Key Insights
Flow has emerged as a prominent Layer-1 network that prioritizes consumer engagement. Notable applications utilizing this network include NBA Top Shot, NFL All Day, UFC Strike, Disney Pinnacle, Mattel Creations, and the Metaverse Football League (MFL). The architecture of Flow is innovative, featuring a multi-role design aimed at enhancing network throughput while maintaining decentralization and security. The recent Crescendo upgrade, implemented in September, introduced significant technological enhancements, including compatibility with Ethereum’s EVM and an upgraded version of the Cadence programming language. Flow has successfully secured around $624 million in funding through its parent company, Dapper Labs, and boasts a $725 million Ecosystem Fund designated for investing in developers and granting tokens.
Introduction
Interest in non-fungible tokens (NFTs) has shown a strong cyclical pattern over the years, leading to the rise and fall of numerous consumer-oriented projects. Nevertheless, Flow and its founding team have played a crucial role throughout these cycles. The founders of Flow were instrumental in creating the ERC-721 token standard with the launch of the CryptoKitties NFT project in 2017. In 2021, Flow’s NBA Top Shot platform significantly popularized NFT collectibles. Today, Flow continues to thrive, driving innovation and establishing itself as a core player in the consumer segment of the cryptocurrency market.
Background
Founded in 2018 by Dapper Labs, Flow was the brainchild of Roham Gharegozlu, Dieter Shirley, and Mikhael Naayem. This venture was created when Dapper Labs separated from its parent company, Axiom Zen, following the successful development of the ERC-721 token standard through the CryptoKitties project. Flow was unveiled in September 2019 as a solution to the scalability challenges faced by blockchain applications targeting consumers, particularly in gaming and digital collectibles.
Flow is designed as a consumer-centric Layer-1 network that supports the development of “a new generation of games, apps, and the digital assets that power them.” The network entered its Beta Mainnet phase in May 2020, allowing for credit card transactions and the use of other tokens while validator nodes initially operated without compensation. In October 2020, Flow launched its Mainnet v1 alongside the introduction of the FLOW token. By December 2020, staking and inflation mechanisms for FLOW were made available. The following years saw the implementation of governance, the launch of a $725 million Ecosystem Fund, and the commencement of permissionless smart contract deployment.
To enhance user experience, Flow has integrated account abstractions that cater to the needs of mainstream consumers. Currently, leading applications on Flow include those linked to renowned brands like NBA Top Shot, NFL All Day, and UFC Strike.
On the development side, Flow utilizes “Cadence,” its unique programming language. Recent advancements have been made through network upgrades. A proposal for EVM compatibility was introduced in October 2023. By December of the same year, Flow announced the formal upgrade to Cadence 1.0, known as “Crescendo.” In March 2024, a test version of the Crescendo upgrade went live, culminating in the official launch of Cadence 1.0 on September 4, 2024. This upgrade allows developers to use Solidity to create applications within the newly introduced Flow EVM environment.
Technology
Flow operates as an integrated Layer-1 Proof-of-Stake (PoS) network with both architectural and governance autonomy. As an integrated blockchain, Flow consolidates execution, settlement, consensus, and data availability functions into a single network. It employs a multi-node architecture that distributes validation responsibilities across various types of validator nodes.
Historically, Flow has been compatible exclusively with its own smart contract programming language, Cadence. However, following the recent Crescendo upgrade, the network now supports EVM compatibility for the first time.
Separating Consensus & Execution
Flow utilizes Proof-of-Stake (PoS) and is based on the Hotstuff Byzantine Fault Tolerant (BFT) consensus algorithm. The transaction processing and state settlement processes occur through a multi-role architecture designed to promote specialization. This setup aims to decouple deterministic tasks, such as computing the outcomes of ordered transactions, from non-deterministic tasks, ultimately enhancing network throughput while preserving decentralization and security.
Flow’s approach addresses the belief that network congestion is primarily due to deterministic tasks. In contrast to traditional networks like Ethereum or Solana, where every validator node must replicate state-update computations before finalizing a block, Flow simplifies the process by limiting consensus to the selection and ordering of transactions, leaving the computation of resulting states to separate execution nodes.
Node Types
Flow’s multi-role architecture divides the functions of a traditional validator node into four distinct roles. These roles are currently permissioned by the Flow Foundation, with each role earning FLOW token rewards and requiring FLOW tokens to be staked.
Collection Nodes: These nodes handle the selection and ordering of transactions while ensuring transaction data is available. They collaborate in randomized “Clusters,” verifying transaction validity before batching them into “Collections.” A super-majority of nodes must sign a “Collection Guarantee,” indicating that transaction data will remain accessible until the respective block is finalized.
Consensus Nodes: Tasked with block formation, Consensus Nodes confirm that a Collection Guarantee has been signed by the requisite majority of Collection Nodes. They then propose a block of transactions, with the likelihood of being selected based on their stake. Consensus Nodes also have the responsibility of slashing the stakes of any validator nodes that exhibit slashing behavior.
Execution Nodes: These nodes compute the final state of a confirmed block, making them the most resource-intensive node type on Flow. They require a complete history of the state and submit outputs as “Execution Receipts,” which are divided into “Chunks” and later revealed to Verification Nodes.
Verification Nodes: Their role is to verify the outputs submitted by Execution Nodes, employing a Specialized Proof of Confidential Knowledge (SPoCK) system that ensures outputs are validated without directly approving them. Verification Nodes validate randomized chunks of Execution Receipts, ultimately reaching hard finality once a “Block Seal” is submitted.
As of September 18, 2024, Flow is secured by a total of 451 validator nodes, including 7 Execution Nodes, 87 Consensus Nodes, 105 Collection Nodes, and 71 Verification Nodes.
Flow also includes two non-validator node types:
Access Nodes: These route transactions to the appropriate Collection Node and manage state queries to Execution Nodes. Running an Access Node requires staking a minimum of 100 FLOW, but no rewards are earned.
Observer Nodes: These provide copies of block data for Flow’s Access API. No staking is required to run an Observer Node, and they do not earn rewards.
Staking Rewards
Holders of FLOW tokens can stake their tokens to help secure the network and earn staking rewards, which are distributed approximately once a week. The annual staking rewards amount to about 5% of FLOW’s total supply, equating to roughly 1.5 million FLOW weekly. A significant portion of these rewards is allocated to stakers and validator nodes, with a recent initiative in August 2024 introducing a Flow Community Rewards program offering a temporary boost on locked FLOW tokens.
As of September 18, 2024, a total of 460.1 million FLOW, representing 30% of the total supply, is staked by validator nodes, while 253.1 million FLOW, or 16.5% of the total supply, is staked by delegators, resulting in an annual percentage yield (APY) of 11.48% for validators and 10.56% for delegators.
Network Transaction Fees
FLOW serves as the native token of Flow and is utilized to settle transaction fees within the network. Each transaction incurs a base execution fee, alongside an inclusion fee that varies based on a surge factor. While the base execution fee differs according to the transaction type, the inclusion fee and surge factor remain fixed, although adjustments may occur through future Flow Improvement Proposals (FLIPs).
Network Storage Fees
Additionally, FLOW is retained by the network as storage fees for account data. Each account holds a certain amount of data, with the storage requirements increasing whenever a user executes a transaction that introduces new token balances or contracts. If the storage capacity is exceeded, an algorithm determines the FLOW amount to be deducted from the user’s balance. Conversely, if the stored data decreases, any excess FLOW is refunded to the account.
Cadence, Crescendo, & EVM Compatibility
Flow’s programming language, Cadence, was inspired by the resource-oriented language concept introduced by Libra’s Diem. As a resource-oriented programming language, Cadence establishes the ownership and existence of on-chain assets, enforcing specific rules regarding their management.
Historically, developers on Flow were limited to using Cadence for smart contract development. However, the recent upgrade to Cadence 1.0, known as Crescendo, has introduced EVM compatibility. This upgrade allows Ethereum developers to build within the Flow ecosystem, facilitating cross-chain token transfers and enhancing state storage efficiency. On September 4, 2024, the Flow EVM environment was officially launched, allowing Solidity developers to create applications while still utilizing FLOW for transaction fees.
Account Abstractions
To enhance the user experience for mainstream consumers, Flow has integrated several account abstractions. Users can onboard without traditional wallets by signing in with email or social accounts and utilizing payment providers like Stripe, PayPal, Apple Pay, or Google Pay. This integration allows seamless access to assets across applications through a single account.
Flow also provides account recovery options through email or social accounts, enabling developers to create user-friendly transactions and sponsor network transaction fees via wallet providers or applications.
Governance
Flow employs an off-chain governance framework through which Flow Improvement Proposals (FLIPs) can influence network parameters. Proposals are initially discussed in the Governance Forum, followed by the formal submission of FLIPs via GitHub. Although the project team implements approved proposals off-chain, final on-chain upgrades must receive majority consent from validator nodes, a process referred to as “sporking.”
While Flow Foundation previously tested a governance tool called Cast, its use has ceased as of May 2023, with governance now reliant on traditional proposal methods.
FLOW Token
FLOW functions as the native token for Flow, compatible with various Flow-native wallets and EVM-native wallets like MetaMask. An ERC-20 wrapped version, WFLOW, also exists for interoperability within the Ethereum ecosystem. Launched in October 2020 during the Flow Mainnet v1 rollout, FLOW began with an initial supply of 1.25 billion tokens. As of September 18, 2024, this supply has risen to 1.53 billion due to inflationary rewards distributed to validator nodes and delegators.
Token Functions
The FLOW token serves several key functions, including:
- Medium of Exchange: FLOW is used for paying transaction fees, retaining account data storage fees, and facilitating transactions across the network, including NFT purchases.
- Staking: FLOW can be staked via Flow Port for various purposes, including operating different types of nodes or delegating stake.
Tokenomics
FLOW’s initial distribution included allocations for various stakeholders, such as pre-launch backers, Dapper Labs, and the development team. Approximately 30% of the initial token supply was directed towards pre-launch backers and community sales, with full vesting achieved by October 2023.
Fundraising
Flow has raised around $624 million through its parent company, Dapper Labs, across several funding rounds. This includes initial rounds led by notable investors and venture capital firms, along with a public token sale that generated significant interest and investment.
State of the Flow Ecosystem
As of September 18, 2024, Flow averages 6,050 daily active addresses and 131,000 daily transactions. The platform has cultivated a robust ecosystem, particularly in the NFT space, with leading applications linked to prominent sports brands. Flow’s initial success in NFTs has expanded into gaming, with projects like the Metaverse Football League (MFL) and Dimension X gaining traction.
Despite Flow’s limited presence in decentralized finance (DeFi), the recent integration of EVM compatibility could spur growth within this sector. Initiatives such as partnerships with Ticketmaster for NFT services and the development of community-focused platforms signify Flow’s commitment to expanding its ecosystem.
Grants
To support the growth of the Flow ecosystem, various funding programs have been established, including a $725 million Ecosystem Fund aimed at supporting developers. Although the structure of this fund is currently being revised, Flow Foundation continues to oversee developer grants and hackathons to foster innovation and community engagement.
Closing Summary
Since its inception in May 2020, Flow has positioned itself as a leading Layer-1 network focused on consumer engagement. The network’s unique multi-node architecture promotes specialization while ensuring security and decentralization. With the recent Crescendo upgrade, Flow has taken significant steps toward achieving EVM compatibility, opening doors for Ethereum developers and enhancing its DeFi ecosystem. To maintain its momentum, Flow must continue attracting top-tier brands and leveraging its Ecosystem Fund to drive growth and user activity, ensuring its status as a key player in the cryptocurrency landscape.
