Introduction

In recent years, stablecoins pegged to the US dollar have gained a lot of attention. These stablecoins provide a bridge 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 access various digital asset markets.

The global inflation is caused by the monetary policies of the Federal Reserve, which has led many residents of non-Western countries to seek stablecoins pegged to assets such as the US dollar to protect their wealth. In this context, stablecoins anchored to the US dollar have become a means of hedging. However, stablecoins still come with risks, which has given rise to a new concept in the cryptocurrency ecosystem - Flatcoin. This is a special type of stablecoin that no longer relies on being pegged to a fiat currency but is closely linked to the cost of living. Flatcoin aims to address the instability that inflation brings to fiat currencies and provide users with a more reliable store of value.

Cryptocurrency and Inflation

In economics, inflation refers to the rise in prices, resulting in a decrease in the purchasing power of money. The Federal Reserve has been implementing tightening policies since March 2022, but globally, asset values, including cryptocurrencies, have been severely affected due to credit tightening. According to the International Monetary Fund’s data forecast, the global inflation rate is projected to reach 6.6% in 2023, compared to 8.8% in 2022.

Source: https://www.imf.org

Stablecoins were born in 2014 and gained wide 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 $13.74 billion. In the realm of digital currencies, although traditional stablecoins aim to be pegged to specific fiat currencies or assets to maintain stability, they are also affected by fiat currency inflation, and stablecoins themselves carry certain risks. For example, major centralized stablecoins like USDT and USDC are subject to the risk of centralized control, making it impossible to verify the adequacy of their collateralized assets. Furthermore, fiat-backed stablecoins are centralized and contradict the spirit of decentralized finance.

Source: https://www.theblock.co/data/stablecoins/usd-pegged, 2023.11.29

Stablecoin Classification

Currently, there are multiple stablecoins in the market, and their issuance methods can be mainly categorized into the following four types:

Commodity-backed Stablecoins

This type of stablecoin is typically 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.

Cryptocurrency-backed Stablecoins

This type of stablecoin usually maintains its value through over-collateralization with cryptocurrency assets. For example, DAI is a cryptocurrency collateralized 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, the price of DAI has remained close to the US dollar.

Fiat-backed Stablecoins

The largest category of stablecoins is fiat-backed, such as USDT and USDC, representing a significant portion of the market value of stablecoins. Today, fiat-backed stablecoins are considered safe after undergoing market tests such as large-scale redemptions.

Algorithmic 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 primary collateral for UST is Luna, whose value is derived from market assessments of UST stability and the activity on the Terra network. However, algorithmic stablecoins have proven to be a risky design as extreme market conditions can lead to destabilization, as evidenced by the collapse of Terra.

Source: https://coinmarketcap.com/zh/currencies/terrausd

Definition of Flatcoin

Flatcoin is an emerging concept of tokenomics, envisioned as a value storage token that adjusts its value with inflation. Flatcoin was first proposed by Balaji Srinivasan, the former Chief Technology Officer 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 anchor its value to an abstract cost of living in a unique way to maintain price stability. To achieve this goal, Flatcoin relies on different data to maintain the stability of its price, ensuring that holders’ purchasing power can match the changes in the cost of living. For example, a Flatcoin project may anchor its currency to a commodity or a basket of commodities, including essential 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 impact of inflation, making Flatcoin a digital asset with adaptability and value preservation.

The Popularity of Flatcoin

At the end of 2022, Vitalik Buterin, co-founder of Ethereum, shared his outlook for the cryptocurrency industry in 2023 during an interview with Bankless. He mentioned three important opportunities that have yet to be realized in the field: widespread adoption of wallets, inflation-resistant stablecoins, and Ethereum-based website login services. He believes that creating a stablecoin that can withstand various conditions, including inflation, will bring tremendous opportunities to the entire cryptocurrency industry.

Brian Armstrong, CEO of Coinbase, has repeatedly talked about Flatcoin in public interviews and discussed this new technology on Twitter, ranking it as one of the top 10 cryptographic technologies. Brian believes that Flatcoin is the direction for the future development of stablecoins. Unlike stablecoins tied to traditional fiat currencies, Flatcoin provides a new and more stable way of storing value by tracking inflation.

The Base Ecosystem Fund is also considering decentralized stablecoins and has shown great interest in Flatcoin. This type of stablecoin can track the inflation rate, providing users with stable purchasing power while also being flexible enough to withstand the economic uncertainty caused by the financial system. Given the challenges facing the global banking system in recent times, Base believes that inflation-resistant stablecoins are more important than ever before.

Typical Use Cases of Flatcoin

Flatcoin Track currently has very few projects. 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. It introduces a stablecoin called NUON, which claims to be the first decentralized flatcoin. The price of NUON is anchored to the inflation rate, fluctuating to protect holders from the loss of value caused by inflation. Unlike stablecoins pegged to fiat currencies, NUON is not influenced by inflation or any government monetary policies. The protocol ensures security and transparency through secure liquidity pool provisions, hooks protected by quadruple redundancy mechanisms, audited smart contracts, and collateral insurance. \

In terms of mechanisms for addressing inflation, the Nuon Protocol introduces the following innovations:

Inflation Index Prediction

NUON’s daily inflation level, anchored by the independent inflation index predictor Truflation, is measured and shared with Nuon Finance.

Peg Calculation

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

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

Overcollateralization

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

Protocol Revenue

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

In addition to NUON, Nuon Finance will also introduce 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 mint RAI using ETH. RAI is an uncollateralized stablecoin. The goal of RAI is to become a decentralized, low-volatility, self-regulating currency.

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

PI Controller

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

Operating Mechanism

When the market price is higher than the redemption price, acquire RAI and sell it to the secondary market until both prices are balanced, then buy RAI from the secondary market to repay the debt. When the redemption price is higher than the market price, it is advisable to buy as much RAI as possible from the secondary market and hold it until the price is balanced.

The first action reduces the circulating supply of RAI tokens in the market, while the second action destroys RAI. Both actions help align with the market price.

What are the use cases of RAI?

• Portfolio Diversification: RAI reduces the risk exposure to ETH price volatility.
• DeFi Collateral: RAI can be used as a supplementary or alternative collateral for ETH in DeFi protocols, as it can dampen the price fluctuations of Ether and allow users more time to react to market changes.
• DAO Reserve Asset: DAOs can hold RAI on their balance sheets to gain ETH exposure without being affected by market fluctuations.

Advantages of Flatcoin

Provide Asset Protection

The design goal of Flatcoin is to protect the purchasing power of users and provide investors with a more reliable asset preservation tool in an inflationary environment. Inflation can erode the purchasing power of fiat currency, but Flatcoin aims to counteract the impact of inflation on purchasing power through a series of mechanisms that are linked to the prices of specific goods or a basket of goods. In an inflationary environment, Flatcoin can serve as a relatively dependable hedging tool, helping investors maintain the value of their assets amidst market fluctuations 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 preservation tool. This stability will increase users’ trust in the cryptocurrency market, making them more willing to participate in the digital currency market.

Deepen The Use Cases

The introduction of Flatcoin may enhance the adoption of digital currencies, making them more suitable as a medium of exchange and store of value. This is expected to attract more users and merchants to participate in the digital currency ecosystem, such as the promotion of inflation-resistant stablecoins for the development of encrypted payments.

Global Payment and Settlement Tools

Flatcoin not only benefits individual investors, but it can also provide new payment settlement tools for businesses and the global community. It has natural advantages for global trade.

Payment Settlement Tools

Since Flatcoin aims to maintain stability, it can be used as a reliable payment and settlement tool. Businesses can utilize Flatcoin for cross-border transactions, reducing uncertainty caused by exchange rate fluctuations and inflation.

Promoting Global Financial Inclusion

As a digital stablecoin, Flatcoin can enhance financial inclusion, especially in areas where the financial system is underdeveloped or unstable. Individuals and businesses can participate in global trade more easily without worrying about inflation and exchange rate fluctuations.

Challenges of Flatcoin

The design of Flatcoin is a highly challenging task, aimed at tracking inflation rates rather than a specific currency. However, there are several challenges in designing an anti-inflation mechanism:

Handling Inflation Data

Different regions and countries may experience varying 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 on multiple levels. Despite the existence of inflation indices such as GDP, CPI (Consumer Price Index), and PPI (Producer Price Index), there are significant differences between these indicators, all of which may have different impacts on inflation.

Furthermore, most inflation indices are updated only monthly, while the actual changes in purchasing power may have immediate effects in daily life. The variation in inflation rates across different countries and regions makes the accuracy of measurement data a crucial factor in designing an anti-inflation stablecoin.

Complexity of Economic Model Design

A token adjusted based on inflation rates may face high price volatility. For example, high inflation may persist in certain regions or industries for an extended period. At the same time, it is also necessary to adapt to situations where there is low price volatility or even no inflation in other regions or industries. Therefore, Flatcoin needs to balance inflation differences in different regions and industries to ensure its effective stability in various 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 an anti-inflation stablecoin. The execution of the Flatcoin system will depend on the reliability and trustworthiness of the oracle subsystem. Designing a reliable and tamper-resistant oracle subsystem requires a range of technologies and mechanisms, including the aggregation and validation of multiple data sources, as well as the design of smart contracts and the use of cryptographic methods to ensure the authenticity and integrity of external data.

Strict Regulatory Restrictions

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

Conclusion

In the cryptocurrency space, especially in the stablecoin sector, industry innovation is not just about expanding the scale of existing assets, but more importantly, creating a new type of stablecoin that can effectively combat inflation in both the short and long term. While Flatcoin is an innovative concept, it is important to emphasize that it has not yet been tested in the actual market and carries a certain level of risk. Whether it can be truly realized and widely promoted in the market in the future remains a question that requires time to validate.