This is the third post in our research series. In this series, we publish data-driven analysis on specific blockchains, dapps, and market segments. Let’s dig in!
Topic: Arweave, a decentralized blockchain for permanent file storage.
Arweave promises to store immutable data indefinitely for a low cost using a decentralized blockchain. Permaweb is Arweave’s user-facing layer that enables Arweave’s data and decentralized applications (dapps) to be accessed using a normal web browser. In this article, we will provide a brief overview of Arweave and take a closer look at its historical performance using Token Terminal’s data.
Protocol overview
Arweave is a decentralized data storage network built on a blockchain. It connects people and organizations who want to permanently store their data with node operators who have the necessary computing and storage resources to maintain the network. By storing data across hundreds or thousands of servers, it can become more robust than centralized data storage providers.
To store data on Arweave, users pay a single fee that Arweave has estimated to be high enough to cover the costs of storing the data forever. Their calculations are based on the expected cost of storing data, which is becoming cheaper every year. Currently, the cost of storing 1 GB of data on Arweave is slightly below 10 USD. The storage fees are split between the block validators (i.e., miners) and the Arweave endowment that will use its funds to pay for the storage costs in the long term.
Arweave has developed a unique blockchain that they call the “blockweave”. It is based on the Succinct Proofs of Random Access (SPoRA) consensus mechanism that incentivizes miners to replicate, share, and verify as much as possible of the data stored on the network. However, the miners are not required to store all blocks. A central design choice is that no node operator is forced to store any content that they do not wish to, making it technically possible to remove data.
Another important feature of Arweave is the Permaweb. It functions like the normal web but all of its contents are stored on the Arweave blockchain. Since it uses HTTP like the normal web, dapps on Permaweb can be accessed using a normal web browser. Some of the dapps deployed on Permaweb include web archives, email, social media, cloud storage, decentralized finance, and more.
Arweave’s native token is AR, which is used to pay for transactions, data storage, and block rewards. The maximum supply of AR is 66 million. 55 million AR were minted in the genesis block at network launch on the 8th of June 2018. The remaining 11 million will be introduced into circulation as block rewards.
Business case
Currently, the contents of the internet are hosted and served by individuals and companies that, whilst working efficiently, do not provide any guarantees that the content will be available in the future. This is a major problem that the users of the web are familiar with. Many links are broken and result in 404 pages. One could argue that there is a lot of content that should be stored in an immutable manner for the long term, such as public government documents, laws and other legal documents, scientific data and reports, cultural heritage in the public domain, etc. The benefits of improving the accessibility and reliability of archived data to the society are immense.
Arweave is in a good position to try to solve this important issue. It has raised over 20 million USD from well-known crypto venture capital funds in several rounds. What separates Arweave from other blockchain-based storage solutions like Filecoin and Sia is that Arweave charges a single fee for storing data indefinitely, whereas other protocols store the data as long as the users pay for it. However, its future success will depend on a number of factors. As the protocol continues to grow, it must be able to scale in a manner that does not compromise the user experience. Moreover, to be able to provide indefinite data storage, it is crucial that the miners’ economic incentives are sufficiently high to store the data. This will ultimately depend on the endowment and the price of AR.
Historical performance
In this section, we will look at Arweave’s historical performance using Token Terminal’s data. Although Arweave launched in June 2018, its growth was initially slow, so we will show data starting from November 2019.
Let’s start by looking at the amount of data stored on its blockchain, shown in the figure below. Although it took over 3 years to go from 0 to 10 TB of stored data, the amount of stored data has grown by over 40 TB in the past six months, highlighting the protocol’s recent growth.
The figures below show the total fees paid by the users. Since the fees are paid in AR and the price of AR has been very volatile over the past year, we are showing the fees denominated in both USD and AR. When measured in USD, the fees paid peaked in September 2021, but this was due to the price appreciation of AR.
Let’s look at the valuation of the protocol. We measure valuation using the fully diluted market capitalization, i.e., the maximum supply of AR multiplied by its price. The price of AR has been highly correlated with the rest of the crypto market.
Finally, let’s look at the protocol’s valuation relative to the fee revenue it is generating. The figure below shows Arweave’s price-to-sales ratio, i.e. its fully diluted market cap divided by annualized fee revenue. Currently, it is around 3,000x, which is relatively high compared to other projects listed on Token Terminal. On the other hand, the high multiple could be interpreted as investors expecting significant (fee revenue) growth for Arweave in the near to mid-term future, which is why they’re comfortable paying a slight premium today.
Roadmap
Given that Arweave’s major upgrade to its new consensus mechanism was completed in February 2022, much of the future efforts will focus on expanding the Arweave and Permaweb ecosystems through initiatives such as the Open Web Foundry. In 2020, Arweave partnered with Solana to store its transaction history on Arweave’s blockchain. If Arweave is able to become the decentralized ledger for other blockchains that generate a lot of data, this would result in a significant demand for AR to pay for storage fees. In fact, the CEO of Arweave has stated that the goal is to become the decentralized data storage provider for most of the crypto industry.
Conclusion
Arweave is an innovative protocol that aims to store immutable data indefinitely. The protocol is off to an impressive start and its long-term feasibility will depend on several factors including how the endowment performs and the price of AR. Given Arweave’s ambitious mission, the time horizon for judging its success is decades or even centuries.
Check out previous posts on Centrifuge and Lido.
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This newsletter is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.
good project
How can a service provider (arweve node) store data indefinitely for some price today, while not knowing all the unknown variables, eg.future market conditions and changes? Where is the incentive to store the data forever? That doesn't make any sense.