Author | 0xAyA
This is not the first time Brian Armstrong has mentioned the concept of Flatcoin. In a recent interview with Yahoo Finance, he said, “This is the next iteration of stablecoins, and it is more likely to be related to CPI or purchasing power.”
At the end of last month, Brian Armstrong tweeted about his top ten favorite crypto tracks, with Flatcoin ranking first. Previously, the Base Foundation announced the four directions supported by its ecological fund, and Flatcoin was still the first concept mentioned.
What exactly is Flatcoin? What prospects does this track hold? Have any projects made products based on this concept? How far away is this concept from reality? Odaily will elaborate on these questions in the following text.
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The Concept of Flatcoin
If traditional stablecoins are intuitively anchored to fiat currencies such as the US dollar at a 1:1 ratio, then Flatcoin is anchored to the abstract concept of “cost of living” in a more “pragmatic” way to maintain price stability.
The goal of Flatcoin is to fight against inflation and ensure that holders’ value does not depreciate due to inflation in fiat currencies. To achieve this goal, Flatcoin optimizes the stability of its price based on different data points, such as CPI or cost of living index, to ensure that holders’ purchasing power matches the changes in cost of living.
For example, suppose a Flatcoin project anchors its currency to a basket of goods, including basic necessities such as food, energy, housing, and transportation. When the prices of these goods change, the price of Flatcoin will adjust accordingly to maintain a stable relationship with the cost of living. If the overall price of the basket of goods increases, the price of Flatcoin will also increase to offset the impact of inflation.
By anchoring to the cost of living, Flatcoin provides a more comprehensive and inflation-resistant way to maintain price stability. This approach can help holders protect the value of their wealth in an environment of economic fluctuations and inflation.
Why is Coinbase obsessed with Flatcoin?
In the Mirror article, Coinbase describes Flatcoin as follows: “We are fascinated by the thoughtfulness demonstrated in the design of decentralized stablecoins, especially ‘Flatcoins’ (i.e., stablecoins that track inflation rates). These stablecoins provide stability in terms of purchasing power and resilience during economic uncertainty in the traditional financial system. We also welcome other forms of ‘Flatcoins’ that do not anchor to fiat currencies but fill the gap between fiat-anchored stablecoins and volatile crypto assets. Given the challenges faced by the global banking system recently, we believe these explorations are more important than ever.”
“I am certain that the term ‘Flatcoin’ was originally coined in a private conversation between Balaji (former Coinbase CTO) and me. The initial concept later evolved into $FPI. The key is that ‘keeping pace with the standard of living’ itself is useful, not an arbitrary reference standard, so Flatcoin is the legitimate successor to the US dollar,” tweeted Sam Kazemian, the founder of Frax.
Balaji himself has made several comments on Twitter about Flatcoin and quoted this concept in another long tweet to illustrate to what extent fixed prices hide volatility: “Flatcoin is a relatively new concept. If the fiat currency itself starts to inflate, then it is no longer truly ‘stable’. Therefore, the goal of Flatcoin optimization is to maintain price stability compared to the on-chain basket of goods.”
Although Balaji has left Coinbase, Coinbase still adheres to the recognition of Flatcoin. As early as the beginning of the year, the Base Ecosystem Fund announced the presence of Flatcoin among the four supported directions. The recently announced first batch of six investment projects, including Truflation, will become the data feed price mechanism for projects like Nuon’s Flatcoin. Brian Armstrong also mentioned in a recent interview that the team is studying Flatcoin and expressed interest in it, although Coinbase has not yet entered this field.
Head project – Nuon Finance
The Flatcoin track is still in the blue ocean market, and one of the representative projects is Nuon Finance – which claims to be the “world’s first truly decentralized Flacoin”. The current level of daily inflation is fed by Truflation, which updates and tracks price data for the entire economy daily, using data from more than 30 sources and over 10 million data points.
Nuon Flatcoin’s price is loosely linked to the current value of a basket of goods priced at $1. This basket of goods includes a wide range of physical goods as well as services considered indispensable in modern society, including food, daily necessities, entertainment, tobacco and alcohol, clothing, housing, transportation, utilities, health, communication, education, and other categories. Each category is divided into multiple subcategories and includes multiple data sources. The Nuon protocol itself uses over-collateralization and arbitrage to maintain the peg, while offsetting the inflation of Nuon Flatcoin holders.
The protocol allows users to participate in four ways: minters can collateralize crypto assets and mint Flatcoin; buyers can purchase Flatcoin; arbitrageurs can profit from price differences and smooth out the spreads; governance token holders can propose and participate in governance activities and earn a portion of the protocol fees.
The Nuon protocol maintains anchoring stability through a unique triple redundancy mechanism: the protocol incentivizes users to mint or burn Nuon; over-collateralization protects the protocol; arbitrage accelerates the re-anchoring process.
The dynamic liquidation ratio system of Nuon is responsible for keeping the price of Nuon as close to the target anchor price as possible. The fluctuation of the dynamic liquidation ratio takes into account the inflation rate, Nuon anchor deviation, and collateral volatility, making it the core algorithm of the Nuon protocol.
Furthermore, regardless of price fluctuations, all minted NUONs need to be over-collateralized on the protocol. This ensures that the actual value of minted NUONs does not fluctuate.
Finally, arbitrageurs also accelerate the recovery of the anchor. They are naturally incentivized to do so by the market’s supply and demand dynamics, just like with all other cryptocurrencies. Nuon also artificially incentivizes arbitrageurs through the buying and selling pressure generated by changes in the liquidation ratio.
Conclusion
With its unique algorithm and mechanism, Flatcoin provides a new choice for the stablecoin track, while achieving price anchoring and resisting market fluctuations. In today’s pessimistic global inflation environment, stablecoins anchored to fiat currencies, especially the US dollar, also face significant risks. The International Monetary Fund (IMF) stated in its World Economic Outlook released in January this year:
Global inflation is expected to decline from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, but it is still higher than the pre-pandemic level (2017-2019) of about 3.5%. India and China will account for half of global economic growth this year, while the combined growth of the United States and the euro area is only one-tenth of global growth. We expect global inflation to decline this year, but even by 2024, the annual average overall inflation and core inflation of more than 80% of countries will still be higher than the pre-pandemic level.
Will Coinbase’s expectations for Flatcoin truly be realized and widely promoted in the future? Is the relationship between Coinbase and traditional stablecoins one of antagonism or mutual assistance? Will it ultimately become the next hottest DeFi narrative? These questions still require time to answer.
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