FIL

1. What is Filecoin and the FIL Token?

Filecoin is a decentralized storage network based on the Interplanetary File Storage (IPFS) protocol. It is designed to rent unused storage globally within a decentralized and efficient storage market powered by blockchain. As it is a peer-to-peer network, anyone can participate in this market as a provider or a client, with prices determined by supply and demand. The objective is to ensure file storage is permanent and distributed across the web. This can be contrasted with traditional cloud services such Amazon Web Services or Google Cloud, where data are stored in servers owned by these private corporations. Data in Filecoin is stored in peers’ hardware distributed across the globe and relying on blockchain.

In March 2023, Filecoin launched the Filecoin Virtual Machine (FVM). FVM is a runtime environment enabling users to deploy their own smart contracts on the Filecoin blockchain, which turned the network from a storage network to a programmable blockchain, enabling various applications such as a full DeFi ecosystem, NFTs, DAOs and tokenized data sets, but with decentralized storage. With this step, DeFi applications, such as GLIF and SFT Protocol, rapidly gained momentum on Filecoin.

The network was developed by Protocol Labs, which was co-founded by Juan Benet, and launched in 2020.

The Filecoin technology makes use of a utility token called FIL. The token serves as a medium of exchange and a governance token on the platform. The token’s market cap recently surged to $2 billion, ranking no. 64 on Coingecko as of date.

2. How Does Filecoin Work?

When a client wants to store data on Filecoin, they will select “storage miners” on the network and pay them FIL to host their files. Miners are the computers responsible for storing users’ files. Any user can become a storage miner by simply connecting a hard disk to the Filecoin network and offering disk-space.

Miners’ pay is determined by an open market where users make bids and offer asks, and miners compete with each other to offer the lowest price for storage. Miners receive the storage fees from clients plus a reward from the network in the form of FIL tokens for block production. The more reliable and useful storage a miner proves to provide, the higher their probability of winning block production rights in each epoch.

There are two types of proofs on Filecoin: proof of replication (PoRep) and proof of spacetime (PoST).

PoRep means to verify that a miner has physically stored the data and held the number of copies they claim. When the Storage Miner receives the client’s data, they run it through the PoRep process, which transforms the data into a sealed sector (a cryptographic commitment), then they submit the PoRep on-chain to show they’ve sealed it and stored it. This type of proof is submitted only once per deal. After that, they submit the PoST. This type shows that a miner has been continuously storing the data over an agreed period of time. These proofs are posted on-chain and checked by the Filecoin network.

Another category of miners is known as Retrieval Miners. Their role is to retrieve data and to perform services that speed up the transmission of data upon clients’ request, and they are paid for that.

3. Use Cases of Filecoin

As outlined above, Filecoin’s main use case is decentralized storage. This encompasses a wide array of data types, including scientific research, geographical data, encyclopedias, financial data, climate data and digital libraries. The network also provides storage solutions for DApps requiring decentralized data storage. The network is not only for institutional data, but also allows individuals to store their personal data.

The introduction of FVM enabled additional use cases. These include, but are not limited to, tokenized data sets, trustless reputation systems, NFTs, storage bounties and auctions, Layer 2 bridges, futures and derivatives, and conditional leasing. DeFi has gained an increasingly significant weight in Filecoin use cases, with TVL locked surpassing 60 million FIL.

4. Use Cases of FIL Token

FIL is the native token on Filecoin. It serves as:

• A method of payment for transaction on the platform. Storage and retrieval fees are paid in FIL.
• A method for rewards. Storage miners and retrieval miners are rewarded with FIL for their honest and sustained participation in the network.
• Collateral by Miners. For the network to ensure good behavior of miners (storing the data for the promised duration, remaining online and accessible, not tampering with or delete the data), storage miners must lock FIL as collateral before accepting a storage deal to ensure they store data reliably.

5. Shariah Screening

In this section, we will highlight Shariah’s stance on some aspects of the Filecoin blockchain and subsequently draw Shariah’s opinion about the exchange and use of Filecoin token. FIL’s Shariah compliance will depend on assessing the following elements:

• The project
• The legitimacy
• Underlying relationships
• Is FIL token a currency?
• Use cases

• The project

The platform aims at providing a decentralized and efficient storage market. This goal per se does not conflict with the Shariah objectives and principles and adds value to the Web3 world.

• The legitimacy

Filecoin website and blog provide adequate information about the protocol and the underlying mechanisms. According to Certik Skynet, the platform Skynet score as of date is 86.3, ranking no. 331, with an A rating. However, the platform’s code security score amounts to only 57.0, mainly due to the lack of audit records on Certik’s Skynet platform. Protocol Labs have however conducted external third-party security audits by reputable firms (e.g., Trail of Bits, Least Authority and Zondax), which all undertook auditing of various components of the network, with no audit covering the entire codebase to the best of our knowledge. We generally consider the platform at acceptable levels of legitimacy.

• Underlying relationships
  • Relationship between Filecoin and Miners

Filecoin allows Storage Miners to participate in the network, and for that, they must pay gas fees. From a Shariah perspective, this is an Ijara contract where Miners are using some of the network’s utilities and services and pay the network some fees in return, which constitute a portion of their acquired fees. This is valid from a Shariah standpoint, provided that the data stored is not related to a haram activity such as data for gambling or prohibited entertainment for example. AAOIFI Shariah Standard no. 9 on Ijara states the following:

“An Ijarah contract may be executed for a house or a chattel, even with a non-Muslim, if the use to be made of it is permissible, such as a house for residential purposes, a car for transport, or a computer to store data, unless the lessor knows in advance, or has reason to presume, that the use of the asset to be leased will be for an impermissible purpose”.

Besides, making the Ijara rental a portion of the beneficiary’s earnings is valid as per an opinion of Imam Ahmed Ibn Hanbal.

In addition, Filecoin mints new FIL tokens as block rewards and gives them to miners. This is considered as a Ju’ala contract where a “reward” is given to whoever makes a certain achievement, with no prior determination of those who will perform it.

• • Relationship between Clients and Miners

Clients who want to store their data submit their request and offer their bid on the network then select the most suitable Storage Miner. The relationship between the two parties is also an Ijara contract, where the Miner offers his disk space in exchange for a pre-determined fee. This is valid from a Shariah standpoint provided that the storage is not done for a haram activity data.

• Rewards

There are two types of rewards given to Miners:

• Transaction fees: these are paid by clients in return for data storage.
• Rewards by the network in return for producing blocks and executing smart contracts.

Both types are permissible with the condition that they do not involve storing data related to a haram activity.

• Is FIL token a currency?

Since FIL token is considered as a medium of exchange on the Filecoin blockchain, it is considered as a currency within that ecosystem. This ruling is based on the force of Particular Custom العرف الخاص in Shariah. This implies that it is subject to the rules of currencies in Shariah, the most important of which is spot delivery in case of exchange with another currency.

• Use cases

The Shariah status of the network’s use cases is important in determining the Shariah compliance of using and exchanging FIL token. As outlined in section 3, Filecoin has a versatile array of uses, with the most important one being decentralized storage. This use case is generally deemed permissible, provided the data stored is not related to a haram activity. There is so far no indication that haram activities dominate the storage market.

Other use cases have been enabled by the network’s FVM and they include DeFi, DAOs, NFTs and other uses. Although some of these components are Shariah non-compliant, there is still no evidence that they represent a majority of the use cases.

Accordingly, we approve using FIL token and exchanging it, unless one knows that the token will be used in a specific haram activity. This opinion is based on the Shariah rule that the default ruling in things is permissibility الأصل في الأشياء الإباحة and the Shariah Rule of Likelihood قاعدة الظن الغالب.

Conclusion of Shariah Opinion

The FIL token on the Filecoin platform has been deemed compliant with Shariah principles based on a comprehensive analysis. This decision considers the Filecoin platform’s purposes, operational framework and use cases. Filecoin is an open blockchain network that provides a decentralized data storage market. The Filecoin Virtual Machine (FVM) enables users to deploy their own smart contracts on the Filecoin blockchain, which turned the network from a storage network to a programmable blockchain, enabling various applications. The FIL token serves as the utility token of the platform and can be used for paying gas fees and rewards.

The analysis highlights the acceptability of using FIL for its specified use cases as well as trading it under spot sale schemes. However, the analysis emphasizes that some use cases of the platform are prohibited such as DeFi apps. Therefore, FIL holders should be careful not to use the token in supporting a specific prohibited use case.