What is Filecoin?
Filecoin is similar to other crypto protocols in that it takes a decentralized, permissionless approach, but it has a unique application. Filecoin is a decentralized storage network, allowing users to monetize their extra storage space by securely sharing it with other users. Filecoin is built on top of IPFS, the InterPlanetary File System, a cryptographic file-sharing system that uses blockchain. Filecoin’s innovation on top of this system is to introduce a system of incentives, so users are willing to rent out their space for the purpose of file sharing. These incentives are payments of Filecoin’s cryptocurrency, FIL.
Filecoin is one of the main projects created by Protocol Labs, an open-source research and development lab founded by CEO Juan Benet. This same team created IPFS, the file-sharing system mentioned above that underpins Filecoin’s storage network. Though the Protocol Labs team created Filecoin, they wanted to ensure decentralized governance of the protocol so an independent organization, the Filecoin Foundation, was established to facilitate governance and fund critical development of the protocol.
There are two main types of miners on the Filecoin network. The first, storage miners, provide storage on the Filecoin network using spare space on their computers. The second type are called retrieval miners who facilitate the retrieval of data from the storage miners, acting as a link between hosts and clients. Retrieval miners bid for storage contracts, are paid for performing services in FIL, and if a party fails to deliver on their commitments, the FIL is slashed to incentivize good and reliable services.
In contrast to other validation processes such as Proof-of-Work or Proof-of-Stake, Filecoin’s protocol performs something called Proof-of-Replication and Proof-of-Spacetime. These checks confirm that miners are fulfilling their hosting duties effectively. A miner must submit for these checks on their data or contracts will be deemed inactive and face a “fault fee.” Provided the validation checks are passed, a miner will be paid the agreed storage fee for hosting the files. This transfer occurs automatically via programmed execution.
What is the FIL token?
FIL is the native cryptoasset to the Filecoin blockchain and it is used both to pay service fees and participate in the Filecoin protocol community. Users pay miners in FIL for their storage and retrieval services, and storage providers post FIL as collateral for their storage contracts as a way of holding them accountable to service quality.
While the Filecoin Foundation, an independent organization dedicated to developing Filecoin, supports Filecoin Improvement Proposals (FIP) in a similar way to many other decentralized protocols—where community members propose and vote on improvements to the protocol’s functionality— the voting process is not powered by holders of FIL staking their tokens. FIL is currently only used to pay fees and collateralize contracts, but a future FIP could theoretically change that.
How does FIL compare to Bitcoin?
Filecoin differs from Bitcoin in a few key ways.
First, Filecoin has a known team that launched, and continues to iterate on, the project. As described above, Protocol Labs and the Filecoin Foundation power and govern the development of the Filecoin platform, but they prioritize and execute on proposals made and voted on by the Filecoin community.
The second major difference between Filecoin and Bitcoin is their age. Filecoin’s Mainnet was launched in 2020 which is when its native token, FIL, started to be distributed. In contrast to Bitcoin’s 12 or so years, the Filecoin project is very young which means it is less proven, less distributed, and has a significantly smaller market value than Bitcoin.
Similar to Bitcoin, a malicious participant or group of participants who gain enough control could negatively impact the value of the asset. If one person or an aligned group of FIL holders decided to manipulate its development, they could draft a malicious proposal and vote it through (similar concentration risk to a 51% attack on the blockchain.)
However, it should be noted that, although FIL is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that FIL will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) However, if FIL crashes, Bitcoin may be less likely to get hurt by virtue of its size.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Filecoin, including an opinion that FIL is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of FIL prior to making it available on Wealthsimple Crypto and has concluded that FIL is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated FIL based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of FIL, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created FIL;
- The supply, demand, maturity, utility and liquidity of FIL;
- Material technical risks associated with FIL, including any code defects, security breaches and other threats concerning FIL and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with FIL, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of FIL.
Like all other crypto assets, there are some general risks to investing in FIL. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that even when compared to other DeFi protocols, FIL presents an elevated short history risk. Further, Protocol Labs, the Filecoin Foundation, and the broader Filecoin community are not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of FIL have no recourse to FIL or Wealthsimple if FIL declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading FIL. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021
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