Original | Odaily

Author | 0xAyA

This is not the first time that Brian Armstrong has mentioned the concept of Flatcoin. Just a couple of days ago, he accepted an interview with Yahoo Finance and talked about Flatcoin, stating that "this is the next iteration of stablecoins, more likely to be related to CPI or purchasing power."

At the end of last month, in a tweet, Brian Armstrong disclosed his top ten crypto tracks, with Flatcoin topping the list. Prior to this, the Base Foundation announced its support for four major directions, with Flatcoin being the first concept mentioned.

So what exactly is Flatcoin? What prospects does this track hold? Are there any projects that have developed products for it? How far is this concept from reality? Odaily will address these questions in the following article.

The Concept of Flatcoin

If traditional stablecoins are directly pegged to fiat currencies like the US dollar at a 1:1 ratio, then Flatcoin is anchored to the abstract "cost of living" in a more pragmatic way to maintain price stability.

The goal of Flatcoin is to counter inflation and ensure that the value of holders' assets does not depreciate due to inflation in fiat currencies. To achieve this goal, Flatcoin optimizes the stability of its price based on different data, such as CPI or the cost of living index, to ensure that the purchasing power of holders matches the changes in the cost of living.

For example, let's say a Flatcoin project anchors its currency to a basket of goods, including food, energy, housing, transportation, and other basic necessities of life. 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 rises, 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, helping holders protect the value of their wealth in an environment of economic fluctuations and inflation.

Why is Coinbase obsessed with Flatcoin?

Coinbase describes Flatcoin in its Mirror article as follows: "We are fascinated by the thoughtfulness demonstrated in the design of decentralized stablecoins, especially the concept of 'Flatcoins' (stablecoins that track inflation rates). These stablecoins provide stability in purchasing power, as well as resilience in the face of economic uncertainty in traditional financial systems. We also welcome other forms of 'Flatcoins' that are not anchored to fiat currencies, but fill the gap between fiat-anchored stablecoins and volatile crypto assets. Given the challenges faced by the global banking system lately, we believe these explorations are more important than ever before."

"I'm pretty certain the term 'Flatcoin' was originally coined by Balaji (former Coinbase CTO) in a private conversation between him and me, and the initial concept later evolved into $FPI. The key is that 'keeping up with the cost of living' itself is valuable, rather than an arbitrary reference standard, so Flatcoin is the legitimate successor of the US dollar." Sam Kazemian, founder of Frax, stated on Twitter.

Balaji himself has made several statements about Flatcoin on Twitter and referenced this concept in a long thread to illustrate the extent to which 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 an on-chain basket of goods."

Although Balaji has left Coinbase, the company still recognizes Flatcoin. Back in the beginning of the year, Flatcoin was included as one of the four areas supported by the Base ecosystem fund. The recently announced first batch of six investment projects, including Truflation, will also serve as data oracles for projects like Nuon, which are based on Flatcoin. Brian Armstrong also mentioned in a recent interview that the team is researching Flatcoin and expressed a strong interest, although Coinbase has not yet entered this space.

Leading Project - Nuon Finance

Flatcoin is currently in the blue ocean market, and one of the representative projects is Nuon Finance - which claims to be the "world's first truly decentralized Flatcoin". The current daily inflation level is determined by Truflation, which updates and tracks price data of the entire economy every day, using data from over 30 sources and over 10 million data points.

The price of Nuon Flatcoin is loosely pegged to the current value of a basket of goods priced at 1 US dollar. The basket includes a wide range of physical goods as well as services considered essential in modern society, including food, daily necessities, entertainment, tobacco and alcohol, clothing, housing, transportation, utilities, health, communication, education, etc. Each category is further divided into subcategories and includes multiple data sources. The Nuon protocol itself uses over-collateralization and arbitrage to maintain the peg and offset inflation for Nuon Flatcoin holders.

The protocol provides users with four ways to participate: Minter can collateralize assets and mint Flatcoin; Buyer can purchase Flatcoin; Arbitrager can profit from price differences and arbitrage opportunities; Governance token holders can propose and engage in governance actions while earning a portion of protocol fees.

The Nuon protocol maintains anchoring stability through a unique triple redundancy mechanism: Incentivizing minting or burning of Nuon; Over-collateralization protection; Arbitrage acceleration for re-anchoring process.

Nuon's dynamic liquidation ratio system is responsible for maintaining the price of Nuon as close as possible to the target anchoring price. The fluctuation of the dynamic liquidation ratio takes into consideration the inflation rate, deviation from Nuon's anchor, and fluctuation of collateral, making it the core algorithm of the Nuon protocol.

Furthermore, regardless of price fluctuations, all minted NUON need to be over-collateralized in the protocol. This ensures that the actual value of minted NUON remains stable.

Finally, arbitragers also accelerate the recovery of the peg. They are naturally incentivized to do so by the market's supply and demand dynamics, just like with any other cryptocurrency. Nuon also artificially incentivizes arbitragers through the buying and selling pressure generated by changes in liquidation ratios.

Conclusion

Through its unique algorithm and mechanism, Flatcoin provides a new choice for the stablecoin track, achieving price anchoring and resistance to market fluctuations. However, in today's world with unfavorable global inflation, traditional stablecoins anchored to fiat currencies, especially the USD, 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 still higher than the pre-pandemic level (2017-2019) of about 3.5%. India and China will contribute to half of this year's global economic growth, while the combined growth of the United States and the Eurozone accounts for 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 in more than 80% of countries will still be higher than pre-pandemic levels.

Is Coinbase's expectation for Flatcoin to truly achieve and be widely adopted in the future? Is its relationship with traditional stablecoins one of conflicts or mutual support? Will it eventually become the next hottest DeFi narrative? These questions still require time to be answered.