Filecoin 

What is Filecoin?

Filecoin (FIL) is an open-source network, protocol, and marketplace for cloud storage. It enables users to store all kinds of data decentrally across thousands of computers in the network rather than on a single centralized server. This setup eliminates the so-called single point of failure, helping protect data against manipulation, loss, or censorship.

Unlike many other cryptocurrencies, Filecoin has focused on practical utility from the very beginning. Its purpose is to make data accessible via the InterPlanetary File System (IPFS) — a distributed storage network. The Filecoin blockchain itself primarily acts as a tool for negotiating and executing smart contracts that provide storage capacity within a decentralized network.

In addition to storing data, Filecoin also supports regular crypto transactions, such as sending coins via the blockchain. Since the network has a built-in utility, rather than consuming energy solely to maintain consensus (as in Proof of Work systems), transaction fees on the Filecoin blockchain may remain significantly lower in the long term. Furthermore, Filecoin tokens have functional value beyond merely storing wealth, which helps maintain a baseline level of demand and gives them an inherent minimum value.

What problem does Filecoin solve?

To understand the fundamental value of Filecoin, it’s essential to look at the InterPlanetary File System (IPFS). IPFS is a decentralized storage system that, similar to filesharing networks like BitTorrent, distributes data through peer-to-peer connections. Unlike traditional storage solutions, data on IPFS is not located at fixed, centralized physical servers.

Anyone who wants to share videos, images, or other files via IPFS can do so from a regular desktop PC with an internet connection, as long as they use a compatible IPFS client. The Brave browser, for example, has built-in IPFS support. Once a file is processed and shared by the client, it becomes globally accessible via a unique content identifier (CID).

The biggest challenge of decentralized storage systems is that files made available on the network often reside on only a few nodes. If those nodes go offline, the data may become inaccessible. Additionally, if a file suddenly gets a surge in demand from many users at once, bandwidth limitations on the hosting nodes can lead to performance issues.

Filecoin addresses these problems by introducing an economic framework designed to make access to IPFS-hosted files more reliable and faster. It introduces two types of miners: Storage Miners and Retrieval Miners.

• Storage Miners are rewarded for storing data persistently over time.

• Retrieval Miners are paid for delivering data as quickly as possible when it is requested.

Through these economic incentives, the Filecoin network tackles both major weaknesses of decentralized file systems: availability and performance.

How does Filecoin work?

As mentioned above, the two most important roles in the Filecoin network are Storage Miners and Retrieval Miners. In addition, there are clients, which are end users who interact with both types of miners.

For Storage Miners, a transparent marketplace exists on the Filecoin blockchain. Clients submit storage requests for a specific, pre-defined period and offer a chosen amount in Filecoin (FIL). Storage Miners can choose to accept these offers—on a first-come, first-served basis. If the offer is too low, no miner will accept the deal.

Once a deal is made, it is publicly recorded on the blockchain, giving both clients and miners a real-time view of current market rates for storage. After the agreement is finalized, the client shares the file identifiers, and the Storage Miner retrieves and replicates the data from the network.

The storage fee—along with a collateral deposit from the miner—is locked in a smart contract and paid out incrementally over the duration of the agreement. This prevents miners from deleting files prematurely after receiving initial payment.

To verify ongoing storage, Filecoin uses a cryptographic technique called Proof of Spacetime.

Put simply, the network performs random spot checks to confirm that the files are still being stored by the miner at any given moment. This requires miners to continuously perform small computational proofs, which means that Storage Mining cannot run on just any machine.

Currently, Filecoin recommends a minimum of 16 GB of RAM for stable operation—an amount available in many consumer systems today, but not typical for basic office PCs.

If a miner fails to deliver Proof of Spacetime, they forfeit both their earned fees and their collateral.

Retrieval Miners, on the other hand, proactively search the network for highly requested files and make them available for retrieval in exchange for a fee. Clients who wish to quickly access these files can pay the fee to download the data. Unlike the on-chain smart contracts used between Storage Miners and clients, negotiations between Retrieval Miners and clients happen entirely off-chain.

Payment is also made incrementally, meaning a client who wants to retrieve a large file doesn’t have to pay the full fee upfront. This incremental payment process is similar to how transactions are handled in a Bitcoin Lightning Network channel. The full retrieval fee is locked in a smart contract beforehand, and as the file is downloaded, the client sends cryptographic signatures step by step. These signatures eventually allow the Retrieval Miner to unlock the smart contract and claim the full fee in one transaction.

Typically, Storage Miners also act as Retrieval Miners, performing both roles within the Filecoin ecosystem.

How many Filecoins are in circulation?

Attentive readers may have noticed that all the mining processes described above already assume ownership of Filecoin tokens (FIL). Similar to other blockchain-based systems, new Filecoins are minted as rewards for block creation. In Filecoin, this responsibility lies with Storage Miners. As described in the previous section, Storage Miners must regularly prove, via the Proof of Spacetime mechanism, that they are still storing the entrusted data. Much like in Proof-of-Stake-based systems, a score is calculated, and the Storage Miner with the highest score is granted the right to generate the next block.

This block contains the latest Filecoin transactions and smart contract operations, and the miner is additionally rewarded with a newly minted amount of FIL.

In total, the Filecoin blockchain has a maximum supply of 2 billion FIL. Slightly more than half of these tokens (1.1 billion FIL) are being distributed through mining. An additional 300 million FIL are held as a mining reserve, which can be released later by a community majority vote.

The remaining 600 million FIL are preminted tokens: some were distributed to early ICO investors, and others are held by the Filecoin Foundation, which continues to support development of the protocol. Notably, 10.5% of the total supply (just over 200 million FIL) were allocated to Protocol Labs, the commercial entity that initially launched and developed Filecoin.

How are new Filecoins introduced into circulation?

New Filecoins are distributed according to two different issuance models. A total of 330 million FIL are released through a mechanism known as Simple Minting, which functions similarly to Bitcoin’s mining rewards. With each block, a fixed amount of FIL is minted. This amount is halved approximately every six years, meaning that the majority of these tokens will enter circulation within about 30 years.

The much larger portion of Filecoins allocated for mining—770 million FIL—is distributed through a system called Baseline Minting, developed by the Filecoin team. In this model, the amount of new FIL generated is tied to the total available storage capacity on the network. The more storage is provided and actively used, the more FIL is minted. This structure creates a strong incentive to offer affordable and abundant storage, helping the network grow and become more attractive for users.

In addition, the Filecoin blockchain includes a mining reserve of 300 million FIL, which has not yet been tapped. However, Storage Miners can unlock it by majority vote, particularly if Simple Minting rewards drop too low over time. This reserve could help keep mining profitable in the future.

The Filecoin network also charges small transaction fees (gas) for executing operations on the blockchain. Unlike Bitcoin, where fees go directly to the miners, Filecoin burns these fees and redirects their value to the Baseline Minting pool. The goal is to minimize costs and only allow fees to rise in cases of network congestion. Under normal conditions, Filecoin gas fees are just fractions of a cent, serving mainly as an anti-spam mechanism—low enough for users to ignore but high enough to make attacks economically unviable.

Use cases

IPFS and Filecoin together enable a wide range of applications. Their primary mission is to provide censorship-resistant infrastructure for file hosting—ideal for websites and information sharing. Gateways like ipfs.io allow users without a dedicated client to access IPFS-hosted files via a browser.

Beyond that, developers are building diverse applications that leverage this decentralized storage layer. One example is ChainSafe Files, which offers Dropbox-like private cloud storage. Other projects are working on decentralized video platforms akin to YouTube, powered by IPFS and Filecoin.

Not least, Filecoin and similar decentralized storage systems are also highly relevant to other crypto projects. Decentralized marketplaces like OpenBazaar, for example, rely on the IPFS network to host images or videos of products listed on the platform. Integrating Filecoin ensures that these files remain consistently accessible, even if individual nodes go offline. Decentralized crypto exchanges could also benefit from using Filecoin to serve specific on-chain or off-chain data more reliably.

For investors, the growing number of use cases for IPFS and Filecoin suggests that demand for FIL tokens could increase over time.

Outlook and forecast

That said, Filecoin is not the only project aiming to merge decentralized storage with a cryptocurrency. Competitors such as Storj, Siacoin, and the still-in-testing Safe Network offer similar value propositions. This growing ecosystem suggests that the overall concept of decentralized data storage is gaining traction.

However, Filecoin sets itself apart in a key way: it is built on top of the already established IPFS network. This means there is already a wide range of applications, gateways, and browser integrations in place that allow easy access to Filecoin-stored data. Moreover, the system allows for a hybrid setup—IPFS can be used without Filecoin, giving developers more flexibility. This could give Filecoin a competitive edge over similar protocols.

From an investment perspective, Filecoin remains a promising and innovative project. However, there are risks. One concern is the large portion of tokens that were pre-mined and distributed prior to the network launch. Although many of these tokens are now likely in circulation, investors should still investigate how much of the total supply is held by entities such as Protocol Labs, which could influence price dynamics.

Another potential issue is the uncensored nature of IPFS, which, while empowering, could also be misused to distribute illegal content. If Filecoin and IPFS become more mainstream, this could lead to regulatory scrutiny or public backlash, potentially affecting the value and liquidity of the FIL token.

All things considered, Filecoin represents an ambitious and forward-looking approach to decentralized storage—one that is likely to play an increasingly important role in the broader blockchain ecosystem.