A system provides file aware block level deduplication in a system having multiple clients connected to a storage subsystem over a network such as an Internet Protocol (IP) network. The system includes client components and storage subsystem components. Client components include a walker that traverses the namespace looking for files that meet the criteria for optimization, a file system daemon that rehydrates the files, and a filter driver that watches all operations going to the file system. Storage subsystem components include an optimizer resident on the nodes of the storage subsystem. The optimizer can use idle processor cycles to perform optimization. Sub-file compression can be performed at the storage subsystem.