A detailed explanation of Flatcoins: the next DeFi hot narrative?

PANews

特邀专栏作者

2023-04-04 19:30 (UTC+8)

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Previously, Coinbase's Base Ecosystem Fund released four major support directions, one of which was Flatcoins.

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Previously, Coinbase's Base Ecosystem Fund released four major support directions, one of which was Flatcoins.

Original author:0x ShinChan| Encryption KOL

Original Compilation: Felix | PANews

Original Compilation: Felix | PANewsBasepicture

Will Flatcoins Be The Next DeFi Hit Narrative?

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According to Base, Base is exploring Flatcoins — decentralized stablecoins that track inflation and enhance the stability of purchasing power and resilience against economic uncertainty. Base is looking at non-fiat-pegged options to fill the gap between fiat-pegged stablecoins and volatile crypto assets.

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What are Flatcoins and why are they Flatcoins?

Unlike traditional stablecoins like USDT, Flatcoins are not pegged to any fiat currency, but to a basket of assets or an index. Flatcoins offer greater stability in the long run, as fiat currencies can lose value over time due to inflation.

The reason we need Flatcoins is that over time, inflation erodes the purchasing power of the dollar, negatively affecting the time value of money. The concept of the time value of money clarifies that the current value of money is greater than its future value.

Here is a real example. As a kid, I used to buy McDonald's ice cream for $0.25 in Hong Kong. But the same $0.25 today can't buy any food at McDonald's.

This is how inflation affects everyone.

Whereas Flatcoins are designed to maintain their value by tracking the rate of inflation. Rather than being pegged to a single currency, they follow a basket of assets, making them less vulnerable to market volatility. The idea is simple: if a Flatcoin can maintain its purchasing power over time, users don't have to worry about losing value due to inflation. This makes Flatcoins a more resilient and reliable store of value for the future.

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Tradfi correlation

Are "Flatcoins" Just a DeFi Concept? uncertain. Institutional adoption has some similarities to Flatcoins.

Singapore's NEER policy focuses on managing the value of the Singapore dollar (SGD) by comparing it against a set of other currencies. This group of currencies is usually the countries with which Singapore trades the most.

To put it simply, imagine that you and a friend are playing a seesaw. If one of you weighs a lot more than the other, the seesaw will tip very hard. But if you're both about the same weight, the seesaw will be more balanced.

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Are there Flatcoins in DeFi?

Reflexer Finance’s RAI token is a prime example of Flatcoins. Even Vitalik considers it the "ideal" type of stablecoin. Let's talk about why it is only ideal, but not practical.

RAI is mortgaged by ETH, which is the basis for its stable value. Users deposit their ETH to mint RAI, borrowing against their ETH holdings. In order to recover their collateral, users need to repay the borrowed RAI. Overcollateralization helps ensure its solvency.

Unlike most stablecoins pegged to a specific fiat currency such as the U.S. dollar, RAI does not have a fixed price target. It is a "governmentless" and "decentralized" stablecoin, with no central authority controlling it.

RAI achieves stability through a mechanism called "redemption price". This price will be dynamically adjusted according to market conditions and user behavior. People are encouraged to buy and sell RAI to stabilize its value. If the price of RAI is greater than the redemption price, users are motivated to sell RAI and make the RAI price closer to the target price through arbitrage.

Will Flatcoins Be The Next DeFi Hit Narrative?

If the price of RAI is less than the redemption price, users are encouraged to buy RAI because it is undervalued, which helps the price of RAI to align with the redemption price. This mechanism balances market supply and demand.

Will Flatcoins Be The Next DeFi Hit Narrative?

RAI has had moderate success when it was launched, but has not yet achieved the popularity of other stablecoins. Despite being a governanceless, decentralized fixed token, its adoption is still somewhat limited. This makes RAI an "ideal" example of an alternative stablecoin.

Will Flatcoins Be The Next DeFi Hit Narrative?

The reason is that stablecoins pegged to non-fiat currencies often face reduced acceptance due to their unpredictable and volatile values.

The lack of a fixed price target complicates the use of RAI in day-to-day transactions, creating a barrier to widespread adoption. Additionally, having ETH as the sole collateral also limits scalability.

In May 2022, as events such as the collapse of UST and LUNA, and the bankruptcy of Celsius hit the market, ETH plummeted from $3,580 to $890 in June 2022.

Will Flatcoins Be The Next DeFi Hit Narrative?

This results in:

(i) Due to the sharp drop in the price of ETH, RAI holders have an increased risk of being liquidated;

(ii) The market price deviates from the redemption price due to the absence of arbitrageurs.

Will Flatcoins Be The Next DeFi Hit Narrative?

Reflexer Finance’s RAI is an example of an innovative adaptive autonomous mechanism backed by ETH, but its adoption is limited.

New Protocol: Nuon Finance

(i) Truflation

Nuon offers a different approach compared to RAI, focusing on inflation pegs. Nuon is a decentralized Flatcoin that tracks inflation, enabling users to maintain their purchasing power.

Nuon relies on an independent inflation index (Truflation) to calculate the daily Nuon peg rate. At launch, Nuon flatcoins are soft-pegged to the value of a basket of commodities at $1, according to the Truflation index. Every day, the Truflation oracle provides Nuon with an inflation-adjusted target peg to maintain the purchasing power of holders.

(ii) Zero Interest Loan

RAI has a fixed loan rate of 2% per annum, but Nuon offers borrowers zero-percent loans as long as the borrower maintains the required collateralization ratio.

Will Flatcoins Be The Next DeFi Hit Narrative?