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The Utility Token Puzzle

I've written about IPFS twice: in 2017 and 2019. If I were sticking to a biyearly schedule, this would be my time to try it again. After all, one of the key pieces of Protocol Labs infrastructure, Filecoin, launched late last year. The tokens that run Filecoin are now worth billions of dollars.

I looked at the state of Filecoin from the perspective of using it, and I'm sure there's a funny post to be written about someone actually trying to do that - use it - maybe with a five-hour YouTube walkthrough. But I have a deeper question.

How is any of this supposed to work?

I imagine that Filecoin, and other "utility token" systems, work like this:

So basically:

  • Miners pay for hardware, network, and electricity. For Filecoin, they buy big hard drives, lots of electricity, lots of network access. For Helium, they buy a LoRaWAN antenna. The idea that folks just "use whatever hardware they have" usually turns out to be false. Spare hardware is probably broken, for mining anything people generally want higher-quality or higher-capacity hardware anyway.
  • Users pay tokens for the service

The idea with these services is that they'll compete with things like Amazon S3 or Backblaze B2 or whatever, and by being "hypercompetitive" they'll be cheaper and better.


My question is: how does any of this work?

Individual "miners" are not going to have the economy of scale of Amazon or any other FAANG company, so the only way they're going to get cheaper electricity or network is by stealing or using coal or something.

Decentralized systems are generally guaranteed to be less efficient than non-decentralized systems. You aren't going to just trust that it's an Amazon server in the Amazon network, there'll be consensus algorithms and algorithms to confirm that the information is intact and a general replacement of trust with computers that requires computers and costs time and money.

So users are going to pay the network, and pay for consensus, and then eventually some cut of that goes to the miners, and then the promise is that the miners are going to accept some sub-Amazon level of real-world money to do that work.

So:

  • Why would miners agree to accept so little?
  • If the pitch was actually "compete with Amazon for a lower price", would anyone actually take it?
  • The breakeven point of a LoRaWAN antenna or a massive pile of hard disks is a lot harder to hit if you're selling storage for $0.023/GB/Month than mining crypto tokens on a mainnet.

So:

  1. It's a gold rush for suppliers, a chance to make a ton of money, to the point that Helium's antennas have an aftermarket and Filecoin miners are buying up hard disks.
  2. Simultaneously, users are promised a service cheaper than commercial alternatives.

Money, if this was a real system, would be flowing from users to suppliers.

If it's cheap for users, suppliers wouldn't be making boatloads of cash (tokens, whatever) and instead would be grinding along with low margins, comparable to commercial entities but without the benefits of scale.


So as far as I can see, utility token systems have a computational disadvantage (untrusted systems, decentralization), and practical operational disadvantages (lower economies of scale). So even if hypercompetitive markets drive the price of Filecoin down to its theoretical minimum, its minimum is higher than Amazon's or Microsoft's, right? I can't see a reason for why they would be cheap.

What am I missing? Can someone give an example of the unit economics of one of these utility token systems and how they could possibly work? None of this makes sense.

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