I am going to start off by saying that this is somewhat frankenmath just to give everyone an idea with easy to read formulas and numbers how the rewards will work in the f-asset pool. However, the possible scenarios are numerous regarding the XRP and FLR prices during the timeframe as well as the total FLR available to be issued as collateral, which will effect the issuance capacity of FXRP. These values will be dynamic when the network is live and could fluctuate wildly. With all that being said, I hope you enjoy the rest of the post and it starts to get your mind churning as to the possibilities.
F-assets are the Flare Network’s way of trustlessly issuing assets from their native chain onto the Flare blockchain using a collateral system. The minting of an f-asset onto Flare requires collateral in Spark (FLR) to be posted at 2.5x the value of the asset being minted. The collateral in FLR will be posted by an agent or a pool of agents with incentives for the agents to maintain the collateral ratios for every f-asset position. Additionally, a 5% fee will need to be paid in the asset that is being minted to provide the agents who will post the FLR collateral to be compensated for their services. Since Flare is a turing complete blockchain, it possesses the ability to compute complex mathematical equations giving it smart contract functionality. Through the implementation of the f-asset system, Flare delivers smart contracts to non-turing complete blockchains like the XRP Ledger and Litecoin blockchain. The representation of XRP and LTC on the Flare Network will be denoted as FXRP and FLTC. It is important to note that if the collateral ratio for the smart contract is maintained throughout the duration of the transaction, the f-asset can be exchanged back to its native chain at a 1:1 ratio at any time. In case of default on the collateral ratio of the f-asset, the original minter will receive a payout in FLR equal to the value of the f-asset defaulted on plus an additional amount to cover any trading fees. This mechanism provides safety to the originator that prevents them from losing value through the f-asset system.
Alright now that we have finished the prelude of what exactly the f-asset system on Flare is, we can move onto the meat of the post. It is time to look at an example that shows the value proposition of taking an asset from its native chain and minting it onto the Flare Network. For our example, we will be using XRP, since the first non-turing blockchain integration with Flare was the XRP Ledger. Assume that the user owns 100k XRP and they want to realize the benefits of Flare by minting all those XRP as FXRP. With XRP facing possible regulatory backlash from the SEC, XRP will be worth $.25 in our example on the Flare launch day, which will also be the day that our originator starts minting his FXRP. This user owns $25k worth of XRP before entering the FXRP position. As an aside, the first few months will provide the largest value proposition as the participation rate will be at its lowest point with the largest number of incentives being awarded to stimulate value flow into the network.
To mint as much XRP as our user can, they will have to pay a fee of 5k XRP (5% * 100k XRP). This fee is equivalent to $1.25k and now serves as the breakeven amount for the user. After minting FXRP, the user now has 95k FXRP that is worth $23.75k, so our user is sitting at a loss. In addition to the user’s initial loss, they also no longer have price exposure to 5% of their former XRP holdings. If the SEC case is settled favorably, our user could miss out on some serious price action for XRP to the upside. However, they still have 95k FXRP, which is redeemable at a 1:1 ratio for XRP at any time or can be traded for a stablecoin, if the user wishes to redeem that FXRP for a more stable value. The fee seems like a small price to pay for the potential benefits the Flare Network will deliver to our user for minting FXRP and providing utility within Flare.
We have established the opportunity costs for minting FXRP. However, the user has the potential for massive upside that may have them completely forget the creation fee for their position. There are possibly up to three ways to earn yield on the 95k FXRP position at once; however, for simplicity we will cover the easiest way to earn with an f-asset position. Our user will be eligible for the general f-asset rewards pool, which is currently comprised of a minimum of 12B FLR and according to Flare Limited will more than likely reach as high as 20B FLR after launch. You may be thinking there is no way that our user will be rewarded for simply minting FXRP, but they will be and more importantly you will be. As an assumption, we will say that the rate at which the FLR rewards are released from this pool will be .64% of the 20B FLR per week. This is representative of a 156-week release schedule lining up with the distribution of all pre-minted Spark (FLR). We also will assume that an average of 5% of the 100B XRP supply will be minted as FXRP throughout the duration of the position, which will be for 26 weeks.
The user now holds roughly .0019% of all minted FXRP (95k user FXRP / 5B total FXRP) as an average over the 26-week duration of their position. Additionally, 128.205M FLR (.64% * 20B FLR) are available to be received for just minting FXRP per week. Our user will receive 2.435k FLR per week (.0019% * 128.205M FLR rewards), which would result in a total of 63.333k FLR rewards earned in just 26 weeks by minting their XRP into FXRP. While we may not know the exact distribution of the f-asset rewards pools, everyone can see the potential earnings one can make especially early on just for minting an f-asset. The most exciting part is that this is only one of the many ways to participate in the Flare Network and receive its incentives. Once we start to account for the compounding yield from the delegation of FLR votes to the Flare Time Series Oracle (FTSO), a competitive marketplace created by signal providers for f-asset votes to the FTSO, staking of FLR with agents to earn the native version of f-assets, lending and borrowing through collateral debt positions, etc; we can begin to realize the enormity of what this crypto-socio-economic experiment will offer to the world.
***This post is designed as a hypothetical example for the community to digest. Additionally, this example uses static variables; we can assume the network will be anything but static. Flare will release exact details for rewards closer to launch, so we will be able to come back to this and model out more accurate scenarios.
~ Patty XRP | The DeFi Standard – 1/25/21