The Economics of Decentralized Storage Protocols
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The Economics of Decentralized Storage Protocols

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The Economics of Decentralized Storage Protocols

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The original article can be found at Beincrypto.

Decentralized storage protocols are becoming increasingly popular due to their ability to offer secure, affordable, and efficient storage solutions. These protocols are built using blockchain technology, which provides a decentralized and distributed network that is resistant to tampering and downtime. More and more protocols are entering the market, each with their own unique business models.

In this article, we will explore the business models of several decentralized storage protocols and how they generate revenue. By understanding these business models, we can gain insight into the economics behind decentralized storage and its potential to disrupt the traditional data storage industry.

What is the typical business model for a decentralized storage protocol?

Decentralized storage protocols represent a marketplace where storage providers can sell their unused storage space to users who need it. The protocol acts as a mediator, facilitating transactions between users and storage providers and taking a fee for its services.

Demand- and supply-side fees are two types of fees used in decentralized storage protocols to incentivize users to participate in the network.

Demand-side fees are fees paid by users who want to store their data on the network. These fees are used to compensate storage providers for the space they allocate to store the data. In some protocols, demand-side fees are also used to prioritize the storage of certain types of data or to incentivize storage providers to store data for longer periods.
Supply-side fees, on the other hand, are fees paid by storage providers who want to offer their unused storage space to the network. These fees are used to compensate the network for the resources it uses to facilitate the storage and retrieval of data. In some protocols, supply-side fees may also be used to prioritize certain storage providers or to incentivize them to provide storage space for longer periods.

In general, demand- and supply-side fees are used to create a sustainable and decentralized storage ecosystem where both users and storage providers are incentivized to participate in the network. By aligning the incentives of both parties, decentralized storage protocols can offer a more efficient, affordable, and secure storage solution compared to traditional centralized storage solutions.

Overall, we can define three typical sources of revenue:

Transaction fees: Decentralized storage protocols typically charge a small fee for each transaction or file upload/download. These fees are used to cover the costs of maintaining the network and incentivizing users. While some decentralized storage networks charge fixed prices to upload or download, others rely on the market prices quoted by their storage miners, which causes the fees to fluctuate based on the network’s storage supply and demand. Filecoin is one of the protocols that uses flexible fees. As per Messari's revenue analysis, Filecoin’s revenues are comprised of four components:
  • Base fees – required by any storage deal or proof; base fees are determined by message congestion;
  • Batch fees – used for adding storage capacity;
  • Overestimation fees – required to optimize gas usage;
  • Penalty fees – collected for storage provider failures.

Messari, State of Filecoin Q1 2023

Storage fees. Storage fees refer to the regular payments made by clients for data storage after having reached a “deal” with the provider. These fees are automatically deposited into the provider’s withdrawal wallet as they continue to perform their duties. The protocol may take a fraction of these fees as compensation for the network’s resource usage. Since low costs are one of the selling points of decentralized storage compared to centralized solutions like Amazon’s Web Services, storage fees typically contribute less to the protocol’s revenue than transaction fees. For example, Filecoin charges ~$0.2 per month for a terabyte of storage space (source). The production of FIL, the network’s utility token used for rewards and tips, subsidizes the cost, creating an incentive for suppliers to always provide storage regardless of whether there is anyone actually using it. Thus, additional costs for storage users in the form of  subscription or fixed fees are unnecessary to incentivize suppliers.
Fees for uploading/downloading data. Some storage protocols may charge extra fees for uploading and downloading data from the network, also known as ingress (uploading) and egress (downloading) fees. Similarly to storage fees, they are typically not the main drivers of the procotol’s revenue.

It's worth noting that not all decentralized storage solutions are profit-driven, as some are developed by non-profit organizations or run on a community-driven model. However, those that do seek to make a profit generally use one or more of the above methods.

Filecoin

Filecoin was created by Juan Benet, the founder of Protocol Labs, in 2014. The project was initially funded through an initial coin offering (ICO) in 2017, which raised over $257 million. After several years of development, the Filecoin network launched in 2020, offering users a decentralized storage solution that incentivizes the sharing of unused storage space.Filecoin uses a token-incentivized model to incentivize users to provide storage space on their computers. Users can earn Filecoin tokens by providing storage space to other users, and then they can use these tokens to store their own data on the network.
The protocol employs deals that price storage based on supply and demand dynamics, rather than a fixed pricing structure. A deal involves paying storage providers to store data for a specified duration. Storage providers are rewarded with FIL, the native token of the network, to incentivize their participation. Retrieval providers are paid to fetch data, and payments are settled off-chain to allow for faster retrieval.

Arweave

Arweave was founded in 2017 by Sam Williams and William Jones. Its main goal was to create a decentralized and permanent storage network that could be used for archival purposes. Arweave mainnet launched in June 2018 with 1800 selected participants acting as early adopters. Before the launch, the team held an initial token sale for whitelisted investors. In November 2019, the company received a $5 million funding round from venture capital firms. Six months later, the team raised $8.3 million in funding for community adoption and growth incentives.
Arweave's blockweave model was introduced in 2018, and it has since gained popularity among developers and users who require long-term storage solutions. At the time of its launch, Blockweave was a novel Proof-of-Access consensus mechanism, allowing users to store data “at a fraction of the cost of Filecoin, Siacoin, and Storj” (source). Similarly to Filecoin, the protocol includes fees for storing and retrieving data, as well as for interacting with dApps within the network. Fees and rewards are conducted in AR.

Sia

Sia was created in 2013 by David Vorick and Luke Champine. The project started with two entities: the non-profit Sia Foundation, centered around Sia blockchain and ecosystem and the for-profit Skynet Labs, a decentralized cloud platform. Although the founders' team shifted its focus from data storage to web applications, Sia remains one of the key underlying value-generating components of the Skynet ecosystem.Siacoin uses a peer-to-peer network to store data across multiple nodes. Users can rent storage space from other users and pay for it using Siacoin tokens. Similarly, Siacoin's revenue model is based on the transaction fees it collects when users rent storage space and the development fund it created through initial coin offerings. This is accomplished through the use of Siafunds. When a contract is created, 3.9% of the contract fund is removed and distributed among Siafund holders.

Storj

Storj was founded in 2014 by Shawn Wilkinson and John Quinn. The project began as a way to create a decentralized cloud storage network that was more affordable and secure than traditional cloud storage solutions. Storj held their ICO in 2017, selling approximately $30 million worth of STORJ. On February 23, 2017, they completed a seed funding round, raising $3 million.Storj Labs operates Tardigrade, a developer tool that claims to be better or on par with all other major cloud providers in terms of durability, performance, and security (S3, Google, Microsoft). It aims to have the potential to save businesses millions of dollars on cloud storage at a tenth of the cost. Any open source applications that enable users to store data on Tardigrade via connectors will receive a percentage of the money produced by those users through the Tardigrade Open Source Partner Program.

Akash

Akash was founded in 2017 by Greg Osuri. The project aims to create a decentralized cloud computing network that is more affordable and accessible than traditional cloud computing solutions. Akash Network launched its mainnet in 2021 on the Cosmos SDK.Akash charges a fee for its services, which is paid in its native AKT token. Users can choose from a variety of computing options and providers, and Akash acts as a mediator between users and providers, taking a fee for its services.

BitTorrent

BitTorrent was launched in 2001 by Bram Cohen and David Harrison. The project began as a peer-to-peer file sharing protocol that allowed users to share large files over the internet.

BitTorrent was acquired by Tron in 2018 and it subsequently launched its own cryptocurrency, BitTorrent Token (BTT), in 2019, which can now be used to incentivize users to share their unused storage space. The BitTorrent token was initially used to speed up downloads by paying seeders for priority bandwidth through BitTorrent Speed. This acted as a solution to the longstanding problem of a lack of incentives for users to continue seeding or sharing files.

The project expanded their services and shifted their focus to creating a token-based economy that prioritizes networking, bandwidth, and storage resources within the existing BitTorrent network. Users are rewarded with BTT tokens for sharing their storage space, which can then be used to pay for additional storage space or to trade with other users.

There are plans to include livestream tipping in BTT, the purchase of downloadable media from creators, and the ability for creators to crowdfund their works.

IPFS

Juan Benet proposed IPFS as a way to create a “Permanent Web” in 2014, the very same year that Filecoin was founded. IPFS accomplishes this by using content hashes for decentralized storage and distribution. Protocol Labs was founded in 2014 to focus on IPFS development. IPFS was released as an open-source project later that year. IPFS has been widely adopted and integrated into blockchain networks, including Ethereum, for storing and accessing dApps and smart contracts.Although Filecoin and IPFS are complementary protocols, they are independent and were implemented separately. IPFS facilitates peer-to-peer data file transfers, while Filecoin provides a system of persistent data storage.IPFS does not generate direct revenue however Protocol Labs has several related projects and products that do.

Datamall Chain

Datamall Chain is an open-source blockchain platform, which provides decentralized storage services for web3 and Dapps. Datamall Coin (DMC) is a decentralized cryptocurrency issued by the DMC Foundation based on the Datamall Chain, building a decentralized marketplace for data storage services. Users who own DMC can enjoy the leading decentralized storage service and receive incentives for owning storage space, which builds a sustainable storage ecosystem.The DMC token represents the actual data storage service capability and acts as an invisible hand to match supply and demand for storage needs. With DMC, users can purchase and sell storage services. The project’s decentralized storage market provides users with safe and efficient storage services that are not controlled and cannot be exploited by any single entity.

Nonstorage

Nonstorage is a storage service based on the TON Blockchain, created by the founders of Searching TON. Nonstorage uses TON Storage, a peer-to-peer file-sharing system on TON Blockchain.

This service enables users to effortlessly upload, download, and distribute files among others through TON Proxy. Currently, users can upload files up to 100 MB by signing in via the wallet app.

Although the developers acknowledge that all user files are currently stored in a centralized way, they have assured users that they will soon adopt TON Storage and create the first-ever decentralized cloud storage service on TON.

Tondrive.io

Tondrive.io is a storage service on TON that presents itself as a "Google Drive" on TON. The team has released a demo where users can upload and manage their files.By the end of Q2 2023, they plan to create a complete infrastructure with upload, download, contract binding, archive functions, and security technology. In addition, the team plans to launch Tondrive Ecological System, a file management system like Amazon Cloud Drive, and Ton Connect technology for decentralized accounts in Q3 2023. This technology will eliminate the need for traditional email registration, as the TON wallet will be used to identify the user, streamlining authentication and protecting their personal information.In early 2024, the team plans to establish a User Privacy Board by adding an encryption algorithm. They also plan to add a private sharing feature that allows file owners to share encrypted file privileges with other users.

Revenue performance

We have prepared a table with an overview of fees for each mentioned protocol, that generates revenue and reports its fees and revenue figures.

Filecoin is leading by the amount of generated fees and ranked 9th across all dApps and blockchains in all Web3 segments by daily cumulative revenue in the last 180 days, according to Token Terminal. Filecoin is an outlier with $5.4M in 30D fees, followed by Storj ($22.0K) and Arweave ($16.2K).

Fees and revenue for the last available time period as of 20.04.23*:

*as of 30.01.23

Filecoin's annualized revenue is not comparable to that of centralized solutions such as Amazon Web Services, Google Cloud Platform, and Dropbox. In 2022, these providers generated $80.1 billion, $26.3 billion, and $2.3 billion respectively (sources: Annual revenue of Amazon Web Services (AWS) from 2013 to 2022, Statista, Global Google Cloud revenues from 2017 to 2022, Statista, Yahoo Finance).

The adoption of decentralized options is still lagging, so even outliers like Filecoin have a long way to go to catch up with common centralized storage providers.

What’s next?

Decentralized storage protocols can offer a variety of new business models beyond the traditional model of creating a marketplace for storage providers and users. Some options include:

  • Decentralized content delivery networks (CDNs), where users can pay for faster and more reliable content delivery;
  • Micropayments and monetization for content creators, allowing them to earn cryptocurrency for sharing their content on the network;
  • Tokenization, enabling content creators to create tokens that represent access to their content, which can be later bought and sold on decentralized exchanges;
  • Digital asset storage, allowing users to securely store and share assets like NFTs and providing an alternative to traditional custodial solutions;
  • Perpetual storage option, a feature that ensures that data remains available on the network indefinitely without a predefined expiration date or the need for periodic renewal or re-upload.

Overall, there are a variety of options available for providing and monetizing a more sophisticated user experience and offering tailored security and privacy features for content creators. As technology in this space continues to evolve, we can expect to see continued innovation.

Current outlook on the decentralized storage industry

The sustainability of business models for decentralized storage protocols is still the subject of debate. Some models incentivize suppliers to provide more storage regardless of demand, often resulting in large amounts of unused space (such as Filecoin). Others create incentives through mining on a demand/supply basis, significantly limiting the protocol's revenue (such as Storj). Despite being the most revenue-generating protocol, Filecoin only generates a fraction of the revenue that centralized storage solutions such as Amazon Web Services, Google Cloud Platform, and Dropbox do. One major advantage of centralized solutions is their distribution through big tech and integration with their ecosystems. However, we have not yet seen big tech companies acquiring decentralized storage providers.

Decentralized storage stands out for its user data ownership, something that centralized solutions simply do not offer. Despite this advantage, revenue figures suggest that on its own it is not enough to convince users to switch from centralized to decentralized options. To remain competitive with centralized solutions, decentralized storage providers may need to offer new value points beyond privacy. Nevertheless, it is clear that decentralized storage has the potential to revolutionize the way we store and share data in the future. However, there is an adoption hurdle that needs to be overcome first.

Frequently asked questions

How do decentralized storage protocols make money?

Decentralized storage protocols act as marketplaces where storage providers can sell their unused storage space to users who need it, and typically take a fee for their services paid by both storage users and suppliers.

What are demand- and supply-side fees?

Demand-side fees are paid by users to store data on the network and compensate storage providers. Supply-side fees are paid by storage providers to offer their space to the network and compensate the network for providing resources to facilitate the storage and retrieval of data.

How much revenue do decentralized storage protocols generate?

The 30D fees range from $0.9K to $20K with Filecoin being the outlier at $5.4M in fees. The annualized figures are only available for Arweave ($197.4K) and Filecoin ($65.8M).

What innovations can we expect in future?

We are likely to see more sophisticated user experience and tailored revenue distribution, security and privacy features for content creators, as well as digital asset tokenization and storage.


by Anastasia Zhiltsova & Kirill Malev.

About the authors

Anastasia is an Analyst at First Stage Labs (https://fslabs.io/), a pioneering venture builder & VC company specializing in launching and scaling Web3 startups on TON Blockchain. She is responsible for preparing overviews of developments within and outside TON with a special focus on the DeFi segment, as well as supporting projects on their fundraising journey. With a major in Finance, Anastasia is also interested in crypto from the personal finance and asset management perspectives. Linkedin


Kirill is a Jr Partner First Stage Labs, DeFi & NFT enthusiast. Ex-deputy head of data science at Localkitchen, co-founder of Vinci. Kirill maintains project sourcing and helps portfolio companies within the area of his expertise. He gets involved in the operations and management of certain DevRel, community, and marketing initiatives of TON Blockchain.

Kirill maintains project sourcing and helps portfolio companies within the area of his expertise. He gets involved in the operations and management of certain DevRel, community, and marketing initiatives of TON Blockchain.
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