How F-Assets Will Work: Flare Agents as Uber Drivers

[brianwalden]

I went back and took a look at the original FXRP whitepaper from last year (PDF): https://flare.xyz/app/uploads/2020/08/FXRP_Version_1.0.pdf

You all know Uber's basic business model. They got around all the regulations by saying, "We're not a taxi company, the drivers are all just individuals picking up a buddy for a ride - we just help them find new buddies to give rides to." The reality is Uber is telling the drivers when and where to pick people up and then drivers have to do it if they want to keep being Uber drivers. Flare is trying to make wrapped coins backed only by the network, without holding any funds in custody, and they're using agents as F-Asset "drivers" to do it.

Uber drivers take people from point A to point B. Flare agents take value from ledger A to ledger B. Just like an Uber driver has to have a car to be a driver, an FXRP agent has to put collateral into the FXRP collateral pool to be an agent. The big number to remember is 40%. The dollar value of 40% of the amount of FLR the agent has in the pool determines the total dollar value of FXRP that the agent can mint (draw) from the pool. The difference between that 40% number and how much FXRP they've actually minted, is the maximum transaction size they're eligible to take.

You can think of this in terms of the crypto lending services that are popular today. Flare lets agents deposit FLR as collateral for a 0% interest FXRP loan with a 40% LTV ratio. Their collateral is locked up until they repay the loan. In return for this free loan they basically become Uber drivers. Flare gets to tell them which transactions to take to trade their FXRP for XRP or vice versa. The agent gets a cut of each transaction (it appears agents will get to set their own rates and Flare will choose the ones with the lowest rates first), but if they screw up they get penalized by losing some of their collateral - the penalty is worse than any profit they could make by not completing a transaction.

Clear as mud, right? Here's a simple example. Agent Alice puts $100K worth of FLR into the FXRP collateral pool, which allows her to mint up to $40K worth of FXRP. Bob wants to convert $1K worth of XRP to FXRP, Flare tells Alice to do the transaction, so Bob sends her his XRP and she uses her collateral to mint the $1K worth of FXRP and send it to Bob. She's now minted $1k worth of FXRP and is still able to mint up to $39K more. Charlie might come along wanting to convert $10K worth of XRP and the same thing will happen. Now she's minted $11K and has $29K still available. This will go on until she hits her limit. Lets say she's minted and traded all $40K worth of FXRP making a generous 5% on each transaction. So she started out with $100K worth of FLR (which she still owns but locked up as collateral) and she now has $40K worth of XRP and $2K worth of fees. Yes, I know agents will go both ways, but especially in the beginning I'm expecting more value will be flowing into Flare than out, eventually agents are going to max out their FXRP lines.

But now she's stuck, what's she going to do? It's not worth it keeping $100K locked up to make a $2K profit. She's going to sell her XRP for FXRP to repay the FXRP she minted and be eligible to mint $40K more. But how's she going to do that? If she pays another agent to convert her XRP to FXRP she's going pay approximately the same fees and lose all her profits. We already know the dollar stablecoin Aurei will be on both ledgers. She can sell her XRP for AUR, send it to FLR, and buy more FXRP to repay the collateral pool so she can now be an agent for more transactions (or retire as an agent, get her $100K worth of FLR back, and enjoy her $2K profit). But the whole process will be easier if FXRP is available to buy as an issued currency on the XRPL and then be bridged over to Flare. Flare already showed an example of how this could be done, and I think they will make it available. This circular flow of value is needed to make the whole thing work.

This is a very interesting system. It achieves an equilibrium where F-assets remain consistently pegged to their native counterpart through this constantly whirling flow of value. If the existing supply of FXRP is high and people are willing to sell it, it's going to be cheaper to just trade your XRP for FXRP on the XRPL. If demand exceeds supply, people will go through the agents to mint new FXRP. There will be this constant competition for which method will provide the lowest rates while the agents are going to be circulating funds between the two ledgers nonstop to be able to continue performing transactions. Velocity of money usually increases its value and is generally good for the whole ecosystem. Either Hugo has figured out a nuclear powerplant of crypto-value generation, or this thing is going to go off the rails and blow up like Chernobyl.

[brianwalden]

If I've got the basic understanding right (and that's a big if), this raises two questions in my mind.

1) Can I somehow be an agent but choose which transactions I want to be an agent for. Like maybe say I only want to be an agent for transactions to and from a particular XRPL wallet (which just happens to be my own).

2) Can I put FLR into the collateral pool to mint/withdraw F-assets without having to act as an agent for transactions. This would essentially be a free loan. You wouldn't make the money on transaction fees that you would if you gave your FLR to an agent to use as collateral, but using the example of Alice above, she could just withdraw $40K worth of FXRP for herself and buy a car or sell it to short XRP or whatever. It's risky, because if you think of it as a loan, it's a loan denominated in a volatile currency, not fiat. So buying a car with it is essentially the same as shorting it - if it goes up in value you get squeezed. But it's an interesting thought.

[Guest]

8 minutes ago, brianwalden said:

If I've got the basic understanding right (and that's a big if), this raises two questions in my mind.

1) Can I somehow be an agent but choose which transactions I want to be an agent for. Like maybe say I only want to be an agent for transactions to and from a particular XRPL wallet (which just happens to be my own).

2) Can I put FLR into the collateral pool to mint/withdraw F-assets without having to act as an agent for transactions. This would essentially be a free loan. You wouldn't make the money on transaction fees that you would if you gave your FLR to an agent to use as collateral, but using the example of Alice above, she could just withdraw $40K worth of FXRP for herself and buy a car or sell it to short XRP or whatever. It's risky, because if you think of it as a loan, it's a loan denominated in a volatile currency, not fiat. So buying a car with it is essentially the same as shorting it - if it goes up in value you get squeezed. But it's an interesting thought.

My interpretation was the same as yours, that F-Assets are effectively stable coins pegged to their original assets.  

1) I think yes, if not right away, eventually. Agents are most likely to be programs and I'm sure there's going to be smart contracts that you can use as a consumer to mint your own FXRP and participate in DeFi or collateralize for Aurei.

2) Almost definitely. I expect this to be the default for most people who wish to participate. And the agent would be able to share their transaction fees with you. They get to keep less from each transaction but with the higher amount of collateral from multiple users they get a lot more absolute value in fees. 

With FTSO, your funds are a 100% secure (always stay in your wallet) but with the FXRP system it's possible that you're looking at a loss if you withdraw enough to cause the issued FXRP ratio to go below 40%. I don't know if the losses are going to be distributed just as the transaction fees would. If you think about it, this is market making  FLR holders are effectively market making across multiple blockchains with FLR as collateral. 

[RipMcGillicuddy]

Guys, my brain must get bigger before I try to do any of this stuff. Is there any function of the flare network that expands brain size?

[brianwalden]

8 hours ago, RipMcGillicuddy said:

Guys, my brain must get bigger before I try to do any of this stuff. Is there any function of the flare network that expands brain size?

Honestly, 99% of people don't need to worry about this stuff. When Flare launches, you'll see that the current fee to convert XRP to FXRP is 2% and you'll decide whether you want to do it or not. There's no need to peek into the back room to see how the sausage is made.

[Seoulite]

11 hours ago, brianwalden said:

This is a very interesting system. It achieves an equilibrium where F-assets remain consistently pegged to their native counterpart through this constantly whirling flow of value. If the existing supply of FXRP is high and people are willing to sell it, it's going to be cheaper to just trade your XRP for FXRP on the XRPL. If demand exceeds supply, people will go through the agents to mint new FXRP. There will be this constant competition for which method will provide the lowest rates while the agents are going to be circulating funds between the two ledgers nonstop to be able to continue performing transactions

There are other variables to consider also:

1) rewards for holding FXRP will increase the demand for It over regular XRP which earns no yield while sitting there

2) we don’t know what potential uses there could be for FXRP is DeFi products that could make it more attractive to hold. If you can gain daily rewards and yield from a DeFi application, that makes it doubly attractive to hold opposed to regular XRP.

Also given that Doge is such a high cap right now, what effect do you think this will have on the system if a significant amount of FDOGE is minted? This will require significant amounts of FLR. Not to mention LTC with its own dedicated rewards pool.

[Guest]

Hugo confirmed two things in the Trustline Telegram channel -

The Agent system is really just a mechanism to borrow spark collateral. The fee is a lending fee.

Technically the Agent can sell the XRP (non-custodial) but as soon as XRP is moved from the original address where it was “locked” to mint FXRP, the FLR collateral is liquidated. So this achieves custodial protection through economic incentives rather than legal ones.

If you’re your own agent, you could use an escrow to make sure you don’t forget and accidentally move your funds to another wallet or sell them.

cc @brianwalden

Edited October 4, 2021 by Ripley

[thinlyspread]

Quick hypothetical.

Could Flare not only observe/digest the state of an external ledger (e.g. XRPL), but control it? 

I don't mean by constantly opening/closing accounts. I mean, at the start (or perhaps by code modification later?), so that one could open an activated XRPL account, then somehow* (??) provably pass over the secret key to a Flare smart contract WITHOUT exposing or compromising it, and have Flare control this single account (initiate transactions, etc).

*This would be staggeringly powerful, if possible – but it's a big ask I know. I believe there are promising technologies on the horizon like ZKPs etc that might manage this?

If so, one could imagine the 'agents' really just being those sending XRP into, or requesting from, the same Flare-XRPL account and address (perhaps using destination tags for identification, but Flare being essentially AI might not even need that to keep track!), and therein Flare itself controls the actual collateral & redemption process, which it "guarantees" programmatically (trustlessly) just as how it guarantees the present f-asset system (in terms of monitoring the mechanics of f-asset vs Spark supply/demand and required collateral). But more so, since agents have some responsibility removed.

That would take it almost to a sort of Qredo-like system, except with only one provate key being controlled per external ledger, rather than the private keys going into a 'magic box' on the network itself.

Edited October 21, 2021 by thinlyspread

[brianwalden]

6 minutes ago, thinlyspread said:

Quick hypothetical.

Could Flare not only observe/digest the state of an external ledger (e.g. XRPL), but control it? 

I don't mean by constantly opening/closing accounts. I mean, at the start (or perhaps by code modification later?), so that one could open an activated XRPL account, then somehow* (??) provably pass over the secret key to a Flare smart contract WITHOUT exposing or compromising it, and have Flare control this single account (initiate transactions, etc).

*This would be staggeringly powerful, if possible – but it's a big ask I know. I believe there are promising technologies on the horizon like ZKPs etc that might manage this?

If so, one could imagine the 'agents' really just being those sending XRP into, or requesting from, the same Flare-XRPL account and address (perhaps using destination tags for identification, but Flare being essentially AI might not even need that to keep track!), and therein Flare itself controls the actual collateral & redemption process, which it "guarantees" programmatically (trustlessly) just as how it guarantees the present f-asset system (in terms of monitoring the mechanics of f-asset vs Spark supply/demand and required collateral). But more so, since agents have some responsibility removed.

That would take it almost to a sort of Qredo-like system, except with only one provate key being controlled per external ledger, rather than the private keys going into a 'magic box' on the network itself.

The fact that this apparently cannot be done is why Flare and it's F-asset system exists. Flare's state connector system can theoretically monitor anything that happens on another ledger and feed that data into a smart contract running on Flare. But what can't happen at this point in time is a smart contract running on Flare that signs a transaction on another network.

One day somebody's going to figure this out and be rich. If you can have a smart contract on one network submit transactions to another network, you've basically solved the cross-chain transaction problem that plagues crypto.

[thinlyspread]

Qredo are the closest thing to this I know of. 

[brianwalden]

4 minutes ago, thinlyspread said:

Qredo are the closest thing to this I know of. 

You keep giving me new things I need to look into. I can only take so much alpha at once.

[thinlyspread]

More alfalfa than alpha.

[jbjnr]

2 hours ago, brianwalden said:

One day somebody's going to figure this out and be rich. If you can have a smart contract on one network submit transactions to another network, you've basically solved the cross-chain transaction problem that plagues crypto.

AFAIK The codius/Hotpocket stuff being developed for xrp run containerized blockchains on subnetworks. These can hold secret keys and therefore sign transactions.