Flare Network Review: Smart Contract Network For XRP
As the third largest cryptocurrency most people familiar with the space have heard about Ripple and they understand that it is a global payment and foreign exchange network that was designed to replace the outdated SWIFT banking network. And while it works great for that specific use case, otherwise it has shown limited usefulness in other functions.
That might all be fixed however as the Flare Network has been created with the goal of improving the utility of XRP tokens by creating a network with smart contract capability for the XRP token. To be certain the smart contracts are not being added to the Ripple network, but will be on the Flare Network, and that network will then support the use of XRP as FXRP.
The Flare Network also has its own token called Spark (FLR), which was recently released to XRP holders in an airdrop that created quite a stir in the Ripple community.
If all of this sounds interesting then grab yourself something to drink and get ready to learn more about the Flare Network.
What is Flare?
Flare was created by Hugo Philion and Sean Rowan in order to solve two basic blockchain problems:
- Three-quarters of the value in public blockchain tokens is unable to be used with smart contracts in a trustless manner. This is the issue of immediate need according to Philion and Rowan.
- The directions being taken in attempting to scale blockchain networks could lead to potential future issues as many of the new networks are addressing scaling through Proof of Stake consensus or some variation thereof. All of these protocols derive their network safety from the native token of the blockchain. This presents both an immediate and a long-term problem.
Proof of Stake Issues
According to Flare, the most immediate problem with Proof of Stake consensus is that it isn’t properly designed to allow for safe alternate uses of the native tokens. As we’re seeing with the explosion in DeFi platforms, any rational token holder who is able to increase the yield on their token by providing liquidity to a stablecoin will do so. The issue is that this takes tokens away from staking, and threatens the security of the network.
Longer term the potential issue comes from the possibility that over time the value of a staking token won’t increase in value. If that occurs while network traffic is increasing the network also becomes increasingly unsafe. While a higher valued token is good for network security and for token investors, it’s bad if we want decentralization to become the norm for doing business.
When the value of the token rises it is diverting capital away from other uses. Over the long term this becomes a problem because eventually in a smart contract network using proof of stake the scale of capital needed simply to secure the network would become too high to be feasible.
Ultimately Proof of Stake networks can scale for transactions, but they are unable to scale for value.
How Flare Aims to Solve these Issues
Flare proposes a new way to scale smart contract platforms without linking the security of the network to the value of the token. While the network still requires a native token to deter spam, that token isn’t linked in any way to the security of the network. Flare uses the FLR token as its native token and it is well suited to enable the trustless usage of non-Turing complete tokens with smart contracts.
Flare calls itself the first Turing complete Federated Byzantine Agreement (FBA) network. It uses the Avalanche consensus protocol that’s been adapted to FBA consensus. The benefit to using FBA is in its ability to achieve network security without relying on any economic incentives for holders. Because Flare uses a version of the Ethereum Virtual Machine (EVM) it is capable of running Turing complete smart contracts.
FBA has been criticized because it can lead to fragile topology where the failure of a single node can cause the failure of the entire network. Flare avoids this by implementing a Unique Node List (UNL) topology to emphasize clarity and ease-of-use while maintaining the open-membership property of FBA.
While Flare enables Turing complete smart contract usage, it also has a protocol built on top of the network that allows for the trustless issuance, usage and redemption, of XRP on Flare. Flare calls this protocol FXRP and it allows XRP to become FXRP on Flare, secured by the native FLR token. In essence this allows XRP to use smart contracts, and can also create a trustless pipeline for XRP to other networks for the purposes of interoperability.
This general methodology can also be extended to any other non-Turing complete token, and the ability to do so has been included in the governance and systems of the network. This means any non-Turing complete token can eventually access the ability to use smart contracts and become interoperable through Flare.
The problem faced by the Flare team in bringing XRP to the Flare Network is the impossibility of a public blockchain smart contract to control an XRP address. This is because smart contracts have no way to store a secret key and maintain its secrecy.
If Flare tried to bring XRP onto the network using just code it would also require a group of individuals to come together and use a multi-signature address they collectively control to authorize transactions. Of course this would mean FXRP under these conditions would be neither decentralized nor trustless. And that would be unacceptable.
With the current implementation of FXRP any XRP holder can send their tokens to an agent on the XRP network. The agent holds the XRP and communicates with the smart contracts on Flare, which issue FXRP at a 1:1 ratio. These FXRP tokens are also secured with FLR at a 1:2.5 ratio. So, for every 1 FXRP issued there must be 2.5 FLR staked. This keeps the XRP held by the agent secure and it does away with the need for any centralized intermediary.
How does FXRP work?
Owners of FLR are able to send their tokens to the smart contracts on Flare that make up the FXRP system. In essence this is providing collateral to the FXRP system. These smart contracts are called agents. The FXRP system will be composed of many agents. Let’s name one of them Guy.
As an agent in the FXRP system Guy has staked 5,000 FLR as collateral. The system requires 2.5 FLR for each FXRP token issued. If the exchange rate of FLR to XRP is currently 10:1 these 5,000 FLR will allow Guy to issue 200 FXRP. i.e (5,000 / 10) / 2.5
Now Guy is ready to mint FXRP. When an XRP holder wants to create FXRP they send a transaction to the FXRP system. The holder initiating this transaction is called an originator. In order to create FXRP they also pay a fee of 0.1% of the transaction value. The fee goes to the agent, and the transaction tells the agent what address it should send the FXRP to when it is minted and where the XRP will originate from on the XRP Ledger.
Presuming there is sufficient collateral in the FXRP system it is locked to secure the FXRP, which makes the transaction trustless because the originator doesn’t have to trust the agent who now has an incentive to return the XRP when requested to do so or lose the FLR that’s being held as collateral. If the system doesn’t have enough collateral it will return the XRP and the fee to the originator.
It’s key to note that the 2.5 collateral ratio must be maintained at all times. If at any time the value of XRP rises or the value of FLR falls so that the ration drops below 2.5 Guy will have a short period of time to restore the ratio by adding more FLR tokens or purchasing FXRP tokens to redeem.
If for whatever reason Guy is unable or unwilling to restore the 2.5 collateral ratio his collateral is auctioned off in order to repurchase the FXRP that was issued against it. If any collateral remains after this Guy is able to keep that remainder.
If Guy keeps the collateral at or above 2.5 all is good. Later when the originator decides to redeem the FXRP back to the XRP ledger they make a transaction to do so, letting the system know what address should be credited with the XRP. Guy will receive instructions from the system regarding how much XRP to return and what address to send it to.
Along with that he will also receive two deadlines by which the transaction must be completed. If he completes the transaction prior to the first deadline he will receive all of his collateral back. However if the first deadline passes and he completes the transaction by the second deadline there will be a small penalty fee assessed before the rest of his collateral is returned. That penalty fee is burned by the system.
If Guy fails to complete the transaction by the second deadline it is considered a redemption failure. In this case the originator is compensated with FLR tokens from Guy’s stake, plus an additional 1% to cover the transaction costs of using that FLR to buy back XRP. The remaining FLR from Guy’s collateral sees 50% burned as a penalty, and the remaining 50% returned to Guy.
FLR and Dependent Applications
The FXRP system is our first example of the FLR Dependent Application (SDA). This is a dApp that uses FLR as collateral, FLR token holders for governance, the Flare Time Series Oracle (FTSO), or some combination of these elements. Note that these are all optional elements. Any application on the Flare Network is capable of functioning using just FLR for transaction and payment costs.
In the case of the FXRP system it uses FLR as collateral, the Flare Time Series Oracle to track the XRP/FLR price, and the FLR token ownership set for governance over certain parameters such as the FXRP creation fee and the collateral ratio. The SDA model provides a template to developers for extending the use of the three optional elements.
Flare Time Series Oracle
Holders of the FLR token are eligible to contribute to the FTSO to help form accurate off-chain data estimates while still retaining decentralization. The structure of the FTSO allows for many estimates of any off-chain time series. The XRP/FLR value is one example of such a time series.
The formulation of the time series data typically has two participating groups. One is the FLR token holders, and the second is the holders of the dependent application token, which Flare calls the F-asset. In the case of the FXRP system the FXRP token is the F-asset. When there is a more complex application that requires the calculation of multiple time series the F-asset will be something similar to an issued governance token.
When creating the time series the FTSO will query each participant for an estimate of the data value. The FLR holders provide estimates for every time series, but F-asset holders can only provide an estimate for the time series that’s related to the F-asset. The estimates are processed as detailed in section 4 of the Flare whitepaper and the result is output to the system that requires the time series data.
F-asset holders are incentivized to participate and provide data to contribute to the safety of the application using that data. FLR holders are incentivized by the potential to earn an oracle reward, which are FLR tokens minted by the system. FLR token holders earn this reward when they provide data that the system deems to be correct. The specific mechanics of this calculation are quite complex, and can be seen in the Flare whitepaper.
This system implicitly stakes all FLR tokens in the system since non-participants or those who provide data that is deemed incorrect do not earn rewards, which is a disincentive compared to the token holders who do receive the reward. This is Flare’s version of staking or mining rewards.
The FTSO will be initiated to provide the following prices for: XRP/FLR, USD/FLR, BTC/FLR, and XLM/FLR. Only XRP/FLR will have a corresponding F-asset at the outset. Additional time series and their related F-assets can be proposed and accepted through the Governance process.
Estimates will come from the FTSO every few seconds, but it is realistic to assume that not every FLR holder will be interested in participating in network governance, or that they will have the necessary hardware to contribute to the FTSO.
Because the Flare team has assumed this to be true they made it possible to detach the votes for these responsibilities and delegate it to others. Delegation can be cancelled anytime, and if the token is transferred to a new address the delegation is automatically cancelled.
One important feature of delegation is that the SDA’s are able to delegate votes back to the actual owner who can then re-delegate those votes to another entity. This means that agents don’t have to choose between earning FLR for providing collateral to the FXRP system or earning from the FTSO. So, whenever FLR tokens become unavailable to the owners in an SDA, as long as the application defines who the actual owner is, delegation can be used.
FLR token holders vote to govern the network, and SDA’s can also request to be governed by the FLR token holders.
In the Flare whitepaper you can find regimes for any manual on-chain changes that can be initiated and voted on by FLR holders. These are things such as changing the fees associated with actions, changing the collateral ratio, changing transactions costs, and other variables that do not require a code change.
For those things that do require a code change, such as changing network consensus parameters, or adding a new time series to the FTSO, there will be created a Flare Foundation. The Foundation hasn’t been created yet, but it will be a non-profit entity with responsibility for 5 areas: grants, investments, research and development, education, publicity and partnerships.
Because the Foundation has the research and development function they become integral to the code update process, building, testing, analyzing and then deploying any proposed code changes.
The Foundation will be created to be completely transparent in its activities and its spending. It will release a bi-annual report on its activities and expenditures. Most importantly it is not empowered to set an agenda, but is created in a way that only allows it to take direction from the FLR holders.
Because of this restriction the Foundation cannot:
- contribute to the FTSO in any way;
- deploy any of its FLR holdings as collateral for any application on the network;
- use its FLR holdings to vote in any governance vote or assign its FLR tokens to others to do so.
In addition, FLR holders could vote at any time to disband the Foundation, in which case it would be required to wind down all activities and burn any of its remaining tokens.
FLR Issuance and Airdrop
Flare chose to release its tokens in something it termed as a utility fork. Traditional forks have split the user base of a network, with a portion heading off in their own direction, and usually taking an antagonistic stance to the parent chain.
By contrast the utility fork is meant to add value to the original chain. That’s exactly what Flare does by allowing XRP to continue to deliver fast, reliable, trustless settlement while bringing it smart contracts and the possibility to create trustless pipelines to other blockchains. It’s a perfect example of bringing new utility to an existing blockchain.
Flare is creating 100 billion FLR tokens to mirror the number of XRP tokens in existence. The intent at the start is to make these tokens available to addresses not owned by Ripple Labs, Ripple founders, whale accounts, and any addresses that are known scammers.
Flare has made 45 billion FLR claimable by XRP holders with these tokens being allocated to addresses holding XRP at the time a snapshot of the Ledger was taken at 00:00 GMT on 12th December 2020. In addition 30 billion FLR is allocated to the Flare Foundation, and an additional 25 billion FLR is allocated to Flare Networks Limited, which is the for-profit organization supporting Flare’s development.
The allocation is meant to be on a 1:1 basis, however the actual calculation led to a distribution ratio of 1.0073 FLR for each XRP at the time of the snapshot. In addition, the tokens cannot be claimed until the mainnet goes live, which is supposed to occur in the first weeks of June 2021. Anyone who held XRP tokens on an exchange supporting the airdrop will automatically be credited with FLR tokens when they are distributed.
The list of supporting exchanges includes Binance, KuCoin, Coinbase, Poloniex and many others. Those who hold their XRP in a self-custodial wallet will need to register a claim, and the FLR tokens will be delivered to the address set in the claim. There will be a number of FLR compatible wallets to choose from when the mainnet launches.
It is also worth noting that Flare has said “You may claim FLR after the network goes live but not after the 6 month date from the Snapshot.” Since the snapshot occurred on December 12, 2020 that indicates the mainnet will launch prior to June 12, 2021.
In addition, not all the tokens are being distributed immediately. Flare will release 15% of the token allocation when the mainnet launches. The remaining FLR will be released over the next 25-34 months at a rate of 2-4% per month.
Who is Behind Flare Networks?
The CEO and a co-founder of the Flare Network is Hugo Philion. Prior to creating Flare he was the founder of the modular building system, Future Generations. His background is in investments and he has a Bachelor of Science degree in Investment and Financial Risk Management from Cass Business School.
Later he received a Master of Science in Machine Learning from UCL. He also gained experience working as a commodity derivatives portfolio manager at two $1bn+ funds.
The other co-founder of Flare and its CTO is Sean Rowan. Sean has been 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. Prior to that he received a dual BA in Mathematics and BE in Electronic and Computer Engineering from Trinity College Dublin.
He later went on the receive a Master of Science in Machine Learning from University College London, which is presumably where he met Hugo Philion. Sean was also an 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.
With Ripple having such a huge following, and a huge potential in the banking space, the Flare Network could become equally large as the network that brings smart contract functionality to XRP. That’s certainly what the founders of the project are hoping, and there’s likely a large group of XRP enthusiasts who are equally enthusiastic over the possibilities brought to Ripple by Flare.
One thing that can be said for the project is that it certainly generated a lot of hype with its airdrop, and we’re willing to bet there are millions who never heard of Flare before who are now aware of its existence, and possibly of its mission and goals. After reading this article you should be counted among them.
The airdrop also created a stir within the Ripple community as the XRP token surged higher by almost 300% in November 2020. That was due to speculators crowding into the coin in order to take advantage of the airdrop. Since then things haven’t been as rosy as XRP has fallen from a high around $0.90 to as low as $0.227880 on December 23, 2020.
We don’t know what will happen with the FLR token when it is distributed, but even with the slow emission schedule initially planned it seems like the market will be flooded with FLR tokens in the initial 2-3 years following the launch of the mainnet. Unless there is some developments that cause a similar spike in demand during that time the token could be poised to drop as the same speculators who bought XRP for the airdrop decide to dump their FLR as soon as possible.
If you’re taking a longer time-horizon this could be a good project to get behind, and if we’re right about the launch of the mainnet it could present a good opportunity to snap up massive bags of FLR on the cheap. Of course only time will tell if that’s true.
The other thing to remember is that Flare began with Ripple, but theoretically it can add smart contract functionality and interoperability to any blockchain. Considering that three-quarters of the value in public blockchain tokens is unable to be used with smart contracts in a trustless manner currently Flare has a huge potential growth curve ahead.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.