Understanding Flow: A Comprehensive Overview

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Key Insights

  • Flow has positioned itself as a leading, consumer-focused Layer-1 network. Top applications include NBA Top Shot, NFL All Day, UFC Strike, Disney Pinnacle, Mattel Creations, and the Metaverse Football League (MFL).
  • Flow utilizes a novel multi-role architecture designed to increase network throughput without affecting network decentralization and security.
  • Flow’s Crescendo upgrade in September introduced several technological upgrades — namely, EVM compatibility via Flow EVM and an upgraded Cadence 1.0 programming language.
  • Flow has raised approximately $624 million in funding, and features a $725 million Ecosystem Fund meant to invest in and grant tokens to developers.
  • Based on the 7-day moving average on Sept. 18, 2024, Flow averages 6,050 daily active addresses and 131,000 daily transactions.

Introduction

Interest in non-fungible tokens (NFTs) has historically been extremely cyclical. With that cyclicality has come the emergence and death of many consumer-focused projects. However, Flow and its founders have played a significant role throughout many of the sector’s cycles. First, Flow’s founders pioneered the ERC-721 token standard via the CryptoKitties NFT project in 2017. Then, in 2021, Flow’s NBA Top Shot application helped put NFT collectibles into the mainstream. Today, Flow stands strong, continuing to innovate and be a foundational part of crypto’s consumer sector.

Background

Flow (FLOW) was founded in 2018 by Dapper Labs and its co-founders, Roham Gharegozlu, Dieter Shirley, and Mikhael Naayem. Dapper Labs was spun out of Axiom Zen, its parent company, after project team members pioneered the ERC-721 token standard via the CryptoKitties NFT project. In September 2019, Flow was announced “as a solution to the problem of blockchain scalability for consumer applications like games and digital collectibles.”

Flow is a consumer-focused Layer-1 network designed for “a new generation of games, apps, and the digital assets that power them.” In May 2020, Flow launched on “Beta Mainnet,” where credit cards and non-FLOW tokens were used, and validator nodes operated without compensation. In October 2020, Flow launched “Mainnet v1” alongside the FLOW token. In December 2020, FLOW staking and inflation were enabled. In the following years, Flow saw governance go live, a $725 million Ecosystem Fund launch, and permissionless deployment of smart contracts begin.

On the user front, Flow implements account abstractions and user experience enhancements to cater to mainstream consumers. Today, Flow’s top applications include those based on world-class brands, such as NBA Top Shot, NFL All Day, and UFC Strike.

On the technical front, developers use “Cadence,” Flow’s novel programming language. Flow’s most recent developments came via a network upgrade. In October 2023, a proposal to achieve EVM compatibility on Flow was introduced. In December 2023, a formal upgrade to Cadence 1.0, dubbed “Crescendo,” was announced. In March 2024, the “Previewnet” to test the Crescendo upgrade went live. Finally, on Sept. 4, 2024, Flow introduced Cadence 1.0 with the Crescendo upgrade, bringing EVM compatibility to Flow via a separate Flow EVM environment. Now, developers can use Solidity to build on Flow EVM.

Technology

Flow is an integrated Layer-1 Proof-of-Stake (PoS) network that is sovereign in both architecture and governance. As an integrated blockchain, Flow combines the responsibilities of execution, settlement, consensus, and data availability into a single network. However, Flow leverages a multi-node network architecture designed to separate validation responsibilities across different types of validator nodes.

On the application layer, Flow has historically only been compatible with Flow’s novel smart contract programming language, “Cadence.” However, after the recent Crescendo upgrade brought about Cadence 1.0, EVM compatibility was introduced for the first time on Flow.

Separating Consensus & Execution

Flow leverages Proof-of-Stake (PoS) and relies on its Hotstuff Byzantine Fault Tolerant (BFT) consensus algorithm. However, the processing of transactions and settlement of state (account balances, smart contracts, etc.) changes occurs via a multi-role architecture. This architecture is designed to encourage specialization, decouple deterministic and non-deterministic tasks, and ultimately increase network throughput without affecting network decentralization and security.

Flow’s approach stems from the belief that the main issues contributing to network congestion are deterministic, or “objective” tasks such as computing the result of ordered transactions. In traditional architectures like Ethereum or Solana, every validator node must reproduce the state-update computation before finalizing a block. Flow takes the stance that the computational effort of participating in consensus can be reduced by limiting consensus to include the selection and ordering of transactions (non-deterministic task) while excluding the computation of the resulting state (deterministic task).

Node Types

Flow’s multi-role architecture splits the roles of a traditional validator node into four roles of validator nodes. Currently, these node roles are permissioned by Flow Foundation. Each role receives FLOW token rewards, requires FLOW tokens to be staked, and can have stake slashed.

  • Collection Nodes: Collection Nodes are responsible for the selection and ordering of transactions and making transaction data available. They work together in randomized “Clusters,” with each Cluster determining whether transactions are valid before batching them into “Collections.” Then, the Cluster’s Collection Nodes come to consensus on transaction ordering as a “Collection Guarantee” is signed by a super-majority of nodes. These signatures indicate that transaction data will be made available by the Collection Nodes until the respective block has been sealed by Verification Nodes, and “hard finality” has been reached.
  • Each Collection Node must stake at least 250,000 FLOW and can be slashed if transaction data is not made available when requested, collections are invalid, or double collections are proposed or signed.

Source: Flow Project Documentation

  • Consensus Nodes: Consensus Nodes are responsible for block formation. First, they confirm a Collection Guarantee has been signed by the required majority of Collection Nodes. Then, a Consensus Node is selected to propose a block of transactions with the probability of selection being proportional to their stake. Once proposed, Consensus Nodes vote and come to consensus on the validity of the proposed block, subject to Flow’s Hotstuff consensus algorithm.
    • Consensus Nodes are also responsible for slashing the stake of each type of validator node if any exhibit their respective node type’s “slashing behavior.”
    • Each Consensus Node must stake at least 500,000 FLOW which can be slashed if they propose or vote for two blocks, propose or vote for invalid blocks, etc.

Sources: (i) Technical Whitepaper 1: Separating Consensus & Compute, (ii) Technical Whitepaper 2: Block Formation and Execution, and (iii) Technical Whitepaper 3: Execution Verification

  • Execution Nodes: Execution Nodes are responsible for computing the resulting state (output) of a finalized block. These nodes are the most resource-intensive node type on Flow, requiring full state history to be stored and computed against. Once Consensus Nodes come to consensus on the validity of a proposed block, Execution Nodes compute the outputs of transactions contained within the block, reaching “soft finality.” These outputs are submitted as “Execution Receipts,” split into separate “Chunks,” and revealed simultaneously to Verification Nodes once each Execution Node’s outputs have been submitted.
    • Each Execution Node must stake at least 1.25 million FLOW and can be slashed if it submits faulty computations, fails to submit an Execution Receipt in a timely manner, etc.

Source: Flow Project Documentation

  • Verification Nodes: Verification Nodes are responsible for verifying that outputs submitted by Execution Nodes are valid. However, Flow implements a Specialized Proof of Confidential Knowledge (SPoCK) that prevents Verification Nodes from approving outputs without checking their validity. The entirety of an Execution Receipt’s Chunks are verified, as Verification Nodes work to verify randomized Chunks. For each Chunk, Verification Nodes sign a “Result Approval.” Ultimately, transactions reach hard finality once a “Block Seal” is submitted, attesting that the execution result of a specific block has been verified and approved by a quorum of Verification Nodes.
    • Each Verification Node must stake at least 135,000 FLOW and can be slashed if it submits a faulty SPoCK or provides an invalid Result Approval.

Source: Flow Project Documentation

As of Sept. 18, 2024, Flow is secured by 451 validator nodes. A full list of Execution (7 nodes), Consensus (87 nodes), Collection (105 nodes), and Verification (71 nodes) Nodes and their respective Node Operator IDs, amount staked, amount delegated to, and delegators can be viewed via Flowscan.

Notably, Flow also utilizes two non-validator node types:

  • Access Nodes: Access Nodes route transactions to the correct Collection Node and route state queries to Execution Nodes. Anyone can run an Access Node by staking at least 100 FLOW, though they do not earn any rewards. As of Sept. 18, 2024, there are 186 Access Nodes
  • Observer Node: Observer Nodes provide a copy of block data that serves Flow’s Access API. Anyone can run an Observer Node, staking FLOW is not required, and they do not earn any rewards.

Staking Rewards

FLOW tokenholders can stake FLOW to help secure the network and share in staking rewards. This can be done by designating a Node Operator ID, a full list of which can be seen here.

Staking rewards over an annual period are equivalent to 5% of FLOW’s total token supply. Staking rewards are distributed once per epoch (approximately once a week), which as of Sept. 18, 2024, equates to approximately 1.5 million FLOW per week. Combined weekly staking rewards comprise all network transaction fees, with any remaining amount being minted as inflationary staking rewards.

  • Stakers, including validator nodes, receive 92% of weekly staking rewards.
  • Validator nodes receive an additional 8% of weekly staking rewards as commission.

As of Sept. 18, 2024, 460.1 million FLOW (30% of the total token supply) is staked by validator nodes, while 253.1 million FLOW (16.5% of the total token supply) is staked by delegators. There are 45,771 delegators, validation APY is 11.48%, and delegation APY is 10.56%.

Notably, in August 2024, Flow Foundation funded a separate Flow Community Rewards program which offered up to a 15% boost on FLOW tokens that were locked for the program’s one month duration. Locked tokens, along with earned token rewards, are linearly unlocked over two months starting on Oct. 1, 2024. As of Sept. 18, 2024, $12.8 million worth of FLOW tokens, or 23.7 million FLOW, have been staked. 

Network Transaction Fees

FLOW is the native token of the Flow network. As such, it does not have a token contract. Notably, other tokens on Flow follow Flow’s FT and NFT token standards, and Flow uses account-based accounting standards.

FLOW is used to settle network transaction fees. The total transaction fee for any transaction on Flow comprises a base “execution fee” plus an “inclusion fee,” which is then multiplied by a “surge factor.” The base execution fee varies depending on the type of transaction. The inclusion fee and surge factor are fixed, though the latter could change in the future via an offchain Flow Improvement Proposal (FLIP) if Flow experiences a sustained influx of transactions.

Source: Flow Project Documentation

Network Storage Fees

FLOW is also retained by the network as account data (state) storage fees. Each account has an associated amount of data (state) that is stored by nodes. The amount of data being stored increases when a user signs a transaction that introduces a new token (fungible and non-fungible) balance or stores a contract. An algorithmically determined amount of FLOW is automatically deducted from the user’s balance if storage capacity is reached and new data must be stored. These storage fees are retained by the protocol but are never spent. If the amount of data being stored by an account decreases, deposited FLOW is automatically refunded to the account.

Cadence, Crescendo, & EVM Compatibility

Flow’s programming language is dubbed “Cadence,” and was inspired by Libra’s Diem which aimed to utilize a novel, resource-oriented programming language called “Move.” Thus, Cadence became a resource-oriented programming language, meaning it defines when an onchain asset is of a tangible value. When a resource is defined, special rules must be followed, like that a (i) resource can only exist in one place, (ii) it has ownership defined by where it is stored, and (iii) certain onchain actions can only be performed by the owner of the resource.

Smart contract development on Flow has historically been limited to Cadence for developers. However, Flow’s most recent network upgrade introduced an updated version of Cadence. In October 2023, a proposal to achieve EVM compatibility on Flow was introduced. In December 2023, a formal upgrade to Cadence 1.0, dubbed “Crescendo,” was announced. This upgrade aimed to integrate Ethereum developers, enable cross-chain token transfers between EVM networks and Flow, increase state storage efficiency, and introduce “attachments.” In December 2023, a formal upgrade to Cadence 1.0, dubbed “Crescendo,” was announced.

On Sept. 4, 2024, Flow introduced Cadence 1.0 with the Crescendo upgrade, bringing EVM compatibility to Flow via a separate Flow EVM environment. Now, developers can use Solidity to build on Flow EVM, which still uses FLOW to pay network transaction fees. Composability between Flow EVM and Flow is achieved as EVM-based transactions are nested within Cadence-based transactions inside the same block. Specifically, Cadence Owned Accounts (COAs) are smart contract wallets on Flow EVM which allow users (resource owners) on Flow to call and control their Flow EVM address.

Account Abstractions

To cater to mainstream consumers, Flow implements various account abstractions. For example, walletless onboarding allows users to log-in without installing a wallet. Users can sign in using and email or social account, then leverage e-commerce payment providers like Stripe, PayPal, Apple Pay, and Google Pay as fiat on-ramps while using applications on Flow. These accounts are linked so users can access their assets across applications within one account, increasing composability.

Flow also features various account abstractions, such as account recovery using email or social accounts. Developers can create scriptable transactions which enable one-click user experiences. Lastly, network transactions fees on Flow are typically sponsored by wallet providers or applications using the Payer Role.

Governance

Flow uses an offchain governance process where Flow Improvement Proposals (FLIPs) can affect network parameters. FLIPs can suggest changes to areas such as network parameters, protocol upgrades, Ecosystem Fund issuance, council member elections, committee budgets, and legal affairs. Flow’s governance process is as follows:

  • Proposal Creation: Proposals first emerge on Flow’s Governance Forum. Once a proposal has been discussed, a formal FLIP can be authored and submitted via an Issue Template to create a pull request on GitHub.
  • Proposal Acceptance: The project team implements onchain changes for Flow Improvement Proposals (FLIPs) that are accepted offchain. However, onchain network upgrades are ultimately subject to independent, majority acceptance by validator nodes. For updates to be “ratified” onchain, the majority of the network’s validator nodes must adopt the upgrade without breaking consensus. This process on Flow is called “sporking,” a full history of which can be seen here.

Note: Flow Foundation previously trialed a tool called Cast where users could stake FLOW to propose and vote on offchain Flow Improvement Proposals (FLIPs). However, the most recent votes on Cast occurred in May 2023, and Flow Foundation confirmed Cast is no longer being used to govern Flow.

FLOW Token

FLOW is the native token of Flow that is compatible with Flow-native wallets like Dapper Wallet, Flow Wallet, and Blocto. FLOW also exists as the native token of Flow EVM, where it is compatible with EVM-native wallets like MetaMask. Notably, an ERC-20 wrapped FLOW (WFLOW) token exists and functions similarly to WETH on Ethereum.

FLOW was launched upon Flow’s “Mainnet v1” launch in October 2020 with an initial token supply of 1.25 billion. As of Sept. 18, 2024, FLOW’s total token supply has increased to 1.53 billion due to inflationary staking rewards being distributed to Flow’s validator nodes and delegators. 

Token Functions

The FLOW token serves functions related to the following:

  • Medium of Exchange: FLOW is used as a medium of exchange throughout the network to (i) pay network transaction fees, (ii) be retained by the network as account data (state) storage fees, and (iii) be used to transact throughout the network, such as purchasing NFTs via Flow-native NFT marketplaces.
  • Staking: FLOW can be staked via Flow Port to facilitate various staking-related functions. These functions include staking to operate a Collection Node, Consensus Node, Execution Node, Verification Node, or Access Node, and delegating stake.

Tokenomics

FLOW tokens were allocated across the following areas:

  • Pre-launch Backers + Community Sale: 374.8 million FLOW (30% of the initial token supply) were allocated to “pre-launch backers + community sale.”
    • 138.8 million FLOW (11.1% of the initial token supply) were allocated to “large backers.”
    • 111.3 million FLOW (8.9% of the initial token supply) were allocated to “small backers.”
    • 125 million FLOW (10% of the initial token supply) were allocated to community sales.
  • Dapper Labs: 250 million FLOW (20% of the initial token supply) were allocated to Dapper Labs.
  • Development Team: 225 million FLOW (18% of the initial token supply) were allocated to the “development team.”
  • Flow Foundation: 160.2 million FLOW (12.8% of the initial token supply) were allocated to a “Foundation Reserve” for the Flow Foundation.
  • Grants: 115 million FLOW (9.2% of the initial token supply) were allocated for “Grants, investments, other distributions.”
  • Collateral Reserve: 125 million FLOW (10% of the initial token supply) were allocated for a “Collateral Reserve.”

As of Sept. 18, 2024, the top 10 addresses collectively hold 733 million FLOW (47.8% of the total token supply), and all allocations fully vested in October 2023.

Fundraising

As seen on Messari Fundraising Data (Flow and Dapper Labs), Flow has raised approximately $624 million across various rounds via its supporting entity, Dapper Labs.

Pre-Launch Rounds

  • Undisclosed Round: In March 2018, Dapper Labs (creator of CryptoKitties) raised $12 million in a round led by Andreessen Horowitz (a16z) and Union Square Ventures.
  • Undisclosed Round: In November 2018, Dapper Labs raised $15 million in a round led by Venrock.
  • Undisclosed Round: In September 2019, Dapper Labs raised $11.2 million in a round that saw participation from Warner Music Group, a16z, Digital Currency Group, and others.
  • Undisclosed Round: In August 2020, Dapper Labs raised $12 million in a round that saw participation from Coinbase Ventures, North Island Ventures, and others, including various NBA angel investors.

Public Token Launch

In October 2020, Dapper Labs conducted FLOW’s public token sale via Coinlist. The sale consisted of two phases:

  • Community Sale (Phase 1): Users were allowed to purchase up to 10,000 FLOW at $0.10 per token. Tokens purchased in this phase were subject to a two-year vesting schedule, which has since lapsed. Over 12,500 users from over 100 countries participated, raising $9 million.
  • Auction (Phase 2): Users were allowed to submit bids for a portion of 25 million FLOW (2% of the initial token supply) with no maximum spending limit. Over 700 bidders paid $0.38 per token, raising $9.5 million. Tokens purchased in this phase were subject to a one-year vesting schedule, which has since lapsed.

Post-Launch Rounds

  • Undisclosed Round: In March 2021, Dapper Labs raised $305 million in a round that saw participation from several sports and entertainment venture funds and angel investors.
  • Undisclosed Round: In September 2021, Dapper Labs raised $250 million in a round led by Coatue, with additional participation from a16z, Version One Ventures, and others.

State of the Flow Ecosystem

Based on the 7-day moving average on Sept. 18, 2024, Flow averages 6,050 daily active addresses and 131,000 daily transactions. Since Flow’s mainnet launch in October 2020, many consumer-focused projects have emerged:

  • NFTs: The NFT ecosystem on Flow is the most active sector on the network, with the top Flow-native NFT marketplaces being Flowverse and Flowty. However, Flow’s top NFT projects do not include traditional profile picture (PFP) projects. Rather, they include Flow’s suite of collectible, sports, and gaming-related applications, which heavily utilize NFTs.
  • Sports: Flow’s most popular applications stem from some of the world’s largest Sports IPs:
    • Basketball: NBA Top Shot was Flow’s first hit app. Top Shot allows users to collect officially licensed NBA collectibles (moments) by purchasing packs or trading the moments. Moments can also be used to compete and play in various challenges and prediction games.
    • Football: NFL All Day follows the same concept as Top Shot, allowing users to collect officially licensed NFL collectibles (moments) by purchasing packs or trading the moments. Moments can also be used to compete and play in various challenges and tournaments. Today, NFL All Day is Flow’s most active app alongside Top Shot.
    • Combat: UFC Strike follows the same concept as Top Shot and All Day, allowing users to collect officially licensed UFC collectibles (moments) by purchasing packs or trading the moments. Moments can also be used to compete in various competitions to win rewards.
    • Cricket: FanCraze follows the same concept, allowing users to collect officially licensed ICC collectibles (moments) by purchasing packs or trading the moments. Moments can also be used to complete various challenge events.
  • Gaming: Flow’s gaming sector started to emerge in 2023 with the launches of two initial games, one of which remains as one of Flow’s top used apps. Examples of games in Flow’s ecosystem include:
  • DeFi: With a total value locked (TVL) of just $24.2 million as of Sept. 18, 2024, Flow lags behind more DeFi-focused networks. Due to Flow’s focus falling outside of DeFi, only one major DeFi protocol exists on the network and comprises the entirety of Flow’s DeFi TVL, Increment Finance. Increment Finance is a full-suite DeFi protocol that allows for trading, lending/borrowing, liquid staking, farming, and a points program. However, Flow’s recent Crescendo upgrade introduced EVM compatibility on Flow via a separate Flow EVM environment. While activity on Flow EVM is muted, Flow’s EVM-based ecosystem is beginning to emerge:
  • Tickets: In August 2022, Flow partnered with Ticketmaster to provide NFT services. These NFTs (Ticketmaster Digital Collectibles) vary from event tickets to collectible items for event goers. Since then, over 5 million NFTs have been minted on Flow via Ticketmaster. on the Flow blockchain, including over 70,000 commemorative ticket NFTs for Super Bowl LVI in 2022.
  • Community: Flow’s community is headlined by Emerald City, a DAO focused on launching tools and platforms, along with in-depth educational resources such as videos, articles, and guides. Toucans is a tool that allows users to create tokens and manage DAOs. Additionally, in September 2024, Flow kicked off a three month Flow World Tour consisting of four meetup events across the world. Lastly, Flow features various working groups that are free for all to join.
  • Wallets: Flow-native wallets included Dapper Waller, Flow Reference Wallet, and Blocto (a full list of supported wallets can be seen here.)

Grants

Flow maintains various programs meant to fund development and activity on the network:

  • Ecosystem Fund: In May 2022, Flow announced a $725 million Ecosystem Fund to invest in and grant tokens to “existing and future developers.” However, Flow Foundation confirmed that the Ecosystem Fund’s structure is being modified as of Sept. 18, 2024.
  • Flow Developer Grants: The Flow Developer Grants for developers is overseen by Flow Foundation. The program aims to help “accelerate and enhance the process of building and consuming apps on Flow.” Grants are issued in FLOW tokens dependent on milestones, with specific amounts being dependent on the project type, scope, and milestones.
  • Flow Incubation Program: Announced in May 2023, the Flow Incubation Program had an initial cohort of 10 projects which received mentorship, grants, marketing, and so forth. However, Flow Foundation confirmed that the Flow Incubation Program has been deprecated as of Sept. 18, 2024.
  • Flow Hackathons: Flow holds hackathons where participants compete for prizes across various tracks. Season 2 of Flow’s hackathons ran from June to July 2023. In September 2024, Flow kicked off a three month Flow World Tour consisting of four hackathons across the world.

Closing Summary

Since its launch in May 2020, Flow has grown to become a leading, consumer-focused Layer-1 network. Under the hood, Flow utilizes a novel multi-node architecture. This architecture is designed to encourage specialization, decouple deterministic and non-deterministic tasks, and ultimately, increase network throughput without affecting network decentralization and security.

Developers on Flow use “Cadence,” Flow’s novel smart contract programming language. The network’s recent Crescendo upgrade introduced Cadence 1.0, bringing EVM compatibility to Flow via a separate Flow EVM environment. While activity on Flow EVM is muted, Flow’s EVM-based DeFi ecosystem is beginning to emerge, which could catalyze an increase in TVL over the coming quarters.

Today, Flow’s top applications include those based on world class brands, such as NBA Top Shot, NFL All Day, and UFC Strike. To maintain momentum, Flow must continue to attract world class brands, like it did in November 2023 with Disney Pinnacle, that can bring net new users and activity. Flow’s $725 million Ecosystem Fund should continue to be leveraged to incentivize growth via programs like Flow Community Rewards. All-in-all, Flow is poised to remain a mainstay in crypto’s consumer sector.

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