The Web3 Token Design Mechanism That Makes Negative Pricing Possible

Aka you can get paid for using a service - in the data storage context

Ditch the cloud storage bills — what if you can always store your data for nearly free or even get paid by the storage providers? I’m not crazy. This is already a reality in the pilot stage via Filecoin’s innovation around token incentive design. Let’s unpack how. Let’s align on terminologies first:

SP: Storage Providers on the Filecoin network. They are miners who provide hard drive space to store clients’ data in a decentralized fashion

SC: Storage Clients on the Filecoin network. One example is universities that have terabytes of historic student records to be stored for cheap.

I know what many of you might be thinking — Filecoin must be straight out paying these SPs to store SC’s data. Otherwise, no way is this sustainable! Trust me it took me a long time to wrap my head around it too but the truth is, no, Filecoin is NOT paying/bribing SPs & yes, such zero/negative pricing for SCs is in fact possible & sustainable.

To understand how, let’s first compare the costs & revenue of storage providers in web2 (AWS/GCP/Azure) vs. web3(Filecoin SPs) in the most broad-stroke way possible.

Web2 Centralized Storage Provider (e.g.AWS)

Numbers are taken from Amazon’s 2021 10k financial report

$64 Billion in CAPEX (tech infrastructure) allocated to AWS, excluding land lease

$44 Billion in OPEX allocated to AWS operations

• payroll costs of ~40k employees (usually 15%-30% of revenue based on industry benchmark)

• Overhead

• Marketing & more

Revenue Source: charge storage clients (mainly enterprise SCs)

VS. Web3 Storage Provider (on Filecoin)

CAPEX: mining equipment

OPEX: just yourself (assuming you are not a Filecoin mining farm) + electricity. But if you run a storage facility, then you’d have the additional SG&A costs like any businesses

Revenue Source:

1. Storage Fee: Optional fee clients may pay to incentivize deals to clear (for reference, storage fee on Filecoin is 99.998% cheaper than web2 cloud storage providers

calculated based on comparing the lowest tier of storage cost (for data archival/cold storage) on Google Cloud ($1/TB/Month) — AWS is more expensive — with Filecoin archival/cold storage ($0.0002/TB/month)

2. Block Rewards: Rewards for securing the network

3. Retrieval /Bandwidth Fee: Optional fee to compensate for bandwidth consumed

4. Gas Premium: Fees paid by network users for message prioritization

5. Compute: Optional fee to compensate for computational resources

Data storage on Filecoin will ALWAYS be orders of magnitude cheaper than AWS because SPs on Filecoin

1. Can get paid handsomely from elsewhere (hint: block rewards)! The Filecoin network is designed in such a way that the more data SPs store, the more block rewards (#2) they get. Hence, revenue from #2 (Filecoin block rewards) can easily outweigh the aggregate revenue an SP can get from charging customers (#1 + #3 + #4 + #5).

2. Cannot charge you premium because there’s no vendor lock-in with IPFS-based data storage. AWS charges hefty egress fees for clients to transfer data out because data stored on AWS is HTTP, or location-based, which is gatekept by AWS. IPFS-addressed data enables exportability & optionality for users to take their data/CIDs to seek other storage providers if their current service provider deviates from the market price. 

   For those of you unfamiliar with IPFS vs. HTTP, essentially HTTP points to a location or data center that stores your data. You guessed it — access to such location is strictly controlled by Cloud providers like AWS/GCP/Azure - this is why they can lock you in. IPFS instead points directly to a content ID (CID), which means you can take your data on IPFS and switch provider anytime you want — hence SPs on Filecoin can’t charge premium over storing because everything is determined by supply vs. demand.

When FIL token price goes up, it actually gets CHEAPER for SCs because SPs will be incentivized to earn more block rewards by getting more data to store vs. charging SCs meager fees.

Negative costs for SCs to store their data (aka getting paid) is a very real possibility! Based on the current utilization rate of the Filecoin network storage capacity (about 1%), SPs competes to store large real dataset to quality for the Filecoin Plug program (that gives you 10x rewards for storing large valuable datasets).In other words, if I’m an SP, I’m willing to pay SCs to get their data because my profit = block rewards from storing these data safely –  my equipment & electricity cost  –  whatever small price I pay to SCs to be chosen to store their data.