What is a flat coin?
A flatcoin is a stablecoin that is pegged to the cost of living to keep up with the rate of inflation. The value of a flatcoin is intended to remain constant in terms of what you can buy with it, even as the cost of living increases.
Flatcoins are marketed as a way for crypto investors to protect their financial assets from rising costs and avoid the volatility of the broader cryptocurrency market.
Technopedia explained
Stablecoins can hedge against inflation by limiting supply. However, as long as a coin is linked to real assets, it is vulnerable to rising prices, which impact return on investment (ROI). The need for an inflation-linked stablecoin linked to the cost of living, and the name flatcoin to describe the concept, are often credited to former Coinbase CTO Balaji Srinivasan.
I’m pretty sure Balaji coined the flatcoin in a private conversation between him and me about the initial idea of what $FPI would become.
The “flat to a standard of living” point is useful in and of itself and not an arbitrary reference binding, so a flatcoin is a legitimate heir to USD.
— Sam Kazemian (¤, ¤) (@samkazemian) March 27, 2023
How flatcoins work
There are several ways developers have attempted to implement flatcoins. A well-known approach is to use what is known as a “basket of wealth” to collateralize an inflation-proof coin. Seigniorage systems and smart contracts are two other popular approaches.
basket of assets
In this approach, developers use a public cost-of-living index, such as the Consumer Price Index (CPI), or an appropriate cost-of-living index, such as Truflation, to calculate the value of the flatcoin on a daily basis and adjust the supply of the coin accordingly.
Using a basket of assets to back a flatcoin is a relatively simple and straightforward approach that somewhat mimics the way fiat currencies are priced. However, it is important to be aware of the challenges associated with this approach before implementing it. They include:
- Asset selection: The assets in the basket must accurately reflect the cost of living. If the wrong assets are selected, the flatcoin value may not be stable.
- asset liquidity: The assets in the basket must be liquid enough to be easily bought and sold. When assets are illiquid, it can be difficult to maintain a stable value for the flatcoin.
- property risk: The assets in the basket must be low-risk. The riskier the assets, the more likely it is that the flatcoin will be volatile.
- transparency: The issuer of the flat coin must be transparent about the assets in the basket and how they are managed. This is important to build investor confidence and ensure inflation proof coins are not used for fraudulent purposes.
- regulation: The issuer of the flatcoin may need to comply with regulations regarding the use of stablecoins that are not tied to a fiat currency. In many cases, regulatory compliance can be confusing. This can make the implementation of the flat coin both more complex and expensive.
Smart Contracts
Perhaps one of the most popular ways to implement a flatcoin is by using a smart contract. In this approach, the smart contract is programmed to adjust the supply of flatcoins in response to changes in a public or proprietary cost-of-living index.
- In the cost of living index risesthe smart contract automatically Peppermints more flatcoins.
- In the cost of living index fallsthe smart contract automatically burns flatcoins.
The smart contract approach is a promising way to implement flatcoins as it does not rely on a central authority managing the supply to reduce volatility. However, using a smart contract to implement flatcoins comes with a number of challenges. These challenges include:
- Security: Smart contracts are inherently transparent. Since anyone can see the code used to implement the smart contract, smart contracts are often a target for hackers. If a flatcoin smart contract is hacked, it could be used to mint or burn coins without permission, destabilizing the coin’s value.
- complexity: Flatcoin smart contracts can be complex and have many dependencies. It can be expensive to hire developers who have the skills to write complex smart contracts that are both secure and efficient.
- Data Source: Flatcoin smart contracts need a reliable, tamper-proof data source to get accurate and timely cost-of-living updates. This usually involves the use of oracles, which introduce another layer of complexity and potential points of failure. According to Forbes, crypto forensics firms have found that Oracle manipulation attacks cost investors $362 million last year.
- scalability: Smart contracts can be difficult to scale and process large numbers of transactions in a timely manner. This could make it difficult to use flatcoins for mainstream payments.
- guide: There is no clear governance structure for smart contracts. This could make it difficult to make changes to the smart contract or resolve disputes.
- regulation: Smart contracts are a relatively new technology and there is no clear regulatory framework for them. Inflation-proof coins that use smart contracts carry the risk of being regulated at some point.
seigniorage systems
Another way to implement a flatcoin is to use a seigniorage system. Seigniorage-style flat coins are issued by a central authority, which then collects seigniorage proceeds from the use of the coin. The seigniorage proceeds are then used to buy back and destroy coins to keep the supply under control.
This approach can be implemented with or without smart contracts.
Examples of flat coins
Notable flatcoins include:
- Nuon is an inflation-proof coin implemented with an Ethereum smart contract. Nuon claims to be the first true flatcoin.
- Spot is a project of the Ampleforth Foundation. The Spot flatcoin is designed to be pegged to the cost of living in the United States.
- International Stable Currency (ISC) is a flatcoin pegged to the value of a basket of real assets that does not include the US dollar.
- Collypto is a blockchain-tradable flatcoin that uses a tokenized index of real estate and commodities as collateral. Collypto says it minimizes the speculative risk associated with traditional cryptocurrencies by basing its value on assets that represent and preserve real-world purchasing power.
- LendrUSD (USDL) is an inflation-proof coin pegged to a proprietary on-chain oracle that uses over 18 million data points from 30+ verified data sources to calculate the inflation rate. According to the official website, LendrUSD allows any holder Redeem USDL at any time in the ratio 1:1 for his support.
The challenge
To keep up with inflation rates, flatcoins need to have enough assets, through stock appreciation and reinvestment, to offset losses incurred when investors withdraw funds or devalue assets.
One approach has been to place collateral in yield farming lending protocols such as Aave and Convex to cover the cost of inflation. By lending collateral, the flatcoin’s developers can earn interest, which can then be used to buy back and destroy coins. This can help keep the supply of flatcoins under control and preserve the value of the coin.
Another approach is for the flatcoin issuers to invest collateral in new assets that help increase the value of the inflation-proof coin. This strategy can also help offset the effects of inflation.
The future of flatcoins
The current development of inflation-linked stablecoins is still in its infancy and the implementation of the concept has already seen some significant ups and downs.
For example, in February 2023, the Frax Finance community voted to fully collateralize its flatcoins after Canada’s securities regulator announced plans to ban non-fiat-backed stablecoins.
However, in August 2023, Brian Armstrong, Coinbase co-founder and CEO, brought up the idea of flatcoins again while promoting the first annual Coinbase Ventures Summit. He is credited with renewed interest in recession-proof coins, suggesting that the concept of flatcoins is still gaining ground despite the challenges it has faced to date.
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