Jinse Finance Reporter Jessy
At the end of last year, Vitalik said in an interview that anti-inflation stable currency (Flatcoin) will be one of the huge “opportunities” that have not yet been realized in the cryptocurrency field. In 2021, the anti-inflation stable currency was first proposed by Coinbase Chief Technology Officer Balaji Srinivasan.
As the name suggests, an anti-inflation stablecoin is a stablecoin that can resist inflation. It is different from the previous stablecoins that were mortgaged with legal tender or mainstream virtual currencies, anchored to the U.S. dollar, and had a constant value. Anti-inflation stablecoins are anchored to the price of a basket of specific commodities, so that when commodity prices rise, the currency in people's hands still has the same purchasing power as before the commodity rose. To put it simply, according to its conception, if an anti-inflation stable currency can be used to buy a cup of coffee at this time, then ten years later, it can still be used to buy a cup of coffee.
From this point of view, anti-inflation stable currency seems to be able to protect the purchasing power of currency in the hands of ordinary people, so that the public will not be harvested in rounds of inflation.
From the perspective of its token theory, it seems that creating an inflation-resistant stablecoin makes sense. However, the most important role of traditional currency is as a measure of value for people to exchange goods. When a currency is constantly linked to the price of a commodity, it is no longer used as a measure of value to measure the commodity, but its own value will be determined by the price of the commodity. At this point, it is no longer a traditional currency. So how big is the market for such a "currency" and is it easy to use?
And more importantly, in terms of the design mechanism, can it be stable, safe, etc.? And, the most fundamental question is whether its design logic can really enable a token system to operate benignly and achieve its own hematopoiesis?
Are inflation-resistant stablecoins necessary?
There is a basic experience in economics: when the government creates excess money, prices rise. At this time inflation occurs. For a country's economic development, if inflation itself is within a reasonable range, it is actually a lubricant for economic development. A low inflation rate can actually stimulate consumption. However, high-speed inflation will increase business costs, leading to slower economic growth and increased unemployment.
For the general public, inflation is not popular, especially hyperinflation. People need to pay more costs to deal with the impact of inflation on the economy and personal life, and in most cases, the growth rate of wages is It cannot keep up with the rate of currency depreciation due to inflation.
In addition, most people do not have financial knowledge and do not have the corresponding knowledge and skills to fight inflation. They can only watch the currency in their hands depreciate and their purchasing power decrease. Vested interests and a small number of people who have mastered financial knowledge have harvested most people through inflation and other monetary policies.
The existing practices regarding inflation stablecoins on the market are all linked to the inflation rate in the United States. The United States experienced a period of low inflation for roughly ten years before the epidemic. During and after the epidemic, prices have remained stable. In a high position.
Anti-inflation is definitely a necessity for the public. In the traditional financial system, people purchase real estate, securities, stocks, precious metals and other products to combat inflation.
In 2008, Satoshi Nakamoto created Bitcoin. At that time, there was a financial crisis, global currency was over-issued, and the credit of sovereign currencies was devalued. The virtual currency represented by Bitcoin has been tasked with confronting the mainstream "financial system" since its inception. In the test of history, some virtual currencies, including Bitcoin, have indeed become an "anti-inflation" tool.
This is how a new financial system based on blockchain technology unfolds. Although virtual currencies like Bitcoin have an anti-inflation effect, their prices fluctuate greatly. It is precisely because of the huge fluctuations in virtual currencies that stablecoins were born. This kind of legal currency anchored in reality is either a mainstream virtual currency, or simply relies on a set of algorithmic mechanisms to keep its price stable. Stablecoins are currently used in a wide range of applications. In virtual currency transactions, they are used as a medium of transaction because of their stable value. In Defi, they can also be used as collateral for loans or to provide liquidity. In the real world, it also plays a role in some foreign trade and other situations.
The emergence of anti-inflation stablecoins is expected to not only achieve anti-inflation effects, but also be used as a medium of value storage and exchange like stablecoins.
According to the concept of anti-inflation stable currency, we can understand that in periods of inflation, anti-inflation stable coins will be popular, and in periods of deflation, when the price level drops, this kind of anti-inflation stable currency is more valuable than legal currency. It's not pleasing either.
Jinse Finance reporter believes that anti-inflation is a rigid need, but for users, it is used to meet this demand and does not necessarily require holding anti-inflation stable coins. Even in the crypto world, currently, investing in Bitcoin seems to be a better anti-inflation option than choosing to hold anti-inflation stablecoins.
Since there are better options for anti-inflation, when used as a medium of exchange, can anti-inflation stablecoins surpass existing stablecoins in terms of security, efficiency, etc.?
The current situation and existing problems of the stablecoin market
We can divide the current stablecoin market into two categories: stablecoins that are collateralized by real-world assets or on-chain assets, and those that use algorithms to maintain stability.
However, both stablecoins classified in this way have problems that seem to be unsolvable at present. The fully guaranteed stablecoins are either centralized, have asset custody risks, or have problems with over-collateralization on the chain.
Purely algorithmic stablecoins such as Basis, Empty Set Dollar, and Seigniorage Shares provide a trustless and scalable model that embodies the early vision of Bitcoin, which is a decentralized and stable currency. But the current drawback is that they are difficult to launch and exhibit extreme volatility. This actually erodes users’ confidence in it and leads to an inevitable death spiral.
So algorithmic stablecoins are seen as an experiment rather than a replacement for collateralized stablecoins. From the above, in the current market, although USDT is criticized by users for being centralized and opaque, its status is still unshakable. The simple logic of 1U anchoring one dollar, and the anchored dollar still makes people immersed in the traditional financial world believe it because of its status as a world currency.
At present, how can anti-inflation stablecoins share the cake in the current situation where USDT is the dominant player?
Jinse Finance reporter believes that the first thing that needs to be ensured is that it can safely maintain the stability of its currency price when the inflation rate stabilizes at a certain stage, so that it can function as a currency and be a medium of exchange.
Another important point is whether its setting can truly adjust the price of the token according to the inflation rate. Especially when situations such as high-speed inflation occur, whether the system settings can cope with it.
Then let’s focus on how the main anti-inflation stablecoins are designed:
What projects are working on inflation stablecoins?
The self-proclaimed earliest anti-inflation stablecoin is Nuon issued by Laguna Labs. In the stablecoin territory of Defi protocol Frax Finance, there is also an anti-inflation stablecoin FPI, and the anti-inflation stablecoin Collypto is a real estate-based stablecoin. and commodities as collateral, designed to maintain the real-world purchasing power of inflation-resistant stablecoins. In addition, there are projects such as Spot and LendrUSD, all of which are practicing anti-inflation stablecoins.
The Jinse Finance reporter mainly analyzed the self-proclaimed first anti-inflation stable currency Nuon, the anti-inflation stable currency project FPI launched by the well-known Defi protocol Frax Finance, and the anti-inflation stable currency launched by the first-generation algorithmic stable currency Ampleforth team.
Nuon
An anti-inflation stablecoin developed by Laguna Labs. Currently, Nuon can be minted on its official website, with a total TVL of $184,000.
When achieving anti-inflation stability, it relies on the Truflation oracle, which according to the project, tracks the price changes of 10 million commodities and generates daily inflation consistent with Federal Reserve estimates. Under this, the value of its tokens is calibrated daily based on changes in inflation.
Specifically, the price of Nuon is softly linked to the current value of a basket of goods priced at $1. The basket of goods includes a wide range of actual physical goods and services considered indispensable in modern society, including food, daily necessities, Entertainment, tobacco and alcohol, clothing, housing, transportation, public utilities, health, communications, education and other categories. Each category is divided into subcategories and includes multiple data sources.
According to its white paper: The Nuon protocol itself uses over-collateralization and arbitrage to maintain the peg.
Jinse Finance reporter read the project's white paper and found that the method adopted by the token to maintain its stability is roughly as follows: when the price of Nuon rises above the peg level, the liquidation ratio of all mortgage assets on the Nuon protocol will decrease. This makes Nuon minting more capital efficient, giving users a strong incentive to mint more Nuon and sell them on the market. Then as the supply of Nuon increases, its price will naturally decrease until the peg is restored. When the price of Nuon falls below its peg, the liquidation ratio of all collateral assets on the Nuon protocol will increase. Arbitrage will accelerate the recovery of anchoring, and the increase in liquidation ratio will also increase the liquidation risk of Nuon protocol participants. This will incentivize users to increase collateral or burn Nuon to maintain a safe collateral ratio.
Officials stated that the over-collateralization method at the time of minting avoided the risk of death spiral runs.
According to the white paper, the increase in Nuon’s value comes from over-collateralization when minted by collateral providers. They compensate for the increase in Nuon price caused by inflation through rewards from the governance token nuMINT and fees from the protocol treasury.
This seems reasonable, in fact, if faced with high-speed inflation, such as the price of a cup of coffee rising from one dollar to two dollars. If one Nuon can be exchanged for 1 U.S. dollar initially, then Nuon can be exchanged for two U.S. dollars at this time. At this time, we will find that although it is over-collateralized, the collateral and Nuon cannot be exchanged one-to-one at this time. At this time, if a large number of people rush in and want to use Nuon to exchange collateral, they will The project will collapse due to failure to pay.
According to the project’s white paper, the project itself is designed to compensate for price increases caused by inflation through fees on governance tokens and protocol treasury. However, Jinse Finance reporters were unable to find details on how the relevant governance tokens function on its official website or white paper.
FPI
One of three stablecoins in Defi protocol Frax Finance.
Like nuon, it is pegged to the U.S. inflation rate, which is pegged to a basket of real-world consumer goods defined by the U.S. CPI-U average. This pegged calculation rate is updated every 30 days and is synchronized with monthly CPI price data released by the U.S. government. In terms of mortgage minting, FPI maintains a 100% mortgage ratio.
According to the introduction to FPI in the Frax Finance white paper, the project clearly stated that when the FPI treasury cannot generate enough revenue to maintain the increased value of each FPI due to inflation, new FPIS (governance tokens) may be minted and sold to increase the value. Treasury funds.
This is still coining money out of thin air and then selling it to fill the hole in FPI.
Spot
An anti-inflation stablecoin project created by the team behind the first-generation algorithmic stablecoin Ampleforth (AMPL).
The implementation of Spot relies on existing tools in the Ampleforth ecosystem.
First, the minting of Spot requires the existing stable currency AMPL. After staking AMPL, the user gets A-Tranche and Z-Tranche, which are two types of debt certificates, and the user then takes the debt A-Tranche to mint Spot. In fact, users who participate in Mint use AMPL as their principal and receive Spot and Z-Tranche.
In terms of redemption, Spot represents the redemption right of a basket of assets on the chain, and it redeems the collateral in the equal-proportion collateral pool according to the proportion of Spot held. For example, 1% of the total Spot can redeem 1% of the collateral.
First let’s take a look at AMPL as collateral. As an algorithmic stablecoin, AMPL itself cannot solve the death spiral. It is unsecured and its price is based on consensus. Its mechanism is very simple, using Rebase (a mechanism similar to stock splits) to overall change the number of coins held by everyone.
In layman's terms, when AMPL exceeds 1U, there will be additional issuance, bringing the price back to 1U; when the price of AMPL falls below 1U, there will be deflation, bringing the price back to 1U. The key to the success of this mechanism lies in people's fomo emotions.
However, in actual operation, the problem of this stable currency also appeared. Its own volatility was relatively large. The project later no longer called itself a stable currency, but a flexible currency.
Using such a token with a low consensus as collateral, Jinse Finance reporter believes that Spot's own collateral is not worthy of trust. So are the anti-inflation stablecoins built on this still trustworthy?
Summarize:
Through the above three anti-inflation stablecoins, we can see that two of them first use oracles to track the inflation index and adjust the token price when maintaining token price stability. Then there is arbitrage by speculators to keep prices from decoupling. This is the same way to maintain price stability as algorithmic stablecoins.
Different projects may have some restriction mechanisms. During extreme financial fluctuations, people are now running (such as large-scale redemption of collateral). For example, Spot uses the same proportion of the collateral basket according to the number of Spots it owns. of collateral. But the collateral itself is also another algorithmic stablecoin within its entire ecosystem.
All the above complex designs seem to make this currency system work, but in fact, the essence of the system is that it is still unable to avoid the death spiral, or it is to create new coins to fill the holes, or it is just using a currency without consensus. Air coins are used as collateral for inflation stable coins. In the eyes of Jinse Finance reporters, this is still not an escape from Pond's dilemma. We cannot hope to use a set of economic models to build a story so that people can reach consensus. And this is even when the anti-inflation stable currency itself is not strictly needed. In general, this can only be a financial experiment, and users are not recommended to invest large amounts of money to participate.
