As inflation hits fiat currencies, a new concept emerges in the cryptocurrency ecosystem - Flatcoin. This article will delve into the concept of Flatcoin and study a series of advantages and implementation difficulties of Flatcoin. Altcoin
Preface
In recent years, stablecoins anchored to U.S. dollar prices have attracted much attention. These stablecoins provide users with a link between the traditional financial system and the cryptocurrency ecosystem. Individuals and institutions can purchase these stablecoins with legal currency and then use them to enter various digital asset markets.
The global inflation problem, caused by the Federal Reserve’s monetary policy, has prompted residents of many non-Western countries to seek to protect their wealth through stablecoins pegged to assets such as the U.S. dollar. In this context, U.S. dollar-anchored stablecoins have become a safe haven. However, stablecoins are still accompanied by risks, so a new concept has emerged in the cryptocurrency ecosystem-Flatcoin. This is a special kind of stablecoin whose value no longer relies on being pegged to fiat currency, but is closely tied to the cost of living. Flatcoin attempts to cope with the instability caused by inflation to fiat currencies and provide users with a more reliable means of storing value.
Cryptocurrency and inflation
In economics, inflation refers to an increase in prices that causes a decrease in the purchasing power of money. The Federal Reserve has begun to adopt tightening policies since March 2022, but as credit tightens globally, the value of assets, including cryptocurrencies, has suffered heavy losses. According to data from the International Monetary Fund, the global inflation rate will reach 6.6% in 2023, compared with 8.8% in 2022.
Source: https://www.imf.org , 2023.11.29
Stablecoins were born in 2014 and gained widespread attention with the rise of DeFi in 2017. Today, USDT and USDC have become the third and seventh largest cryptocurrencies in the world by market capitalization respectively. Currently, there are 18 main stablecoins on the market, with a total market value of US$137.4 billion. In the field of digital currency, although traditional stablecoins are designed to be linked to specific legal currencies or assets to maintain stability, with the inflation of legal currencies, the corresponding digital stablecoins have also been affected, and stablecoins themselves carry certain risks. For example, stablecoins that are mainly centralized operations such as USDT and USDC have the risk of centralized control, so they cannot verify the adequacy of their mortgaged assets. In addition, fiat-backed stablecoins are centralized and run counter to the spirit of decentralized finance.
Source: https://www.theblock.co/data/stablecoins/usd-pegged , 2023.11.29
Stablecoin classification
There are many stablecoins in the current market, and their issuance methods mainly fall into the following four categories:
1. Stable currency backed by commodities
This type of stablecoin is usually backed by assets such as gold or real estate to maintain the value of the stablecoin. For example, PAX Gold (PAXG) is a gold-pegged stablecoin, with each PAXG representing one ounce of gold.
2. Stablecoins backed by crypto assets
Stablecoins in this category typically maintain the value of the stablecoin by over-collateralizing cryptoassets. For example: DAI is a crypto-asset collateralized stablecoin issued by MakerDAO, a decentralized autonomous organization that manages DAI. Each time more DAI is minted, the protocol adds more cryptocurrency as Collateral. Since its inception, the price of DAI has been nearly parity with the U.S. dollar.
3. Stablecoins backed by legal currency
The largest category of stablecoins is backed by legal currency, such as USDT and USDC, which represent the market value of most asset classes. Today, after experiencing market tests such as large-scale redemptions, fiat-collateralized stablecoins are considered safe.
4. Algorithm-adjusted stablecoins
This type of stablecoin typically adjusts its supply algorithmically to maintain the value of the stablecoin. The most famous algorithmic stablecoin UST belongs to the Terra/Luna ecosystem. The main collateral for UST coins is Luna. The value of Luna mainly comes from the market's assessment of the stability of UST and the activity of the Terra network. However, algorithmic stablecoins have proven to be a risky design, as extreme market conditions can lead to stablecoin run-like declines, as was seen with the Terra crash.
Source: https://coinmarketcap.com/zh/currencies/terrausd , 2023.11.29, UST value trend
Flatcoin Definition
Flatcoin is an emerging token economics concept conceived as a store of value token whose value will adjust with changes in inflation. Flatcoin was first proposed in 2021 by Balaji Srinivasan, the former chief technology officer of Coinbase. The goal of Flatcoin is to preserve the purchasing power of token holders and specific interest groups.
Unlike traditional stablecoins that are directly anchored 1:1 with legal currencies such as the U.S. dollar, Flatcoin chooses to be anchored with the abstract cost of living to maintain price stability in a unique way. To achieve this goal, Flatcoin maintains its price stability based on different data, ensuring that the purchasing power of holders can match changes in the cost of living. For example, a Flatcoin project might anchor its currency to a commodity or basket of commodities, including basic necessities such as food, energy, housing, and transportation. When the prices of these commodities change, the price of Flatcoin will adjust accordingly to offset the effects of inflation, making Flatcoin an adaptable and value-preserving digital asset.
Flatcoin attracts attention
At the end of 2022, Vitalik Buterin, the co-founder of Ethereum, shared his outlook for the cryptocurrency industry in 2023 in an interview with Bankless, mentioning three important opportunities that have not yet been realized in the field: large-scale wallet adoption, anti-inflation stablecoins, and blockchain-based Website login service for Ethereum. He believes that creating a stablecoin that can withstand various conditions, including inflation, will bring huge opportunities to the entire cryptocurrency industry.
Coinbase CEO Brian Armstrong has spoken about Flatcoin multiple times in public interviews and discussed the new technology on Twitter, ranking it at the top of a list of 10 crypto technologies. Brian believes that Flatcoin is the future direction of stable currency development. Unlike traditional stablecoins linked to fiat currencies, Flatcoin provides a new, more stable way to store value by tracking inflation.
Base Ecological Fund is also thinking about decentralized stablecoins, expressing its interest in Flatcoin. This stablecoin can track the inflation rate, giving users stable purchasing power, and is also elastic to withstand economic uncertainty caused by the financial system. sex. Given the recent challenges facing the global banking system, Base believes that inflation-resistant stablecoins are more important than ever.
Typical case of Flatcoin
There are currently very few projects on the Flatcoin track. This article will briefly introduce the following two projects.
Nuon protocol
Source: https://nuon.fi/
Nuon Finance is a decentralized stablecoin DeFi protocol built on Arbitrum. The stablecoin NUON launched by Nuon Finance claims to be the first decentralized flatcoin. Its price anchor fluctuates with the rise and fall of the inflation rate, protecting holders from Loss of value due to inflation. Nuon is not a stablecoin pegged to fiat currency and is not affected by inflation or any government monetary policy. The protocol maintains security and transparency with secure liquidity pool provisions, pegs protected by quadruple redundancy, fully audited smart contracts, and peg and collateral insurance.
In terms of mechanisms to address inflation, the Nuon protocol has the following innovations:
Inflation Index Forecast
The daily inflation level anchored by NUON is measured by Truflation, an independent inflation index predictor, and shared with the Nuon Finance protocol.
hook calculation
Nuon's price is soft-pegged to the current value of a basket of goods worth $1 on the date Nuon was launched, based on the Truflation Index of real, unbiased, and reliable daily inflation data. The Truflation oracle provides Nuon with a target peg for Flatcoin on a daily basis, calculated by dividing Truflation's daily year-over-year inflation rate by the number of days in the year. This target peg is an inflation-adjusted representation of Nuon’s holder purchasing power and is supported by cryptographically verifiable census-level data.
Source: https://whitepaper.nuon.fi/protocol/peg-calculation
overcollateralized
The Nuon protocol uses over-collateralization and arbitrage to maintain the exchange rate while offsetting inflation for NUON holders.
Agreement income
The Nuon Treasury charges fees when collateral is deposited/withdrawn, and when NUON is minted/destroyed.
In addition to NUON, Nuon Finance will also launch nuMINT for participating in protocol governance and capturing platform fees.
Reflexer
Source: https://reflexer.finance/
Reflexer is a stable and decentralized currency platform that allows anyone to use ETH to mint RAI, a non-anchored stablecoin. RAI aims to be a decentralized, low-volatility, self-regulating currency.
In terms of mechanisms to address inflation, Reflexer has the following innovations:
PI controller
RAI is a controller-based stablecoin that keeps its value consistent with the value of USD by using economic incentives guided by the PI controller and an oracle that can sense the price of RAI/USD at any point in time.
Operating mechanism
When the market price is higher than the redemption price, RAI is obtained and sold to the secondary market until the two prices become balanced, and then RAI is purchased from the secondary market to repay the debt. When the redemption price is higher than the market price, it will be to buy as much RAI from the secondary market as possible and hold it until the price reaches equilibrium.
The first behavior will reduce the number of RAI tokens circulating in the market, and the second behavior will destroy RAI. Both actions encourage alignment with market prices.
What are the use cases for RAI?
1. Portfolio diversification: RAI reduces the risk exposure of ETH price fluctuations;
2. DeFi collateral: RAI can be used as a supplementary or alternative collateral to ETH in DeFi protocols because it can suppress the price fluctuations of Ethereum and allow users more time to react to market changes;
3. DAO reserve assets: DAO can keep RAI on its balance sheet and gain ETH exposure without being affected by market fluctuations.
Advantages of Flatcoin
Provide asset protection
Flatcoin's design goal is to protect users' purchasing power and provide investors with a more reliable asset preservation tool in an inflationary environment. In an inflationary environment, the purchasing power of fiat currency may decline, and Flatcoin offsets the impact of inflation on purchasing power through a series of mechanisms or by being pegged to the price of a specific commodity or basket of commodities. In an inflationary environment, Flatcoin can become a relatively reliable hedging tool, helping investors maintain the value of their assets amid market volatility and uncertainty.
Improve market stability
The introduction of Flatcoin is expected to improve market stability and alleviate investors' concerns about inflation risks. Flatcoin aims to maintain the stability of its value, making it a reliable asset store. This stability will increase users' trust in the digital currency market and make users more willing to participate in the digital currency market.
Deepen usage scenarios
The introduction of Flatcoin may deepen the adaptability of digital currency, making it more suitable as a transaction medium and value storage tool. This is expected to attract more users and merchants to participate in the digital currency ecosystem, such as: anti-inflation stablecoins promoting the development of crypto payments.
Global payment settlement tool
Flatcoin is not only beneficial to individual investors, but can also provide new payment and settlement tools for enterprises and the world. It has natural advantages for global trade.
Payment and settlement tools
Since Flatcoin is designed to remain stable, it can serve as a reliable payment and settlement tool. Businesses can use Flatcoin for cross-border transactions, mitigating uncertainty caused by exchange rate fluctuations and inflation.
Promote global financial inclusion
As a digital stablecoin, Flatcoin can improve financial inclusion, especially in regions with underdeveloped or unstable financial systems. Individuals and businesses can more easily participate in global trade without worrying about inflation and exchange rate fluctuations.
Flatcoin Challenges
Flatcoin was designed to be a very challenging task and was intended to track inflation rather than a specific currency. However, there are many challenges in designing anti-inflation mechanisms:
Processing of Inflation Data
Different regions and countries may experience different levels of inflation, and different industries or sectors may also exhibit differences in inflation. Inflation is a complex economic phenomenon that needs to be measured at multiple levels. Although there are inflation indices such as GDP, CPI (Consumer Price Index) and PPI (Producer Price Index), there are large differences between these indicators and they may all have different effects on inflation.
Additionally, inflation indexes are mostly updated only once a month, whereas actual changes in purchasing power can have an immediate impact on daily life. Variations in inflation rates in different countries and regions make the accuracy of measurement data an important factor in designing inflation-resistant stablecoins.
The complexity of economic model design
A token that adjusts for inflation may experience high price volatility. For example, high inflation may occur in certain regions or industries, and this may persist for an extended period of time. At the same time, there is a need to adapt to situations where price volatility is low or even absent in other regions or industries. Therefore, Flatcoin needs to balance the inflation differences in different regions and industries to ensure that it can effectively maintain stability in different environments, which may require the adoption of complex economic models.
Difficulty of technical implementation
Ensuring accurate and timely measurement of inflation is a key challenge in the design of inflation-resistant stablecoins. The execution of the Flatcoin system will rely on the reliability and trustworthiness of the oracle subsystem. Designing a reliable and difficult-to-be-manipulated oracle subsystem requires the adoption of a series of technologies and systems, which may include the aggregation and verification of multi-source data, and design intelligence Contracts, using cryptographic methods to ensure the authenticity and integrity of external data.
Strict regulatory restrictions
The legal and regulatory environments of different countries and regions may impose different restrictions on the design, issuance and trading of inflation-resistant stablecoins. In terms of ensuring the credibility of oracles, it is also necessary to establish effective supervision and audit mechanisms to supervise and verify the operation of oracles.
Summarize
In the field of cryptocurrency, especially in the field of stablecoins, industry innovation is not only to expand the scale of existing assets, but more importantly, to create a new type of stablecoin that can effectively fight inflation in the short and long term of the market. Although Flatcoin is an innovation in concept, it needs to be emphasized that it has not yet been tested by the actual market and there are certain risks. Whether it can be truly realized and promoted on a large scale in the market in the future is still a question that needs time and market development to verify.
Author: Snow
Translator: Sonia
Article reviewer: Wayne, Piccolo, Elisa, Ashley He, Joyce
Copyright: Gate.io
