Flare Network: A Full Protocol Analysis
The $82b question for Flare's main-net launch...
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Hi internet frens👋 ,
With the Christmas break and then getting organised for 2022 this has taken much longer to write than I would have liked, however we are now live!
Flare first came on my radar when, as a long term XRP hodler and builder on the XRPL, I saw that Ripple’s investment arm Xpring had backed a small team from the UK that were going to bring smart contracts to a ledger famed for being singularly focussed on payments.
Having seen the rise in dApps on other platforms I was very excited and quickly jumped on following the team and their progress.
My first video featuring Flare was from back in April where my main comments were we need to wait and see if these guys can deliver.
Thankfully this September we finally got a taste of what was to come with the launch of the Songbird Canary Network (Flare’s version of what Kusama is to Polkadot).
Now it has been a few months we can gather the data and revisit what promises to be one of the most interesting L1s I have analysed to date.
And without further ado then let’s do this…
Will Flare ignite in 2022?
As always this is not investment advice… DYOR
If you have heard of Flare or not there is no doubt that you’ll be hearing about it everywhere soon when it launches it’s main network and unlocks nearly 65% of value stored in tokens...
Today, we’ll go deep on Flare, covering:
What the Protocol does
The Problem it is solving
How it solves the problem with some clever tech solutions
Who the investors are and how the Tokenomics will drive demand and supply
Why miners and validators are irrelevant and what replaces them
How Flare is doing attracting 3rd parties to build on their tech
A summary of existing dApps and their KPIs
What the structure of the team is and the networks governance structure
Wrapping up with the bull and bear cases for Flare
L1 Analysis Framework Refresher
As a quick reminder on how we do these analyses; for any L1 technology I adapted a16z’s economic flywheels for crypto framework as shown below:
In principle, what happens here is the team designs the protocol, the protocol attracts funding via investors and they give liquidity to the network, which gives a protocol its initial token price. Miners and validators are then attracted to supporting the network because of incentives (tokenomics) which improves the platform functionality because we're now validating blocks.
We now have a working blockchain with nothing being built on it so we turn to developers and try to incentivize them (via resources, grants etc) to build on the blockchain. They put human capital into building dApps and other useful stuff that people want to use attracting users onto the blockchain. These users form the community and eventually help govern the system.
Flare is a distributed network that can be used to create two-way bridges between networks. It integrates the Ethereum Virtual Machine (EVM) which enables the network to run Turing complete smart contracts.
Flare is a contestant in the Great Alt EVM wars…
Flare Networks seek to solve two problems:
Non Turing Complete Blockchains hold around 65% of the total value in crypto
Proof of Stake networks have some issues when it comes to security of the network
Firstly, Flare's vision is to unlock the assets that are held in non-Turing complete chains. Turing Completeness is a key aspect of the chain design that enable smart contracts to exist. Smart Contracts are required for the many functions that are needed to build useful dApps.
On launch the “F-Assets” - the wrapped versions of assets that sit on Flare’s network, that will be listed are as follows: $XRP, $DOGE, $ALGO, $LTC, $XLM and $GALA
According to my (very rough) calculations, on release Flare would have an immediate market of 38m wallets, 218b coins representing $82b worth of value.
TVL calculations are more complicated than this but it gives us an idea of the size of the opportunity.
When the network launches the biggest determinate of Flare's success (imo) will be how many of the available coins get turned into F-Assets. Tracking Flare’s “AUM” will be the one to watch in late 2022.
Secondly, the team have identified issues with Proof of Stake due to the fact that PoS derive network safety from their native tokens.
In the short term this is an issue because if the staking yields are less than that of a DeFi protocol on the network the staker will likely divert tokens away from staking compromising the network’s security.
Over the long term the Flare team state:
“As a Proof of Stake network gains usage and the value built on top of it increases, the value of the staking token must increase or the network will become unsafe. This requires a constant inflow of capital if proof of stake were to become the ubiquitous method of doing business, the scale of diversion of capital required from other endeavors, just to secure the value built on these networks, would make the cost of commerce unfeasibly high.”
I find the second reason a bit of a stretch as I believe that PoS networks will find alternatives, but the first issue is very much a known entity.
So how does Flare solve these issues?
The Spark Token is the native token of Flare. It helps prevent spam attacks and can be used as collateral within DApps, providing data to an on-chain oracle, and participate in protocol governance. Importantly it isn’t required to secure the network!
Flare is the world’s first Turing complete Federated Byzantine Agreement (FBA) network. Nodes run the Avalanche consensus protocol with a key adaptation to the FBA consensus topology.
A key property of FBA is that it is unique as a consensus topology in that it achieves safety without relying on economic incentives that can interfere with high-value and high-risk use cases. This is because it enables individual participants to effect quorum slice decisions independently.
I heard Flare’s FBA & UNL were centralised! Fear not Flare have a cunning plan for this...
In terms of Transactions per second (TPS) we don’t have real readings yet but Avalanche (the blockchain) is fast with up to 7k quoted in some instances but a baseline of:
More importantly perhaps than TPS is Time to Finality, which again while not measured should be immediate due to FBA topology. The Songbird (Flare’s canary network as mentioned in the introduction) explorer does seem very fast with a block time of ~350ms.
I mentioned the opportunity with F-Assets earlier, and while a great idea we don’t yet know how well it works.
The technology itself is revolutionary and I’ll not go into too much detail here but the following diagrams are a high level overview of the flow and you can read more about it here
And to complete the loop the redemption flow is:
You can also read more about the ins and outs of all this on the Flare website here.
It is worth reiterating here that the Flare Network will reward you in Spark (FLR) just by holding an F-Asset.
Summary Section 1: Vision & Protocol
Flare’s tech is well suited for use case being EVM compatible.
It solves issues with PoS by utilising FBA & Avalanche.
The network has the potential to bring dApps to large existing communities which is a clever growth hack imo as they can leverage established user bases rather than having to attract their own from scratch.
The investors in Flare came in two rounds:
2019 - Unknown amount by Xpring (RippleX) - Press Release
June 8, 2021 - $11.3m seed backed by big names inc Cardano’s C-Fund (although F-Asset not yet announced)
We don’t have a break down of what token allocation the investors got for this investment although we know “Flare Networks Ltd” got 25m spark tokens allocated which we will come back to in the team/governance section further down.
Both FLR and SGB tokens are inflationary as they are geared up for utility rather than token value. There are two ways in which inflation works:
FTSO payout for participation is in newly minted tokens. The inflation rate is set at 10% per year, without compounding, of total initial Spark tokens.
F-Asset & FXRP Incentive Pool (which we discussed earlier): Flare tokens are progressively unlocked for the holders at a rate of 3% a month. These tokens can be inflationary until all the 100 billion FLR tokens are released to the market.
The demand for tokens will come from two areas:
FTSO contribution: lock up/delegation of tokens to data providers if the holders are not going to act as FTSO data providers.
Collateral: FLR can be used as collateral within applications, e.g., on the FXRP system.
Stedas put together this nice infographic which shows the way to earn yield in Flare:
As we have mention the FTSO a lot in this section let’s take a quick look into it…
The FTSO is a critical component of the network
It is responsible for collecting and forming accurate estimates of data to the network for Spark (FLR) holders and applications
Signal Providers earn rewards by how accurate their data is which are then distributed to token holders
FTSO Statistics from Songbird
By the end of last year there were some impressive stats on the Songbird FTSO usage:
Tracking public FTSO providers can be done on flaremetrics.io:
Just a note here: if the protocol was PoS this list seems too short to provide a good enough attack resistance but as Flare uses other methods there is no issue with Nakamoto co-efficient.
Skirting around the technical details the agents gain newly minted spark tokens for providing their services which also adds inflationary pressure to the supply. I would recommend this article for a full overview.
Summary Section 2: Investors, Tokenomics and Validators
Two rounds from large investors RippleX, then $11.3m seed inc Cardano’s C-Fund (although F-Asset not yet announced)
Both FLR and SGB tokens are inflationary. There are two ways in which inflation works: FTSO paying out newly minted Spark, F-Asset & FXRP Incentive Pool. Demand is derived from use.
59-100 FTSO providers, would be good to see grow over time
One key area that is in urgent need of attention is the developer experience. Two things stand out: developer resources e.g. support, tooling etc, and (the big one) developer grants.
At the moment there is only pretty basic support coming directly from the team, as an example this tweet regarding testnet upgrades:
This is unsurprising and should be expected as Flare is a new chain so it will take time to create tools and build the knowledge base for developers to really make the most of the network.
While they are doing a good job with the resources they have I think we would need to see this whole area be lifted to another level.
Enter their newt hire @dommoore as Head of Ecosystem. He was previously Head of Growth at Outlier Ventures, a very well respected crypto VC and Web3 accelerator.
The need to develop grant program is critical as other L1s have massive funds to support a rapid acceleration of development across their ecosystems.
Flare are very much behind in this regard, having raised a relatively small (compared to other L1s) $11.3m in 2021. Without an initial (Coin/Dex/Protocol?) offering to boost finances I expect we will see much larger raises coming and the release of the $FLR to generate further funds (if structure as IxO).
Near, for example, have a massive warchest of an estimated ~$1.2b for their grant program, so for Flare to compete we will need to see a $1b step up 💰
Is there a precedent for this? Potentially as Oasis $ROSE just announced that @BinanceLabs will be contributing to the Oasis Ecosystem Fund, growing the fund up to 200M $USD.
Time will tell if Flare will be able to repeat this success but hiring is in progress as we can see from the Flare Careers page, so watch this space!
Summary Section 3: Third-party developers
Probably the area most underdeveloped (understandably)
Actions are being taken to rectify but they will need to move fast and raise a lot of money which comes with execution risk
Usage and Traction
Here is a great overview thread on Flare’s progress in 2021:
We’ll first look at how Songbird (Flare’s Canary network) has done and then dive into specific dApps.
Songbird Network Statistics
The Songbird network is already exhibiting high levels of use and functionality with the following statistics from Dec 13th last year.
The 240k wallets rivals that of Polkadot’s canary network Kasuma whcih can be seen here
Also as of 11th Jan 22 we confirmed 10M transactions have taken place:
Projects being built on Flare
There are already a small batch of projects building in the ecosystem:
DeFi: @FlareFinance @TrustlineInc
FTSO: @FTSO @ftso_au @BestFtso @lightFTSO @ftso_eu @AlphaOracle1 @ftso_uk @AureusOx @scandinodesFTSO
Data: @flaremetrics & https://songbird-explorer.flare.network/
NFTs: @GoGalaGames @crypto888crypto @GE_Federation @fcflio @BoredApesXRP
@SparklesNFT @SGBPunks @BabySongbirds
Wallets: @BifrostWallet @UpholdInc @Ledger @Trezor @MetaMask @DCENTwallets
In my recent video & tweet thread I gave a fair amount of detail on the traction statistics for Flare and various projects.
dApp Highlight: Flare Finance
Flare Finance is an anonymous team of developers building out critical DeFi infrastructure on the Flare Network. They aren’t affiliated with the core team although my understanding is that Hugo Philion, the CEO of Flare, has met the team and vouched for them.
This is what Flare Finance say about themselves in the whitepaper:
Flare Finance is the first institutional-grade decentralized finance platform built on the Flare Network. It offers a suite of 6 unique decentralized finance products dedicated to bootstrapping the Flare Network with a single suite DeFi solution for business and retail finance products. Flare Finance utilizes Web3 capabilities to allow people to engage with our products and services trustlessly without giving up custody of their funds
And so far they have delivered…
Flare Finance's Experimental Finance (ExFi) platform V2 is live on the Songbird Network and already has over $20 million in TVL with only 3 products live on the platform. Even in the last 7 days we have seen some impressive stuff from Flare Finance’s on demand liquidity product FlareX:
And the Flare Loans product isn’t doing too badly either despite a recent sell off…
It hasn’t all been easy sailing though with the ExFi airdrops not holding value particularly well, delays, reworking of distributions and more… This has left some in the community frustrated:
I can’t comment on prices as the market is the market, but what I will say is I believe the Flare team has been very transparent with their work and acted in good faith where issues have cropped up as this thread with ExFi shows:
This leads us nicely into team and governance but first a quick check back to our L1 flywheel.
Summary Section 4: dApps, DeFi & more
Very positive statistics coming from songbird network already
240k wallets signed up – rivals Polkadot’s testnet Kasuma
Flare finance already pushing their TVL higher
Flare’s set up and Governance
The core team are as follows:
Hugo Philion, Co-founder & CEO, previously founded of modular building system, Future Generations. Commodity derivatives portfolio manager at two $1bn+ funds.
Sean Rowan, Co-founder & CTO, involved in the blockchain space since 2015 when he designed secure vehicular communications protocols leveraging a blockchain-based public key infrastructure with colleagues at UCLA and TCD. R&D Engineer at RAIL in Dublin, Ireland where he developed backend networking software for a healthcare-assistive robot. The latest version of this robot by RAIL is featured on the cover of TIME magazine in November 2019.
Dr. Nairi Usher, Chief Scientist, was previously postdoctoral researcher in Quantum Machine Learning UCL. Worked in collaboration with Siemens on applications of quantum algorithms to healthcare and image recognition.
The wider team has grown significantly recently as Flare has been on a hiring spree and now has ~20 people in the organisation.
Eight advisors have been appointed to the project. All advisors bring business acumen and specific expertise in blockchain-related projects. Their combined experience and education are relevant to the project.
Flare Company Structure
As mentioned above there are two entities that Flare have created; the foundation and a limited liability for profit company. They will have different roles as summarized below:
Interestingly, Flare Networks Ltd has kept the voting power rather than the foundation which as far as I know is unusual. Their logic is that the company will always act in the best interest of the network as it’s long term financial viability relies on the network’s success.
The token allocation breakdown is as follows:
Community Governance of Flare
This is an evolving area but with 65% of the votes the community does have a large say in the future direction of the network.
FTSO.uk broke down the decision categories into this nice infographic showing the different thresholds to pass:
Ideally I would love to see a plan for the Flare Networks Ltd part of voting power get gradually handed over to the community but this will likely come with time.
This completes our analysis so let’s put it all together on our L1 Flywheel…
L1 Full Business model breakdown
So here it is the full breakdown:
Now we have this let’s move on to our bull / bear case!
Bulls and Bears
My bull case for Flare Networks is simple:
The users of non Turing complete chains convert assets to Flare in search of yields
Continued additions to F-Asset roster pulling in more communities ad infinitum as new chains are launched
Proof of Stake is shown to be less secure, and more users convert
Flare achieves scale without issues and carves out a piece of the L1 pie
In the bear case there are several risks highlighted:
Technology becomes outdated quickly, will Flare be so nimble when it is live?
Still not live and as such other L1s have a headstart with massive funding behind them
Will the demand for assets be there? wBTC still only accounts for ~1.4% of circulating supply and that’s not change since June 21 really…
Spark Dependent Applications (SDAs) rely on third-party networks to keep growing and gain adoption.
Wild swings supported currencies/tokens could potentially cause collateral issues.
So there we have it. As always DYOR this is not investment advice, also I might have missed stuff that is a key technology thing that you may understand better than I do.
Hope you enjoyed this deep dive into Flare Networks, I will be talking about it a lot more on Twitter. So if you follow me there @0xGregH that will give you the latest.
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