Messari: A Detailed Analysis of the Current Status, Technical Features, and Competitive Landscape of the Flow Network

Written by: Messari

Key Points of the Report

• The Flow blockchain initially gained significant success with NBA Top Shot NFTs, currently boasting over 3 million active users across the network, including validating and delegating nodes.
• Flow currently leads in C2C NFT transactions, surpassing Ethereum and Solana.
• Flow recently announced a $725 million ecosystem fund to further support developers and users within its ecosystem.

In Q2-Q3 of 2021, the NFT market saw a massive influx of capital, with estimated transaction volumes increasing by over 8000%. Since then, individual investors, independent artists, and consumer giants have turned their attention to the NFT market, ushering in what is referred to as "Renaissance 2.0." Platforms providing NFT minting and trading services have accelerated technological innovation, becoming gateways for individual investors to participate in the crypto market and the Web3 world.

Flow is one of the most well-known platforms in this space. Flow is a Layer 1 (L1) proof-of-stake (PoS) blockchain developed by Dapper Labs, designed to provide a platform for Dapper Labs, independent project teams, developers, and artists to build decentralized applications, avoiding the complexities of Ethereum's Layer 2 (L2) scaling solutions. The Flow blockchain employs a unique multi-role network architecture, which is simpler and more efficient compared to Ethereum L2's sharding solution, enhancing both network speed and throughput.

Historical Overview

In Q4 2019, the Flow blockchain released its developer preview version, allowing developers to create smart contracts without needing access to a full instance. Prior to this, it had raised over $30 million through three rounds of private funding from more than 80 VCs, including Coinbase, Samsung, and Union Square Ventures (USV).

During this period, Dapper Labs utilized the Flow developer preview to develop NBA Top Shot—one of the earliest and most well-known sports NFT projects in the market. The success of NBA Top Shot, combined with the launch of Flow Beta Mainnet V0.1 in Q2 2020, led to Flow's rapid rise within the L1 protocol ecosystem. Since the beta mainnet launch, Flow has partnered with globally recognized sports brands like UFC and NBA, deploying over 800 smart contracts on the network and accumulating more than 4 million unique accounts.

Flow Blockchain

As mentioned earlier, the Flow blockchain network operates on a multi-node architecture design. To avoid the complexities of Ethereum sharding, Flow's multi-node architecture separates the tasks of validating nodes at different stages of transactions, allowing each type of node to focus on a specific task to improve the efficiency of each validation step and transaction. In contrast, in a sharding design, shard nodes are responsible for different transactions but do not set dedicated validating nodes for each step of a single transaction.

This design encourages nodes to focus on deterministic or non-deterministic tasks, based on the idea that the main bottleneck causing network congestion is deterministic tasks, i.e., "objective" tasks such as calculating the results of sequential transactions. Each node continuously optimizes its existing capabilities, thereby improving the overall throughput of the blockchain and addressing issues faced by users and developers within the network.

Tasks on the Flow blockchain are executed by four different types of nodes, each of which must stake a certain amount of funds to perform designated tasks:

• Consensus Nodes: Determine whether each transaction exists and its order.
• Execution Nodes: Perform calculations related to each transaction.
• Verification Nodes: Ensure that execution nodes are functioning correctly and maintain network security.
• Collection Nodes: Collect transaction data from user agents, providing better network connectivity and data availability for projects on Flow.

To ensure network security, there are numerous nodes on the Flow chain that execute non-deterministic tasks for consensus and verification nodes, thus providing security guarantees for the network. Execution and collection nodes perform purely deterministic tasks, making them less susceptible to attacks. This also means that execution nodes must be run on specific professional hardware devices.

Source: Flow Whitepaper

To become a validator on the Flow network, a certain amount of FLOW tokens must be staked, as follows:

• Consensus Nodes: 500,000 FLOW
• Execution Nodes: 1,250,000 FLOW
• Verification Nodes: 135,000 FLOW
• Collection Nodes: 250,000 FLOW

Flow Chain Data

In the initial phase of the project, Flow launched three large-scale token distribution/participation programs to expand community member engagement and network scalability:

1. Cloudburst Partners: Selected by initial FLOW token holders, running one or more types of nodes while distributing rewards to builders on the Flow platform.

2. Floodplain Validators: Ecosystem participants interested in early involvement and helping Flow expand content and resources.

3. Decentralized Reputation and Incentive Protocol (DRIP): Aimed at distributing FLOW tokens to end-users of dApps on Flow to incentivize users to stake, delegate, or actively participate in the ecosystem.

During this period, Flow faced potential risks to security and scalability due to the concentration of most tokens in centralized entities. Transitioning to a decentralized network depended on when its token distribution plan could incentivize developers and users to participate in maintaining the network's security and scalability. Since then, Flow has successfully achieved network decentralization through token distribution. As of now, community nodes account for over 68% of the network's consensus nodes, and Flow has recently been recognized as "community-controlled."

The latest data shows a total of 305 nodes across the network:

• Execution Nodes: 7
• Consensus Nodes: 115
• Collection Nodes: 106
• Verification Nodes: 77

Additionally, over 31,000 users have contributed to the Flow network through delegation. Specifically, delegation refers to FLOW token holders staking FLOW by delegating tokens to node operators. Currently, over 730 million FLOW tokens (approximately 52% of the total supply) are staked across the network, with staking rewards exceeding 100 million FLOW (over 7% of the total token supply).

Technical Features

Cadence

Like most new L1 protocols, Flow has its own programming language, Cadence, for smart contract development. In terms of data storage (e.g., digital assets), Cadence provides a higher level of decentralization. Unlike Solidity, which stores information on a central ledger, Cadence stores data directly in users' accounts. With no centralized data storage, Cadence can offer greater security for Flow's network architecture. It also provides developers and users with a simpler way to create and transfer digital assets on the Flow chain.

SPoCK

Additionally, Flow has integrated an innovative cryptographic technology called Secret Knowledge Proof of Knowledge (SPoCK) to address the dilemma of validators. SPoCK features cryptographic commitments. They prove that validating nodes have correctly performed their work and will not blindly approve the results they generate without properly verifying that the execution node's tasks have been completed correctly. SPoCKs also constrain execution nodes by ensuring that each execution node correctly computes each block.

Flow Client Library (FCL)

Almost all L1 protocols allow interaction between crypto wallets (e.g., Metamask), decentralized applications (dApps), and blockchains. Traditionally, dApps access crypto wallets through browser plugins or browser wallets. While these methods have facilitated the adoption of many blockchains, they hinder user entry. They are difficult to scale and require additional development to enable interaction between wallets and dApps. In contrast, FCL allows developers to connect with wallets or dApps by writing only a few lines of code. It also enables any dApp to interact with any FCL-compatible wallet and vice versa. For developers, this provides a seamless development experience for building dApps on Flow and ensures consistency in interactions between applications and various wallets.

FLOW Token

The FLOW token is the foundation of the Flow blockchain, allowing developers and users to interact on the Flow chain. Holders can stake FLOW tokens, participate in maintaining network security, and contribute to the execution of computing and storage tasks across the network. FLOW tokens are also used to pay rewards to stakers and serve as gas/transaction fees for on-chain activities.

FLOW Distribution

During the initial issuance of FLOW tokens, a total of 1.25 billion FLOW were minted and distributed to the following holders:

• Dapper Labs: 20%, allocated to a long-term treasury.
• Development Team: 18%, released over three years with a one-year cliff.
• Ecosystem Development: 29%, locked for the first year, unlocking no earlier than the first unlock time for early supporters and the team.
• Community Sale: 13%, locked for 12 months.
• Major Supporters (contributing over $1 million): 11.1%, with a 24-month lock-up period and a one-year cliff.
• Minor Supporters (contributing less than $1 million): 8.9%, with a 24-month lock-up period and a one-year cliff.

Source: Flow Official Website

It is important to note that during the lock-up period, FLOW tokens could only be used for staking or within NBA Top Shot from the outset. The lock-up and transfer restrictions for the aforementioned parties strictly adhered to the timeline.

Flow has not yet established its own treasury; however, the Flow Foundation will participate in managing 250 million FLOW tokens reserved for long-term distribution and ecosystem development.

Governance

On-chain governance for FLOW stakeholders includes three types of decision-making processes:

1. Ecosystem Decisions: Involves issues related to electing council members and determining foundation fund allocations.

2. Protocol Parameters: Involves network parameters that do not require protocol upgrades.

3. Protocol Upgrades: Involves all matters during network hard forks, requiring substantial participation and support from all FLOW stakeholders.

These features are planned to be publicly launched in Q2 2022. Currently, most decisions within the Flow ecosystem are made off-chain, including submitting proposals to the Flow GitHub repository, community discussions on proposals, and making decisions based on community consensus on whether to implement changes proposed. Once community consensus is reached, authorization is needed to implement changes for deployment to the relevant nodes.

Ecosystem Overview

Compared to other blockchains, Flow's mainnet has been online for a relatively short time, yet its on-chain transaction volume is impressive.

In terms of total transaction volume and active wallets, Flow currently has over 3 million active users, including delegators and validating nodes. Given the relatively short time since the protocol's launch, Flow has a long way to go to catch up with "older" L1 ecosystems like Ethereum. However, Flow has made significant progress in accelerating user activity, providing ample support for new developers looking to build and deploy on the network, attracting dApps across various sectors, such as DeFi and Web3 projects. As more projects are built on Flow, the gap in network traffic and ecosystem participation with other chains continues to narrow.

As previously mentioned, over 800 smart contracts have already been deployed on Flow, and it is particularly known for attracting NFT projects. The trading volume of the secondary market for NFTs on the Flow chain stands in stark contrast to other L1 chains (and L2 chains on Ethereum). Flow appears to be leading in C2C NFT transactions. Furthermore, with continuous user engagement in native projects and a surge of new projects, Flow continues to make significant strides in the NFT space.

In terms of secondary market transaction volume rankings, NBA Top Shot, based on the Flow chain, remains a strong competitor among new NFT projects and existing well-known projects.

After the Q1 2021 testnet, the number of new developers entering Flow significantly increased. Collaborations with well-known brands such as Samsung, Ubisoft, and Warner Music Group provide Flow with a unique advantage, allowing it to continuously attract mainstream users, not only into the NFT market but also to further explore a richer array of crypto projects. On the other hand, the mainstreaming of DeFi and Web3 projects based on Flow can enhance user and institutional awareness and participation in Flow.

Dapper Labs continues to invest in projects built on Flow and collaborates with top VCs like a16z and Animoca Brands. Additionally, the Dapper Labs team provides extensive resources and investor relations to support project financing.

L1 Chain Competition and Risks

Competition

The development of L1 chains has always been at the forefront of the crypto space, with an accelerating pace of evolution and various technologies proposed to enhance blockchain throughput, security, and speed.

Flow's efforts to compete with other chains are noteworthy, especially in the NFT and Web3 gaming sectors. Thanks to the performance of the Flow chain itself, combined with high-quality partners, Flow significantly outperformed other L1 chains in 2021.

Moreover, last year saw a noticeable increase in developer activity on the Flow chain.

Source: Electric Capital

The above data is compiled from open-source repositories and code submissions across multiple platforms, including GitHub, Gitlab, CoinGecko, and DappRadar. In 2021, among public chains with over 50 developers, Flow ranked ninth in growth rate, and if only full-time developers are considered, Flow's ecosystem growth rate ranked fifth.

Potential Risks

The above chart illustrates how market participation has formed over the past year, particularly for new blockchains providing innovative solutions for users and developers. However, all L1 chains face the challenge of balancing scalability, security, and decentralization. Generally speaking, L1 networks composed of a single type of node may struggle to balance scalability, security, and decentralization.

Flow's multi-node architecture helps achieve such a balance. The division of labor among nodes allows each type of node to prioritize one aspect of scalability, security, or decentralization. Currently, consensus, verification, and collection nodes are more decentralized compared to execution nodes. Since execution nodes are responsible for executing deterministic tasks, they do not require the same level of decentralization. On the other hand, execution nodes require specialized hardware to operate, thus contributing more to scalability.

Due to the complexity of execution nodes, there may be issues with network performance and availability. Although failures of these nodes do not threaten network security, if all eight execution nodes fail, it could lead to a halt in transaction processing. For example, during a recent network upgrade, Flow experienced a network interruption due to the introduction of new execution identifiers by execution nodes. Specifically, execution nodes are responsible for deterministic tasks, but the newly implemented identifiers were non-deterministic, leading to block failures and requiring additional memory to maintain network operation. The design of the Flow blockchain prioritizes security when activity and security conflict, so the network was paused at that time to avoid packaging erroneous blocks.

However, the incident response team responded positively to the issue and clarified what occurred during the period of network instability. The team also took measures to prevent similar events from happening in the future.

Future Directions

Flow has not provided a clear roadmap. However, according to Dapper Labs' core vision, the Flow chain can support large-scale, high-detail crypto games. Dapper Labs is currently bringing in other projects and mainstream consumer brands to gradually realize this vision, while also planning to migrate existing projects like CryptoKitties to the Flow chain.

Source: Dapper Labs

With the development of NFTs on the platform, developer activity has also increased. Flow is introducing more projects in the crypto space, including IncrementFi—a decentralized marketplace and liquidity engine aimed at building the first batch of DeFi protocols on the Flow chain.

Thanks to the influx of mainstream partners, high-quality on-chain projects, and the performance of the blockchain itself, Flow has established a significant position in the crypto industry. According to data from Dapper Labs' project team, over 6,000 developers are actively building and learning how to deploy smart contracts using Cadence on the Flow testnet. NFTs and crypto games have gained widespread adoption among mainstream investors, and Flow continues to serve artists and developers, empowering them to innovate in this field. Flow recently announced the establishment of an ecosystem fund dedicated to supporting developers and users on the network. The fund has raised a total of $725 million to support and accelerate dApp development based on Flow.

Furthermore, as native crypto protocols and Web3 applications on Flow diversify, it is expected to attract more attention and applications from developers. Although Flow faces a competitive environment before becoming the most efficient and widely used L1 blockchain, it is poised to grow into a significant challenger.