Filecoin Investor FAQ

2017-08-09

Hi everyone,

Throughout this week we’ve heard a number of great questions. We’ve gathered some of the most broadly relevant questions and responses here. As always, you can reach us at filecoin-sale@protocol.ai.

We found that many of these questions are also answered by the previously published documents at CoinList.co’s Documents page, as well as email updates to registered investors on CoinList.

Filecoin Primer

Sale Economics

How to Invest in Filecoin

Filecoin Whitepaper

Research Roadmap 2017

SAFT - Simple Agreement for Future TokensPPM

Private Placement Memorandum

Update: First Hour Averaging

Thank you,

Protocol Labs

Filecoin Team

(Important Disclaimer: Responses here may contain forward-looking statements, subject to risks and uncertainties that could cause actual results to differ materially. They are not investment advice. They are not legal advice. Please review the risks outlined in the Private Placement Memorandum (PPM) and make your own investment decisions.)

Filecoin Strategy & Fundamentals

Please review the Filecoin Primer and other documents in detail.

Q: What are the business metrics for Filecoin? Who are the competitors? What’s the revenue opportunity? How will that value the network? What does that mean for investors?

Please be aware that any and all answers to this are speculative, subject to high risks, evolving circumstances, competitive landscape changes, market risks, and more. All our plans and answers to these questions are subject to change as the markets evolve, and subject to risks and uncertainties that may cause material differences.

As a two-sided marketplace, the Filecoin Network grows alongside its miners and clients.

While IPFS & Filecoin are already well-known in the decentralized web community, we will need to meet or beat traditional storage system SLAs to expand our reach and establish a competitive service. To compete and to have a chance to succeed, decentralized technologies must be as good as or better than centralized technologies. For example, we would need parity or to improve on existing solutions on durability (not losing user data), availability/uptime (files being available for user access) and latency (how quickly we can serve the file to our users). These yield many metrics to evaluate and optimize. To be up-front and clear, creating a valuable cloud storage platform is a very hard challenge, and very hard to achieve. We think the Filecoin protocol offers novel solutions, and we have good reason to believe we can compete, but ultimately this is a very risky endeavor and we may ultimately fail. Please do not invest if you are not completely comfortable with all the risks.

In cloud storage (as relates to the Filecoin Storage Market), AWS S3, Google Cloud and Microsoft Azure are the main players. For Content Delivery Networks (as relates to the Filecoin Retrieval Market), AWS Cloudfront, Akamai, Cloudflare are the main players. Sia, Storj and MaidSafe are other projects advancing decentralized storage.

The revenue opportunity and value potentials are very hard to quantify here, because we are talking about a crypto token whose value is related to (but not strictly proportional to) the quality of the overall service, the broad utility of the network, the usage it sees, and the value it creates for its users. Additionally, the token could be used as a store of value, which can throw off many models. As some illustration of ranges, we encourage investors to think about the various markets involved. Please refer to the Filecoin Primer pg 16 for a discussion on these markets, their sizes, and the potential value the network can create. Of course, all of this is forward looking, and subject to massive risks of failure. Please do not invest if you are not completely comfortable with the risks.

The cryptocurrency space is quite nascent, and there are no time-proven methods of valuing the networks at the moment. Most models fail drastically in a number of ways. But we invite our investors and miners to carefully study how the most established cryptocurrencies (such as Bitcoin, Ethereum, and others) are valued and how the current industry leader (AWS) is valued within Amazon.

Ultimately, investors should consider this to be a very high risk technology investment, and only invest capital they are completely willing to lose for the small chance of great success. This is the same for any technology startup. The risks in these kinds of investments are considerable.

For a full list of use cases and potential markets for Filecoin, please refer to page 16 of the Filecoin primer.

Technology

Q: Why a native blockchain?

The plan -- as presented at DEVCON 2 -- was to create all of Filecoin as a virtual blockchain on top of Ethereum’s blockchain (eg. a layer 2 blockchain). Last March, the Filecoin team solved a fundamental problem in producing a useful Proof-of-Work consensus for Filecoin, using Proofs-of-Replication and Proofs-of-Spacetime. This achievement meant that the Filecoin Network could create a blockchain and secure it using useful work of proving storage, as opposed to Bitcoin and Ethereum hashing Proof-of-Work protocols. Therefore, our team felt it necessary to create our own blockchain. We plan to make Filecoin compatible with Ethereum, using a bridge of some sort.

Q: What’s useful proof of work?

Blockchains such as Bitcoin and Ethereum (pre casper) use a power based consensus protocol, where a hashing Proof-of-Work algorithm secures the network. Filecoin instead uses a Proof-of-Spacetime consensus protocol, which is a useful Proof-of-Work. It is useful in that the Proof-of-Spacetime miners compute verifies that they indeed had been storing important data entrusted to them. This is a more fundamental notion of valuable work than Bitcoin’s pure hashing Proof-of-Work.

Q: How far along is Filecoin? Is it implemented?

The Filecoin technical paper outlines the Filecoin Protocol. In terms of development, Filecoin is a protocol with multiple subcomponents and will leverage other technologies, such as IPFS, libp2p, and Ethereum. IPFS, libp2p, and Ethereum are ready and used in production. They are the foundation for Filecoin. The Filecoin network is not implemented yet. We recently completed the new protocol construction, and released the new technical paper. We will be developing the software implementation over the next months.

Technology (IPFS)

Q: What is the relationship between Filecoin and IPFS?

Filecoin leverages the whole IPFS protocol stack, including libp2p, IPLD, and Multiformats. Filecoin will use the IPFS protocol to address and distribute content. Filecoin introduces incentive structures for file distribution that can help IPFS nodes store, back up, and serve content.

Q: How will IPFS and Filecoin interoperate?

Filecoin nodes will include an IPFS node, and so they will be running the IPFS protocol directly. Other IPFS nodes may request content stored in Filecoin through such Filecoin nodes with IPFS. Technology (Ethereum)

Q: What is the relationship between Filecoin and Ethereum?

Filecoin plans to leverage both the Ethereum technology stack (EVM and more) and the Ethereum Network itself. Filecoin will have a contract native on Ethereum that serves as a bridge to the Filecoin Network. Hybrid nodes (running on both the Ethereum and Filecoin networks) may exist in the future. Filecoin has been part of and a strong supporter of the Ethereum ecosystem, and we will continue to do so.

Q: Is Filecoin an ERC20 Token?

No, Filecoin is not an ERC20 token. It is the native token of the Filecoin Network (like Ether is the native token of the Ethereum Network). There will be a bridge to Ethereum.

Juan mentioned Filecoin would be a virtual chain on top of Ethereum, what changed? See “Why a native blockchain” above.

Q: Will Filecoin use Ethereum technology?

Yes. Filecoin plans to leverage much of Ethereum’s technology, and the Ethereum Network itself. This also means that the Filecoin Network may become a strong participant in the Ethereum ecosystem, and potentially may fund or perform development work to improve Ethereum stack tooling. In particular, we are interested in improving peer-to-peer capabilities, browser support and tooling, and smart contract security, all of which Filecoin needs.

Fairness Among Participants in the Filecoin Network

Q: I’m not an accredited investor, how can I contribute to the Filecoin network?

Due to the nature of our offering and securities laws (offering of SAFTs under US Reg D, 506(c)), investment is restricted to accredited investors. It is unfortunate for many of our supporters, who are unaccredited, and wish to contribute. It is important to remember that investing money is only one way to contribute and participate in the Filecoin Network. We suggest the following other options:

Filecoin Mining

Contribute to the research.

Contribute to the development of all the necessary software.

Other ways

Mining. Filecoin miners are key to the Filecoin Network, and contribute a significant fraction of the whole value created by the network. They store and retrieve data, establish consensus, process transactions, and increase the security of the network. It is worth remembering that Filecoin is a network that prioritizes miners -- 70% of all the FIL tokens will be distributed to miners, who will be doing useful work for the network.

Many of you have already indicated interest in mining. A few quick stats: 8,500+ miners have indicated interest in our Early Mining Program. 60 different countries are represented from Argentina to Zimbabwe. Of course, apart from mining, after the network launches, FIL tokens may be available in crypto asset exchanges.

Research. Research into cryptography, blockchains, distributed systems, file systems, and computer networks will continue to be an integral part of the Filecoin project for years to come. Stay abreast of the research we publish, as we often outline many open problems. Solutions to these open problems can improve various aspects of the Filecoin Network. In the future, we may offer grants for research work.

Development. Development of the network software and all the ecosystem tools and services is a significant part of making the network work. All the code will be open sourced and available for anyone to contribute to. In addition, we plan to offer development grants for some of the development work, in particular independent libraries and tooling.

Other. There will be many ways to contribute and participate in the network. This is a time that is specific to investors and investments, but please keep in touch as there will be many opportunities to contribute to the network in a great variety of ways.

Q: Why are the advisors getting a discount? Why are they extremely valuable to the network? Why will all stakeholders benefit from them?

The advisor sale involved an impressive group of technologists, researchers, entrepreneurs, engineers, designers, industry leaders, and investors. All of these people and organizations: either (a) have been working hard with us for years to make IPFS and Filecoin successful, (b) have fully committed themselves to work hard with us and for the Filecoin Network for many years to come, and/or (c) offer tremendously valuable advice, hands-on help, knowledge, skills, resources, connections, and more. We have already worked with most of the people and firms involved, for the last 3 years, as advisors or investors to Protocol Labs, to IPFS, and to our team. We welcomed many new people and firms that showed significant promise, and who have made very strong commitments for the long term. We managed to get some key partners in the cloud storage and content delivery industry that may prove to be pivotal in making the Filecoin work globally, and in growing it into a decentralized service millions of people can rely on.

Our advisors are extremely capable and will contribute deeply and significantly to the Filecoin Network. Through minimum vesting and through optional increased vesting, our advisors have demonstrated their long-term commitment to the network. We plan to work closely with them, to make the Filecoin Network as valuable as we can, for years to come.

Sale Logistics & Pricing

Q: What can I expect the average prices in the first hour to be?

Many of you asked for more insight about pricing during and after the first hour of the token sale. We would like to share two calculators that illustrate the models and calculations we used in making the decision to introduce the first-hour average pricing, as well as a clear equation.

(1) A spreadsheet of scenarios based on different assumptions: amount raised in the first hour, and the vesting discounts investors choose. Please review the model to understand the potential outcomes. All formulas are visible in the spreadsheet for full transparency, and you can copy the spreadsheet to play with the model. https://docs.google.com/spreadsheets/d/1IBJApmWDhS9cEdI0weoYuUWHpe4g94Es3z2f8lUOf4U/edit#gid=1681113432

(2) An interactive model of the potential prices of Filecoin in the first hour, as determined by both the original method and the averaging method presented in this blog post. This plot allows a visual comparison of (1) the average price per Filecoin paid as a function of previous total raised under the original model and (2) the average price per Filecoin paid by all investors in the first hour as a function of the total amount raised in the first hour. It is a nuanced graph, but it shows why we think this change benefits the great majority of early investors (and in some potential circumstances, all investors). https://protocol.github.io/filecoin-econ-graphs/FirstHourAvgPlot.html

(3) This is the full description of the price function change, including how first hour averaging is calculated: https://ipfs.io/ipfs/QmctuosvkwWE1mEL1ZPjwTcU5DMqTmJcBBRkV77QtTQA5S

DISCLAIMER: All calculations are for demonstration of trade-offs only, and relying on them may cause you irreparable financial harm. Please make sure to confirm all calculations yourself and come to your own conclusions on whether or not to invest.

This average pricing turned out to be a more controversial change than we originally anticipated. Most of the confusion is attributed to a lack of understanding in the risks of the previous model, and a lack of honest assessment of the inherent probabilities. The likelihoods that certain investors would get the lowest prices were abysmally low, and the majority of investors would end up paying dramatically more. We understand some of you were comfortable with those risks, and preferred the risk of paying a significantly higher price for a small chance to get a low price. But ultimately, we must do what we think is best for everyone, and in this case, it meant this change. We hope that the calculators above help illustrate the potentials here, and help illustrate that this model actually gives all investors in the first hour a much better price, as a group and individually, than the previous model.

Q: How will the price be shown during the first hour? Will it be blank?

The price will be displayed as a range “$X to $Y”. $X is the most recent average price. If no more investments come in for the rest of the first hour, that is the price you would pay. $Y is the absolute theoretical maximum price if all filecoin is purchased. It is hard to estimate how much interest there is, but we do not think the likelihood of selling out is high.

Q: Will I need to wait for a follow up email telling me how many tokens I got at what price?

As soon as the payment confirms, the platform shows the token amount and price in your CoinList purchase history.

Q: Do we get the SAFT immediately or after the sale completes?

Immediately after purchasing, you should be able to view and download a preliminary SAFT. After the sale is over, we will go through all SAFTs manually, verify their correctness, and make corrections if needed. After that, we will send an email to everyone with a link to their final SAFTs. Naturally, we do not anticipate any errors, but we want to be fully certain all information is correct in the final legal agreements.

Q: When we check out after purchasing with crypto, we will be shown a destination wallet address. Do we just need to verify that address and send?

That’s correct. We are using HD wallets for increased privacy and security. They are unique for each transaction, so you will only see the destination wallet address at checkout. There is a verification tool to ensure you have the right address. Please see the “How to Invest” guide for more information on this tool.

Vesting & Sale Structure & Float

Q: What happens if less than <200mm tokens are sold? Do they get burnt? If not, who owns them?

This is detailed in the Q&A section of the Sale Economics document. We will split all remaining tokens as follows:

We will first apply the remainder to pay for the costs of the token sale itself (many token sales usually pre-allocate this cost)

We will sell half of the remainder to the public on network launch.

We will keep the other half for market stability (buying and selling filecoin on exchanges to provide market liquidity, price stabilization, correcting unbalanced incentives for storage and retrieval miners, etc.).

Q: Following the 6 month lockup, are investors of Filecoin able to sell their tokens immediately?

Even better, investors will begin to receive some portion of their tokens shortly after network launch. As each block in the Filecoin blockchain is mined, the usage restriction is lifted on a certain amount of tokens, making those tokens usable (what we call “vested”). For example, an investment with 6 month vesting would have 50% of its tokens available for use 3 months after network launch and 100% available (fully vested) 6 months after network launch.

Q: With the delay, are you keeping the same sale structure?

Yes, we are keeping the same sale structure. We believe that in networks, earlier participants take on excess risk and improve the network for future participants. We would like to make sure the early participants get the same outcome and take out the risk involved.

Q: Why not fix the price at a low price during the first hour? Why not do an uncapped sale? Why not use <different sale structure here> ?

We know many investors would prefer a different sale structure. In the last few days we have seen so many suggestions, pointing in many different directions, with opposing views, and optimizing for many different things.

We cannot change the sale structure significantly at this point. The strongest feedback we’ve gotten is “do not make any more changes!” At this point, either we do the sale, or we stop it completely. Purely hypothetically, if we had to stop the sale altogether and re-consider different sale structures, we would be forced to postpone the sale for months into the future. We would want to seriously re-evaluate the structure, and give both our team and our potential investors time to regroup. This stuff takes significant amounts of time, both for our team to implement and for investors to learn about and understand.

Q: Why not stop the sale and do a proper unaccredited ICO around network launch?

See answer above. In the hypothetical that we had to stop the sale for now -- we would be forced to postpone it for several months at least, and to consider various structures. Yes, postponing for a proper ICO around network launch for the token itself (not for SAFTs) would again become an option.

Protocol Labs, Filecoin, and Filecoin Foundation

Q: Why won’t more of the proceeds go towards Filecoin Foundation or an entity that is strictly required to work on Filecoin?

We are selling these SAFTs to finance Protocol Labs, the Filecoin Foundation, to build Filecoin, its entire ecosystem, and fund future work. For example, we will continue funding IPFS, IPLD, libp2p, and other underlying technologies, all of which are absolutely key to Filecoin. There's a whole stack of relevant protocols. More, we have to fund more research and development work in cryptography and distributed systems, we need more good implementations of various tools and protocols Filecoin relies on. Separately, we may invest significantly into the Ethereum tooling ecosystem, as we will be using lots of that technology, and we need to improve some of it. We need to have the flexibility to invest in these and other ancillary projects that contribute to the success of Filecoin. Also, it’s worth noting that Protocol Labs is a research, development, and deployment lab -- much of the work that will benefit Filecoin for years to come may come out of seemingly unrelated work. Note also that Protocol Labs' reward is to be able to do and fund more, different work.

Q: How can we have confidence that most of the funds raised will go to building Filecoin and its dependencies?

Protocol Labs expects that a substantial amount of all of the proceeds of the offering will be used by the company to originate and subsequently to progress the development of the Filecoin network and the Filecoin ecosystem as a whole, including foundational technologies and surrounding ecosystem tools and services.

As a further assurance we have included a refund clause. Refer to the official documents for more information, but in plain English, if the product is not launched within 5 years (July 18, 2022), Protocol Labs is obligated to repay investors. This is a strong assurance that other blockchain networks simply do not provide.

Since 2014 —well before the recent wave of token sales — we have been building IPFS, the underlying protocol technology that Filecoin will leverage. IPFS and our work in this field demonstrates our deep commitment to decentralization and to improving the internet. Filecoin was conceived as an incentive structure for IPFS, and as a sister protocol as part of a broader ecosystem. We’ve achieved many of our goals so far without economic incentives. IPFS is fully open-source, and we have more than a thousand open-source developers and contributors alongside us. With this token sale, we are simply looking to accelerate the progress of decentralizing the web by layering an incentive structure on top. We hope to raise funds that will allow us to compete with entrenched participants who do not want decentralization, and to survive unlikely but potential catastrophic events that may make supporting these projects difficult. We are here for the long term. We are here to upgrade the internet.

Turning the Filecoin Whitepaper into working code is the first milestone we will focus on. Decentralizing the world’s data and successfully launching an open global market for data storage will require a coordinated effort with thousands of organizations and millions of participants. It will also require continued research and development at the cutting edge of computing, cloud storage, UX, and network infrastructure. Meanwhile, we will be competing with formidable tech titans in the search for top talent to achieve our mission. Our efforts across talent, research and technology will move the arc of the web back towards decentralization. We hope that you join us in achieving our mission.