What Is Siacoin and How Does It Work? – A Beginner’s Guide

Get introduced to Sia, a decentralized cloud storage platform that offers a robust solution for a very real problem.

As the world is shaped by the rise of blockchain technology, we are left to constantly work to adapt to the changes. Nowadays, there’s a technological solution for almost any problem you can think of, making mankind extremely dependent on computers. However, this isn’t as bad as it may sound. 

The truth is that we rely on technology for good reasons most of the time. Not only does technology make life a lot easier for most of us, but it also offers solutions to many problems we couldn’t solve otherwise.

Among these solutions are projects like Siacoin, a platform that has received a fair amount of attention over the past year.  

What Is Siacoin?

Siacoin is the cryptocurrency of Sia, a blockchain-based storage platform that provides a solution for decentralized cloud storage. Sia stores and encrypts data and distributes it across its decentralized network. Anyone can use the Sia platform to access and host encrypted storage and can have all of their storage proofs, transactions and contracts verified by the public ledger of Sia’s blockchain. 

Sia is one of the major competitors for centralized cloud storage platforms like Amazon Cloud, Dropbox and Google Drive. However, there are many differences between Sia and these storage options. 

What mainly sets Sia apart is the fact that it ensures the data is stored in a decentralized blockchain and allows users to profit from being part of the decentralized network. Instead of renting hard drive space from centralized providers, the peers on Sia’s network are able to rent it from one another. Not only does this make Sia more secure by distributing data across an entire network, but it also reduces costs drastically. 

If you’re a member of Sia’s network and you have unused hard drive space, you can rent it out to other members of the network and receive compensation for your storage space in the form of Siacoins. In the simplest terms, Sia can be equated to Airbnb for hard drives. 

How Does It Work?

Essentially, the idea is to give individuals the right to manage and control their storage instead of leaving it in the hands of monolithic providers. Sia’s technology connects hosts who offer an underutilized hard drive with users who need additional file storage, all of this within a peer-to-peer storage ecosystem. 

Anyone interested in renting out or taking advantage of extra hard drive space can do so by using Sia. Those looking to offer their hard drive space will receive Siacoins in exchange for their storage space.

Here’s how the platform works:

Files Partition

Prior to uploading, Sia separates the files into 30 segments. Each of these segments is targeted to be distributed to hosts across the world. Such diverse distributions reinforce the redundancy and the uptime of the network and guarantee that no host can represent a point of failure.

Files Partition

The file segments are created using Reed-Solomon erasure coding. The technology, commonly used in DVDs and CDs, allows the software to do an excessive partition of the files. In such a partition, any 10 segments out of the total of 30 can completely recover the files of the user. What this means is that even in a case where 20 hosts out of 30 go offline, Sia users will still be able to download their previously uploaded files.

Files Partition

Segment Encryption

The encryption of each file segment happens on the storage space renter’s end. Before the files leave the renter’s computer they’re fully encrypted, ensuring that every host stores only encrypted user data.

Sia’s software does the encryption by default, which is something conventional centralized storage providers do not practice. This characteristic makes Sia significantly more secure than current storage solutions.

Sia uses the Threefish algorithm, which is a secure, open-source, high-performance standard for encryption. 

File Contracts

Every time a provider and a client want to conduct business, they must form and agree to a file contract. Just as it does with the data itself, Sia stores the contracts for the arrangements made on the blockchain network. 

The file contracts, just like any other contract, are important because they ensure that both participants conduct their obligations as outlined in the contract. The file contracts that Sia uses are a kind of smart contract. They define the terms of a storage agreement, uptime commitments, pricing and more factors. The file contracts allow the platform to create and store service-level agreements on the Sia blockchain.

File Contracts

These smart file contracts add a needed safety layer to the network. The network enforces the file contracts automatically, removing the need for third-party involvement. 

Siacoin Payments

Built on the Sia blockchain, Siacoin is the cryptocurrency that both hosts and renters use on the platform. While hosts earn Siacoins for each file contract, renters pay with Siacoin to purchase storage capacity.

Siacoin Payments

Payment channels, the technology used for the flow of these micropayments, is similar to Bitcoin’s Lightning Network. In the Sia ecosystem, the payments happen off-chain, which greatly increases the scalability and the effectiveness of the entire network.

Contracts Renewal

Within the file contracts, renters prepay the host for storage with the Siacoin cryptocurrency. By doing this, the renters set aside a concrete amount of Siacoin they wish to be spent on transferring and storing files. The smart contracts Siacoin uses usually don’t last more than 90 days.

Contracts Renewal

Renewal of the contracts is done automatically on the platform once they’re within the expiration window. In case the file contracts are not renewed, Sia returns the coins that have not been used to the renter at the end of the contract period 

When it comes to contract renewal, a process known as file repair may occur if an individual host goes offline. In such a scenario, the Sia platform automatically allocates the user’s data to a new host.

Storage Proofs

To protect users from malicious or fraudulent providers, Sia implements a process called proof of storage. In order for providers to receive payments, they must present a number of proofs within a certain time frame specified by the terms of the file contract.

Storage Proofs

When a provider fails to prove the storage, the payment is secured in a missed proof address until the provider submits proof of storage. For the negligence, the provider may also receive a penalty. The contract may terminate entirely as well, which happens in cases when a provider misses many proof of storage mandates.

However, if the provider is successful at supplying proof of storage, the payments are sent to a valid proof address according to the file contract.

The technology used for storage proofs is known as Merkle Trees. Thanks to this mechanism, it’s possible to confirm that a small data segment is actually a part of a larger data file. No matter how big the file is, these proofs are very small, which is their great advantage. Storage proofs are very important in the Sia ecosystem because the proofs stay stored on the blockchain permanently.


In an industry full of promises and unproven products, Sia is a refreshing project. The team built a viable platform offering a decentralized solution for a very real problem.  As both Sia and blockchain in general mature, we’ll see whether the industry standard for cloud storage will be revolutionized forever. As the global market for cloud storage continues to grow, Sia appears to have come around at the ideal time, which makes the business worth keeping an eye on.

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