Society is transitioning from the industrial age to the information age, and data is becoming the world’s most valuable resource.

As humans continue to generate countless petabytes of data, the question of where and how to store it becomes increasingly important. Migration from on-premise storage to cloud storage has been the major theme of the past decade, and the trend is accelerating. The tech giants currently dominate this market. Amazon, Google, Facebook, Apple, and Microsoft each control a huge share of the world’s data. But this existing system leaves much to be desired. It’s insecure, expensive, centralized, and involves putting a lot of trust in these large corporations.

Centralized servers containing valuable or sensitive information are targets for hackers, as we saw in the iCloud hack of 2014 and the Dropbox hack of 2012. These systems are only as secure as the measures put in place by the companies running them. Even the world’s best and most funded tech teams cannot protect themselves: see Equifax, Verizon, Target, etc. The fact that each of these companies actually takes custody of customer data means that there is always risk of theft.

These companies also have broad jurisdiction to censor individuals or data, to provide users’ data to governments or other law enforcement agencies, or even to sell customer data to advertisers. They are central points of failure that are targets for nefarious actors and are inherently fragile. Earlier this year, for example, a human error by an Amazon S3 employee caused several prominent websites to temporarily go offline.

Blockchain technology has created the first opportunity to rethink cloud storage on a technical level and as an economic system by solving these major problems. Blockchain-based decentralized storage is cheaper, more secure, faster, censorship resistant, and more distributed than existing cloud storage solutions. It leverages the fact that massive amounts of storage space sits unused on people’s hard drives around the world; creating a market for this allows people to monetize their spare storage space. The influx in supply into the global storage market will drive down storage prices. To do this in a secure, trustless, peer-to-peer fashion is the promise of the blockchain itself.

A number of teams are pursuing this opportunity: Filecoin, Storj, SAFE Network, Sia, and Swarm are the major projects in the space. Below is a general overview of the state of blockchain-based decentralized cloud storage protocols, and some thoughts about each.

Filecoin

Filecoin is the 800-pound gorilla. Protocol Labs, the company that created Filecoin, has one of the most experienced and respected teams in the entire blockchain space. Led by CEO Juan Benet, the team has already created both the Interplanetary File System (IPFS) and Coinlist. IPFS, which is designed to work with Filecoin, demonstrates the team’s competence in creating large-scale digital infrastructure, while Coinlist showcases their ability to create well-functioning and clean user-facing applications. Both of these characteristics will be paramount for success.

Moreover, the Protocol Labs team just completed the largest token sale in history for Filecoin. They raised $205 million, effectively arming themselves with a war chest of capital. Protocol Labs can afford to hire the best developers in the world and invest in an aggressive go-to-market strategy. It’s also worth noting that Filecoin has raised money from many of the biggest names in both Silicon Valley and the blockchain space, including Andreessen Horowitz, USV, Sequoia Capital, Naval Ravikant, and many more. These players wield significant power and influence, and their vested interest in making Filecoin a success gives the project a major advantage over competitors.

Filecoin is the decentralized cloud storage project to beat. As such, many believe it presents the best investment opportunity in the sector. But Filecoin is likely 12-18 months out from the launch of the protocol, while other decentralized storage protocols are live today. If demand for decentralized cloud storage continues to grow over the next year and a half, other protocols may be able to use their first-mover advantage to carve out a market niche.

We believe that network effects are far weaker for decentralized storage than current market valuations of each decentralized storage token suggest. This should allow some projects to focus on a particular subset of users who have unique demands. These features could include an intense focus on privacy, low latency times, regulatory compliance, and more. Smaller projects with less funding may find it difficult to compete with Filecoin for overall market share. Their best bet will likely be to double down on a particular use case or niche audience.

Storj

Storj is a decentralized cloud storage protocol built on Ethereum. The project is interesting for a number of reasons, most notably its focus on user experience.

Storj Labs, the company that created the Storj protocol, has built an easy user interface to access the platform Storage pricing is fixed in USD terms, meaning users don’t have to worry about fluctuations in the price of the STORJ token Users can pay by credit card, eliminating the crypto acquisition barrier to entry Storj offers a pay-as-you-go model for users, which creates an easier user experience

For these reasons, Storj appears to have a much better chance of attracting consumers than current competitors. Storj, in its current form, is not a perfect solution. It still requires much more technical know-how than comparable services like Dropbox, but it offers competitive pricing and much better privacy and security. For users who care about the latter two, especially, Storj presents a compelling utility.

Dropbox currently offers 2GB of free space for users, while Storj offers 25GB of storage and 25GB of bandwidth each month, for 12 months, to new users for free. Dropbox’s paid service offers 1TB of storage to users at a cost of $9.99 per month or $99 annually. To store 1TB per month on Storj would cost $15 monthly, plus bandwidth costs. Dropbox only offers the 1TB option, no matter how much data a user wants to store. With Storj, users only pay for what they actually store, so it is likely a better (and cheaper) option for many users. Moreover, Dropbox users are unable to purchase more than 1TB of space unless they upgrade to an enterprise account.

While Dropbox and Storj offer different advantages for different users, Storj excels in a number of areas. Most notably, Storj offers client-side encryption and sharding of files (as do all decentralized storage protocols), a service that strongly appeals to privacy and security-conscious users, which Dropbox simply can’t provide. Nobody but the owner of the data has access to it, but it is still stored across a large network of nodes, ensuring redundancy. For large-scale users, Storj also offers better pricing than Amazon Web Services and Microsoft Azure, with the additional privacy and security advantages.

One notable issue with Storj is that Storj Labs controls the only point of access to the network for non-technical users. While this portal is what allows for Storj’s easy UX, fixed pricing, and fiat capabilities (credit card payments), it does also present a risk. If Storj allows other third-parties to create similar portals, it would not only increase access to the protocol and lessen the centralization risk, it might also drive down prices. These would both be positive improvements and value-adds for users.

The Storj development team raised $30 million in May of 2017, giving them significant capital to continue to develop and improve the project. While Storj still requires technical know-how to set up, improvements to the UX and front-end could make using Storj as easy as using Dropbox or Google Drive in time. This will likely be the major determining factor that drives usage in the medium-term, and we hope that the team dedicates significant resources towards this goal.

If Storj is able to implement both improvements to the UX and more points of access in the near-term, Storj could carve out and maintain a market share prior to the entrance of the Filecoin behemoth. We believe that it is the project most likely to do so.

SAFE Network

SAFE Network is one of the most ambitious projects in the space. It attempts not just to create a decentralized storage network but also to build an entirely new infrastructure layer for the internet that provides secure and decentralized storage, application hosting, website hosting, messaging, and more. Because SAFE Network is attempting to accomplish such a huge task, the project entails a high level of technical risk.

The salient concern with SAFE Network is that the protocol has been in development for many years and has yet to officially launch. Such ambitious projects of course take time, but SAFE Network has less momentum and less funding than competing projects, and the network may not launch for quite some time. We are skeptical of projects that have been in perpetual R&D.

SAFE Network also utilizes a non-blockchain consensus model, designed for scalability, that is unique to the project. Scalability is incredibly important, and may be a major factor in the success of decentralized protocols, but the fact that the SAFE Network is not actually live means that this consensus model has not been sufficiently tested for fault tolerance. This presents an additional risk.

Despite these risks, SAFE Network’s promise of high scalability and a fully decentralized web ecosystem may appeal to some users. The SAFE Network also prioritizes privacy and security for individual users above almost everything else, which could allow it to carve out a market share by catering specifically to this niche.

Sia

Sia is another blockchain project offering decentralized storage, and the network is currently live and operational. Sia is interesting for its design features and its funding model. Each offers potential upsides and downsides.

The Sia team has been explicit about its preference for proof-of-work (PoW) blockchains (Link 1, Link 2), and has even created and sold its own ASICs specifically for Siacoin mining. It is the only one of these protocols that is specifically committed to this consensus model. Ethereum (and applications built on top of it) will transition to a proof-of-stake model, while some of the other decentralized cloud protocols utilize alternative models. Some users in the blockchain community have a hard preference for proof-of-work, and Sia can certainly cater to this niche.

Each time a user and a hosting provider enter into a contract on Sia, the user must put up an allowance (to pay for the hosting), and the hosting provider must put up a deposit (to ensure good behavior). Upon conclusion of a contract, 3.9% of both the allowance and the deposit is collected by the software and paid to holders of Siafunds, a secondary token of the protocol. Nebulous Labs, the company developing the protocol, holds ~90% of Siafunds.

This is certainly an interesting long-term funding model and an alternative to the “all-at-once” ICO model in vogue today; however, this feature may impose a structural cost on the system that makes it more expensive than competitors. File storage is likely to be a highly competitive market, driving down prices significantly (compared to current centralized options). Once several different decentralized cloud storage platforms have been deployed, these protocols will compete not just with centralized alternatives but also with one another. Sia levies their 3.9% fee on both the allowance and the deposit, but in most contracts both of these fees are paid by the user. Other protocols do not have this structural cost, and that may make them less expensive and more attractive to users in the long-term.

Finally, Sia faces a somewhat significant barrier to entry. Currently, one must purchase Bitcoin, use that to purchase Siacoins, and send the Siacoins to the Sia client software to begin using the network. For everyday users who do not already hold cryptocurrencies, this is a major roadblock. It also presents an issue for enterprise clients, since most businesses remain unwilling to hold or transact in cryptocurrencies for regulatory and financial risk reasons. To date, the Sia team has not prioritized design, accessibility, or usability, and has given no indications that this is a significant priority.

Swarm

Swarm is a file storage protocol that is built into the Ethereum Web3 stack. Swarm functions much like IPFS/Filecoin but has native integration with Ethereum. Some high-level differences between the two protocols have been outlined by the Swarm team. For all but the most technical of individuals, these differences are largely irrelevant. The Filecoin/IPFS project is further along and will likely launch before Swarm. Swarm’s advantage is its inherent integration with Ethereum, which is building a large and loyal following of developers. Swarm provides the storage layer that integrates with Ethereum’s computation layer and Whisper’s secure messaging layer.

Ethereum’s Mist browser recently integrated Swarm, making it much easier for regular Ethereum DApp users to interact with the protocol. This integration provides an early example of the kind of infrastructure-level advantages that Swarm might have in comparison to other protocols by virtue of being a native layer in the Ethereum stack. Being a built-in part of Mist instantly gives Swarm a huge audience and user base and will allow the protocol to more quickly achieve efficient scale.

Swarm only works directly with the Ethereum network, whereas Filecoin and IPFS could likely integrate with both Ethereum and other platforms. As alternative protocols like Tezos and EOS emerge, this feature may prove to be an advantage for Filecoin. What’s more, Swarm may not prove useful for a majority of users until the entire protocol has been developed (this includes both the storage layer and the marketplace layer). If Filecoin is first to market and can integrate well with Ethereum, Swarm is less likely to gain significant market share.

Decentralized Cloud Storage Market

The total market for cloud storage is large and continues to grow. Amazon Web Services, which includes Amazon’s cloud storage offerings, earned $4.1 billion in revenue in Q2 of 2017, implying a $16B annualized rate for both compute and storage offerings. Market research groups have estimated the future size of the cloud storage market: $74.94 billion by 2021 and $92.49 billion by 2022. All of the blockchain-based projects listed above, by contrast, have an implied value of less than $3 billion combined (a significant majority of which is Filecoin at $2B). Decentralized cloud storage options will not immediately disrupt existing models — the large corporate players that currently dominate the market offer services not available to users of decentralized options. Nevertheless, it is difficult to imagine decentralized cloud protocols not earning a significant share of this total market.

One factor not taken into account in these estimates of total market size, however, is the growth of decentralized storage networks. These blockchain-based networks will offer significantly cheaper storage, which should reduce the combined network values of the successful protocols of the industry. The proliferation of cheaper decentralized options may drive more storage, but that seems highly unlikely to fully mitigate the effects of a collapse in storage prices. Some estimates suggest that Filecoin could easily offer prices between $1 and $10 per TB per month or lower, depending on the number of times the user chooses to replicate the data and the number of users offering storage. Sia, which automatically replicates files, currently costs between $0.50 to $2 per TB per month. Neither of these protocols has reached critical mass or achieved true market equilibrium. We expect that in a few years time, prices will continue to decrease. None of the estimates available today about cloud storage account for a massive price collapse, and are therefore overly optimistic about growth projections.

As Joey Krug explains, “Amazon’s margin is Filecoin’s opportunity.” He outlines how the dynamic market pricing models offered by these protocols could allow blockchain-based storage providers to significantly undercut Amazon. Prices would continue to collapse as more storage providers entered the market. It’s rational to assume that many will since these protocols allow for users to monetize storage space that would otherwise sit idle.

Conclusion

The decentralized cloud storage market is unlikely to be a winner-take-all scenario. Filecoin may capture something like 85% of that market for decentralized storage, but that still leaves room for other protocols to cater to specific niches. Network effects are minimal beyond a certain level of scale. Unused hardware is already a sunk cost for most users, so there is no supply side “scale” that should lead to lower prices. Moreover, storage suppliers will gravitate to the market with the highest prices. If demand materially exceeds supply in any of these distributed storage markets, prices will increase, causing suppliers to shift to networks where they can earn more profit. Because these protocols are open and permissionless, 3rd parties will build utilities that monitor prices and automatically shift suppliers between networks to maximize profits. This will have the effect of equalizing prices across networks through negative feedback cycles. Analogous tools are available today for mining. It’s likely that prices will equalize across all of these platforms over time. The less-popular protocols won’t die off completely, but they will likely experience little price growth.

Filecoin is currently the project most likely to succeed, and we expect that it will come to own a significant share of the cloud storage market. Other protocols may offer better services for specific use cases, and will likely be competitive on price. The addition of decentralized protocols to the cloud storage market will likely cause prices to collapse; asset valuations in the space must take that into account. Other factors like token velocity, ease of use, and market timing and should also be considered.

We are excited about the possibilities offered by decentralized cloud protocols to reshape core parts of Internet infrastructure and application delivery, and we think they are one of the most interesting uses of blockchain technology. We look forward to watching the ecosystem evolve over time as these teams bring these technologies to market.