• 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 a centralized authority to 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 Bitcoin’s workings. 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 Bitcoin’s functionalities. This trend quickly peaked as many developers sought to stretch the capabilities of such 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 decreases, 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 Web3’s goals. To bring about global adoption, Web3 had to find better ways to integrate its various elements into daily life. This prompted many developers to seek ways to develop new forms of stable crypto coins.

In 2021, ex-Coinbase CTO Balaji Srinivasan pondered 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 in developing countries with high inflation rates. 

This spurred blockchain developers to design assets and extend their reach beyond the value of a specific investment or currency to track its inflation rate. In an interview, Armstong mentioned that flatcoins had the potential to bridge the gap between digital assets and real-world applications. 

For instance, flatcoins enable improved value retention in escalating global inflation. The concept inspired other organizations, such as Ethereum, which built Nuon, an inflation-proof coin, while Spot pegged its cost of living in the U.SU.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, broadening their implementation into three main approaches.

Basket of Assets

A well-known approach to developing this new technological marvel is known as the Basket of Assets. This approach 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 estimate their value daily accurately 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 mirrors a nation’s fiat currency, valued via a blockchain system. This has also raised several concerns over its functionality and accuracy. 

Also, Read Stablecoins is empowering Africa’s economic growth amid currency depreciation.

For instance, the assets in the basket must maintain a heightened form of accuracy. Any wrong assets chosen will significantly affect the stability of Flatcoin. 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. 

The use of this method also raises issues of transparency. Unfortunately, since the value of flatcoins hinges on the inflation rate, trust is a core element for its success. Reassuring investors and users that they will not be subjected to fraudulent activity is a must-have component.

Smart Contracts

Flatcoins require a smart contract different from other assets in decentralized finance. Through this approach, developers program smart agreements to adjust their supply in response to public or proprietary cost-of-living index changes.

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 typically 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 its supply. If hacked, hackers would have complete control over the entire ecosystems, allowing them to burn or mint assets at will. Furthermore, developing this kind of digital asset presents an issue of complexity. 

Smart contracts are immutable and hence heavily rely on blockchain developers’ skills. Due to this, a tamper-proof data source providing accurate 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, its reliance on smart contracts has an issue of governance, creating several issues in resolving disputes.

Seigniorage systems

Seigniorage systems are another popular method of flatcoin; their efficiency and performance trump other methods, but they forgo the core concept of a Defo system. Seigniorage-style flatcoins rely on a centralized authority to collect seigniorage revenue from the coins’ use.

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 Defi. 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 has the potential to create a currency free from central bank policies. Furthermore, it can become a medium of exchange that competes with or replaces national fiat currencies. The challenges surrounding this process are immense, but it holds the potential to unify the web3 industry and economies.

Also, Read Africa: stablecoins offer an efficient solution for cross-border remittances.