Arweave Economics and the AR token
Part of the foundation of the Arweave network is the decentralized network that will actually store the files that you put onto it.
Remember, decentralized means that instead of having one big company storing your files in one (or two) spots in the world, your files will be spread and duplicated (securely) through thousands of different places by people all over the globe.
But why would these people store your data?
These people store your data because they get paid. Just like you wouldn’t go to work unless you got paid, they wouldn’t store your data unless they got paid.
To store these files the people need an economic incentive to do so – for a long period of time. So how did Arweave overcome this problem?
Enter the Arweave Token (AR)
As mentioned in the previous lesson blockchains have a coin or token associated with them. In this case, Arweave created a token called AR that is used as payment to put data onto the storage network. The people who store the data are compensated in AR (which they can exchange for normal currency at exchanges) for the data they store.
But, the economic system is a little more complicated than this.
When you put a file onto the Arweave network you have to pay a one-time fee in AR. That's simple enough.
Your payment to the network gets divided two ways:
- As an upfront payment to pay the initial storage costs of 200 years
- The reminder goes into an endowment for future storage years
The first question we need to ask is: 200 years is a long time, isn’t that expensive to pay for that much storage at one-time?
It sounds expensive because we are used to prices going up in almost all areas of our life, but data storage is one of the few areas that goes against that trend. Over the past 50 years, data storage has seen its costs decrease by an average of 30.5% per year.
As of February 2022, the price to put on 1 MB of storage onto the network is around $.01 USD. Or, in a simpler way to understand, for a $1 you can add 400 office documents or 40-50 average-size photos to Arweave.
Decreasing costs of storage
Arweave’s working assumption is that the price of storage will continue to decline over time. Given the technological improvements still to be made, along with society’s increasing appetite for data storage, this seems to be a highly plausible assumption to make.
So, for the economics of permanent storage to work, is Arweave betting that data storage costs will keep going down 30.5% per year?
No, definitely not!
The working assumption to make the economics viable for permanent storage is extremely conservative: Arweave assumes that data storage costs will decline by just 0.5% per year.
Again, part of the initial cost to upload data to the Arweave network covers the first 200 years of storage. If data storage declines are anything greater than 0.5% per year, this simply adds to the number of years that the data will be stored.
For example, with a 2% decrease in storage costs, instead of 200 years of storage you would get 300 years.
Arweave Endowment
If part of the one-time fee goes to the initial storage price, where does the rest go?
Arweave designed the system so that a portion of costs paid to host data onto the Arweave network goes into an endowment. This endowment will be able to pay for the cost of storage based on the interest generated from it.
Think of an endowment for a University or non-profit. The endowment will use interest off of the money raised to pay for the costs of the organization. Unlike those organizations, which have rising costs, Arweave is paying interest towards storage costs that are declining rapidly. Even in the unlikely case that the storage costs do not decline the one-time storage fee and the built up endowment would still cover the cost of storage for 200 years.
The Arweave endowment has already been built up to a sizeable amount, and will ensure that the storage of data is compensated well into the future. This endowment is the economic incentive that will engage the decentralized network to store data for lifetimes to come.
📕 For further reading, see 'Can data really be stored permanently?'
Watch the Coin Bureau's 20-minute video on Arweave
Now probably one of the most important questions is: What are some of the ways that data is being stored permanently?