Comprehensive Interpretation of the New Public Chain Flare Network: Bringing Smart Contracts to Non-Turing Complete Chains, a New Player in the EVM War

Written by: 0xGregH

Compiled by: 0xbread

Will Flare explode in 2022?

Whether you have heard of Flare or not, you will soon hear about it everywhere when it launches its mainnet and unlocks nearly 65% of the value stored in tokens…

Today, we will dive deep into Flare, covering several sections:

1) The role of the protocol

2) The problems it is solving

3) How it addresses these problems through some clever technical solutions

4) Who the investors are and how the tokenomics will drive demand and supply

5) Why miners and validators are irrelevant and what replaces them

6) How Flare attracts third parties to utilize their technology

7) A summary of existing dApps and their KPIs

8) What the team structure and network governance look like

9) Summarizing Flare's bull and bear cases

L1 Analysis Framework Review

A quick reminder of how we conduct these analyses; for any L1 technology, I use a16z's economic flywheel for the crypto analysis framework, as shown below:

In principle, what happens here is that the team designs the protocol, which attracts funding from investors who provide liquidity to the network, thus establishing an initial token price for the protocol. Then, due to incentive mechanisms (tokenomics), miners and validators are attracted to support the network, improving platform functionality as we are now validating blocks.

We now have a working blockchain with nothing on it, so we turn to developers and try to incentivize them (through resources, grants, etc.) to build on the blockchain. They invest human capital into building dApps and other useful things that people want to use, thereby attracting users to the blockchain. These users form a community and ultimately help manage the system.

Flare Protocol

Flare is a distributed network that creates bi-directional bridges between networks. It integrates the Ethereum Virtual Machine (EVM), enabling the network to run Turing-complete smart contracts.

Flare is a contender in the Great Alt EVM War…

Flare Networks is committed to solving two problems:

1. Non-Turing complete blockchains account for approximately 65% of the total value in cryptocurrency.

2. PoS networks have some issues with network security.

First, Flare's vision is to unlock assets in non-Turing complete chains, where Turing completeness is a key aspect of chain design that allows for the existence of smart contracts. Many of the features needed to build useful dApps require smart contracts.

When launching "F-Assets"—the wrapped versions of assets on the Flare network—the following will be listed: $XRP, $DOGE, $ALGO, $LTC, $XLM, and $GALA.

According to my (very rough) calculations, Flare will immediately have a market of 38 million wallets at launch, with 218 billion coins and a value of $82 billion.

Calculating TVL is more complex, but it gives us an idea of the size of the opportunity.

When the network launches, the biggest determinant of Flare's success (in my view) will be how many available tokens turn into F-Assets. Tracking Flare's "AUM" will be worth watching by the end of 2022.

Secondly, since PoS derives network security from its native tokens, the team has identified issues with proof of stake.

In the short term, this is a problem because if staking yields are lower than the yields from DeFi protocols on the network, stakers may move their tokens out of staking, jeopardizing the network's security.

In the long term, the Flare team states:

"As the usage of proof of stake networks increases and the value built on top of them increases, the value of the staking tokens must increase, or the network will become insecure. If proof of stake is to become a ubiquitous business method, it will require a constant influx of capital, and to ensure the value built on these networks, capital will need to be transferred from other efforts at a scale that makes business costs unfeasible."

I find the second reason a bit far-fetched because I believe PoS networks will find alternatives, but the first issue is a well-known and existing one.

So how does Flare solve these problems?

The Spark token is Flare's native token. It helps prevent spam attacks, can be used as collateral within dApps, provides data to on-chain oracles, and participates in protocol governance. Importantly, it does not need to secure the network!

Flare is the world's first Turing-complete Federated Byzantine Agreement (FBA) network. Nodes run the Avalanche consensus protocol, with keys adapting to the FBA consensus topology.

A Deep Dive into Avalanche

A key feature of FBA is that it is unique as a consensus topology because it achieves security without relying on economic incentives that may interfere with high-value and high-risk use cases. This is because it allows individual participants to independently influence the arbitration slice decisions.

Read the excellent full text here

Heard that Flare's FBA & UNL is centralized! Don't worry, Flare has a clever plan for this…

In terms of transactions per second (TPS), we don't have a real read yet, but Avalanche (the blockchain) is fast, citing up to 7k in some cases, but the baseline is:

Perhaps more important than TPS is Time to Finality, which should be instantaneous due to the FBA topology, even without measurement. The Songbird (Flare's mentioned canary network) browser does indeed look very fast, with block times around 350 milliseconds.

See for yourself at https://songbird-explorer.flare.network/…

F-Assets

I previously mentioned the idea of F-Assets; while it's a good idea, we still don't know how well it will work.

The technology itself is revolutionary, and I won't go into detail here, but the following image provides a high-level overview of the process, and you can read more about it here.

To complete this loop, the redemption process:

You can also read more about all of this on the Flare website here.

It is worth reiterating that Flare Network will reward you for holding F-Assets in Spark (FLR).

Summary Section 1: Vision and Protocol

Key points:

1. Flare's technology is well-suited for EVM-compatible scenarios.

2. It addresses PoS issues using FBA and Avalanche.

3. In my view, the network has the potential to bring dApps to the existing large, smart, and growth-hacking community, as they can leverage established user bases without having to attract their own from scratch.

Investors

Flare's funding is divided into two rounds:

1) 2019 - Xpring (RippleX), amount unknown.

2) June 8, 2021 - $11.3 million seed round funding.

While we know that "Flare Networks Ltd" allocated 25 million Spark tokens, we do not detail what token allocations investors received for this investment, which we will discuss in the team/governance section later.

Tokenomics

Supply

Both FLR and SGB tokens are inflationary as they are designed for utility rather than token value. Inflation occurs in two ways:

1) FTSO participation pays out newly minted tokens. The inflation rate for the initial total supply of Spark tokens is set at 10% per year, with no compounding.

2) F-Asset & FXRP incentive pools (which we discussed earlier): Flare tokens are gradually unlocked for holders at a rate of 3% per month. These tokens may trigger inflation before all 100 billion FLR tokens are released into the market.

Demand

Demand for the tokens will come from two sources:

1) FTSO contributions: If holders do not intend to act as FTSO data providers, they will lock/delegate their tokens to data providers.

2) Collateral: FLR can be used as collateral in applications, such as in the FXRP system.

Stedas compiled this nice infographic showing how to earn on Flare:

FTSO

As we often mention FTSO in this section, let's quickly go over it…

From Alpha Oracle, these explanations of FTSO and signal providers are much more concise than I could do, but in summary:

1) FTSO is a key component of the network.

2) It is responsible for collecting and forming accurate estimates of network data for Spark (FLR) holders and applications.

3) Signal providers are rewarded for the accuracy of their data, which is then distributed to token holders.

4) FTSO is likened to the brain of the network.

Songbird's FTSO Statistics

By the end of last year, there were some impressive statistics regarding the usage of Songbird FTSO.

Tracking public FTSO providers can be done at flaremetrics.io:

Please note here: If the protocol is PoS, this list seems too short to provide adequate attack resistance, but since Flare uses other methods, there are no issues with Nakamoto consensus efficiency.

F-Asset Agents

Agents bypass the technical details to obtain newly minted Spark tokens to provide services, which also adds inflationary pressure to the supply. I would recommend this article for a complete overview.

Summary Section 2: Investors, Tokenomics, and Validators

Key points:

1) Two rounds of funding from major investor RippleX, followed by $11.3 million funding, including Cardano's C-Fund (though F-Asset has not yet been announced).

2) Both FLR and SGB tokens are inflationary. Inflation occurs in two ways: FTSO pays newly minted Spark, F-Asset, and FXRP incentive pools. Demand stems from usage.

3) 59-100 FTSO providers, and it's great to see growth over time.

Developer Experience

A key area that urgently needs attention is the developer experience. Two things stand out: developer resources, such as support, tools, etc., and (mainly) developer funding.

Resources

Currently, there is only very basic support directly from the team, such as this tweet about testnet upgrades:

This is not surprising and should be expected, as Flare is a new chain, and it takes time to create tools and build a knowledge base for developers to truly leverage the network.

While they are doing well with the resources they have, I think we need to see the entire field elevated to another level.

Enter their new hire @dommoore as the ecosystem lead. He was previously the growth lead at Outlier Ventures, a highly respected crypto VC and Web3 accelerator.

Grants

The necessity of developing a grant program for developers is crucial, as other L1s have substantial funds to support the rapid growth of their ecosystems.

Flare is significantly lagging in this regard, having raised a relatively small (compared to other L1s) $11.3 million in 2021. Without an initial (Coin/Dex/Protocol?) proposal to increase finances, I expect we will see larger raises and the release of $FLR to generate more funds (if structured as IxO).

For example, Near's funding program is estimated to have a massive $120 million fund, so to make Flare competitive, we need to increase funding by $100 million…

Is there a precedent for this? Possibly, as Oasis $ROSE just announced that @BinanceLabs will contribute to the Oasis ecosystem fund, increasing the fund to $200 million.

Time will tell if Flare can replicate this success, but as we see from Flare's career page, hiring is underway, so keep an eye on this space!

Summary Section 3: Third-Party Developers

Key points:

1) Possibly the least developed area (understandably).

2) Actions are being taken to rectify this, but they need to act quickly and raise substantial funds, which brings execution risks.

Use Cases and Traction

This is a great overview of Flare's progress in 2021:

We will first look at how Songbird (Flare's Canary network) is performing, then delve into specific dApps.

Songbird Network Statistics

According to the following statistics from December 13 of last year, the Songbird network has already demonstrated high levels of usage and functionality.

240k wallets can rival Polkadot's canary network Kusama, which can be seen here.

Additionally, as of January 11, 2022, we confirmed that 10 million transactions have occurred:

Projects Built on Flare

There are already a small number of projects in the ecosystem building:

1) DeFi: @FlareFinance @TrustlineInc

2) FTSO: @FTSO @ftsoau @BestFtso @lightFTSO @ftsoeu @AlphaOracle1 @ftso_uk @AureusOx @scandinodesFTSO

3) Data: @flaremetrics & https://songbird-explorer.flare.network/

4) NFT: @GoGalaGames @crypto888crypto @GE_Federation @fcflio @BoredApesXRP

@SparklesNFT @SGBPunks @BabySongbirds

In my recent video and tweet thread, I detailed the traction statistics for Flare and various projects.

dApp Highlights: Flare Finance

Flare Finance is an anonymous developer team building critical DeFi infrastructure on the Flare network. They are not affiliated with the core team, although my understanding is that Flare's CEO Hugo Philion has met with the team and vouched for them.

This is how Flare Finance describes itself in its white paper:

Flare Finance is the first institution-grade decentralized finance platform built on the Flare Network. It offers a suite of six unique decentralized finance products specifically designed to guide the Flare network through a single suite of DeFi solutions for commercial and retail financial products. Flare Finance leverages Web3 capabilities to allow people to use our products and services trustlessly without giving up custody of their funds.

So far, they have delivered.

Flare Finance's Experimental Finance (ExFi) platform V2 is live on the Songbird network and has already surpassed $20 million in TVL, with only three products on the platform. Even in the past week, we have seen some impressive things from Flare Finance's on-demand liquidity product FlareX:

Despite the recent sell-off, Flare Loans product has also performed decently.

Although the value of the ExFi airdrop is not particularly good, with delays, reworks in distribution, etc., it hasn't been smooth sailing. This has frustrated some in the community:

I cannot comment on the price as the market is the market, but I will say that I believe the Flare team's work is very transparent and that they act sincerely when issues arise, as this post from ExFi shows: this puts us in a good position with the team and governance, but first, let's quickly check our L1 flywheel.

Summary Section 4: dApps, DeFi, etc.

Key points:

1. Very positive statistics from the Songbird network have emerged.

2. 240,000 wallets registered—competing with Polkadot's testnet Kusama.

3. Flare Finance has already boosted their TVL.

Flare's Setup and Governance

The core team is as follows:

Hugo Philion, Co-founder and CEO, previously founded the modular building system Future Generations. Portfolio manager for two commodity derivatives funds over $1 billion.

Sean Rowan, Co-founder and CTO, has been involved in blockchain since 2015, when he designed a secure vehicle communication protocol utilizing blockchain-based public key infrastructure with colleagues from UCLA and TCD. R&D engineer at RAIL in Dublin, Ireland, where he developed backend network software for medical assistive robots. The latest version of this robot launched by RAIL was featured on the cover of Time magazine in November 2019.

Dr. Nairi Usher, Chief Scientist, was previously a postdoctoral researcher in quantum machine learning at UCL. Collaborated with Siemens to apply quantum algorithms to healthcare and image recognition.

Recently, with Flare's hiring spree, the broader team has significantly grown, now comprising about 20 people in the organization.

The project has appointed eight advisors. 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, Flare has created two entities: a foundation and a limited liability company. They will play different roles, summarized as follows:

Interestingly, Flare Networks Ltd retains voting rights, which is not unusual for a foundation as far as I know. Their logic is that the company will always act in the best interest of the network, as its long-term financial viability depends on the network's success.

The token distribution details are as follows:

The full text is here.

Flare's Community Governance

This is an evolving area, but the community, holding 65% of the votes, has significant say in the future direction of the network.

FTSO.uk breaks down decision categories into this nice infographic, showing the different thresholds that need to be passed:

Ideally, I would like to see a gradual transfer of part of the voting rights from Flare Networks Ltd to the community, but this may emerge over time.

This completes our analysis, so let's place them on our L1 flywheel.

Complete Business Model Breakdown of L1

So here is the complete breakdown:

Now that we have this, let's continue with our bull/bear analysis!

Bullish and Bearish

My bullish case for Flare Networks is simple:

1) Users of non-Turing complete chains will convert assets to Flare in search of yield.

2) The continuous addition of F-Assets with the launch of new chains will infinitely attract more communities.

3) Proof of stake is proving to be less secure, leading to more user conversions.

4) Flare scales effortlessly and takes a slice of the L1 pie.

In a bearish case, there are several obvious risks:

1) Technology can quickly become outdated; will Flare be flexible enough when it goes live?

2) Still no live product, so other L1s have substantial funds backing them.

3) Will there be demand for the assets? wBTC still only accounts for 1.4% of the circulating supply and has not changed since June 21…

4) Spark Dependent Applications (SDA) rely on third-party networks to maintain growth and gain adoption.

5) Severe volatility in supporting currencies/tokens may lead to collateral issues.