Welcome to Elaborate VC! Today, I’m highlighting Arweave, a decentralized crypto-based data storage protocol.
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Executive Summary: Arweave $AR is a layer-1 decentralized data storage and internet archiving protocol that focuses on allowing users to store data permanently. Arweave uses a unique blockchain structure where instead of a linear blockchain, it uses a decentralized blockweave network known as a “SmartWeave” to connects users seeking to store data with data storage providers. Users who want to store data must use the $AR token to pay a one-time upfront fee for permanent data storage. When a user pays this one-time fee in $AR tokens, a portion is paid to the miner for the transaction mined in the form of a block reward. The rest of the fee goes to the protocol’s Storage Endowment, which is designed to fund the Arweave network when needed and to keep mining profitable, even as block rewards and inflation levels decrease.
Arweave is predicated on the assumption that the cost of perpetual storage will decline by ~0.5% per year (This is a very reserved assumption considering storage costs have decreased by ~30% on average over the past 50 years). This 0.5% assumption implies that the price users pay will ensure at least 200 years of storage. If storage costs decreased by 2% per year going forward (vs. 0.5%), you would get 300 years of storage. This is illustrated here:
Arweave’s primary product aims to solve issues related to data storage for the internet. It is known as the Permaweb, a permanent decentralized collection of the internet built on top of the Arweave protocol and core Arweave data storage layer.
Statistics:
Total Funding: $22M
Stage: Seed
Investors: a16z crypto, Multicoin Capital, Union Square Ventures, Coinbase Ventures, FJ Syndicates, Karnika Yashwant
Current Team Size: ~13
Location: London, England
Website: arweave.org
Team:
Sam Williams is the CEO and Co-Founder of Arweave. He has a background in computer science with a P.h.D from the University of Kent. He began the Arweave project through his interest in BitTorrent and Bitcoin in the early 2010s according to this FTX podcast.
William Jones was the CTO and a Co-Founder of Arweave before leaving the project in August 2018.
Sebastian Campos Groth is the Chief Operating Officer of Arweave, having joined in June 2019. He has a background in public policy and international relations and was a Program Manager at Techstars Berlin.
India Raybould is the Chief Coordinating Officer of Arweave. She has a background in psychology from The University of Manchester and was previously an advisor at Canterbury Christ Church University.
Kevin Leuthardt was the Chief Financial Officer of Arweave from March 2020 to May 2022 before becoming an advisor to Arweave in June 2022. He has a background in economics and tax law and was previously a Senior Consultant at KPMG Switzerland.
Tokenomics: The $AR token derives its value from its utility as a payment method since it is used to pay a one-time fee to permanently store data on the Arweave network. You can view the costs of storing a KB, MB, GB, and TB in $AR here.
A portion of the fee is paid to miners in the form of block rewards while the rest funds Arweave’s Storage Endowment. The endowment is used to pay miners in the case that mining becomes unprofitable from lower block rewards.
$AR tokens are currently inflationary due to block rewards. Per the yellow paper, inflation will eventually reach zero when all 66M $AR tokens are in circulation but the current inflation reward per block is ~2.8 $AR.
55M $AR tokens were minted at genesis and 11M tokens were allocated for distribution through block rewards.
According to the community Arweave Discord channel, $AR token distribution at TGE is as follows:
26.5% - Reserve
18.9% - Private Sale
19.1% - Ecosystem
13.0% - Team
10.8% - Seed Sale
7.1% - Strategic Sale
2.9% - Advisors
1.7% - Public Sale
It is unclear how this token distribution correlates with the above noted token distribution of 55M tokens minted at genesis and 11M tokens allocated for block rewards.
Investment Thesis: The internet has been a revolutionary invention that has changed human society forever, significantly improving access to information for everyone. However, the internet continues to have pain points with regards to its information being revocable, mutable, and censorable. Arweave aims to solve this issue by introducing an immutable, unforgeable, and uncensorable historical collection of the internet.
Bet #1: There is demand for a permanent and decentralized storage center for the internet’s history.
Since we’ve primarily moved away from print to online, most of the information we consume is stored in centralized and mutable databases. Although it’s much more convenient than reading from books and newspapers, information is constantly changed and deleted online, leading to the issue of a lost and compromised internet history.
More than 100 scientific open-access journals have disappeared from the internet over the last 20 years, with hundreds more at risk (link)
50% of the links in U.S. Supreme Court opinions and 70% of those in Harvard Law Review and other journals do not link to the originally cited information (link)
According to the folks at Arcast, 95% of data from internet from 20 years ago is no longer there (link)
Arweave changes this.
Bet #2: Arweave has established a market leader position in decentralized storage from building a moat through its partnerships and growing ecosystem.
Arweave’s ecosystem has grown ~86% from Q4 2021 to Q1 2022.
Arweave also gained significant traction starting in Q3 2021 and has sustained transaction number and data usage growth from 2021.
Transactions
Data Usage
Arweave’s blockweave has also grown dramatically and consistently since the beginning of 2021
Bet #3: Web3 has a clear use case for a decentralized data storage solution with NFTs.
When you or anyone else buys an NFT on the blockchain, the ERC-721 token sits on the blockchain but in the case of many NFTS, the actual image of the NFTs you see are not stored on the blockchain but rather sit on a server that the blockchain points to via URL.
The images are usually not stored on the blockchain because it is typically too expensive and impractical. However, this means that your NFT’s image relies on centralized web2 URLs and servers. Arweave introduces a decentralized, scalable, affordable, and permanent storage solution that allows users to move all their information into a decentralized and permanent space for the NFT to live on forever.
Competitors:
Protocol Labs (IPFS / Filecoin ($FIL)): Filecoin is a P2P blockchain-based network that allows the storage of files utilizing excess hard drive space in the network. IPFS is a P2P decentralized and distributed system for storing and accessing files, websites, applications, and data.
Sia ($SC): Sia is a Dropbox-like decentralized cloud storage platform where clients rent storage space from each other.
Storj ($STORJ): Storj is data storage competitor that utilizes blockchain technology for P2P digital file storage.
Amazon Web Services ($AMZN): Amazon Web Services is a centralized web2 company that relies on their centralized databases to provide cloud computing and data storage solutions.
Pricing:
It currently costs ~$2.803 or 0.27316 $AR tokens to store a GB of data permanently on Arweave. This is much cheaper than most of Arweave’s competitors if users are looking for a permanent solution. For comparison, I’ve calculated how long it’ll take for users to break even on when paying per year to store a GB of data when using other services versus Arweave’s permanent storage price. It’s clear that Arweave is much cheaper than most in the table except for Filecoin’s pricing. However, the source I used may or may not be accurate as it does not come directly from Filecoin.
Investment Risks:
I believe Arweave’s tokenomic structure does not lend itself well to token price appreciation. Although there are plans to decrease $AR token inflation levels to zero, there lacks demand for users to buy and hold $AR tokens. Miners must sell most of their tokens to pay for infrastructure costs, creating sell pressure on most newly created tokens while users only have to buy and pay a small amount of $AR to purchase storage space. The lack of buying pressure within a lacking tokenomic structure leads to a decreasing token price in spite of increasing adoption and usage.
In Q1 2022, China had the highest number of nodes and interest. According to a memo on February 17, 2022, there were 874 nodes in China at the time but as of this writing, only ~4 months later, the number has decreased to 22 nodes. The United States currently has the highest number of nodes with 29 nodes (link). It’s unclear what led to the significant decrease but China has made concerted efforts to halt crypto mining and cryptocurrencies altogether.
Arweave mining has some issues surrounding the economics of centralized and solo mining. All these concerns were outlined in a Reddit post here.
Arweave already has significant competition with Protocol Labs (IPFS / Filecoin), Siacoin, and Storj. Arweave also has to compete with layer-1 blockchains who can innovate to offer more scalable storage. If Arweave wants to continue, it will also have to compete with Amazon Web Services and other web2 data storage solutions.
Concluding Remarks: Due to Arweave’s tokenomic structure that doesn’t incentivize users to buy and hold the token for long periods of time outside of pure speculation, I believe an investment in purchasing the $AR token is a poor investment decision (Equity in the company, if available, could be a different conversation). Although Arweave clearly has a niche use case carved out within the web3 space and there seems to be a need for a decentralized data storage solution, I don’t think it’s a financially viable investment. I think Arweave also faces an uphill battle with regards to adoption unless they are able to begin onboarding enterprise entities. However, this will bring them into competition with centralized web2 data storage entities like Amazon Web Services which has an ingrained moat within the existing business community. Overall, I would not recommend an investment in Arweave despite its interesting proposition as a decentralize data storage solution.
To learn more about Arweave, I’d recommend reading their yellow paper and two further articles about the protocol here and here. I’d also recommend reading @AlanaDLevin’s Twitter thread here and Zach Dinan’s investment memo here.
I am not a financial advisor. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.