- Flatcoins enable improved value retention in a situation of escalating global inflations.
- The basket of Assets approach relies on a public cost-of-living index like the Consumer Price Index or a proprietary cost-of-living index like Truflation.
- Seigniorage-style flatcoins rely on centralized authority as they collect seigniorage revenue from using the coins.
The crypto industry is the first genuine success of the web3 community. Through the functionalities and success of Bitcoins, developers discovered the revolutionary concept of blockchain technology. Since then, the industry has expanded from a redefining financial system to an entirely new form of the internet, Web3.
Decentralization has become the next evolution of technology as many developers have sought to improve the working of Bitcoins. For instance, Vitalik Buterin designed Ethereum, Bitcoin’s only competitor, but he expressed that he never desired to compete with the original crypto coin.
On the contrary, Vitalik poured his resources into improving the functionalities of Bitcoin. This trend quickly peaked as many developers sought to stretch the capabilities of digital assets. This led to multiple coins like Stablecoins, meme-coins, and CBDCs. In time, cryptocurrency introduced an entirely new financial system, Decentralized finance.
Despite its achievements, securing a stable form of cryptocurrency has proved difficult. Digital assets like stablecoins and CBDCs have presented a somewhat stable version of cryptocurrency but have deviated from several core principles. Fortunately, a new coin, Flatcoins, has emerged with a brighter future and an innovative approach to the market.
This new digital asset tackles the issue of volatility right from its core by reworking how smart contracts function.
What are flatcoins?
Volatility is the crypto market’s most valuable asset and most deterrent feature. The value of the entire market hinges on supply and demand. If the demand for a specific coin increases, so does its value, and its supply reduces. On the other hand, if its supply increases and demand reduces, its value will instantly drop.
This dynamic has driven the crypto market to where it is today. Unfortunately, it’s because of this reason that most governments and financial institutions have struggled to find ways to incorporate cryptocurrency. This became a hindrance to the goals of web3. To bring about global adoption, web3 had to find better ways to incorporate its various elements into daily life. This prompted many developers to seek ways to develop new forms of a stable version of crypto coins.
Over the years, digital assets have evolved, and now, a new version has emerged with the promise of success. Flatcoins share a similar design to stablecoins since their main purpose is to bring about stability. Although, unlike stablecoins, Flatcoins are pegged to the cost of living to keep pace with a nation’s inflation rate.
In 2021, ex-Coinbase CTO Balaji Srinivasan pondered the different ways to improve the adaptability of digital assets. Stablecoins were a success, but because they mainly relied on the US dollar, they generally neglected the need and requirements for other currencies more in developing countries with high inflation rates.
This spurred the blockchain developers to design digital assets and extend their reach beyond the value of a specific asset or currency to track its inflation rate. In an interview, Armstong mentioned that flatcoins had the potential to bridge between digital assets and real-world applications.
For instance, flatcoins enable improved value retention in escalating global inflations. The concept soon inspired other organizations to take up the idea, such as Ethereum, which built Nuon, an inflation-proof coin, while Spot pegged its cost of living in the U.S.
How do Flatcoins work?
Unlike ideas like CBDCs, stablecoins, and cryptocurrency, flatcoins offer a broader viewpoint on decentralized finance. By relying on the inflation rate, developers must consider several factors when designing flatcoins. This broadens the implementation of flatcoins into three main approaches.
Basket of Assets
A well-known approach to developing this new technological marvel is known as the Basket of Assets. Through this approach, it relies on a public cost-of-living index like the Consumer Price Index or a proprietary cost-of-living index like Truflation. These analyses build the foundations behind flatcoins, allowing developers to accurately estimate the value of flatcoins daily and adjust it in case of any peaks.
Basket of Assets is a popular methodology due to its simplicity and straightforward approach. Unfortunately, many within the community have claimed it merely mirrors a nation’s fiat currency, which is valued via a blockchain system. This has also raised several concerns over its functionality and accuracy.
For instance, the assets in the basket must maintain a heightened form of accuracy. Any wrong assets chosen will significantly affect the flatcoin’s stability. In addition, the assets chosen must be liquid enough to ensure a smooth trading process. This issue also hinges on the kind of risk associated with the asset. This has narrowed down the number of usable assets depending on the nation’s inflation rate.
An issue of transparency also arises with the use of this method. Unfortunately, since the value of flatcoins hinges on the inflation rate, trust is a core element for its success. Reassuring investors and the user that the flatcoins will not be subjected to fraudulent activity is a must-have component.
Flatcoins require a different kind of smart contract as compared to other assets in decentralized finance. Through this approach, developers program smart contracts to adjust the supply of flatcoins in response to changes in a public or proprietary cost-of-living index.
The smart contract should automatically mint more flatcoins when the cost-of-living index rises. In contrast, when the cost-of-living index falls, the smart contract automatically burns flatcoin. This approach generally gains the benefits of automation from the smart contracts. It generally does not rely on a central authority to manage the supply to reduce volatility. Similar to Basket on Assets, smart contracts have several challenges.
For instance, its security issues were one of the main issues since it presented a central point of failure. The underlying smart contracts control the supply of flatcoins. If hacked, hackers would have complete control over the entire ecosystems, allowing them to burn or mint digital assets at will. Furthermore, developing this kind of digital asset presents an issue of complexity.
Smart contracts are immutable and hence heavily rely on the skills of the blockchain developers. Due to this, a tamper-proof data source providing accurate information and timely data is required to ensure optimum performance. This introduces the use of oracles, adding another layer of complexity and potential points of failure. Furthermore, flatcoins relying on smart contracts have an issue of governance, creating several issues in resolving disputes.
Seigniorage systems are another popular method of flatcoin; their efficiency and performance trump other methods, but they forgo the core concept of a decentralized finance system. Seigniorage-style flatcoins rely on a centralized authority to collect seigniorage revenue from using the coins.
The presence of a central authority improves several factors and can function with or without a smart contract. Unfortunately, many within the community have flagged this method as a forgoing the decentralized nature of digital assets.
The promise of flatcoins
Flatcoins emerged as a response to the limitation of stablecoins within decentralized finance. Coinbase CEO Brian Amstrong and Vitalik Buterin have expressed enthusiasm regarding flatcoins. Despite its complexities, flatcoins have parallels to proposed inflation-indexed government bonds.
It contains the potential to create a currency free from central bank policies. Furthermore, it has the potential to become a medium of exchange competing with or even replacing national fiat currencies. The challenges surrounding this process are immense, but it holds the potential to unify the web3 industry and economies.