Disclaimer: This is not financial advice and is for educational purposes only.
The Arweave Protocol (via the $AR, its native token) currently has a market capitalization of $1.3B and appears undervalued based on its (1) healthy token economics which effectively captures network value, (2) rapidly growing cloud storage market, (3) technically more compelling value propositions than its decentralized peers and (4) Arweave currently being valued at about 0.4% of Filecoin on a fully diluted value basis.
Background
The Arweave protocol is built on a unique blockchain-like data structure called Blockweave, designed to provide permanent, decentralized, scalable and censorship-free on-chain data storage. The goal is to allow users to pay a single upfront cost and store data forever. The Arweave mainnet launched in June 2018 and differentiates itself from both legacy and decentralized file storage solutions with permanent data storage. The growth and size of the Blockweave has accelerated in Q1 2021 and currently sits at ~8.5TB in total with 151 nodes.
Arweave has a slate of extremely high-profile investors including: A16Z, Coinbase Ventures, Union Square Ventures, Multicoin Capital and Arrington XRP Capital. The price of the $AR has seen a considerable re-rating in Q1 2021, seeing a 12x increase YTD.
The Value Proposition
1. Permanent, censorship-resistant and immutable data storage
To understand the unique value proposition and vision for the protocol it helps to understand the motivation of its original founders. Permanent, censorship-resistant and immutable data storage is certainly a compelling solution, but to what problem? The founder, Sam Williams, states that both in the ancient world and in modern history we’ve seen the destruction, alteration and loss of vital information from library fires to malicious book burning activities by authoritarian states. Modern society has witnessed a plethora of examples of corporations or powerful entities manipulating and deleting information from the internet, a place where most assume readily accessible information will exist forever. In fact, upwards of 95% of all information on the web has been and is lost every 20 years1. Ultimately, Arweave aims to prevent an Orwellian ‘memory hole’ from occurring.
The same unique properties of Arweave align with many of the goals of other blockchains and their decentralized applications. For instance, DeFi applications that host front end interfaces on centralized servers are at risk of censorship by government authorities. Although those same governments won’t be able to force closure of the Uniswap DEX protocol itself, it can attempt to takeover the web-app frontend which would be how most users interact with the protocol. Arweave provides significant steps towards full decentralization of crypto protocols, free from censorship and stringent government regulations.
2. Pay once, store forever
Almost all the pages on the web today are housed within centralized data centers, each controlled by one organization. Even without malicious intent, storing information incurs costs which if not maintained can lead to whole websites simply disappearing. As such, Arweave differentiates itself from the likes of other decentralized storage solutions, Siacoin and Filecoin, which will delete data if payments are missed. With Arweave, a single payment is made up front and the data is stored forever, not even the owner or the protocol can technically delete this data once it is on the blockchain.
This specific solution is no more significant than for NFTs, an emerging market that is growing at a rapid pace and gaining major mainstream adoption. ERC721 NFTs have a very specific and major flaw where the contract itself only stores a link to the metadata which itself is most commonly stored on a centralized server which can be lost if storage upkeep costs are not maintained or even changed by the owner. That metadata then links to the location where the data itself (a picture, GIF or video for example) is stored, again a location that can be manipulated or lost. We can see examples of this in the tweets below, where the original creator and owner of the NFT has either deleted or changed the data after selling it.
Arweave solves this problem in two ways: (1) embed the transaction ID from Arweave that contains the data asset into the ETH blockchain or (2) create atomic NFTs, where the contract, metadata and data asset are all held permanently in a single address on Blockweave
3. The Arweave ecosystem
The base protocol is one solution, but the Blockweave provides an application layer for an entire ecosystem called the Permaweb. The Permaweb strives to store parts of the internet in perpetuity and being built on the HTTP protocol, the permaweb is accessible via any modern web browser. Today, the permaweb itself hosts hundreds of dApps that aim to leverage the unique properties of the Blockweave that don’t answer to traditional centralized entities like IFPS, web infrastructure, data servers and nodes.
The Blockweave also boasts scalability features that other PoW chains cannot, for instance applications as large as Youtube can be built on top of the Blockweave. Being implemented by popular languages such as HTML and Javascript immediately expands the developer resource pool. Thus, the potential for Arweave goes far beyond a decentralized storage tool but an entirely new ecosystem of permanent applications . Further details on the important dApps currently being built on the Blockweave can be found in the Appendix.
The Protocol Mechanism
Arweave uses a PoW-like consensus mechanism to achieve immutable decentralization, however traditional PoW networks require full node consensus and store all blocks for verification. This is a significant limitation in scaling the network as the chain grows larger, increasingly larger resources are required to maintain the chain as a full node. This is a significantly greater problem for Arweave which has an exponential growth rate in the Blockweave size. Four main technological functions exist to solve this problem.
1. Blockweave and PoA
The Blockweave is powered by the PoA (Proof-of-Access) consensus within which no individual node needs to store the entire blockchain. In the Blockweave data structure, each block is linked to two prior blocks: the previous block in the ‘chain’ (as per traditional blockchain protocols) and a block from a previous history of the blockchain. As a result, the Blockweave is not strictly a ‘chain’, hence the name. Unlike PoW blockchains, miners in the Arweave network get rewarded for not only for completing proof of work but are also required to replicate historic data. The block reward mechanism is also such that all data is replicated by multiple nodes as storing ‘rarer’ data provides miners with higher rewards.
This mechanism has two distinct advantages: (1) offsets the value that is normally wasted in blockchain networks with useful and energy efficient storage of data and (2) offers further decentralization by lowering barriers to entry as miners do not need to scale their storage in line with the size of the Blockweave.
2. Wildfire
Wildfire is a self-organizing network topology system that incentivizes miners to increase their network ‘rank’ in order to share blocks within the network and promptly respond to requests for information.
3. Blockshadows
In order to transact essentially unlimited size blocks Arweave uses a system that decouples transaction distribution from that of block distribution in the network. This allows only a ‘shadow’ of the block to be moved around the system (the instructions necessary to rebuild the block from its constituent transactions), rather than the full block itself. This means that the information required to process large blocks can be distributed across the network in just a few kilobytes.
4. SPoRA (Succinct Proofs of Random Access)
A limitation of the PoA consensus is that miners could pool storage in remote, centralized servers to reduce storage costs, defeating the original intent and reversing some of the properties of the protocol. Arweave recently developed the SPoRA consensus mechanism, an enhancement of PoA. This mechanism incentivizes miners to store their data closer to the computation hardware and shift away from using centralized data servers such as AWS.
Permanent Storage Economics
The basis for how Arweave is able to provide a pay once, store forever model is in declining storage costs of which has seen an average annual decline of 30% over the last 50 years.
As technological advancements continue, it can be safely assumed that this rate of decline in storage costs will continue, if not accelerate. However, even without such assumptions, Arweave’s pricing model assumes a storage cost decline at an average annual rate of 0.5% which provides significant safety margin indefinitely. If the rate of decline were to somehow fall below 0.5%, the initial payment would still theoretically cover 200 years of storage at a minimum. The founder, Sam Williams, states that if this worst-case scenario were to occur ‘something seriously wrong would have happened to humanity’.
Arweave’s block reward model is the key to providing permanent storage with one upfront payment. The transaction fee to store data is broken up into two portions, 14% of the fee is provided as an immediate reward to the miner whereas the remaining 86% is sent to an endowment pool. The tokens in the endowment pool are not expected to be released unless block rewards are not enough to compensate miners to sufficiently replicate data on the Blockweave. As block rewards are expected to shrink over time, it is expected that miners will be sufficiently compensated via transaction fees and the growing endowment pool (currently sitting at ~$500k).
All utility in the protocol is denominated in $AR, Arweave’s native token. In order to stabilize storage costs in fiat terms Arweave implements a mechanism to dynamically adjust the transaction fee price ($AR/megabyte) rate such that miners always remain profitable in the face of a volatile $AR price. For example, as the price of $AR increases, the profitability of mining also increases. Higher mining profits brings more miners, raising the replication rate, the effective hashing rate, and the difficulty of mining. Higher difficulty lowers the AR per MB cost of storage, thus rebalancing the fiat price of storage and vice versa.
Token Economics
55M $AR were created in the genesis block at network launch on June 2018 with a further 11M being introduced into circulation as block mining rewards for a total capped supply of 66M. The token allocation and vesting schedule details are shown in Table 1.
The token inflation rate is relatively healthy with the only major vesting tokens being 3M per year until 2023, about 5% of the total supply each year. As mentioned earlier, 83% of each transaction goes into the endowment pool which is slowly paid out to miners over time. As cost of storage continues to decrease far beyond Arweave’s 0.5% assumption, the rate at which the endowment pool is drained will also significantly decrease. Therefore, as demand for permanent storage increases, $AR will be purchased and taken out of circulation. This economic model serves as an effective value capture for the $AR token, similar to the buy-back model proposed by ETH’s EIP-1559.
Cloud Data Storage Market Dynamics
Data is the new oil and as it grows at a rapid pace so does the demand for storage of that data. Over the last decade the cloud storage market has grown to become behemoths of the tech industry, estimated to further grow to $173B by 2025 at a CAGR of 22%2.
Filecoin, Sia and Storj are all decentralized storage network solutions, competing in a similar space to Arweave. However, the major difference is these solutions attempt to compete with legacy cloud storage providers on cost and/ or performance, whereas Arweave’s value proposition is permanence and not either of the former.
The argument for these decentralized alternatives is based on a claim that lower costs are possible because they are utilizing otherwise idle storage space. They also provide a higher degree of censorship resistance than legacy cloud storage providers. This logic seems plausible in theory but in practice Filecoin and the like are subsidizing costs with token issuance/ inflation which can’t last indefinitely. Legacy cloud storage providers such as AWS, Google Cloud and Alibaba Cloud have become giants in the tech industry and have aggressively competed on and subsidized costs. These legacy businesses have a history of vertical integrations, and optimizing for efficiency to radically slash costs as seen in Fig. 5 with AWS’ historical data storage pricing decline over time.
With this in mind, competing with legacy players in this space will be extremely difficult and despite the claim ‘idle storage space’, personal computers will not be able to participate in Filecoin’s network (the recommended hardware is 128-256 GB of RAM and a 24 Core CPU). Therefore, it is highly unlikely that relatively small mining facilities will be able to out-compete some of the largest data centers in the world on higher timeframes.
Competition Comparisons
Table 2 below shows comparisons across the legacy and decentralized cloud storage market with valuations, used storage and storage pricing metrics. To store a file on Arweave, a user creates a transaction that pays some amount of $AR tokens as a network fee (currently ~$10/GB) to store data forever. In comparison AWS charges ~$0.26/GB per year whilst Siacoin and Storj are about 40-50% cheaper. This can imply that Arweave’s data storage costs are almost 39x and 67x higher than AWS and Siacoin respectively.
*Filecoin’s pricing model is an extreme outlier here, but as mentioned above costs are currently being heavily subsidized via token inflation.
**200 year pricing considers 0.5% annual average cost decline
However, this is an arbitrary comparison with Arweave due to its novel value proposition. Therefore, another comparison has been made on extrapolated pricing of each competitor at the minimum of 200 years of storage (using Arweave’s 0.5% annual average cost decline). In such a scenario we can see that Arweave’s pricing model seems more reasonable, especially considering the ambition is storage forever, not just 200 years. A 0.5% annual average cost decline may seem disingenuous but Arweave would also benefit from this large margin as this mechanism helps to accrue value to the $AR token as mentioned in the Token Economics section.
Being a zero to one change and completely novel solution, it’s difficult to quantify how large the market for permanent storage is and will be. However, an arguably more compelling and attractive set of value propositions have been identified compared to that of its decentralized peers. Despite this, on a fully diluted basis Arweave is valued at about 0.4% of its most well-known competitor, Filecoin. As such Arweave appears undervalued particularly based on the two major differentiating factors:
Pay once, store forever – A novel solution that doesn’t attempt to compete with legacy cloud storage providers which may not be feasible in the long run
Permanent data ecosystem – The potential of building out an entire ecosystem of new applications on the novel idea of permanent data is a feature that doesn’t exist on any other competing project
Conclusion
Arweave is very interesting, serving an entirely new market, based on a completely unique blockchain technology and one that aims to build an entire ecosystem of unlocking further unique applications for its blockchain. I would compare it to the early days of Ethereum, grand ambitions but difficult to comprehend the market, its size and potential for penetration. Nor would early users and investors alike have been able to comprehend the full magnitude of the ecosystem that is currently thriving on Ethereum now.
Appendix - Arweave Ecosystem
Arweave calls the permanent web applications built on its blockchain, profit sharing applications because they have the same attributes as Arweave itself: they are permanent, based around a token (Profit Sharing Tokens or PSTs), governed by the community, and have economic incentives that are in line with the developers and users. PSTs are very similar to the ERC-720 tokens in the Ethereum blockchain.
Ardrive - Permanent Dropbox
Ardrive offers permanent, secure and always-on data storage for a single upfront cost with enterprise-grade security and end-to-end encryption. Ardrive is also one of the first Arweave projects looking to develop easy fiat onramps for the $AR token and is a key project for the ecosystem.
Limestone - Data Ecosystem for Decentralized Finance
Financial data is the backbone of DeFi, enabling efficient market making of assets and collateral management. Without reliable price feeds, oracles, it would be impossible to create decentralized exchanges and instruments like derivatives, options and futures. Chainlink is the market leader for decentralized price oracles but faces high costs for storing pricing data on-chain (paying about ~$100k for ETH storage fees). This model is heavily subsidized and may not be sustainable especially as more financial products and instruments enter the market.
Argo - One-Click Permaweb
Argo offers the ability to deploy a website/ frontend app on the Blockweave in a seamless manner with just one click. Argo itself is a decentralized deployment and management platform that brings Arweave’s properties such as: one time fee, 100% uptime, permanent and immutable, decentralized storage and censorship-resistance which are all critical to any crypto application. The native $ARGO token is not only used for platform transaction fees and governance but also provides utility when staked in the form of discounts and certain VIP features.
Verto - Decentralized Exchange
Verto is a decentralized exchange built on Blockweave meant for the trading of Arweave ecosystem PSTs such as the $ARDRIVE and $ARGO tokens. The native Verto token $VRT is used both for governance and accrue value by earning a volume-weighted index of all PSTs being traded on the exchange (0.5% of all PST transactions made on the exchange are sent to $VRT holders).
Gitopia - Open-Source Code Repository
Gitopia offers decentralized and permanent code repositories, an immutable Github-style platform. Open-source, source code that is made freely available for possible modification and redistribution, has become a major strategy for independent developers and large corporations alike to share projects for widespread use and adoption. Github being the primary source for open-source software has a flaw where the code is exposed to the risks associated with centralized datacenters. Github itself, understanding this flaw started the Arctic Code Vault, capturing a snapshot of every active public repository and storing it in a decommissioned coal mine in Norway. For Github to do this proves the extreme criticality and need for a permanent, decentralized and immutable code repository.
Sarcophagus - Dead Man’s Switch
Sarcophagus is a dead man’s switch and smart contracting network hosted on Arweave, allowing users to create a general purpose, self-sovereign, digital dead man’s switch. Arweave’s properties are critical in ensuring the integrity of a dead man’s switch and has the following use-cases: will/ trust, password recovery, credential passdown, political activism, key material backup and emergency communication.
Weve - Permanent & Private E-mail
Weve is an opensource, decentralized email platform with an immutable privacy policy, since the policy itself is built into the Blockweave it cannot be changed.
fQRweave - Supply Chain Management
fQRweave is an anti-counterfeiting solution for the commonly used QR code standard. A current flaw with the QR code is that they can be replicated or faked, for example leading consumers to a fake website. fQRweave solves this as each one is unique and immutable because it is actually the ID of an Arweave data transaction. A real-life example use-case would be supermarket product codes, where retailer of a product holding an fQRweave cannot change the expiry date, discount offers, market price or country of origin. The team recently partnered with mask and sanitizer manufacturer, making progress in retail adoption of the new technology.
Mirror - Writing and Publishing Platform
Mirror is a writing and publishing platform geared towards the unique needs of authors themselves. Decentralized and user-owned, Mirror utilizes Arweave’s profit sharing community technology to ensure that writers are rewarded based on the content they create.
https://ardrive.io/arweave-vs-filecoin/
https://www.marketsandmarkets.com/PressReleases/cloud-storage.asp