Crypto investment firm DARMA Capital has created the first financial derivative based on a decentralized storage protocol: the Filecoin Asset Use Swap, or FAUS.
DARMA (Digital Asset Risk Management Advisors) is making $100 million worth of its filecoin (FIL) holdings available to be loaned out, removing the need for users to buy the token to participate in the network, and allowing more storage providers to earn returns through the system’s proof-of-stake mechanism.
Turning the potential yield of filecoin into a swap – a contract where two parties typically exchange fixed and variable asset-backed cash flows for a set period of time – is being accomplished through the Commodity Futures Trading Commission (CFTC), DARMA said in a press release on Monday. The CFTC is the agency that regulates derivatives markets in the U.S.
Managing data storage on the internet – a service currently offered by large firms like Amazon – but doing it in a decentralized manner, is a cornerstone of so-called Web 3, the next generation of interconnecting blockchain apps and services.
Filecoin storage providers, who hold files for the network and retrieve them when necessary, provide their spare hardware and meet electricity costs, but also have to acquire filecoin (FIL currently trades around $20 a token), an additional cost that presents an obstacle to many, according to DARMA Managing Partner Andrew Keys.
“People are used to bitcoin mining, where electricity, real estate and the hardware are needed,” said Keys in an interview. “It’s not the same hardware in the case of filecoin, but another huge hurdle that I don’t think people modeled for was the acquisition of the actual filecoin.”
Unlike a lot of crypto lending, which requires 80%-120% of the notional amount as collateral, DARMA’s swap requires only enough collateral to cover the risk of slashing, the penalty proof-of-stake participants can incur if they go offline or behave unpredictably.
The duration of the filecoin swaps range between 1.5 and 2.5 years. “Based on the current conditions on the Filecoin network, storage providers typically earn about 60%-80% on their pledged filecoin, contingent upon the amount of block rewards each storage provider respectively wins,” DARMA Product Manager Hyunsu Jung said in an email.
Jung said the use fee that storage providers are charged is a FIL-based rate that takes a share of the storage provider’s FIL rewards generated over the duration of the swap.
As well as removing the capital expenditure hurdle, another driver is diversifying the network away from China, where around 65% of Filecoin storage providers are concentrated, DARMA CEO James Slazas said.
“From a macro perspective, we want to get this out of China over the next 12 months,” said Slazas in an interview. “Most enterprises are going to have certain types of restrictions about data being held in China. So now we have a nice way to have it deployed in different jurisdictions, like the U.S., Europe and Australia.”
UPDATE (Feb. 14, 13:07 UTC): Changes DARMA to allcaps throughout.
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