Background
The Filecoin network is a decentralized storage marketplace developed based on IPFS technology. It utilizes blockchain technology to establish a decentralized consensus layer, enabling anyone to offer storage services and trade storage spaces. The P2P storage marketplace ensures data is secured and verified without needing a centralized trust entity through Proof-of-Replication and Proof-of-Spacetime.
Storage Providers (SPs) keep the system running by committing storage capacity to the network. In return, they are rewarded through block rewards, network fees, and funds generated from storage mining.
Using Initial Pledge Collaterals and delayed reward distributions ensures that SPs remain accountable and safeguards the security and quality of storage services on Filecoin. However, the Initial Pledge Collateral also places a capital-intensive requirement that creates unnecessary burdens on SPs, which could result in bottlenecks in the storage growth of the overall network as the pledged capital can often exceed hardware costs.
As a result, SPs are eager to borrow Filecoin tokens from FIL holders and service providers and are willing to pay interest in exchange. There are currently three options available to SPs to acquire FIL to enable them to commit more storage capacity to the network:
Using FIL rewards from storage deals
Buying FIL from the open market
Borrowing FIL from centralized market
All three options are sub-optimal to ensure the consistent growth of the Filecoin network, as each provides individual challenges for SPs.
For example, using FIL rewards from previous storage deals would be the perfect solution for consistent and sustainable storage growth. However, only 25% of the block reward is liquid when received, with the remaining 75% being linearly distributed over 180 days. Therefore, most rewards cannot be allocated to operating income, preventing the FIL from being used to commit additional storage capacity.
Buying FIL from the open market is also a sub-par solution as it creates additional financial burdens for SPs. Purchasing FIL from open markets requires SPs to sit through market volatility, which shouldn’t be on the books of any business. Furthermore, the cash used to purchase FIL could be utilized better, such as upgrading hardware for additional storage capacity.
Finally, borrowing FIL from centralized markets presents its own challenges as lenders typically require an over-collateralization of 150% or more to secure loans. Again, this increases the financial burden for SPs as they have to deposit more funds and take on additional risk to acquire FIL. SPs also have to trust centralized parties to store and not mismanage their deposit, and lending services often charge high-interest rates, which do not reflect real-time market conditions.
As a result, SPs need another option to get ahold of FIL to continue expanding their storage capacity and growing their business.
On the other hand, numerous FIL holders are eager to earn passive income by participating in the lending market. However, centralized service providers currently dominate the market and reap most of the benefits, while FIL holders who provide the funds receive only a small portion of the interest. Therefore, the development of a trustless FIL lending protocol that balances the benefits for providers and the costs for borrowers is crucial in the current landscape.
This is where FILLiquid steps in.