2020 was a boiling year. From the 312 crash to the new high of Bitcoin, from the DeFi craze to the launch of Filecoin. "One bull market can make 10 years of money", but some people also suffered tragedies due to contract losses. As we usher in 2021 amidst the clamor, don't forget that the freedom of choice is ultimately in our own hands.
This article was first published on January 4, 2021 on the official account: Wu Says Blockchain Real, with special author Bai Ye.
With the popularity of Filecoin, tens of billions of mining machines have been sold, and the total market value is less than 7 billion. Investors are at great risk of losses. This article records the history of Filecoin in detail, exclusively discloses many chaos in the industry, and believes that "as long as Filecoin's real storage application cannot be realized, it is a scam." For the criticism, listen to both sides and read it for your benefit.
On October 15, 2020, Filecoin, which had been delayed many times, finally went online on the mainnet.
On Gate.io, FIL opened at $200 and then plummeted until it stabilized at around $50 the next afternoon.
On the same day, there were rumors that Filecoin had a loophole. Someone discovered that the test coins of the test network nodes could be traded in the secondary market after the main network was launched. This meant that a large number of test coins were directly converted into main network coins and cashed out through the secondary market. The official strongly denied and clarified that it had always been the plan to convert test coins directly into main network coins.
Two and a half months have passed since the launch of Filecoin’s mainnet, and the price of FIL has fallen to around $20. Most people have long forgotten the “bug” on the day Filecoin went online. As for how many test coins flowed into the secondary market that day, the official did not list the distribution details of FIL for clarification. Reference article Data Puzzle: What is the real circulation of Filecoin? How much test coins have been converted into real coins? How much wool has been fleeced?
Although the test coin issue is just an episode, the disputes, interests, and chaos it contains seem to be a microcosm of Filecoin this year.
1. The ambition of IPFS & Filecoin
In 2014, Juan Benet, a Mexican who graduated from Stanford University, founded a company called Protocol Labs in the United States and launched a project called "The InterPlanetary File System (IPFS)". IPFS is translated into Chinese as Interstellar File System.
IPFS is a peer-to-peer distributed network transmission protocol that aims to create a more open, fast and secure Internet.
In fact, the main underlying technology of IPFS is P2P, which means peer-to-peer transmission. If you have used BT seed download, you will be familiar with this technology. The download tools we used before, including eMule VeryCD, BitComet, and the commonly used Thunder seed download and magnet download, actually use the P2P transmission protocol. IPFS is not a brand new project. It is an improved version of the P2P transmission protocol, adding file slicing, hash deduplication, intranet penetration and other functions.
So why has IPFS become a star project? Because it has capital support, such as Sequoia Capital, Stanford University Capital, YC Capital, Winklevoss Brothers Fund, Distributed, etc. With the halo of capital and the strong support of domestic mining machine manufacturers, IPFS has become a high-end Web3.0 basic protocol, and even "will replace the HTTP protocol."
At present, IPFS cannot replace HTTP. The underlying P2P protocol of IPFS mainly corresponds to "cold data", that is, static data, such as videos, pictures, documents, etc.; in terms of "hot data", such as dynamic web pages, games, AI intelligence, etc., the P2P protocol has no advantage over CDN, and cold data such as videos and software can easily lead to copyright disputes and content censorship. At the same time, because P2P technology will occupy a large amount of the network, the telecommunications authorities of various countries have imposed restrictions on P2P communication methods to varying degrees.
So why did the IPFS technology enter China and become widely known? Because of the cryptocurrency Filecoin.
Filecoin is also a project developed by Protocol Labs. It is a peer-to-peer, decentralized distributed storage network. In layman's terms, Filecoin is a "blockchain (digital currency driven) + cloud storage" project.
Filecoin’s original idea was to create a storage network where all idle hard drives around the world can be connected to the network and provide storage and retrieval services to customers, who pay FIL (Filecoin’s cryptocurrency) for the service. However, due to technical factors, this idea is difficult to achieve. Today, the configuration and price of Filecoin mining machines are the highest among all mining projects, with extremely high operation and maintenance difficulties and electricity consumption, and the highest overall cost.
From the current situation, it is difficult to implement Filecoin's storage function. Filecoin is only suitable for storing cold data and cannot interact and verify hot data. The network is currently not very stable and bugs frequently occur. The data stored by miners is basically garbage data generated by one click, and the main income of miners also comes from block explosion, which is the so-called block reward.
On the other hand, Filecoin’s TPS is very fragile (system throughput, which is also the number of system transactions per second), and network congestion has become the norm. It is temporarily impossible to support large-scale storage application demands of up to hundreds of thousands of transactions per second.
2. Flowers bloom within the wall and the fragrance is within the wall
In July 2017, Protocol Labs released the Filecoin white paper and conducted an 1CO in August of the same year, raising more than 200 million US dollars in start-up funds with 7.5% of the token shares. The payment methods are ETH, BTC, ZEC, USD and other legal currencies.
2017 was a great year for blockchain cryptocurrencies. In that year, the highest price of Bitcoin was close to 20,000 US dollars; the price of Ethereum broke through 1,000 US dollars; in the same year, many blockchain star projects including Filecoin, EOS, Tezos, Hdac, etc. carried out ICOs, among which EOS's financing lasted until June of the following year, raising a total of 4 billion US dollars.
The bull market of 2018 has passed, and the best investment opportunity has been lost. The new investors in the cryptocurrency circle have become old investors, and some have become "investors" from new investors. Capital is ready to move, and people are in urgent need of finding the next blockchain outlet. At this time, Filecoin began to surface.
If we look back at the first batch of Filecoin mining machine manufacturers in China, we will find that most of them registered their companies between May and August 2018. That is to say, from that time on, the concept of IPFS & Filecoin was officially introduced to China.
The main promoters of Filecoin are mining machine manufacturers. After Filecoin released its white paper, someone quickly translated the white paper into Chinese and spread it in the circle. Mining machine manufacturers think this is a good opportunity. Following this project, they can sell mining machines and mine to get FIL coins. So Filecoin was quickly packaged by mining machine manufacturers and promoted on a large scale from various aspects such as technology, prospects, subversion, and wealth. The promoters are called evangelists, and the evangelists and the people who receive the sermons gather together to form a community.
Since Filecoin is a new thing and there was only an ambiguous white paper at the time, evangelists often started with IPFS and Protocol Labs when promoting it. Investment institutions such as Sequoia Capital became the best endorsements, and Bitcoin and Ethereum became ideal benchmarks.
Among these evangelists, there is a special group called the Panquan, which generally refers to teams such as "capital disks, pyramid schemes", etc. These teams often switch between various projects to find opportunities to make money. The halo of IPFS & Filecoin as a blockchain star project has a natural lethality to people in this circle. As a result, the leaders of these circles have become mining machine dealers and promoted them through various channels. The curtain of Filecoin is slowly opening in China.
On October 29, 2018, a seemingly high-end conference was held at the Sheraton Hotel in Zhengzhou. The name of the conference was "2018 Zhongyuan Silicon Valley First (International) Innovation and Technology Festival and CAI Rich Ranking Launch Conference".
This conference was full of hype because the organizer (Zhongyuan Silicon Valley Innovation Technology Industrial Park) invited two important guests. They were Hurun, the founder of the "Hurun Rich List", and the Institute of Semiconductors of the Chinese Academy of Sciences. In fact, all participants knew that both Hurun and the "Institute of Semiconductors of the Chinese Academy of Sciences" were just supporting roles in this conference. The real core of this conference was two other names that were completely unfamiliar to the outside world at the time: a virtual currency called CAI and a mining machine called "Snail Interstellar Server".
The organizers advertised that users could mine CAI before the launch of Filecoin, the IPFS token. After Filecoin is launched, users can dynamically switch based on the principle of maximizing profits, forming dual mining of CAI and Filecoin...
Today, we all know that this was a scam and the price paid by the entrants was 2 billion RMB.
The StarSnail mining machine is essentially a NAS storage machine, which costs a few hundred yuan and does not have the function of accessing Filecoin mining. However, this type of machine was sold as a Filecoin mining machine by various mining machine manufacturers from 2018 to 2019, with a price ranging from 4,000 to 7,000 yuan. It is said that a manufacturer in Shenzhen alone has sold more than 10,000 units.
With the support of mining machine manufacturers, IPFS will replace the HTTP protocol, and Filecoin will subvert the centralized cloud storage represented by Alibaba Cloud, Amazon Cloud, Huawei Cloud, etc. The value of Filecoin is comparable to global cloud storage, and there is unlimited room for development.
Before the test network was launched in December 2019, Filecoin officials stated that Filecoin mining machines need to use GPUs to mine, which means that many NAS mining machines previously sold are completely scrapped.
After the test network was launched, mining machine manufacturers launched their own nodes one after another, and competed for the node ranking. Because the higher the ranking, the more it can show its strength, and it is easier to sell mining machines.
The competition between mining machine manufacturers is not only reflected in the node ranking. In order to promote their own mining machines, more and more mining machine manufacturers have joined hands with industry media to hold activities and forums. For a time, various distributed storage forums were extremely lively, and gradually capital began to enter the market. Filecoin has become a star project ecology that can be compared with Bitcoin and Ethereum.
Driven by the trend of distributed storage, more and more people are starting to buy Filecoin mining machines. Interestingly, more than 95% of Filecoin mining machine vendors, investors, customers, and media are from China. In the United States and other European and American countries, there is very little attention paid to Filecoin.
The promotion of Filecoin in China is so successful. According to rough estimates, the mining machines sold by Chinese mining machine manufacturers may have reached tens of billions of RMB, while the current market value of FILECOIN is less than 7 billion RMB.
3. Mining machine vendors "make money out of nothing"
As of December 29, 2020, there are more than 900 active nodes on the Filecoin network, which are controlled by less than 200 mining machine manufacturers. Among these 200 mining machine manufacturers, no more than 5 can independently output technology.
Filecoin mining involves many technical aspects, such as algorithms, scheduling, networks, hardware, storage systems, etc. The standards of these technologies are still very high. In fact, most mining machine manufacturers are latecomers. Before the Filecoin test network, they did not invest in technical personnel at all, and only relied on marketing methods to maintain the high-end image of technology companies.
It was not until the test network was launched that more and more customers began to pay attention to node performance. Only then did the mining machine manufacturers realize that marketing tactics were no longer effective and that they had to compete with technology. However, technology needs to be accumulated, and it is definitely too late to cram at the last minute. Some mining machine manufacturers did not believe in it and tried it themselves, but found that they could not do it.
What to do now? Simple, outsource.
Among the entire technical modules of Filecoin, there are two most complex ones.
The first is the optimization of the code (algorithm) at the blockchain level, including zero-knowledge proof, replication proof and space-time proof. The official code is very rough. If it is to be used, the mining machine manufacturer needs to perform in-depth optimization based on the source code. The purpose of the optimization is to increase the packaging speed of data (sectors), and to better complete the space-time proof and obtain more block packaging rights. In the field of zero-knowledge proof, most domestic mining machine manufacturers do not have the ability to complete it independently, and this technology is basically outsourced to several technical teams.
Another complex technology is the storage system. There are few mining machine manufacturers in China that can independently complete large-scale storage clusters. We see that the single-node data volume on the network is several PB or tens of PB. It is no exaggeration to say that most of them are outsourced and O&M services provided by storage service providers such as Alibaba Cloud, Huawei Cloud, Inspur, and Sugon. This is a very contradictory behavior. Mining machine manufacturers promote that Filecoin will replace centralized cloud storage, but they are actively cooperating with centralized cloud storage service providers because they cannot handle distributed storage systems themselves.
As for the mining machine hardware, it is even simpler. Filecoin uses a general-purpose server for mining. What does that mean? It is an assembled machine. Anyone can buy a server chassis, motherboard, CPU, GPU, memory, SSD, and hard disk to assemble a Filecoin mining machine, which is no different from assembling a desktop computer by yourself. Therefore, mining machine manufacturers do not need to produce mining machines by themselves. They only need to find suppliers, buy accessories, assemble and debug.
What mining machine manufacturers need to do is to maintain an operation and maintenance team. The computer room still needs someone to maintain it on site; and design a set of coin-splitting software. Of course, there are also mining machine manufacturers who save even these and outsource them all.
Mining machine manufacturers package themselves through marketing; outsource algorithms, storage, operation and maintenance technologies; and then find several hardware suppliers. In this way, a Fileocin mining machine company, or a distributed storage technology company, is formed. Of course, there are certain risks in doing so. For example, a company in Hangzhou purchased a patent on Taobao and its Wangwang chat records were intercepted, causing a sensation and becoming infamous.
The profit of mining machine manufacturers mainly comes from two parts, one is the price difference of mining machines, and the other is the technical service fee. A mining machine with general configuration on the market is basically priced at more than 200,000 yuan, while the cost may be only 40,000-50,000 yuan, 30%-40% is distributed to dealers, and the gross profit of mining machine manufacturers is 30%-40%. In addition, mining machine manufacturers generally charge a technical service fee of 15%-25%, which means that 15%-20% of the mining machine's output of coins must be paid to mining machine manufacturers. With just these two pieces, mining machine manufacturers can make a steady profit.
In order to maximize profits, mining machine manufacturers have also spent a lot of time on product design. Since the price of a whole mining machine is more than 200,000, which exceeds the purchasing power of most customers, most mining machine manufacturers default to multiple people buying a mining machine together, and distribute FIL income according to each person’s investment ratio.
On the other hand, mining machine manufacturers will also play some tricks. Taking hard disk backup as an example, the erasure code technology is commonly used in the market, which can basically achieve 1.5-1.3 or even higher backup, that is, 1TB of the 1.5TB or 1.3TB storage space is effective space. However, some mining machine manufacturers advertise that they use double copies or even triple copies, so that there is only 1TB of effective space in every 2TB of storage space. The final delivery of the mining machine is the effective space. Compared with the erasure code, the double copy and the triple copy can deliver a lot less effective space, and this alone can save a lot of hard disk costs.
Even worse practices are to use second-hand accessories or oversell mining machines. After all, customers rarely go to the computer room for on-site acceptance and they can be fooled as long as they see the data in the background.
In addition, there are many problems in the distribution of FIL income. There are two reference values for FIL income: the actual income of the node and the average income of the whole network. The node income may be higher than the average income of the whole network, or it may be lower than the average income. Since the mining machine manufacturer has collected technical service fees, it should guarantee a certain level of technology, and the distribution of FIL income should not be lower than the average income of the whole network. If the node performance is lower than the average of the whole network, it should be distributed according to the average of the whole network; if the node performance is better than the average of the whole network, it should be distributed according to the actual income of the node.
However, in reality, mining machine manufacturers either pay out fees that are lower than the average revenue of the entire network, or pay out fees that are in accordance with the average revenue of the entire network. So what is the meaning of the technical service fees collected by mining machine manufacturers? What is even more incomprehensible is that most mining machine manufacturers do not disclose their nodes, and investors do not know which node their mining machine is at or how much actual revenue they have obtained.
What’s more, some investors cannot afford the pledged coins, so theoretically their mining machines will not participate in mining. But in fact, his mining machine is still running. His mining machine is used by the mining machine manufacturer to package data, and the profits belong to the mining machine manufacturer; some idle mining machines will also be rented out by the mining machine manufacturer to others to package data, and these The depreciation cost of the mining machine is borne by the investor, and the mining machine dealer makes a huge profit.
4. Investors who enter the market ignorantly
“It will soon replace the HTTP protocol, replace centralized cloud storage, Web3.0 infrastructure, and become a blockchain star project. It will be the next coin that will increase by a hundred or a thousand times, and will provide high returns with quick returns” - in the face of these halos-filled concepts, investors who have been educated by the market have no resistance at all. Many people don’t even know what IPFS and Filecoin are, but they can’t wait to buy mining machines.
According to industry insiders, to date, the sales of Filecoin mining machines in mainland China are no less than 50 billion RMB, and some even boldly estimate that it exceeds 70 billion. However, some conservatives believe that it is between 10 billion and 20 billion.
So did the investors make money? At present, many people did not.
If we talk about who has made money with Filecoin, the first one is the protocol lab, followed by mining machine manufacturers, dealers, hardware suppliers, storage service providers, IDC computer rooms, outsourcing service providers and industry media, etc. Investors (miners) are at the bottom of this ecological chain.
Miners need to pay several costs to participate in Filecoin: the cost of purchasing mining machines, 15%-25% technical service fees, mining machine hosting fees, and pledged coins.
Here we will focus on the pledge coins. In order to constrain miners to fulfill the storage agreement, Filecoin has a pledge mechanism: miners need to submit a certain amount of pledge coins for the storage space they provide, which is about 9-10 FIL/TB, which is about 1,800 yuan when converted into RMB. The storage life cycle of Filecoin is generally 540 days. During these 540 days, if there is no problem with the stored data, the system will return the pledge coins after the expiration; if there is a problem with the data, as a penalty, the system will deduct a corresponding proportion of the pledge coins.
Staking coins is a necessary condition for mining. Due to the high cost and the inability to predict whether the price of coins will plummet after 540 days, most mining machine manufacturers will not take the risk of staking for their customers. Then miners can only buy FIL from the secondary market (exchange) for staking. Therefore, many miners pay for mining machines on one hand and go to exchanges to buy pledged coins on the other hand, making contributions to the cash flow and price stability of the Filecoin ecosystem in obscurity.
As Filecoin's GAS fee is getting higher and higher, I heard that some mining machine manufacturers are planning to let miners bear the GAS fee themselves. Some mining machine manufacturers have also developed FIL lending business, with an annualized rate lower than that in the market, in the name of helping miners, but from another perspective, it is a bit like cutting the miners who have been cut again and again.
So can miners make their money back? From the current situation, under the premise of paying the full amount of pledged coins, miners can recover their costs in more than 100 days. However, due to Filecoin's lock-up mechanism, 75% of the FIL produced in these 100 days needs to be released linearly within 180 days. The FIL produced on the 100th day can only be obtained on the 280th day, and the invested pledged coins can only be obtained after 540 days. There is a risk here. No one can predict what the situation of FIL coins will be in 180 days or 540 days? What if the price of the coin hits the bottom?
What’s more, for every 1TB of data stored, the pledged coins plus GAS can be as high as 20FIL, about 3,500 RMB. What does this mean? The GAS burned every day is close to the FIL output. If investors are also required to bear the GAS fee, it will undoubtedly be a mining disaster.
5. Is Filecoin a scam?
In October 2020, the Filecoin mainnet was launched. Can the Filecoin project be implemented? Ultimately, it depends on whether it can become a decentralized distributed storage network as stated in the white paper. If this project only relies on miners to generate garbage data to fill hard drives with one click, and relies on high-energy hardware computing to obtain cryptocurrency rewards, then it actually has nothing to do with real storage applications. As long as Filecoin's real storage application cannot be done, it is a scam.
At present, Filecoin still has at least several essential problems: from a technical perspective, due to the technical characteristics of Filecoin, it is limited to cold data storage; at the same time, its fragile TPS and poor code stability make it difficult to withstand large-scale concurrent storage and transmission needs.
From the perspective of the economic model, Filecoin’s storage and retrieval transactions are based on FIL, and the price of FIL fluctuates at any time and cannot be used as a price anchor for storage payments. The Filecoin economic model mechanism also leads to the strong becoming stronger and the weak becoming weaker, and the alliance of several large miners can control the entire network.
From the perspective of storage cost analysis, Filecoin’s storage cost is higher than that of traditional cloud service providers such as Alibaba Cloud and Amazon Cloud, and it cannot guarantee the safe and stable storage of data. From the perspective of storage security, Filecoin is actually inferior to traditional multi-location disaster recovery backup and is more likely to cause data loss.
Of course, Filecoin may one day realize the vision in the white paper, but it is just the beginning.
The price of Filecoin is maintained by miners (investors). On the one hand, miners purchase mining machines, and on the other hand, they go to exchanges to buy FIL for pledge, providing the main cash flow for Filecoin.
At the same time, due to the oversale of Filecoin mining machines, the computing power is seriously oversupplied. More and more investors are entering the market, diluting the block revenue and lengthening the payback period. Once the investor's profit expectations are not met, collective rights protection incidents are likely to occur, and many incidents have already occurred.
Similar to the game of passing the parcel, what will happen if one day there are no new investors buying mining machines and no new miners buying coins?
