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# FIP Issue 123 | Qualitative Analysis & CLD

> Economic Dynamics of Inner and Extra Protocol Negatively Priced Storage Deals

This document aggregates ideas and insights related to the economic implications of [FIP Issue 123](https://github.com/filecoin-project/FIPs/issues/123). The goal is to explore the potential differences between negatively priced deals (NPDs) inside or outside of the Filecoin protocol (vs exploring the dynamics of NPDs in general). This is a high level qualitative analysis to inform discussion. In the future, with the release of the Filecoin [digital twin](https://medium.com/block-science/introducing-complex-adaptive-dynamics-computer-aided-design-cadcad-38b63b541eb8), it will be easier to quickly develop a more data driven understanding of FIP proposals like this one.

## FIP Summary

> *The following summary is copied directly from the FIP Issue. More details and discussion can be found on the [FIP 123 GitHub Issue](https://github.com/filecoin-project/FIPs/issues/123).*
>
The Mission of Filecoin is to create a decentralized, efficient, and robust foundation for humanity’s information. As such, one of the core goals of Filecoin is to create strong incentives for capacity committed to the network to be utilized in storage deals for valuable data. To achieve that, Filecoin clients and storage providers should be able to propose and accept negatively priced deals - aka deals where the storage provider pays the client to store their Filecoin+ data.

Right now, demand from storage providers for verified storage deals (made by clients with FIL+ datacap) is very high, since it confers a 10x multiple in block rewards proportional to the verified deal size (which helps storage providers quickly achieve and maximize profitability). However, access to these verified deals is constrained by the number of new storage clients onboarding data onto the network. To compete for this high-value resource, miners should be able to offer not just FREE storage and retrieval for verified deals, but NEGATIVELY PRICED storage/retrieval deals.

Negatively priced deals (that share the 10x multiplier returns from FIL+ data with the storage client) will help attract new high-value clients to the Filecoin market, thereby increasing the network's utility and the overall number of FIL+ deals available. As @jbenet mentioned in his EthCC talk, this is a super exciting opportunity that is uniquely available in Filecoin. Instead of having to build these auction/incentive systems outside the deal-making structures of Filecoin, we should simply encode the ability for storage providers to set a negative ask price.

## Current Dynamics


> *Current Filecoin network dynamics wrt negatively priced storage deals.*

- Filecoin storage miners have invested a lot of resources in the Filecoin network: capital to purchase storage equipment, time to develop expertise to understand the network, and FIL to participate in the network.
- There's an abundance of committed capacity, but not very many storage deals. Supply >> demand.
- Some clients are already creating negatively priced deals (NPDs) outside of the Filecoin protocol. This means miners are paying clients, in fiat (not FIL), for the privilege of storing their data on the Filecoin Network to earn FIL subsidies. This has the effect of moving economic activity outside of the Filecoin protocol, making the ecosystem activity/dynamics more opaque, and creating counterparty risk for users due to the use of subjective off-chain contracts rather than deterministic on-chain contracts built into the protocol.
- There have been discussions of negatively priced storage deals in various channels such as the Filecoin Slack as well as past community calls. This would allow negatively priced storage deal activity to move on-chain inside the Filecoin network and protocol.
- Regardless of whether FIP 123 is enacted or not, the Filecoin network is transitioning from growing Committed Capacity (CC) to growing Verified Deals (VD). Currently demand for VDs is so high that miners are going outside of the protocol to create negatively priced deals (NPDs). This makes the supply/demand dynamics of the deal marketplace crucial to the success of the Filecoin network.

## Potential Future Dynamics


> *Potential Filecoin network dynamics wrt negative storage deals if FIP 123 is approved.*

### Demand for Storage Services

Currently some miners and clients are engaging in NPDs outside of the Filecoin protocol. Were the protocol to natively support NPDs, the amount of clients and miners who engage in NPDs could increase. This might be due to the decreased counterparty risk of protocol coordinated deals, the ease of discovering and engaging in NPDs, or simply awareness that it's an option.

Verified deal subsidies support miner operations, however, with a free floating market rate for storage this subsidy could be channeled to clients as miners pay them for deals. This would allow the market to determine where the subsidy is most needed in order to promote network growth and usage. With FIP 123 NPDs would be paid for in FIP, whereas currently it's unknown what currencies miners are using outside the protocol for NPDs.

If NPDs were formerly adopted by the Filecoin protocol it would remain to be seen if there would be sustained demand for NPDs, or if the market would correct back to positively priced deals (PPDs) due to increased demand. There is a chance that NPDs could act as a market based "sale" dynamic where Filecoin storage services are offered at a discount when demand is low, but then the discount drives demand back to PPDs. If this happened within the protocol it would be much easier to measure as a signal wrt network health.

Negative storage prices could mitigate the perceived risk of storing large amounts of deals, especially if the client has scarce resources. Because IPFS and Filecoin are new, potential clients might be unsure of the utility and reliability of the network. Validating utility/reliability could unlock latent demand. Negatively priced deals (NPDs) could make it easier for potential clients to try the network, then upscale their usage. This could apply to public datasets, for example Wikipedia.

### Supply of Storage Services

Artificially setting constraints on storage prices (>= 0) does not allow the market to express preferences via the price signal. As a result, clients who would happily offer to store data on the network at a negative price are excluded from participating in the protocol. With limited demand for services miners might have an incentive to have less efficient operations in terms of computational infra (because no one's using the infra). If inner-protocol NPDs increase demand for storage services, that might incentivize miners to improve operations and/or increase supply to get more deals.

If network power and VD grows over time, the VDS FIL reward per sector will go down. If at the same time the FIL price also increases the fiat value of the reward per deal might be the same over time even if the FIL reward per sector/deal is lower. But if the FIL price is uncorrelated with storage/deal volume, then miners might agree to NPDs now that are unprofitable in the future. If NPDs are enforced by the protocol and miners cannot meet the deal requirements they will be terminated deterministically (bad for miners and the clients they store data for). If NPDs are outside the protocol miners might have more flexibility to negotiate prices with clients, defer payment, etc.. allowing them to maintain operations in market downturns (better for miners and clients). So while inner-protocol NPDs could reduce short-term client risk and transaction costs, they could also increase long-term risks for miners - and if miners cease operations that would impact the clients whom they are storing data for. A way to mitigate this might be to restrict inner-protocol NPDs to short time horizons. Overall, these dynamics around NPDs are important because if NPDs really accelerate VD adoption, then the block reward per VD sector should fall quickly which could make NPDs unprofitable. *All that being said, miners could also source loans outside of the protocol to offset volatility (network power and FIL price) regardless of if NPDs are inside or outside of the protocol.*

### Circulating FIL Supply

Due to the mechanics of the market actor, miners would likely have to lock FIL into VDs to be released to the client [over the lifetime of the deal](https://spec.filecoin.io/#section-systems.filecoin_markets.onchain_storage_market.storage_deal_flow.deal-payment-and-slashing) based on the [CronTick](https://github.com/filecoin-project/specs-actors/blob/master/actors/builtin/market/market_actor.go#L502) function. We say *likely* here because the exact implementation of FIP 123 has not yet been specified. At the moment both clients and miners deposit FIL into the [StorageMarket](https://spec.filecoin.io/#section-systems.filecoin_markets.onchain_storage_market.storage_market_actor) at the beginning of a deal (see step 1. [here](https://spec.filecoin.io/#section-systems.filecoin_markets.onchain_storage_market.storage_deal_flow.add-storage-deal-and-power)). Currently NPDs happen outside of the protocol and are not released over the lifetime of the deal via CronTick. Due to the fact that extra-protocol NPDs are outside of the protocol we do not have visibility into their structure. They could be paid out over time, all at once, or via any other schedule. Were NPDs to happen within the protocol, these dynamics would become apparent and the FIL token flows would be more predictable.
- *Note: It's unclear how a client would technically supply negative FIL to a deal contract. In order to proceed with this analysis we assume that any implementation of FIP 123 would allow the miner to supply the FIL needed for an NPD.*

If inner-protocol NPDs increase demand, and thus supply and network usage, that could lead to more FIL being burned via 1559 gas dynamics. This could help offset the inflation of circulating supply that comes from VD subsidies.

As the Filecoin network distributes verified deal subsidies (VDS) to miners, those miners might need to sell FIL to pay for operations. Also, end users who receive FIL for NPDs might sell their tokens, esp if they are a business that has their own operating expenses or doesn't want volatile assets on their balance sheet. With inner-protocol NPDs FIL would (probably) be locked and distributed according to the StorageMarket, making the flow of FIL steady and predictable. With extra-protocol NPDs, however, it's unknown if miners would be pricing NPDs in FIL or fiat, or paying for deals upfront or over time.

## Further Research


This high level qualitative analysis is not a complete view of the Filecoin network. It is a perspective based around how [FIP 123](https://github.com/filecoin-project/FIPs/issues/123) (negatively priced storage deals within the Filecoin protocol) might impact key metrics such as end user demand for storage services (clients), storage provider profitability (miners), and value flows (FIL token price).

Filecoin is a decentralized network with a diverse set of stakeholders. Different people may have differing interests, goals, and time preferences. Depending on your perspective, enabling negatively priced storage deals could be good or bad. While we cannot advocate for a particular perspective, we hope this high level qualitative analysis provides some insights wrt the dynamics at play.

For more information on some of the dynamics that affect Filecoin network economics we recommend:
- The Baseline Minting series ([part 1](https://medium.com/block-science/sustainability-goal-achieved-filecoin-network-crosses-baseline-target-cec13a3ed8f) and [part 2](https://medium.com/block-science/baseline-minting-incentives-743b229b9b80)) by [BlockScience](https://block.science/).
- The [Economics of Providing Web3 Storage on Filecoin](https://www.starboard.ventures/post/economics-of-providing-web3-storage-on-filecoin) by [Starboard](https://www.starboard.ventures/).

To further explore the economic dynamics of Filecoin wrt FIP 123 you can interact with and [fork](https://docs.kumu.io/guides/forking.html) the [causal loop diagram](https://kumu.io/burrrata/fip-123#fip-123) presented in this doc.