DEFINITION of 'Filecoin'

Filecoin is a decentralized blockchain data storage network that compensates miners by storing and retrieving data.

BREAKING DOWN 'Filecoin'

The Filecoin network serves as a decentralized hub that matches requests for storage capacity with providers who have excess capacity to rent. The novelty of Filecoin is that it is linked to network storage.

The use of decentralized storage networks (DSNs) will be unfamiliar to businesses used to storing data within their own networks, but will be more familiar to businesses used to Amazon Web Services (AWS) and other cloud-based storage companies. Filecoin aims to make a more efficient use of excess storage capacity.

Individuals and businesses pay to have data stored on (and retrieved from) available network space. In exchange, providers (“storage miners”) are paid tokens for allowing data to be stored on their networks, and other participants (“storage retrievers”) are paid tokens for retrieving the data. Filecoin tokens can be exchanged for other cryptocurrencies or for hard currency over cryptocurrency exchanges.

Filecoin relies on proof-of storage concepts when determining whether miners have conducted storage and retrieval activities. This is similar to the proof-of-work activities required in other cryptocurrencies, and is a method that allows parties to check that data that is supposed to be stored is still being stored as expected. It also assures data integrity without requiring entire data sets to be downloaded for verification purposes. The two primary components of the Filecoin protocol are proof-of-replication and proof-of-spacetime.

Proof-of-replication is used by storage providers to show that they have stored a unique set of data to space it owns. Proof-of-spacetime enables storage providers to show that data has been stored over a specific period of time. This is done by requiring a storage provider to show sequential instances of proof-of-replication.

Blocks in the blockchain are created by miners, but, unlike bitcoin miners, the primary activity of Filecoin miners is storing data in available network space. While Filecoin uses blockchain technology, miners earn tokens for storing and retrieving data, while clients spend tokens to have their data stored and retrieved.

In some regards, the system is like a business renting out a storage unit, but rather than store physical goods it is storing data, and rather than pay a monthly rental fee in dollars, it pays in Filecoin based on how much data is stored and how often it is accessed.

In 2017, Filecoin completed a round of initial coin offering (ICO) financing valued at over $257 million. This round of financing involved the sale of Simple Agreements for Future Tokens (SAFTs), which allow the buyers to convert their stake in the company into tokens once they are released.

The use of SAFTs is a novel concept in cryptocurrencies, and is designed to provide a relatively straightforward and simply way for companies seeking to raise funds through digital assets to remain in compliance with regulations. While SAFTs make sense in principle, in practice they may still run afoul of regulatory bodies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

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