The Battle of Distributed Storage: Filecoin vs. Arweave

Crypto Valley Live (ID: cryptovalley)

Crypto Valley Live (ID: cryptovalley)", Author: Spencer Applebaum & Tushar Jain, translation: Olivia, reprinted by Odaily with authorization."Editor’s note: This article was co-authored by Multicoin Capital co-founder and managing partner Tushar Jain and Multicoin Capital partner Spencer Applebaum. Multicoin Capital is a thesis-oriented investment firm investing in cryptocurrencies, tokens and blockchain companies.

Over the past decade, businesses have come up with ingenious ways to move vacant properties and other

idle

Assets are better utilized. Airbnb shocked the hospitality industry by cashing in on otherwise vacant homes and bedrooms. Uber upended the taxi industry by turning otherwise idle cars into taxis. Building on this theme, distributed storage networks aim to disrupt the cloud storage industry by increasing the use of otherwise idle computer storage.

Cloud storage is a market worth challenging. Over the past decade, new cloud models have replaced traditional on-premises servers. For example, new technology giants such as Amazon Web Services (AWS), Alibaba Cloud, Microsoft Azure, and Google Cloud Platform (GCP) were born. Today, market research firms estimate that the global cloud storage market will reach $137.3 billion by 2025, growing at a rate of 22.3% per year, which is destined to be a huge market.

Filecoin mining is booming in China and FIL is now trading around $28, which means (as of writing this article on October 21st) that Filecoin’s network valuation is fully diluted. When the main network was first launched, the market was in a state of high excitement, and the hype reached an all-time high. Meanwhile, Arweave has recently raised funding from prominent investors including Andreessen Horowitz, Union Square Ventures, and Coinbase Ventures. In April 2020, Arweave 2.0 was launched, and its storage has continued to grow.

As investors assess the upcoming storage wars, some big questions loom. Given a choice between the two, which network would the developer choose? Can decentralized storage networks compete on cost with Web2 giants like Amazon and Alibaba? How should investors compare the two approaches to decentralized storage?

In this post, we explore these questions and provide a framework for evaluating the decentralized storage market. This post is not investment advice, but a framework for evaluating one of the most exciting markets in Web3. With this background, the first step is to understand the differences and tradeoffs between Filecoin and Arweave.

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Both Filecoin and Arweave enable decentralized, trust-minimized, and censorship-resistant data storage. Both are built using blockchain technology. And both networks can be used for long-term data storage, both for archiving and for real-time applications like website hosting. At first glance, they are similar. So instead of evaluating Filecoin and Arweave’s respective blockchains, let’s start with how they intend to provide storage to end users.

Filecoin's economic model mirrors that of centralized cloud providers: contract-based storage. Contract-based storage can be thought of more simply as a pay-as-you-go model. Users pay a network of nodes that store X bytes of data for Y time periods and guarantee Z retrievability. Storj, Sia, and SAFE use the same model.

Arweave introduces to the market an entirely new economic model that was not possible before the advent of permissionless encrypted networks: a model of permanent storage. With permanent storage, users only need to pay a one-time upfront fee to store data forever. Persistent storage creates a whole new market (we'll get to that later). The Arweave protocol achieves this by utilizing cryptoeconomic game theory and provides compensation to miners who ensure data availability, reliability, and durability.

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Filecoin and other contract-based decentralized storage protocols (Sia, Storj) mainly compete on cost. They claim to be able to offer lower costs than centralized providers because they utilize otherwise unused hard drive space. These networks also offer greater censorship resistance than traditional cloud storage providers.

Given the influence of Filecoin, we have reason to expect it to occupy a certain share in the Web3 storage market. In practice, however, it's unlikely to consistently drive down Amazon's pricing. Filecoin will effectively subsidize the cost of storage buyers through the issuance of FIL in the early days, but (1) the cost of additional Token subsidy cannot continue forever without adversely affecting Token prices; (2) Amazon, Alibaba, Tencent, Microsoft and Google has more capital, which they can use to subsidize prices if they get into a price war; (3) Amazon cross-subsidizes its S3 business lines, such as storage, computing, database, etc.

In each of Amazon's business units, they vertically integrate and essentially cut costs. For example, Amazon has steadily moved up the shipping value stack and now ships over 50% of its own packages in the US (compared to relying on third parties for 100% of its shipping just a few years ago) . They're taking a similar approach with cloud services, offering everything developers need at scale and at low cost. Storage customers benefit from these economies of scale (as shown in the diagram below), but at the expense of platform risk."image description"Source: Thomas Vachon

How did Amazon achieve this? They can negotiate bulk purchase deals that get cheaper storage and power. According to a study conducted by the Ponemon Institute LLC called

The cost of supporting computing power"According to the study, the average annual cost of electricity/kW ranges from $5,467 for data centers above 50,000 square feet to $26,495 for data centers between 500-5,000 square feet. Amazon also buys hardware in bulk, which allows them to get cheaper parts that they then pass on to cloud customers."Based on hardware configuration, Filecoin mining machines cannot be compared with traditional cloud storage providers in terms of cost. Therefore, Filecoin's main

features

Not cost, but ideology and a greater degree of censorship resistance.

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The Arweave's claim

• The Arweave protocol offers permanent storage as an available service. It does so not by creating contracts between users and storage providers, but by creating cryptoeconomic incentives for miners to copy as much data as possible. Persistent data storage is an entirely new service that Amazon, Google, and others cannot provide.

• To store a file on Arweave, developers need to create a transaction and pay a certain amount of AR Token as a network fee (currently $5/GB) to store data forever. In comparison, Amazon S3's low-tier pricing charges $0.276/GB per year, meaning Arweave is 18 times more expensive than Amazon. Indeed, Arweave doesn't claim to compete with Amazon on cost. Arweave users are clearly paying a premium for something Amazon can't offer -- permanent storage."We have identified two market segments that are now adopting Arweave. Players in these two areas are less price sensitive, but have a need for permanent storage:"Blockchain of available data - The purpose of the blockchain is to store the history of the transaction network forever. Arweave enables Layer1 and Layer2 teams to permanently store a copy of their decentralized ledger. This is the key to its ability to conduct audits in the future. Some notable teams, such as Solana and SKALE, are now working on their final integrations with Arweave for this, and we expect more chains to announce similar moves in the coming months.

Internet Archive - The Internet Archive recently announced that they will be utilizing Arweave for their mission; they are the non-profit organization that hosts the famous Wayback Machine project, which hosts old websites even after their original creators removed them is also like this. Although this is not widely known, the

link rot

• is a huge problem. For example, more than 49 percent of links cited in U.S. Supreme Court decisions are broken, according to a 2013 study. The Internet is eating up data at a compound rate. As more data is generated, more links break.

• Although we don't know how big the permanent storage market is, we do know that if the blockchain is to scale, it needs to store a lot of data. We also know that humans have created a large amount of data, and some organizations are actively looking for ways to store human history in a fault-tolerant way.

• There are several other markets where it is reasonable to expect that they value permanence in data storage and are willing to pay a premium for it.

• Journalists want to make sure their stories are always available to shine a light on the truth.

• Political dissidents who want to ensure that the government cannot censor their ideas.

NGOs or foundations want to keep their records forever.

Finally, and most importantly, we hope that Arweave will enable new types of applications that rely on permanent, immutable storage. The Arweave team has been facilitating the growth of this nascent ecosystem for years. At the 2019 Fall Summit, Arweave founder Sam Williams gave a presentation outlining how Permaweb will reshape the web as we know it. Today, Arweave is now at a stage similar to what Ethereum was in early 2016. Dozens of developers are building new types of applications based on Arweave, including . ArDrive, Limestone, Evermore, Nest.land, Non-Zone, ArGo, Outpost, OpenBits, Verto, WeaveID, etc.

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Source: ViewBlock

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• Relative Network Valuation and Token Economics

Filecoin's native Token FIL has two functions.

Miners must use FIL as collateral in exchange for the ability to host files. They must bet 0.1901 FIL for every 32GiB of data, which can be converted into storage mining capacity.

FIL is used as a medium of exchange.

Arweave’s native AR token, on the other hand, is around $2.69, implying a fully diluted valuation of $178 million. It should be noted that AR Token is subject to a strong token velocity precipitation (more important than FIL's cyclical payment structure, that is, storage nodes host FIL tokens to receive FIL tokens). When users pay to store data on the Arweave network, they are not just paying miners for storage, who can then sell it for USD. Instead, more than 83% of fees go to a single pool. The pool of funds will slowly pay miners for storing data over time. For each file, this pool slowly approaches 0 over time, but never actually reaches 0. This is possible because storage costs decrease over time. In the past 50 years, the cost of storage has decreased by about 41% per year. Therefore, as the demand for permanent storage grows, users buy AR and then lock it in the pool, creating constant buying pressure. We believe that the economic model of AR captures value more effectively than FIL.

Source: CoinMarketCap

Or to put it another way, Arweave - as a fully launched, fully functional network with a novel token economic model - is worth 0.31% of Filecoin today. The figure below demonstrates this difference. Filecoin is the red thread. Arweave is the blue line.

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storage wars