Understanding Flatcoin in One Article

Preface

In recent years, stablecoins pegged to the US dollar have garnered significant attention. These stablecoins provide users with a link that connects the traditional financial system with the cryptocurrency ecosystem. Individuals and institutions can purchase these stablecoins with fiat currency and then use them to enter various digital asset markets.

The global inflation issue has been driven by the monetary policy of the Federal Reserve, prompting many residents of non-Western countries to seek protection for their wealth through stablecoins pegged to assets like the US dollar. In this context, dollar-pegged stablecoins have become a means of hedging. However, stablecoins still carry risks, leading to the emergence of a new concept in the cryptocurrency ecosystem—Flatcoin. This is a special type of stablecoin whose value is no longer dependent on being pegged to fiat currency but is closely related to the cost of living. Flatcoin attempts to address the instability that inflation brings to fiat currency, providing users with a more reliable means of value storage.

Cryptocurrency and Inflation

In economics, inflation refers to the rise in prices, leading to a decrease in the purchasing power of money. The Federal Reserve has been implementing tightening policies since March 2022, but globally, as credit tightens, the value of assets, including cryptocurrencies, has been severely impacted. According to projections from the International Monetary Fund, the global inflation rate is expected to reach 6.6% in 2023, compared to 8.8% in 2022.

Source: https://www.imf.org, November 29, 2023

Since the inception of stablecoins in 2014, they gained widespread attention with the rise of DeFi in 2017. Today, USDT and USDC have become the third and seventh largest cryptocurrencies by market capitalization, respectively. Currently, there are 18 main stablecoins in the market, with a total market capitalization of $137.4 billion. In the digital currency space, although traditional stablecoins aim to maintain stability by being pegged to specific fiat currencies or assets, they are affected by fiat currency inflation, and stablecoins themselves carry certain risks. For example, major centralized stablecoins like USDT and USDC face risks of centralized control, making it impossible to verify the sufficiency of their collateralized assets. Furthermore, fiat-backed stablecoins are centralized, which goes against the spirit of decentralized finance.

Source: https://www.theblock.co/data/stablecoins/usd-pegged, November 29, 2023

Classification of Stablecoins

There are various types of stablecoins currently in the market, primarily categorized into the following four types:

1. Commodity-backed Stablecoins

This type of stablecoin is usually backed by assets such as gold or real estate to maintain its value. For example, PAX Gold (PAXG) is a stablecoin pegged to gold, with each PAXG representing one ounce of gold.

2. Crypto Asset-backed Stablecoins

This type of stablecoin typically maintains its value through over-collateralization of crypto assets. For example, DAI is a crypto asset-backed stablecoin issued by MakerDAO, a decentralized autonomous organization responsible for managing DAI. Each time more DAI is minted, the protocol adds more cryptocurrency as collateral. Since its inception, DAI's price has closely tracked the US dollar.

3. Fiat-backed Stablecoins

The largest category of stablecoins is fiat-collateralized, such as USDT and USDC, which represent the market capitalization of most asset classes. Today, after undergoing market tests such as large-scale redemptions, fiat-collateralized stablecoins are considered safe.

4. Algorithmically Adjusted Stablecoins

This type of stablecoin typically adjusts its supply through algorithms to maintain its value. The most famous algorithmic stablecoin, UST, belongs to the Terra/Luna ecosystem. The main collateral for UST is Luna. The value of Luna primarily derives from the market's assessment of UST's stability and the activity level of the Terra network. However, algorithmic stablecoins have proven to be a risky design, as extreme market conditions can lead to a collapse in stablecoin value, as seen during the Terra crash.

Source: https://coinmarketcap.com/zh/currencies/terrausd, November 29, 2023, UST value trend

Definition of Flatcoin

Flatcoin is an emerging concept in token economics, envisioned as a value storage token whose value adjusts with changes in inflation. Flatcoin was first proposed by Balaji Srinivasan, former CTO of Coinbase, in 2021. The goal of Flatcoin is to maintain the purchasing power of token holders and specific interest groups.

Unlike traditional stablecoins that are directly pegged to fiat currencies like the US dollar at a 1:1 ratio, Flatcoin chooses to peg to an abstract cost of living, maintaining price stability in a unique way. To achieve this, Flatcoin relies on various data to maintain its price stability, ensuring that holders' purchasing power can match changes in the cost of living. For example, a Flatcoin project might peg its currency to a commodity or a basket of goods, including essential living necessities such as food, energy, housing, and transportation. When the prices of these goods change, the price of Flatcoin will also adjust accordingly to offset the impact of inflation, making Flatcoin a digital asset with adaptability and value preservation.

Flatcoin in the Spotlight

At the end of 2022, Ethereum co-founder Vitalik Buterin shared his outlook for the cryptocurrency industry in 2023 during an interview with Bankless, mentioning three significant opportunities that have yet to be realized in the field: widespread wallet adoption, anti-inflation stablecoins, and Ethereum-based website login services. He believes that creating a stablecoin capable of withstanding various conditions, including inflation, will present a tremendous opportunity for the entire cryptocurrency industry.

Coinbase CEO Brian Armstrong has frequently discussed Flatcoin in public interviews and on Twitter, listing it as a top priority among ten cryptocurrency technologies. Brian believes that Flatcoin represents the future direction of stablecoin development. Unlike traditional fiat-pegged stablecoins, Flatcoin offers a new and more stable means of value storage by tracking inflation.

The Base ecosystem fund is also considering decentralized stablecoins and has expressed interest in Flatcoin, which can track inflation rates, providing users with stable purchasing power while being resilient against economic uncertainties caused by the financial system. Given the recent challenges faced by the global banking system, Base believes that anti-inflation stablecoins are more important than ever.

Typical Cases of Flatcoin

Currently, there are very few projects in the Flatcoin space. 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, and its stablecoin NUON claims to be the first decentralized flatcoin, with its price pegged to fluctuate with inflation rates, protecting holders from value loss due to inflation. Nuon is not a fiat-pegged stablecoin; it is unaffected by inflation or any government monetary policy. The protocol maintains security and transparency, employing secure liquidity pool terms, a peg protected by a quadruple redundancy mechanism, fully audited smart contracts, and insurance for the peg and collateral.

In terms of mechanisms addressing inflation, the Nuon protocol has the following innovations:

Inflation Index Prediction

The daily inflation level pegged to NUON is measured by an independent inflation index predictor, Truflation, which shares its data with the Nuon Finance protocol.

Peg Calculation

Nuon's price is soft-pegged to the current value of a basket of goods worth $1 on the day Nuon was launched, based on the real, fair, and reliable daily inflation data from the Truflation index. The Truflation oracle provides Nuon with the target peg for the Flatcoin daily, calculated by dividing Truflation's daily year-on-year inflation rate by the number of days in the year. This target peg represents the inflation-adjusted purchasing power of Nuon holders, supported by verifiable census-level data.

Source: https://whitepaper.nuon.fi/protocol/peg-calculation

Over-Collateralization

The Nuon protocol uses over-collateralization and arbitrage to maintain the exchange rate while offsetting inflation for NUON holders.

Protocol Revenue

The Nuon treasury charges fees during collateral deposits/withdrawals and NUON minting/burning.

In addition to NUON, Nuon Finance will also launch nuMINT for protocol governance participation 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, which is a non-pegged stablecoin. RAI aims to be a decentralized, low-volatility, self-regulating currency.

In terms of mechanisms addressing inflation, Reflexer has the following innovations:

PI Controller

RAI is a controller-based stablecoin that maintains its value in line with USD through economic incentives guided by a PI controller and an oracle capable of sensing the RAI/USD price at any given time.

Operational Mechanism

When the market price exceeds the redemption price, RAI is acquired and sold on the secondary market until the two prices converge, then RAI is bought back from the secondary market to repay the debt. When the redemption price exceeds the market price, the goal is to buy as much RAI as possible from the secondary market and hold it until the prices converge.

The first action reduces the circulating supply of RAI tokens in the market, while the second action destroys RAI. Both actions encourage alignment with market prices.

What are the use cases for RAI?

1. Portfolio Diversification: RAI reduces exposure to ETH price volatility;

2. DeFi Collateral: RAI can serve as a supplementary or alternative collateral for ETH in DeFi protocols, as it can dampen the price volatility of Ether and give users more time to react to market changes;

3. DAO Reserve Asset: DAOs can hold RAI on their balance sheets to gain exposure to ETH without being affected by market volatility.

Advantages of Flatcoin

Asset Protection

The design goal of Flatcoin is to protect users' purchasing power, providing investors with a more reliable asset preservation tool in an inflationary environment. In an inflationary environment, the purchasing power of fiat currency may decline, while Flatcoin offsets the impact of inflation on purchasing power through a series of mechanisms or by being pegged to the prices of specific goods or a basket of goods. In an inflationary environment, Flatcoin can serve as a relatively reliable hedging tool, helping investors maintain the value of their assets amid market volatility and uncertainty.

Increased Market Stability

The introduction of Flatcoin is expected to enhance market stability and alleviate investors' concerns about inflation risk. Flatcoin aims to maintain the stability of its value, making it a reliable asset preservation tool. This stability will increase user trust in the digital currency market, encouraging greater participation.

Deepening Use Cases

The introduction of Flatcoin may deepen the adaptability of digital currencies, making them more suitable as a medium of exchange and a value storage tool. This is expected to attract more users and merchants to participate in the digital currency ecosystem, such as promoting the development of anti-inflation stablecoins for crypto payments.

Global Payment Settlement Tool

Flatcoin benefits not only individual investors but can also provide businesses and the global community with new payment settlement tools, offering inherent advantages for global trade.

Payment Settlement Tool

Since Flatcoin aims to maintain stability, it can serve as a reliable payment and settlement tool. Businesses can use Flatcoin for cross-border transactions, mitigating uncertainties caused by exchange rate fluctuations and inflation.

Promoting Global Financial Inclusion

As a digital stablecoin, Flatcoin can enhance financial inclusion, especially in regions with underdeveloped or unstable financial systems. Individuals and businesses can more easily engage in global trade without worrying about inflation and exchange rate fluctuations.

Challenges of Flatcoin

Designing Flatcoin is a highly challenging task, as it aims to track inflation rates rather than a specific currency. However, there are numerous challenges in designing anti-inflation mechanisms:

Processing Inflation Data

Different regions and countries may experience varying degrees of inflation, and different industries or sectors may exhibit different inflationary behaviors. Inflation is a complex economic phenomenon that requires measurement on multiple levels. Although there are inflation indices such as GDP, CPI (Consumer Price Index), and PPI (Producer Price Index), there are significant discrepancies among these indicators, each of which may have different impacts on inflation.

Moreover, inflation indices are mostly updated monthly, while actual changes in purchasing power may have immediate effects in daily life. The variations in inflation rates across different countries and regions make the accuracy of measurement data a crucial factor in designing anti-inflation stablecoins.

Complexity of Economic Model Design

A token adjusted based on inflation rates may face high price volatility. For example, high inflation may occur in certain regions or industries, and this situation may persist for a long time. At the same time, it is also necessary to adapt to situations where price volatility is low or even non-existent in other regions or industries. Therefore, Flatcoin needs to balance inflation differences across different regions and industries to ensure effective stability in various environments, which may require complex economic models.

Technical Implementation Difficulties

Ensuring accurate and timely measurement of inflation is a key challenge in the design of anti-inflation stablecoins. The execution of the Flatcoin system will rely on the reliability and credibility of the oracle subsystem. Designing a reliable and tamper-resistant oracle subsystem requires a series of technical and institutional measures, which may include aggregating and verifying multi-source data, as well as designing smart contracts and employing cryptographic methods to ensure the authenticity and integrity of external data.

Strict Regulatory Constraints

The legal and regulatory environments in different countries and regions may impose varying restrictions on the design, issuance, and trading of anti-inflation stablecoins. Effective regulatory and auditing mechanisms need to be established to supervise and verify the operation of oracles to ensure their credibility.

Conclusion

In the cryptocurrency field, especially in the realm of stablecoins, industry innovation is not just about expanding the scale of existing assets; more importantly, it is about creating a new type of stablecoin that can effectively combat inflation in both the short and long term. Although Flatcoin is an innovative concept, it is important to emphasize that it has yet to undergo practical market testing and carries certain risks. Whether it can truly be realized and widely promoted in the market remains a question that requires time and market development to validate.

Author: Snow

Translator: Sonia

Article Reviewers: Wayne, Piccolo, Elisa, Ashley He, Joyce

Copyright: Gate.io