FLOW – blockchain for the mainstream

With Dapper Labs, of all people, the inventors of the NFT changed the blockchain. Can FLOW seriously compete with Ethereum?

This article first appeared in the April issue of Crypto compass, the magazine for everything to do with blockchain. Do you want to know more about it? Then click on this button:

The craze for collecting has reached the blockchain space: digital collectibles – from works of art to tokenized tweets – are achieving record prices, trading venues for non-fungible tokens (NFT) are growing rapidly and even the big daily newspapers have now noticed that something is in the bush. Another effect of the hype: the prices of crypto tokens with an NFT focus have performed above average since the beginning of the year.

The fact that most of them – be it Rarible (RAR), Enjin (ENJ), Chiliz (CHZ) or WAX (WAXP) – rely on Ethereum should come as a surprise to few. After all, Ethereum is not only the breeding ground for the overwhelming majority of decentralized applications (dApps), but also the home of the CryptoKitties, the first NFT, which had a resounding success at the end of 2017. The kitten collection dApp was the first application of the Ethereum token standard ERC-721, the most widely used token standard for NFT to date.

Alone, the most popular transshipment point for digital collectibles is away from Ethereum: on the Flow Blockchain. There is neither a certain irony nor a good justification that the creators of CryptoKitties and ERC-721 came to the fore to overthrow Ethereum as the smart contract king from the throne.

The NFT hit machine Dapper Labs

The Canadian start-up Dapper Labs proved two things with the CryptoKitties in 2017. First, there is a market for blockchain-based digital collectibles. Second: When the user rush is high, Ethereum reaches its limits all too quickly. Because the hype about the collecting kittens was responsible in its heyday that the Ethereum blockchain could no longer keep up with the processing of the transactions and the network fees skyrocketed.

“We got nasty emails from people who were annoyed that we had built this thing because we ruined the network for everyone else,” recalls Dapper Labs CTO Dieter Shirley in an interview about the CryptoKitties hype.

Dapper Labs therefore saw the need for a new technological basis for mass-compatible dApps – the idea behind the Flow Blockchain was born. The start-up received strong financial support for the development of Flow, including from Andreessen Horowitz, Union Square Ventures and our company of the month, the Warner Music Group.

Imagine it’s blockchain – and nobody notices

With Flow, Dapper Labs wants to put the user experience in the foreground. Applications on Flow should also be accessible to users who did not have a doctorate in blockchain. The best (and so far only) example is the NBA Top Shot application. At Top Shot special moments from NBA games are made tradable. The collectibles are in the form of short video clips. There are regular “drops” of new bundles of clips that can be purchased through the NBA Top Shot portal. There, users can also pay with crypto currencies, but the payment option via credit card is more mainstream.

Top Shot has its own marketplace in which users offer their “Top Shots” to each other for sale. This marketplace is by far the busiest in the NFT sector, both in terms of sales volume and user numbers. At the time of going to press (March 24), almost 40,000 traders had used the Top Shot app in the last 24 hours, exchanging NFTs worth around USD 7.56 million in 36,952 transactions. Even though the app is still in the beta phase. For comparison: The runner-up, the CryptoKitties imitation CryptoPunks, had just 70 users and 49 sales in the same period.

Flow blockchain: division of labor instead of sharding

In order to achieve scalability at the mainstream level, the flow network relies on a process that comes from computer science: pipelining. Put simply, pipelining describes the process of breaking down commands into subtasks and processing them in parallel. In this way, the computing efficiency of a CPU is significantly increased.

Flow makes use of this concept by transferring this form of division of labor to a network. There are four different types of network nodes (validator nodes) at Flow, each of which specializes in different subtasks.

• Consensus nodes register the transactions on the blockchain and organize them
• Execution nodes perform the calculations associated with each transaction
• Verification nodes control the execution nodes
• Collection nodes improve network connectivity and guarantee data availability for dApps

What these have in common is the fact that they have to deposit a stake before they can start their work. This is where Flow’s platform currency comes into play: the FLOW token.

FLOW: staking, staking, staking

The FLOW token serves at the same time to secure the network and as an incentive for the operation of a validator node: These earn FLOW by performing their respective tasks in the network. Another source of income are the transaction fees that are incurred per network operation and are also paid out with each block. Those who do not operate a validator node themselves can participate in staking by delegating FLOW tokens to a validator.

So far, staking has been the main use case for FLOW. The proportion of coins staked in the network is currently correspondingly high. At the time of writing, 93 percent of all FLOW tokens are staked. This means that FLOW is still far from the 50 percent that was targeted as the average value for the first year and a half after the launch of FLOW in October 2020.

This share should decrease with the growing number of applications for the FLOW token. For example, like Ether (ETH), FLOW should also be used to create new coins and serve as a bridge currency within its ecosystem. For corresponding smart contracts, Flow uses a specially developed programming language called “Cadence”, which is supposed to be particularly developer-friendly.

Investment case FLOW Token

In view of the enormous price development that the Flow Token has seen since its publication, the question now arises whether there is still a lot of upside potential. The answer to this is yes and no.

On the one hand, Dapper Labs has a number of outstanding partnerships that are not limited to cooperation with the NBA. Dapper Labs is also partnering with the UFC, Dr. Seuss and the game manufacturer Ubisoft. Companies such as T-Systems, Samsung and Coinbase have invested in Dapper Labs and operate Validator Nodes. So one could speculate that NBA Top Shot will not remain the only hype-laden box office hit on the FLOW blockchain. A circumstance that could give the FLOW course further impetus.

Dump in sight? FLOW 2020 is still available at a bargain price

You have to keep in mind, however, that Flow has a lot of early investors who were able to acquire FLOW tokens very cheaply last year. Over 12,500 users took part in the community sale on the IEO platform CoinList, where FLOW was offered for $ 0.1. The community sale alone raised around 9 million US dollars – 90 million flow tokens. In a subsequent Dutch auction, another 25 million FLOWs came under the hammer at a closing price of USD 0.38. The tokens from the community sale are subject to a blocking period of two years, with 50 percent being activated after one year, after which the remaining 50 percent is distributed linearly. The tokens from the Dutch Auction will be activated after one year.

So you have to expect that there can be greater profit-taking in October 2021 at the latest. In addition to the IEO participants, there are also other early investors in the boat whose holding period has expired. Flow launched in January with 1.25 billion FLOW tokens, all of which are subject to a lock-up period. That means: All 32.7 million FLOW that are in circulation at the time of going to press are tokens that come from staking rewards. The discrepancy between real market capitalization (only circulating FLOW tokens: 910 million USD) and diluted market capitalization (all FLOW tokens: 37.4 billion USD) is correspondingly large.

Centralization of access and capital

In addition, the flow blockchain can so far neither be described as really decentralized nor freely accessible. On the one hand, candidates for Validator Nodes must apply to Dapper Labs. On the other hand, there is also a centralization of capital. 20 percent of the tokens that were distributed with the Genesis block went to Dapper Labs. Another 18 percent are assigned to the development team, which consists of 90 members, some of whom come from Dapper Labs and some from other companies. The lion’s share of 29 percent goes into a reserve for the expansion of the FLOW ecosystem. Again, Dapper Labs has the final say on who should receive the funding.

Although Dapper Labs states that they want to hold the FLOW tokens for the long term, trust has to be exercised.

Conclusion: accessibility at the expense of decentralization

However, it may be this centralization that makes Dapper Labs and FLOW particularly attractive to mainstream partners. There is a direct contact person who helps with the implementation of projects in Flow. This can be worth its weight in gold, especially with supposedly complicated constructs such as NFT. The low-threshold entry made possible by NBA Top Shot is definitely a role model for apps based on blockchain.

However, whether FLOW will succeed in competing with the really open and decentralized smart contract primus Ethereum in the long term depends largely on whether Ethereum gets its scalability deficits under control. The clock is ticking: Ethereum with version 1.5 should switch to Proof of Stake this year.