When you use the internet today, it can seem like magic. You enter a random set of characters and within seconds you see an ever-expanding volume of data.
While the Internet and the cloud make it appear that the Internet exists in the ether, it is largely a physical phenomenon. 98% of the world’s data travels over fiber optic cables – a network of interconnected computers. (The following figure). The Internet has evolved over decades, with enormous coordination across the globe to build the infrastructure and define standards for how data is transmitted over the Internet.
World Wide Web
The early development of the Internet took about 20 years until Sir Timothy Berners-Lee invented the World Wide Web in 1989, unlocking its enormous potential and changing the way we interact with data and communicate with each other. The World Wide Web sits on top of the infrastructure that supports the Internet, using unique identifiers called Uniform Resource Locators to link data, such as the text and images that make up a website. We call this identifier a URL.
Most data transmitted across the Internet infrastructure relies on a location-based protocol called Hypertext Transfer Protocol (HTTP), which acts like an operating ) to the location where the data is stored, usually a big data center. As shown in the Figure below, the HTTP protocol requires a server located in a specific geographic location to send requested information to a client. This method is called “Location Based Addressing”.
This protocol works fine in most cases. evidence? Well, you are reading this. But it does have its drawbacks. The figure below illustrates one of these key issues. By centralizing data, owners of data storage facilities wield considerable power and can create commercial products to sell to consumers. This gave birth to today’s data giants such as Amazon, Microsoft and Google.
This stage of technological development, commonly referred to as Web 2.0, requires significant infrastructure investment to meet the data demands of consumers and businesses as they move online. By accessing the capital markets, technology leaders, which Holon calls “today’s hypercapital,” have leveraged these massive economies of scale to become trillion-dollar giants. As we discussed in our previous XY article, these companies already own and dominate the data storage and distribution business.
The reliance on these key suppliers has had unintended consequences. As we’ve seen recently, concentrating on a handful of technology leaders means that when a service provider goes offline, it can shut down half the network at once, costing billions of dollars to companies that depend on the internet.
Over the next few decades, with emerging technology platforms such as self-driving cars, Internet of Things devices, and digital payments, the amount of data generated will explode. Holon estimates that by 2040, the data generated for autonomous vehicles and IoT devices alone will be 1,000 times larger than all the data generated in 2020 alone, as shown in the figure below.
Total annual data created from 2020 to 2040
Which begs the question? Is there a better way?
This is where the opportunity lies with IPFS and Filecoin.
So, What is IPFS?
IPFS stands for “Interplanetary File System” and it uses an alternative to HTTP. When a data file is created, the IPFS protocol (or operating system) creates a fingerprint of the file, known as a unique content identifier (CD) for the file itself. When a client makes a request for specific content, it uses the IPFS protocol to search for its unique file CD identifier.
For example, if someone in your city recently viewed the file, the request can be accessed from the closest available source, rather than a specific geographic location where HTTP occurred, resulting in cost and time efficiencies for the user.
What Does Filecoin Have to Do With IPFS?
Filecoin is a native digital asset that supports the IPFS network. Data storage providers provide access to their storage hardware and use Filecoin collateral (in the form of tokens) to ensure they secure this data. They are rewarded in the form of Filecoin token payments for providing this service. These reward tokens allow them to fund new data storage capacity additions to continue growing their storage infrastructure. This incentive mechanism introduces decentralization of data storage, allowing any individual or company to build storage capacity on the Filecoin network.
let’s go a little deeper
In the Figure below, we can see a key difference comparing how data operates on the HTTP and Filecoin networks. In the example on the left, users cannot directly share data with each other because the data addresses are concentrated in the data center. On the right, the introduction of CD identifiers allows IPFS users to search and share information with each other. This small change had a profound impact on scale.
This has the potential to speed up the internet while increasing its resiliency by reducing our dependence on a handful of providers. Furthermore, users requesting known data files, rather than more generally requesting data appended to location addresses, with little knowledge of their contents or the presence of any attached viruses, creates a safer Internet for all users.
However, IPFS innovation is only part of the solution. It is not enough to just understand how the internet works in a more efficient way, it is important to create a network effect where the world uses IPFS solutions.
Get the Filecoin mining rig to start Filecoin mining.
Filecoin Incentive Mechanism
Leveraging the unique qualities of cryptocurrencies, Filecoin’s incentives are designed to bring infrastructure builders together to scale the network globally. This incentive is greater in the early stages of its expansion, providing higher returns to network builders and paving the way for mainstream adoption. However, as the network scaled and more clients moved their data storage needs from HTTP to IPFS, the incentives began to diminish as Filecoin became widely accepted.
These rewards are provided in the form of FIL tokens and provide a revenue stream that enables data storage providers to offer their customers incredibly low-cost storage, estimated at only 1% of the current cost of data offered by today’s tech giants. HTTP Network 1. These subsidies are valid for 20 years, giving Filecoin a long way to build the utility of its network and attract global users.
As the network matures and subsidies are reduced, the challenge for IPFS is to reduce the cost of drive storage across the network to a level that allows them to compete with AWS, Google, or Azure without relying on incentive token payments.
The vision of Filecoin is to turn data storage and distribution into an open marketplace, not unlike the approach taken by Uber for ride-hailing and Airbnb for homestays. However, the key difference is that storage providers and Filecoin holders have full ownership of the network without the need for centralized service providers to charge fees for coordinating providers and users.
The success of Filecoin will depend on whether the value of the network provides sufficient incentives for customers and storage providers to switch to the IPFS network. Given the infancy of the network, this will take time; however, it does offer great potential in terms of price and security, and continues to attract strong demand from developers and customers looking for alternatives to the data storage solutions currently offered2.
Given the projected 1000x increase in data generation over the next 20 years, Filecoin’s potential is enormous. Interested investors should not see it as the next Amazon or the next Google, but rather seek to understand its potential to replace HTTP to drive the future of the Internet, Web 3.0.