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Autor: Andrzej Mackowiak 20.11.2023r.
This article was inspired by a recent tweet from Hugo Philion, CEO of Flare Network, which perfectly reflects the Flare team’s vision and actions in building a truly decentralized network that could serve as a cornerstone for the Web 3.0 World, where decentralized data will play a pivotal role.
Decentralization, a fundamental principle of cryptocurrencies, entails the lack of control by any central authority or individual. Instead, power is distributed among decentralized participants, ensuring the system’s security and independence from single-party actions, thereby minimizing censorship and manipulation risks.
Despite the dynamic growth of Web 3.0, I have observed a somewhat diminished pursuit of decentralization in the crypto realm in recent years. This could be attributed to the inherent challenges of achieving true decentralization, which demand significant financial and organizational resources. In practice, cryptocurrency decentralization remains incomplete. Numerous crypto projects continue to rely on centralized solutions, including exchanges, widely used oracle solutions or private networks. The primary reason for this situation is the complexity of the architecture of main blockchain networks. While new solutions are often constructed atop these networks as additional layers, they fail to achieve the level of decentralization characteristic of layer-one protocols.
This article dig into the Flare team’s efforts to build a truly decentralized network that will become an integral component of Web 3.0. Flare Network, the world’s first decentralized oracle network, eliminates the need for trust in third parties when accessing data. This will open up a lot of new possibilities and applications that are currently beyond our imagination.
2.The state of today’s crypto decentralisation
Despite the fact that individual cryptocurrency projects themselves are characterized by a high degree of decentralization, they operate in a market that is dominated by centralized entities. In practice, there are many cases where the decentralization of cryptocurrencies is just an illusion.
a) Centralized Exchanges
One of the most common examples of apparent decentralization in cryptocurrencies are centralized exchanges (CEXs).
Centralized cryptocurrency exchanges (CEXs) are currently the most popular way to trade cryptocurrencies. CEXs are in reality controlled by centralized organizations. This means that CEXs have access to user funds and, as they are a central point for the market, this can lead to various problems, such as:
- Centralization of power: Centralised exchanges (CEXs) have control over user funds, which can lead to the risk of manipulation or an exit scam.
- Threat of censorship: CEXs can block access to certain cryptocurrencies or transactions, which can limit freedom of speech and the decentralization of the market.
- Risk of hacking: CEXs are a target for hackers, as they hold large amounts of cryptocurrency.
Another example of apparent decentralization in cryptocurrencies is that Oracle solutions are not entirely decentralized. Popular Oracles are in fact controlled by centralized entities. This means that Oracles can be liable to manipulation or attacks.
Total Value Hacked in 2023 Source: Hacks — DefiLlama
Oracles play a crucial role in the DeFi sector, bridging the real world with the blockchain world. DeFi applications require real-world data, such as price data, to function and be valuable to people and organizations worldwide.
Currently, the market capitalization of the top 100 DeFi projects (the value of tokens issued by them) is around $60 billion (as of November 2023, according to DeFi Llama).
The DeFi market heavily relies on solutions that are not fully decentralized and do not provide 100% security. Solving this problem is not easy, especially when building new solutions on top of existing ones. In such cases, we are unable to change the fundamental functioning principles. This lack of decentralization and security hinders broader adoption.
Another big challenge for oracles is to create economic incentives for data providers to ensure the accuracy of the data they provide while preventing the temptation to falsify it. With billions of dollars flowing through the DeFi market, there is a risk of malicious actors taking advantage of the situation to harm the network. This potential for manipulation also impedes wider adoption.
List of last hacks in 2023 — Source: Hacks — DefiLlama
c) Bitcoin ETFs
The cryptocurrency community is also banking on the approval of the Bitcoin ETF, hoping it will serve as a catalyst for broader crypto adoption.
The growing reliance of cryptocurrencies on financial institutions is evident, and the introduction of ETFs to traditional financial markets could further fuel institutional investor interest in cryptocurrencies, potentially triggering a speculative surge.
If ETFs are approved for trading on traditional financial markets, it will signify that cryptocurrencies are becoming increasingly integrated with the centralized financial system, leading to greater centralization. This would align with a ‘convergence’ trend we have been observing for several years. Cryptocurrencies are becoming increasingly accepted by financial institutions, such as banks and investment funds.
From one perspective, this trend could be viewed as a paradox, as cryptocurrencies were created as an alternative to the traditional financial system, yet they are becoming increasingly integrated into those very institutions.
3. Flare’s road to decentralization
Flare Network is an example of a project that prioritizes decentralization. Their journey toward decentralization is ambitious and ongoing. The team has made significant progress toward this goal and is committed to seeing it through.
The first step in this direction was the distribution of FLR tokens that bypassed centralized exchanges. The initial FLR token distribution was based on a snapshot of the XRP network. A later improvement, FIP.01, further decentralized the process by allowing any FLR holder to receive a monthly airdrop based on their holdings. This way, the Flare network opened itself up to the entire crypto market, not just the XRP community.
The previously mentioned FIP (Flare Improvement Proposal) functions as a process for the community to propose changes to the Flare protocol. The Flare team has launched a Flare Governance Forum, which allows Flare token holders to discuss and vote on proposed FIPs. In the future, community-proposed FIPs will add another factor of decentralization to the project.
These are just a few examples of the progress Flare has made toward decentralization. The team continues to work on this goal, and another example of decentralization is FTSO.
a) The Flare Time Series Oracle (FTSO) is a decentralized oracle that provides Flare smart contracts with timely and accurate off-chain data. Specifically designed for handling time-series data, FTSO serves as a native oracle for this data type.
FTSO operates by utilizing a network of Data Providers, independent entities responsible for collecting data from various sources, including decentralized and centralized exchanges. The provided data is aggregated and verified by FTSO before being made freely available to end users. This data provided by the FTSO system is consequently referred to as a “public good” by the Flare Team.
The network of decentralized Data Providers is rewarded through the protocol’s built-in inflation mechanism. The use of a native protocol ensures that the FTSO system is highly scalable, decentralized, and secure. This combination of attributes is likely to contribute to its wider adoption, as data provided on the blockchain is poised to play a significant role in the future.
This protocol is an integral component of the Flare Network, enabling smart contracts to interact with real-world data. By providing access to off-chain data.
One of the FTSO’s advantages lies in its decentralization, as the system is not controlled by a single entity but rather by a network of independent Data Providers. This decentralized structure enhances its resilience to censorship and manipulation. The ultimate goal is to achieve complete independence among these entities, enabling them to actively contribute to building the ecosystem by providing valuable tools, solutions, or supporting infrastructure, in addition to improving the price forecasting algorithm (which generates income for both the Data Providers and network users who delegate their FLR to Data Providers).
Thanks to this solution, the FTSO protocol and the data delivery system on the Flare Network are devoid of single points of failure that could be exploited, making the entire solution remarkably resistant to attacks.
b) Transition to Proof-of-stake. The Flare Network is currently undergoing a transition to a proof-of-stake (PoS) consensus mechanism. This transition marks a crucial step in the network’s development, as it will enhance the network’s decentralization and security.
Over two months prior to the FLR token distribution, the network successfully surpassed the decentralization threshold. Following the initiation of FLR token distribution on the mainnet, 20 validators became operational, including four operated by the Flare Foundation, which held control over less than 33% of the network’s validation power. The remaining 16 validators were managed by partners such as BlockdaemonHQ, Figment_io, Staked_us, and Intotheblock.
The Flare Network’s transition to PoS is being implemented in three phases. During each phase, independent validators (meticulously selected from among FTSO providers) are incorporated, tasked with verifying transactions and safeguarding the network. Phase 1, which commenced in July 2023, involved the selection of the initial set of validators. Phase 2, currently in progress, involves the gradual increase in the number of validators. Phase 3, scheduled for completion in 2024, will finalize the transition to PoS.
We are presently in Phase 2 of the transition process and on that stage, the number of independent validators has risen to 75, enabling FLR token holders to stake their holdings with them and earn staking rewards.
The three phases of the transition to Proof of Stake.
c) The Burning of 2.1 Billion FLR Tokens to Support Ecosystem Health.
The Flare team has taken a significant step toward decentralization by initiating a plan to burn 2.1 billion FLR tokens. This substantial reduction in the circulating supply, representing over 2% of FLR’s total token count, is expected to yield a range of positive outcomes for the network, such as reducing dilution of community token holdings.
By permanently removing these tokens from circulation, the community allocation of FLR will increase from 58.3% to 59.6%. This move is expected to incentivize new users to join the network and align token allocations with Flare Improvement Proposal (FIP) 01, which aims to broaden access to token distribution and encourage greater participation from connected communities.
In addition, the Flare Team has reached an agreement with shareholders and investors to burn nearly 40% of their token allocation. This will reduce competition for FlareDrops and further reduce the dilution of holdings of all ecosystem participants.
The burning process will be executed in a phased manner, with an initial burn of 198,880,170.19 FLR tokens on the 10th November. The remaining 1.9 billion FLR tokens will be burned monthly in installments of 66,293,390.06 FLR, with the final burn scheduled for January 2026, coinciding with the completion of the FlareDrop process.
The burning of 2.1 billion FLR tokens is a clear indication of Flare’s commitment to decentralization and is expected to have a positive impact on the network’s long-term health and sustainability. It is also worth noting that, in addition to the aforementioned token burn, FLR tokens are regularly burned as gas and unclaimed FTSO rewards/monthly drops.
The Flare team is steadily implementing its goal of building a fully decentralized and secure network that will play a significant role in the Web 3.0 world. From the outset, the project’s creators have prioritized decentralization. To this end, they have taken a number of actions, including securing the network by increasing the number of validator nodes and reducing the stakes of the project’s original shareholders by burning tokens. The provision of data by FTSO is another example of the decentralization of this network.
It is undoubtedly clear that decentralization is one of the main priorities of the creators, as it can be predicted that in the Web 3.0 world, projects that provide it will play a significant role. The development of the Flare network and its decentralization is an ongoing process. It is likely that we will soon witness the next step from the Flare team, which is the release of protocols that enable the building of fully decentralized bridges for cryptocurrencies. This in turn will open a new chapter for the Flare network, whose priorities are: