Arweave Network ($AR) and the Decentralized Storage Stack
I. Overview of Arweave Opportunity
Arweave is a protocol that allows users to store data permanently and sustainably, with a single upfront fee. The protocol matches people who have hard drive space to spare with those individuals and organizations that need to store or host data permanently. Arweave achieves this using a decentralized network; all data stored is backed by a sustainable endowment ensuring it is available in perpetuity.
On top of the core Arweave protocol lives the permaweb: A global, permanent web of pages and applications that live forever. The Arweave network is powered by the AR token, which can be found on most major exchanges. Within the decentralized storage stack of web3, Arweave is uniquely positioned with its value proposition of data permanence to continue to outpace the growth of its sector competitors with regards to data storage rates, revenues, etc.
II. Investment Thesis & Highlights
My core macro investment thesis for the next 6-12 months focuses on the following themes and sectors.
1. L1s/DEXs
2. NFTs/Metaverse
3. Dec. Storage
4. DAO/Community
Arweave does a fantastic job of combining at least three of these themes, potentially all four, as outlined below
· Decentralized Storage - The current Web2 data storage industry is dominated by AWS at over 70% of market share. This is a highly centralized service that is currently employed by many decentralized applications as well. The decentralized storage stack consists of 4 major players in Arweave, Filecoin, Sia, and Storj. Filecoin currently enjoys the position as sector leader. While Filecoin, Sia, and Storj all require continuous payment for data to be stored and maintained, Arweave has approached this dilemma in a very innovative way. Arweave aims to innovate by pioneering information and data permanence with a single upfront cost as its competitive advantage.
·NFT/Metaverse – The NFT/metaverse sector is likely going to continue to grow as both crypto native companies/communities and traditional world counterparts aim to take advantage of the obvious benefits provided by this new market. As the market matures, the need for truly permanent data storage accelerates.
Although the NFT itself lives on the blockchain, what actually gives it value (i.e. for art, the colors and shapes) don’t necessarily live on-chain. That information can live on a centralized server, and is subject to disappearing just as content on the internet has disappeared in the past. Arweave is a great solution as it ensures permanent data storage, which enables NFTs (minted anywhere) to have actual immutability.
· DAO/Community - Arweave is a completely community-owned and operated open source network. The Arweave community has built a complete suite of tools and services that allow users to launch completely decentralized applications that live on top of this permaweb. Developers on the Arweave network are incentivized to build with a unique system of profit sharing tokens (PSTs) in which they can implement with their dApps.
· L1/DEXs – Arweave is uniquely positioned as a permanent decentralized storage solution at a time where blockchain generated data is exploding. From the Layer 1 wars rivaling Ethereum (Solana, Terra, Avalanche, etc) to the continued growth and interest in the NFT industry and everything in between, the need for truly permanent decentralized storage solution is at an all-time high, and will only increase. Arweave and Solana are currently partnered to backing up Solana blockchain data on the Arweave network.
With the upcoming Kyve Protocol launch, Arweave will be perfectly positioned as the value accrual destination for the above scenario playing out. Kyve Protocol is an initiative to store any data stream, with built-in validation. By leveraging the Arweave blockchain, Kyve aims to permanently and immutably store this data. Think of Kyve as the standardization process/model for all data, regardless of blockchain or network, to be stored and queried on the Arweave network.
III. Investment Analysis & Valuation Framework
Tokenomics
The Arweave network uses the AR token, the scarcity of which is enforced through the consensus mechanism of the blockweave data structure. 55 million AR were created in the genesis block at network launch. 11 million AR, an additional 20% of the genesis block supply, are being introduced into circulation gradually as block mining rewards. The max circulation will be 66 million AR.
In order to write a transaction into a block, a user has to pay some AR as a transaction fee. This transaction fee is not transferred in its entirety directly to a miner of this block, unlike in traditional blockchain systems. Rather, most of the transaction fee is contributed towards a storage endowment, which is distributed to the wallets of miners over time.
Value Accrual Mechanism
In order for mining of the Arweave to remain profitable and sustainable over time the reward emitted by the network at any given block must be greater than cost required to maintain the blockweave for that period. This constraint is met normally through a steady release of tokens from the endowment. Arweave also avoids releasing endowment tokens in situations when miners have already surpassed profitability. Mining rewards mechanics only take from the endowment in instances where the cost to maintain the Blockweave surpasses value emitted by the inflationary block rewards. These clever designs are important for value accrual and stability of the network against fluctuations in token price and storage pricing/related costs.
Note: not all data was readily available/reliable with the sources I was able to find, so those sections were omitted below
Valuation & Metric Comparison Takeaways
i. At first glance, Arweave looks out of place, and it probably is to an extent. As we know, Filecoi, Sia, and Storj all aim to disrupt to centralized data storage industry by implementing blockchain technology with geographically decentralized server capacity whereby users pay miners to store data for a period of time. This fundamental similarity explains why FIL, SIA and STORJ all have data stored metrics in the PiB (~1000 Terabyte) range, while Arweave is still in the Terabyte range.
ii. Instead of looking at Data Stored in isolation, I think looking at data storage change over time gives a clearer picture of the networks usage. We can see that Arweave has seen the largest % increase in the last 3month period.
iii. Another way to compare Arweave to the group is by looking at 30d/90d revenues generated by the protocol. I was not able to accurately find these numbers for Sia and Storj, but I was able to source them for Arweave and Filecoin. Arweave outpaces Filecoin revenues while having orders of magnitude less storage usage so far. Filecoin is also a decent enough proxy for the other projects as they are very similar in their data storage methods.
iv. Daily Transaction count is another insightful metric as it shows how active users are within the network. Keep in mind that active users generate transactions, which in turn generates demand for the networks token. The only reliable metrics I could find were for Arweave and Sia which shows a much more active user base of Arweave over the last 3mo while having magnitudes less data stored on the network.
v. We can compare Mkt Caps and FDVs of the networks to look at possible dilutive effects as future tokens are released into the supply. The big standout here is Filecoin at only 6% of mkt cap/fdv while all of the other networks very comparable.
vi. Using public comps, and assuming that the Arweave network grows to be 3-4x bigger than its current size over the next 6-18mo(Blockweave has doubled in last 30d), the market cap would be 7-8$Bn mkt cap. Based on current supply, the price target for $AR would be around $150. If Arweave can continue to attract more network usage through its partnerships with Solana, Kyve, and additional L1 networks, in addition to the growing NFT/metaverse industry, the Blockweave could grow to be several times larger than the above scenario. Assuming 100Tb of stored data with similar network usage statistics, the Arweave network would have a market cap of $15Bn. This would imply a price target for $AR at around $300. None of this takes into account the additional demand for $AR generated by network usage aside from storage transactions (permanent dApps, etc).
IV. Trade Execution
The only way to execute this opportunity is to buy and hold $AR tokens from a major exchange. There is no farming or staking mechanisms for Arweave.
V. Risks
Smart Contract Risk: Mitigation - Audits have been completed and will continue to be complete as the smart weave blockchain develops
Current reliance on Solana/SOLAR partnership: Mitigation – Kyve Network partnership which will bring multiple chains/dApps to Arweave
Scrutiny from regulators/governments should/when sensitive information makes its way into the permaweb (ex Wikileaks): Mitigation – potential content/moderation policies. In essence, nothing on the Arweave network (node, dApp, etc) should be forced to store information, host apps, or process tx that they do not wish to process
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