contracts cost about 3% of Amazon Web Services (AWS) Glacier Deep archival storage. If customers are storing data for the long term, the cost savings start to become very compelling, especially for large data sets.
Understanding a customer’s Filecoin needs over time is difficult to predict, but there are some key factors. One is the scale of data storage needs. We are rapidly moving into an artificial (AI) and Internet of Things (IOT) enabled world where the demand for data is almost endless. We need more and cheaper data storage solutions than we have today: potentially 100 times cheaper than today. Demand in dollar terms will translate into FIL demand.
Supply side of Filecoin
Supply minted. The supply of FILs entering the market comes from FILs purchased by early investors. Their Filecoins are subject to an attribution schedule. the FILs are also released to miners from the blockchain via “block rewards”. Block rewards are an incentive to build the infrastructure of the Filecoin network.
The chart below shows the annual supply released if the network reaches 100% of the KPI (baseline reward). If the Filecoin network does not reach 100%, the rate of supply slows down. In our analysis, we assume that it does.
This corresponds to 1.7 billion FIL potentially entering the market supply (with an additional 300k set aside for further incentives needed in the future).
Another factor burning supply. Removing FIL from the supply is one of its defining features as an investable asset. filecoin has introduced EIP-1559 (Ether Improvement Proposal), which introduces a fee-burning mechanism that permanently removes coins from the total circulating supply of FIL. This means that transaction fees are burned and the circulating supply is reduced. Some FILs are burned to fund on-chain computation and bandwidth as network information fees (priority fees are not burned but given to miners for block production including information). The burning of transaction and network information fees creates long-term deflationary pressure as tokens burn due to storage and consensus failures.
While the fee mechanism is intended to address the user experience issue of predictability of transaction fees, especially as the network becomes congested, it has the added benefit of driving scarcity of the underlying asset to the benefit of all existing users (FIl holders). As the utility of the Filecoin network increases, the number of transactions on the network increases. The more transactions there are, the more FILs are burned in the process.
Understanding the value of FIL is difficult, but understanding the components that affect the supply and demand of the network is an important task.
Regardless, the above reading should illustrate how the demand (value proposition) for the Filecoin protocol is directly tied to the price of FIL over time, and that this price should stabilize over time and represent the value of the network as a whole.