Flatcoin

Flatcoins are cryptocurrencies whose value is pegged to the cost of living, rather than fiat or commodity.


What Are Flatcoins in Crypto?

Unlike traditional stablecoins pegged to fiat, flatcoins aim to maintain a constant purchasing power over time. These are cryptocurrencies whose value is pegged to the cost of living, rather than fiat or commodity. 

The first flatcoin, Nuon, uses an algorithm that tracks inflation via an oracle network called Truflation, which monitors the prices of millions of goods to determine the rate at which the cost of living changes. The protocol then algorithmically adjusts the coin’s supply to maintain its peg to the original $1 value from the base date.

This differs from popular stablecoins like Tether, whose value relative to the cost of goods can fluctuate over time as inflation affects the underlying fiat currency. The aim of flatcoins is to provide a “flat” value that resists inflationary effects. 

How Do Flatcoins Maintain Their Peg? 

Maintaining any peg requires clever economics. For flatcoins, it boils down to collateral and adjustable supply. 

For a flatcoin, users must overcollateralize it by depositing other assets like BTC or ETH. This provides a cushion to absorb price volatility. The protocol then uses its Truflation oracle to algorithmically adjust the supply of crypto coins in circulation to retain the peg. If the value rises too far above $1, new coins can be minted and sold to bring the price back down. If it falls too far below $1 (purchasing power), coins can be bought back and burned to reduce supply.

This pushes the price back to the target. However, the system relies heavily on external data feeds, presenting risks if oracle manipulation or failure occurs. It also needs active user participation, unlike fiat-backed coins like USDC. The long-term viability of flatcoins’ adjustable peg remains unproven.

Why Are Flatcoins Needed?

Flatcoins emerged as a response to the struggles of other stablecoin models amidst high inflation. Fiat-pegged stablecoins, like USDT or USDC, are only as stable as the underlying currency (usually the US dollar). As inflation accelerated post-Covid, the purchasing power of fiat declined significantly. This affected pegged stablecoins, reducing their ability to hold their purchasing power.

Volatile cryptocurrencies, like BTC, also failed to provide stability during this period of rising inflation. While BTC is deflationary by nature, its volatility as an investment asset leaves holders exposed to dramatic price swings. Flatcoins aim to offer a way to escape fiat inflation while avoiding the volatility of other cryptocurrencies. 

By pegging value to a fixed basket of goods, flatcoins aim to provide predictable purchasing power over time. This appeals to those seeking shelter from the devaluation of fiat currency w.r.t purchasing power. If the technology proves effective, flatcoins could provide a better inflation hedge than either fiat-pegged coins or deflationary but volatile assets like BTC.

How Do Flatcoins Differ From Other Stablecoins? 

Flatcoins have some key differences compared to leading stablecoin models like fiat-pegged coins and crypto-collateralized coins. 

The most widely used stablecoins are fiat-pegged, with Tether and USD Coin being prime examples. These hold underlying fiat currency reserves to maintain a 1:1 peg to the dollar or other currencies. The advantage is simple and reliable price stability when the peg holds. But reliance on fiat exposes them to inflation risk.

Crypto-collateralized stablecoins like DAI avoid this by using other cryptocurrencies to back the stablecoin’s value. However, volatility in those collateral tokens can still destabilize the peg (TerraUSD flashbacks). Flatcoins focus on stabilizing purchasing power over time rather than price.

This dedicated focus comes at the cost of greater complexity in maintaining the peg. Flatcoins rely on active user participation and complex algorithmic supply changes rather than simple fiat backing. It remains to be seen whether flatcoin mechanisms can sustain stability in the long run. But they present an innovative approach.

What Are the Challenges for Flatcoins?

While flatcoins offer benefits on paper, they still face hurdles to becoming a viable stablecoin solution. One is their reliance on oracles to provide external data on inflation rates. Oracles represent a central point of failure – if they are compromised, the flatcoin peg could break. 

Flatcoins also face adoption challenges. They require active user participation to collateralize and help stabilize the peg. Fiat-backed coins operate passively but flatcoins need constant user activity, presenting a chicken-and-egg problem. They also involve added complexity compared to simple fiat backing models.

It’s unclear if flatcoins can truly maintain long-term stability. Their complex systems must consistently balance supply and demand to hit their CPI peg target. And if inflation cools, flatcoins could even face risks of deflation, de-pegging on the downside. The models are untested at scale in volatile markets.

Regulatory treatment also remains uncertain. Flatcoins currently operate without oversight, but if they gain adoption, regulators may eventually impose stricter requirements around collateralization and reserves. This could impact their decentralized nature.

What Do Experts Think About Flatcoins?

Flatcoins have generated excitement but also skepticism among crypto thought leaders and economists. The concept of tying currency value to a basket of goods rather than fiat intrigues experts, but many question whether it can work reliably at scale.

Coinbase CEO Brian Armstrong and ETH co-founder Vitalik Buterin have expressed enthusiasm about crypto pegged to inflation rather than fiat currencies. But Buterin also cautions there are substantially hard algorithmic problems involved in making it work smoothly.

Outside crypto, flatcoins have parallels to proposed inflation-indexed government bonds. Some praise flatcoins for applying blockchain technology to create a currency free from central bank policies. However, economists argue relying on specific goods baskets can distort relative prices in the economy over time.

Flatcoins as Legal Tender

A more radical view envisions flatcoins evolving to become mediums of exchange competing with or even replacing national fiat currencies. Some flatcoin proponents may argue that governments should adopt inflation-resistant crypto models in place of traditional money issued by central banks.

El Salvador’s adoption of Bitcoin as a legal tender fed this concept. If the country were to instead peg a national currency to a goods basket via blockchain, it could create a national “flatcoin” free from dollar dominance. Such a currency could be issued to all citizens digitally, providing them with an inflation-resistant means of exchange.

However, replacing fiat with flatcoins would face immense challenges. Most governments and central banks currently have little incentive to relinquish monetary control to decentralized flatcoin protocols. Doing so would restrict their ability to use monetary policy to respond to economic black swan events. The complex transition path makes a shift to national flatcoins unlikely for major economies. However, the idea may appeal to smaller countries or struggling states.