The Flow Blockchain: one of the most promising crypto projects
Please note that this letter is not intended as financial advice.
Flow is one of the most promising projects in the crypto space.
They have partnerships with NBA, UFC, Ubisoft, Warner Music and others. They are reaching mainstream users.
The first project launched on Flow was the NBA Top Shot in October/2020. This is an online marketplace where users can buy, sell and trade NBA moments. It is the digital version and evolution of the old trading card games. Rather than a picture of a player with statistics on the back, you have a video highlight. These remarking “moments” are NBA video highlights that can be owned by users and traded in this marketplace.
You can see below an example of a highlight extremely valuable (US$ 208,000!!!).
The results until now are astonishing (02/28). They reached more than US$ 250 million in sales on the digital marketplace and have more than 100.000 owners participating. It is still growing, as they have 200.000 users in line for the next pack drops.
Source: https://www.cryptoslam.io/ (02/28)
Flow Blockchain
NBA Top Shot was created using Flow blockchain.
The Flow was created by Dapper Labs with the objective to help developers to build a new generation of games, apps, and the digital assets that power them. It is not the first time, Dapper Labs team released a hit. They were also responsible for launching CryptoKitties in 2017 that was a success within the crypto space.
Applications on Flow can keep consumers in control of their own data; create new kinds of digital assets tradable on open markets accessible from anywhere in the world; and build open economies owned by the users that help make them valuable.
Their technical approach to validation in the blockchain is innovative. They separate the functions of the validators node into four different roles: Collection, Consensus, Execution, and Verification. Thus, they can therefore specialize for and greatly increase the efficiency of their particular stage of focus.
Their network is being tested with a mainstream product, NBA Top Shot, that is gaining traction and adoption. Their experience with this project can prove the network’s functionality and business value through real usage. After that, we have more confidence that Flow could be used for many other applications. I am looking forward to seeing the launch of the UFC digital collectibles game (https://ufc.onflow.org/).
Moreover, Flow is integrating with Circle and enabling the use of USDCoin in the digital marketplace. As the diagrams reveal, behind the scenes, incoming funds are converted to USDC, which are then transformed into NFTs in a user’s account.
Source: https://www.circle.com/en/digital-dollar-stablecoin-solutions-for-non-fungible-tokens
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Flow Token Supply
One important aspect to understand in crypto investment is inflation. When investing in a crypto project, you are investing in a community with its own currency. The price tells only a part of the story, the other part is the number of tokens today and in the future.
Lessons from the previous bull cycle are that tokens should have more value capture mechanisms and that governance is important to coordinate decision making and enable accountability. A token that is only a medium of exchange with high currency velocity does not accrue much value.
In the case of Flow, as the network matures, token holders will be able to use their FLOW in an evolving number of ways:
Payment for computation and validation services (i.e., transaction fees)
Medium of exchange
Deposit for data storage
Collateral for secondary tokens
Participation in governance
In the first year of operation, monetary inflation will be higher to incentivize greater levels of staking while the collateral, payments, and other complementary parts of the Flow economy mature.
The total new issuance rate across the network is capped at 5% per year. This cap will go down to 3% after June 1, 2022. Flow guarantees a set payout to node validators and only issues new tokens as necessary to make up the difference between transaction fees and that guaranteed payment. As transaction fees approach this payout amount, new issuance approaches 0%. If transaction fees exceed the payout amount, they are held in an escrow account and used to offset future inflation indefinitely.
Especially in the early days of the network, transaction fees will be low, starting at 0.001 FLOW.
You can find below the table that shows the token supply by year. As some token lockups end on October/21, the circulating supply will increase.
Source: https://www.onflow.org/token-distribution
Considering the price of 21.48 (02/28), we have a market cap of US$ 13 billion at the end of 2022:
Source: elaborated by the author
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The Y+10 Market Cap1 would place them in the 4th position in the ranking of Smart Contract Platforms:
Source: https://messari.io/ (02/28)
For investments in the crypto space besides Bitcoin and Litecoin, which are more mature projects, I need to have growth visibility that can result in a potential return between 10x to 100x the investment value to compensate for the risks.
It is a Venture Capital strategy, investing small amounts when projects are starting and doing follow-ons as projects mature. For this, we need a huge addressable market and a good price to begin.
In summary, I really admire the Dapper Labs team's capacity to build interesting products and think they will deliver a lot. They can take the blockchain industry to mainstream users. But, in my opinion, as an investment, the Y+10 market cap already reflects high expectations on this growth and in the team. Moreover, we will have lockups ending this year and the daily volume in exchanges are still small, around US$ 10 million. On the other hand, from the entrepreneur perspective, it is a very good project to consider a partnership when building a startup in crypto.
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It is the market cap of the asset accounting for known issuance 10 years into the future.